On January 14, 2011, in a ruling that could have
implications for other failed bank investors' securities class action lawsuits,
Northern District of Georgia Judge Charles A. Pannell,
Jr. granted defendants' motions to dismiss the securities suit that had
been brought by investors in the failed Haven
Trust Bank of Duluth, Georgia. A copy of Judge Pannell's order can be found
This case may be familiar to readers as I recently wrote
about the FDIC's failed bid to intervene in this case. As discussed here,
Judge Pannell denied the FDIC's motion to intervene.
Banking regulators closed Haven Trust on December
12, 2008. As detailed here, on December 31,
2009, investors who purchased shares in the bank's holding company filed suit
in the Northern District of Georgia alleging that the company's former
officials had misled investors in connection with the share offering, in
violation of federal and state securities laws.
In his January 14 order, Judge Pannell granted the
defendants' motion to dismiss, finding that the plaintiffs had not adequately
alleged violations of either the state or federal securities laws. With respect
to the plaintiffs' federal securities laws allegations, Judge Pannell held that
the plaintiffs had not adequately alleged scienter or loss causation.
In holding that the scienter allegations were
insufficient, Judge Pannell said that "the amended complaint's reliance on
the defendants' positions as directors and officers, their attendance at
meetings, and access to internal documents and reports is insufficient to
allege a strong inference of scienter." He also found that the defendants'
alleged motivation to maintain a dividend stream was also insufficient to
Finally, with respect to the plaintiffs' allegations that
there had been "excessively risky" loans to one of the defendant's
children "may be relevant to a shareholder derivative claim for corporate
mismanagement" but were not relevant to determining scienter.
With respect to loss causation, the plaintiff's allege
that the FDIC announcement that it was taking over the bank caused the loss in
value of the plaintiffs' stock. Judge Pannell said that "this allegation
does not establish that the defendants' alleged misrepresentations and
omissions caused the plaintiffs' loss, but instead establishes that the loss
was caused by the FDIC's decision to close the Bank due to the effect of the
subprime mortgage and financial crises on the Bank's loan portfolio."
After quoting with approval from a Second Circuit
decision holding that "when the plaintiff's loss coincides with a marketwide
phenomenon.. . the prospect that the plaintiff's loss was caused by fraud
decreases," Judge Pannell concluded by stating that "in this case,
the plaintiffs have not offered any facts distinguishing between losses caused
by the defendants' alleged misrepresentations and the intervening events that
wreaked havoc with the banking industry as a whole."
Read the article in its entirety at the D&O Diary, a blog by