In a recent post, I discussed several recent decisions in which
securities cases involving failed or troubled banking institutions survived
dismissal motions. By contrast, however, in an August 16, 2010 ruling (here),
Southern District of New York Judge Robert
Patterson, Jr. granted the defendants' motion to dismiss without prejudice
in the securities class action lawsuit filed against Raymond James Financial
and certain of its directors and officers alleging inadequate disclosures
regarding the company's banking subsidiary's loan loss reserves.
As discussed in greater detail here,
plaintiffs first filed their action against Raymond James Financial in June
2009. The plaintiffs' allegations center on the loan portfolio and loan loss
reserves at the company's banking subsidiary, Raymond James Bank. Judge
Patterson stated in his August 16 opinion that, despite the length of the
complaint (which "extreme length," Judge Patterson noted, provides
"an independent ground for dismissal"), the plaintiff's allegations
"boil down to one proposition: that the Defendants purposefully
underfunded their loan loss reserves and then made material misrepresentations
about het adequacy of those loan loss reserves during the class period."
With one small exception, Judge Patterson concluded that
the misrepresentations and omissions on which plaintiff seeks to rely are not
actionable. For example, he concluded that the alleged misrepresentations about
the bank's loan loss reserves "are, without exception, general statements
of optimism" which "in and of itself renders these statements
inactionable."
Similarly, Judge Patterson concluded that the statements
about the quality of the bank's loan portfolio "were, similarly, very
general and not sufficiently detailed to have misled investors" and
"for the most part" represent "classic puffery."
The one exception to his conclusion that the statements
on which the plaintiff sought to rely are not actionable were two paragraphs in
the Amended Complaint relating to the quality of the loan portfolio. These
statements included representations that the bank "independently
underwrote" all loans, including loans "sourced from agent or syndicate
banks." The Amended Complaint reference the testimony of a confidential
witness who avers that many loans that were later charged off were not
independently underwritten.
However, Judge Patterson also concluded that the
plaintiff had not sufficiently alleged scienter. He concluded with respect to
the plaintiffs' scienter allegations that:
None of the allegations of scienter are sufficiently
specific that they allow the Court to determine whether the Defendants knew (or
even likely knew) that their statements were false when made. For the most
part, the scienter allegations are of the sort that could be made about nearly
any company operating in the United States, namely that the executives were
motivated to create profit, that the executives received a near-constant stream
of information about economic trends, and that the executives made mistakes in
some of their forward-looking projections.
These allegations, Judge Patterson concluded, were
insufficient to give rise to a strong inference that the defendants acted with
the requisite state of mind.
Accordingly, Judge Patterson granted the defendants'
motions to dismiss, but he did so without prejudice.
I have added Judge Patterson's opinion to my running
tally of subprime and credit crisis-related dismissal motion rulings, which can
be accessed here.
Read other items of interest from the world of
directors & officers liability, with occasional commentary, at the D&O Diary, a blog by
Kevin LaCroix.