The opinion of the court was delivered by: Rufe, J.
MEMORANDUM OPINION AND ORDER
Lead Plaintiff Steamfitters Local 449 Pension Fund ("Plaintiff") brings this securities fraud class action on behalf of persons and entities that purchased publically traded Advanta Corp. ("Advanta") securities between October 16, 2006 and January 30, 2008 (the "Class Period"). The Complaint alleges that Defendants had information about the true state of Advanta, but engaged in deceptive practices to artificially inflate Advanta's financial results and stock prices. *fn1 Plaintiff also alleges that some Defendants engaged in insider trading, dumping their stock at high prices based on non-public information about the company, while issuing announcements designed to keep the stock prices artificially high.
Because Advanta is now in bankruptcy, Plaintiff brings its claims for violations of Sections 10(b), *fn2 20(a), *fn3 and 20A *fn4 of the Securities Exchange Act of 1934 ("Exchange Act") against Advanta's officers and directors, and also against John F. Moore, the president of Advanta's subsidiary Advanta Bank Corporation ("Bank Corp."). Defendants move for dismissal of all counts set forth in Plaintiff's Amended Complaint, *fn5 for failure to state a claim under the Federal Rule of Civil Procedure 12(b)(6) and/or the Private Securities Litigation Reform Act of 1995 ("PSLRA"). For the reasons set forth herein, Carroll and Moore's Motions will be granted, the Management Defendants' Motion will be granted in part and denied in part, and the Outside Director Defendants' Motion will be granted.
Plaintiff has filed a detailed, 105-page complaint. It bases its allegations in large part on the assertions of a confidential insider witnesses, including a senior information solutions manager, an executive assistant, a vice-president of innovation and business development, a senior information solutions manager, and other Advanta employees. *fn6
Prior to its collapse, Advanta was an issuer of credit cards to small businesses. *fn7 It operated its business primarily through its wholly-owned subsidiary, Bank Corp. *fn8 Advanta's former senior information solutions manager describes a drastic change in Advanta's formerly conservative approach to adding new customers beginning in 2005. *fn9 According to Plaintiff, the new, aggressive approach to the company's growth led the company to engage in problematic business practices during the Class Period, and misleading Advanta investors about the unsound practices. The material misstatements and omissions to investors led to artificially inflated stock prices. By fall 2007, Defendants could no longer conceal the truth about Advanta's financial condition, and stock prices began to fall. Eventually, Plaintiff alleges, the same practices about which investors were misled caused the collapse of the company.
A. The Misstatements and Omissions Plaintiff's allegations regarding Advanta's misstatements and omissions to investors fall into three categories: 1) credit quality; 2) delinquency; and 3) repricing.
(1) Credit Quality Plaintiff alleges that
Advanta exaggerated the credit quality of its customers, telling
investors it was adding "high credit quality" customers and
maintaining average FICO scores above 700, *fn10
when in fact the credit quality was declining due both to
the company's practice of
accepting new credit customers with lower and even sub-prime FICO
scores *fn11 and to the loss of more
credit-worthy customers because of repricing practices. In addition,
Advanta was issuing cards to riskier businesses, such as construction
subcontractors and small start-up companies, for which high FICO
scores were not good predictors of Advanta's ability to collect.
(2) Delinquency In 2005, Defendant Carroll
initiated an internal audit of the collections department. Plaintiff
alleges that the audit resulted in recommendations designed to prevent
collections employees from masking true delinquency rates,
*fn13 but by October 2006 the recommendations had
not been implemented and the problems persisted. *fn14
Carroll initiated another audit at that time.
*fn15 Both audits found that certain collections
employees were inaccurately recording loans as current based on
"promises to pay," and recording very delinquent loans as less
delinquent. *fn16 The most past due accounts
were most significantly distorted, so that the loans would not be
"charged off" and would not deplete the company's loss reserves.
*fn17 Plaintiff further alleges that company
incentive programs rewarded employees who misrepresented delinquency
rates, as their financial bonuses (between 25% and 37% of their annual
salary) were tied to reducing delinquencies on
paper, rather than to cash actually collected. *fn18
Lack of oversight by management allowed the practice to
continue. *fn19 This practice caused falsely
positive reports of Advanta's receivables, loss reserves, and
charge-offs, which are calculated directly from delinquency
rates. *fn20 Plaintiff alleges that Advanta
continued telling investors that its delinquency and charge-off rates
were low while conducting the internal audits, and even after it
received the results of those audits. *fn21
In early 2007, Advanta reported that delinquency rates had improved in
the prior fiscal year, and that it was seeing lower losses from newer
customers than from older customers. *fn22
According to Plaintiff, Advanta continued to misrepresent the credit
quality of its customers and the delinquency rates throughout the
(3) Repricing Plaintiff alleges that Advanta
was repricing its credit cards, i.e. raising interest rates (to 30%
for most cardholders) and minimum payments, regardless of the account
holder's payment history and credit-worthiness. *fn23
Defendants Alter and Rosoff implemented the repricing
scheme as a way to raise capital in the short term, despite known,
adverse, long-term consequences to the company. *fn24
The repricing did lead to short-term increases in
revenue, but over time Advanta's high credit-quality customers took
their business to other banks where they could get better credit
terms, and its low-credit-quality customers were more likely to
default. *fn25 Plaintiff alleges that Advanta
misled investors by failing to disclose its repricing campaign. For
example, its Form 10-K filed in February 2007 stated that Advanta's
products were designed to attract and retain high credit quality
customers, *fn26 when in fact the repricing
campaign caused it to lose good customers and created increased
Throughout the Complaint, Plaintiff gives examples of actual statements Advanta made to investors during the Class Period about the company's earnings, credit losses, delinquency rates, and the credit quality of its customers. These statements, according to the Complaint, were supported with facts and figures about the number of new customers, the average FICO scores, the credit losses, etc., and were not mere "puffery." *fn28 Plaintiff also alleges that Defendants had incentives to make false statements about the financial condition of Advanta because they each personally held large quantities of stock in Advanta. *fn29
The false statements continued through the end of October 2007. By the end of October, the company was forced to disclose deteriorating financial results and delinquency problems for the third quarter of 2007. *fn30 Upon release of this news, Advanta stock collapsed more than 20%. *fn31
More bad news followed in November 2007, when stock values dropped another 9%, *fn32 and in January 2008, when stock values fell 6%. *fn33
B. Culpability of Defendants Plaintiff alleges that as officers and directors of Advanta, Defendants had access to confidential and material information about Advanta's practices, policies, customer base, financial status, internal audits, and future prospects, and could control both the business itself and public statements about Advanta (including reports, press releases, statements to securities analysts, etc.). Plaintiff also points to some Defendants' sale of their own personal holdings in Advanta during the Class Period as evidence that Defendants had personal financial incentives to mislead investors, that they possessed non-public information indicating that Advanta shares were overvalued, and that their assurances to investors were false. *fn34 Plaintiff alleges, for example, that Carroll sold $644,000 in shares just before Advanta authorized the second internal audit he requested in October 2006; Rosoff sold $11.9 million in shares just as Carroll was reporting Advanta to the FDIC; and other Defendants also allegedly sold their shares at key moments during the Class Period. *fn35
C. Injury Finally, Plaintiff alleges that during the Class Period, when Advanta stock prices were artifically inflated (allegedly due to Advanta's misrepresentations about the credit quality of the company's customers, repricing practices, and delinquency rates), some Defendants sold large percentages of their own Class B shares in Advanta. *fn36 Named Plaintiff alleges that it bought those shares at the inflated prices, in reliance on Advanta's misstatements, beginning in April 2007. *fn37
Dismissal of a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted is appropriate where a plaintiff's "plain statement" does not possess enough substance to show that plaintiff is entitled to relief. *fn38 In
determining whether a motion to dismiss should be granted the
court must consider those facts alleged in the complaint, accepting
the allegations as true and drawing all logical inferences in favor of
the non-moving party. *fn39 Courts are not
bound to accept as true legal conclusions couched as factual
allegations. *fn40 Something more than a mere
possibility of a claim must be alleged; plaintiff
must allege "enough facts to state a claim to relief that is plausible
on its face." *fn41 The complaint must set
forth "direct or inferential allegations respecting all the material
elements necessary to sustain recovery under some
viable legal theory." *fn42 The court has no
to "conjure up unpleaded facts that might turn a frivolous . . .
action into a substantial one." *fn43
Securities fraud claims are subject to a heightened pleading standard. *fn44 In alleging fraud, a plaintiff must state with particularity the circumstances constituting fraud. A complaint must identify specific statements alleged to be misleading and the reason why those statements are misleading. *fn45
While Rule 9(b) does not require a plaintiff to plead scienter
with particularity in a typical fraud claim, the Private Securities
Litigation Reform Act ("PSLRA") adds a heightened pleading requirement
as to scienter for securities fraud cases. *fn46
Plaintiff must state with particularity the facts from
which the court can infer that defendant acted with the required
scienter. *fn47 Then, the Court must look at
the complaint as a whole to determine "whether all of the facts
alleged, taken collectively, give rise to a strong inference of
scienter," and consider "plausible opposing inferences" to determine
whether the inference of scienter is "at least as compelling as any
opposing inference one could draw from the facts alleged."
A. Statute of Limitations for Claims Against Outside Directors, Carroll, and Moore Plaintiff filed its Complaint against Advanta and the Management Defendants (Alter, Rosoff, Browne and Weinstock) on October 14, 2009. On August 4, 2010, the Complaint was amended to add the Outside Director Defendants (Blank, Botel, Costello, Dunn, Lubner, Olafsson and Stolper), Christopher J. Carroll and John F. Moore. *fn49 Those later-added Defendants now argue that the statue of limitations bars Plaintiff's claims against them.
Securities fraud actions must be filed within two years of discovery of the fraud, or five years after the event, whichever is earlier. *fn50 The period begins to run at the point that plaintiff knew or reasonably should have discovered facts constituting the violation, including the requisite scienter. *fn51 Defendants argue that the facts Plaintiff relies upon in the Amended Complaint to establish Defendants' violation of securities laws were known to Plaintiff no later than January 30, 2008, the last day of the Class Period. At that time, Plaintiffs knew or could have known, from publically available information, that the company had made the alleged false or misleading statements, that the stock price was plummeting, and that certain managers and directors had sold stock during the class period. As such, Defendants argue, the August 3, 2010 Amended Complaint must be dismissed as barred by the statute of limitations as to the Outside Directors, Carroll, and Moore.
Plaintiff argues that Defendants have not met their burden of proving that the Amended Complaint was untimely as to the later-added Defendants. In fact, Plaintiff notes, it did not learn until 2010 that the Outside Directors and Moore were aware of the internal audits and the resulting reports, that Carroll had initiated the internal audits, and that all later-added Defendants had knowledge of all three alleged fraudulent schemes. Plaintiff was unable to state claims against these Defendants until it had evidence of scienter. When it discovered such evidence, Plaintiff argues, it timely amended its complaint. The Court cannot find, as a matter of law, that Plaintiff's allegations against the later-added defendants are time-barred. Accordingly, the Court will consider their Motions to Dismiss on the merits.
B. Claims Under 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 In Count I, Plaintiff alleges that Defendants, *fn52 as well as Advanta itself, which is not a party to this lawsuit, violated Section 10(b) of the Exchange Act and Rule 10b-5 *fn53 by
disseminating or approving misleading public statements about the company's financial status, defrauding Plaintiffs and others similarly situated, and causing them to purchase Advanta common stock during the Class Period at artifically inflated prices.
Section 10(b) and Rule 10b-5 broadly prohibit misrepresentation by misstatements or omissions of material information, and fraud. *fn54 To state a § 10(b) claim, Plaintiff must allege: 1) a material misstatement or omission of fact; 2) made with scienter; *fn55 3) in connection with the purchase or sale of a security; 4) upon which Plaintiff relied; 5) economic loss; and 6) loss causation. *fn56 Here, Defendants challenge the adequacy of Plaintiff's allegations regarding the first and second elements of a § 10(b) claim.
Non-disclosed or misleading information is material
if a reasonable investor would have viewed that information "as
having significantly altered the 'total mix' of
information made available." *fn57 Notably,
the Securities Exchange Act does not impose "an affirmative duty to
disclose any and all material information," but only that information
which is necessary to keep statements the company opts to provide from
being misleading. *fn58 The allegations in
the Complaint must "raise a reasonable expectation that discovery will
reveal evidence satisfying the ...