1This action is stayed as to defendant ABFS because of its January 21, 2005 bankruptcy

filing. 

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

:

IN RE AMERICAN BUSINESS : CIVIL ACTION

FINANCIAL SERVICES, INC. : NO. 04-0265

SECURITIES LITIGATION :

:

O’Neill, J. June 2, 2005

MEMORANDUM

I. INTRODUCTION

These consolidated actions brought against defendants American Business Financial

Services, Inc. (ABFS), Anthony J. Santilli, Richard Kaufman and Albert W. Mandia have been

filed on behalf of all persons who purchased or otherwise acquired ABFS’ publicly traded

securities during the Class Period. Plaintiffs allege that defendants made false and misleading

statements concerning ABFS’ financial performance and seek to recover damages for violations

of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule

10b-5 promulgated thereunder.

Now before me is the individual defendants’ motion to dismiss plaintiffs’ consolidated

amended class action complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b)

and the Private Securities Litigation Reform Act of 1995 (PSLRA).1 For the reasons stated

below I will grant defendants’ motion. 

II. BACKGROUND

Defendant ABFS, a diversified financial services organization that sold and serviced

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 1 of 40
-2-

business purpose home equity loans through its subsidiaries, is the parent holding company for

American Business Credit, Inc. and its primary subsidiaries, Home American Credit, Inc. (also

known as Upland Mortgage), American Business Mortgage Services, Inc. and Tiger Relocation

Company. ABFS also purchased home equity loans from financial institutions. Plaintiffs allege

that the typical customers of ABFS and its subsidiaries were credit-impaired or high-risk

borrowers who could not obtain traditional financing from banks or savings and loan

associations. During the class period, defendant Santilli served as ABFS’ chairman, chief

executive officer, chief operating officer and director, defendant Kaufman served as an outside

director and defendant Mandia was ABFS’ chief financial officer. 

On January 21, 2005, ABFS filed a petition for reorganization pursuant to Chapter 11 of

the Bankruptcy Code, Title 11 of the United States Code, in the United States Bankruptcy Court

for the District of Delaware in Wilmington, Delaware. In re ABFS, Inc., et al., (No. 05-10203)

(MFW). Pursuant to Section 362 of the Bankruptcy Code, ABFS’ bankruptcy filing

automatically stayed this action against the corporate defendant. On April 1, 2005, the

Bankruptcy Court authorized the Creditors’ Committee to retain Special Litigation Counsel to

investigate potential claims on behalf of ABFS noteholders. Although the noteholders are not

members of the putative class in this case, the conduct that is the subject of the Special Litigation

Counsel’s investigation may relate to some of the conduct at issue in this matter, including

ABFS’ accounting practices, internal auditing procedures and internal financial controls. On

April 4, 2005, ABFS announced that it intended to wind down its operations and dispose of its

assets through a Chapter 11 plan of liquidation. On May 17, 2005, the company’s Chapter 11

bankruptcy proceeding was converted to a Chapter 7 liquidation. 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 2 of 40
-3-

A. Alleged Fraudulent Scheme

Plaintiffs allege that to raise capital, ABFS used a financing technique known as a

securitization. In its Form 10-K filed with the Securities and Exchange Commission (SEC) on

October 10, 2000, ABFS noted that “[t]he ongoing securitization of our loans is a central part of

our current business strategy.” (Consol. Compl. ¶ 5). In each of its securitizations, ABFS

transferred a pool of mortgage loans to a trust in exchange for certificates, notes or other

securities issued by the trust that were then sold to investors for cash. Plaintiffs allege that ABFS

would often retain the rights to service the loans for a fee and would retain an interest in the cash

flows generated by the securitized loans (called an “interest-only strip”). 

Plaintiffs further assert that ABFS’ loan delinquency ratio, or the ratio between the

company’s current and delinquent loans, affected ABFS’ ability to securitize its loan pools and

consequently its profitability. They allege that investors were less likely to invest in securities

secured by loan pools containing a higher number of delinquent loans. Thus, plaintiffs assert that

ABFS would be unable to execute its quarterly securitizations if the company’s loan delinquency

ratios became too high and the company’s profitability would suffer. Plaintiffs allege that

throughout the class period ABFS consistently reported an extremely low delinquency ratio as

compared to industry averages for the sub-prime mortgage industry thus allowing the company to

obtain securitizations for increasingly large sums with each successive quarter. 

At the core of plaintiffs’ claims is their allegation that defendants fraudulently altered

their loan delinquency ratio by engaging in improper practices to artificially lower the number of

loans that were reported as delinquent. Plaintiffs assert that ABFS employees “knowingly

accepted bad checks to satisfy ABF[S’] months delinquency goals . . . .” (Consol. Compl. ¶ 42). 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 3 of 40
-4-

Plaintiffs also allege that ABFS engaged in “re-aging” techniques such as forbearance and

deferment agreements and that ABFS pressured delinquent borrowers to enter into such

agreements in order to keep properties from being counted as delinquent. (Consol. Compl. ¶¶

31-41). 

Forbearance agreements are agreements negotiated between a borrower and a lender

whereby the lender foregoes a given remedy against the borrower for non-payment. Under a

forbearance agreement, property held by a non-paying borrower would not be counted as

delinquent. A deed in lieu of foreclosure is one type of forbearance device where a delinquent

borrower deeds a mortgaged property to a lender in exchange for a release from all obligations

under a loan. Under a deferment agreement, a lender will defer a borrower’s payment (including

past-due payments, plaintiffs allege) and roll the amount due onto the back of the loan to be paid

back over time. Plaintiffs assert that the use of these techniques is limited by the guidelines of

the Federal Financial Institutions Council (FFIEC) and that ABFS violated the FFIEC

requirements. 

Absent from plaintiffs complaint are specific allegations as to the frequency with which

re-aging techniques were used to avoid delinquent loans or specific allegations as to the amount

by which the reported delinquency rate was understated at any point in time. To support their

allegations that defendants fraudulently lowered the company’s delinquency ratios, plaintiffs rely

upon the statements of five confidential witnesses, all purported to be former ABFS employees. 

(Consol. Compl. ¶¶ 31-36, 37-38, 39, 40-43). Confidential witness 1 is alleged to have served as

a collections supervisor at ABFS from 1997 to 2003, working to oversee the collections process

for delinquent loans. (Consol. Compl. ¶30-31). He alleges that “individual collectors in his

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 4 of 40
-5-

department were expected to, and did, use information they had obtained from borrowers in

previous months, such as bank routing numbers, in order to falsify payments from borrowers who

were delinquent . . . .” (Consol. Compl. ¶ 31 (emphasis omitted)). Confidential witness 1 also

reported attending a 1999 meeting where ABFS’ lawyers discussed forbearance agreements and

deeds in lieu of foreclosure. (Consol. Compl. ¶ 32). Plaintiff alleges that confidential witness 1

reported that at the meeting the lawyers also emphasized the need to minimize loan delinquency

ratios for purposes of obtaining securitizations (Consol. Compl. ¶ 32). Plaintiff further alleges

that in 2001 confidential witness 1 complained to American Business Mortgage Services’

president of operations because he believed that the use of forbearance agreements and deeds in

lieu of foreclosure were improper and that he regularly refused requests to negotiate and execute

them. (Consol Compl. ¶ 36). 

Confidential witness 2 is alleged to have served as a vice president of sales for American

Business Credit, an ABFS subsidiary and is alleged to have been in close communication with

ABFS executives during his tenure with the company from 1997 to 2003. Confidential witness 2

is alleged to have stated that the company regularly “roll[ed] the amount past-due onto the back

of the loan . . .” allowing the borrower to “pay [the loan] current” and preventing the loan from

being recorded as delinquent. (Consol. Compl. ¶37). 

During his employment at ABFS from 1996 to 2004 confidential witness 3 is alleged to

have served in a number of positions including as underwriter and assistant vice president of loan

processing. Plaintiff asserts that confidential witness 3 confirmed that the loan servicing units of

ABFS’ subsidiaries were closely monitored by ABFS executives. (Consol Compl. ¶ 38 n.3). 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 5 of 40
2REO stands for “Real Estate Owned.” REO properties have gone through foreclosure

and are owned by a lender. 

-6-

Confidential witness 4 is alleged to have been an asset manager in the REO department2

at ABFS from 1998 through 2002 where he was responsible for overseeing the marketing and

selling of properties that the company acquired through foreclosure or deeds in lieu of

foreclosure. Plaintiff asserts that confidential witness 4 said that defendant Santilli was very

involved in the Collections Department and in “getting the [delinquency ratio] number where

they wanted it to be.” (Consol. Compl. ¶ 39). Plaintiff alleges that confidential witness 4 claims

Santilli was present at regular management meetings where the delinquency numbers were

discussed and that the numbers appeared to be particularly important to him. (Consol. Compl. ¶

40). 

Confidential witness 5 is alleged to have served as Senior Vice-President of Servicing at

ABFS from 1999 through 2002. He allegedly stated that ABFS had a recidivism rate among

borrowers with forbearance agreements that was higher than the industry standard because of its

“aggressive” use of forbearance and deferral agreements. Confidential witness 5 also allegedly

said that ABFS ignored the FFIEC guidelines prohibiting lenders from using forbearance or

deferral agreements with an individual borrower more than once in a twelve month period or

twice over the lifetime of a loan. (Consol. Compl. ¶ 41). Confidential witness 5 further alleged

that ABFS employees knowingly accepted bad checks as a result of the company’s policy that

they should “[k]eep delinquency down. [W]e don’t care how you do it.” (Consol. Compl. ¶ 42). 

Confidential witness 5 also alleges that the company’s collectors were given cash bonuses when

they met their monthly delinquency goals and that these bonuses acted as an incentive for

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 6 of 40
-7-

collectors to engage in improper practices. (Id.). Confidential witness 5 alleges that ABFS

executives would have been aware of the aggressive use of forbearance and deferral agreements

because they received monthly risk management reports that tracked delinquency rates,

recidivism rates and the use of loss mitigation, foreclosure and bounced checks to “pay” loans. 

(Consol. Compl. ¶ 43). 

In addition to the allegations of the confidential witnesses, plaintiffs further allege that

ABFS received a civil subpoena from the Department of Justice on May 14, 2003 inquiring into

the company’s use of forbearance agreements. They assert that after ABFS announced it had

received the subpoena the company was unable to complete its quarterly securitization because

the investors “began to realize that the notes the company had been selling (and was currently

attempting to sell) during its securitization were of a much lower quality than represented by the

company.” (Consol. Compl. ¶ 6). ABFS filed a Form 8-K on June 13, 2003 disclosing the

company’s receipt of the civil subpoena and a second Form 8-K on June 26, 2003 reporting the

company’s shift away from reliance on quarterly publicly underwritten securitizations in favor of

whole loan sales for cash. Plaintiffs allege that both of these filings prompted a strong decline in

the value of ABFS stock shares as investors became aware of potential problems with ABFS’

delinquency reporting practices. 

B. Alleged Materially False and Misleading Statements

Plaintiffs allege that from January 27, 2000 to June 26, 2003 all of ABFS’ quarterly press

releases or SEC filings that reported financial results or the closing of its securitizations were

materially false and misleading. (Consol. Compl. ¶¶ 44-48, 50-55, 57-60, 62-63, 65-67, 69-72,

74-77, 79-80, 82-84, 86-87, 89-90, 92-94, 96-98). As an example, plaintiffs cite to ABFS’ Form

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 7 of 40
-8-

10-Q filed on February 14, 2000 which stated, in part:

Published statistics gathered from a national sample of sub-prime

mortgage companies by the Mortgage Information Corporation, have shown that

delinquency rates averaged 14.39% as of September 1999 as compared to our

current mortgage delinquency rates of 3.47% and September 30, 1999

delinquency rate of 3.53%. . . . . We believe that our delinquency rate is in part

the result of our centralized credit underwriting structure, adherence to written

underwriting standards and emphasis on collections.

(Consol Compl. ¶ 46). They argue that this statement and the statements made in the company’s

other SEC filings and press releases were misleading because they failed to disclose that (1)

ABFS was using forbearance agreements and deeds in lieu of foreclosure to improve the

company’s delinquency ratio; (2) the company was improperly rolling delinquent amounts onto

the back end of outstanding loans through the use of deferment agreements; (3) ABFS was

knowingly accepting bad checks and falsified payments; (4) the company was not following

FFIEC guidelines; and (5) the company was using its scheme to reduce its delinquency rate to

securitize its loans, collect interest income from its loans and inflate its financial results. 

(Consol. Compl. ¶¶ 49, 56, 61, 64, 68, 73, 78, 81, 85, 88, 91, 95, 99). 

Plaintiffs also allege that ABFS’ May 15, 2003 Form 10-Q was materially false and

misleading for the reasons noted above and because it failed to disclose or misrepresented the

substantial impact of the forbearance and deferment agreements on the company’s delinquency

ratio and also failed to disclose that these agreements were initiated not solely at the behest of

borrowers, but “were actively solicited by the company and its employees.” (Consol. Compl. ¶

104). In the Form 10-Q, the company announced that it had engaged in a “significant increase in

the usage of deferment and forbearance agreements which impact the aging status of loans for

purposes of delinquency reporting.” (Consol. Compl. ¶ 102). 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 8 of 40
-9-

C. Scienter Allegations

Plaintiffs allege that ABFS’ core business required the manipulation of delinquency rates

to allow it to accomplish securitizations and that the alleged fraudulent scheme was therefore

central to the company’s business and is thus evidence of defendants’ scienter. (Consol. Compl.

¶ 5). Plaintiffs also allege that defendants’ scienter is established by the individual defendants’

desire to maintain their compensation standards and by the company’s need to complete its debt

securitizations. (Consol. Compl. ¶¶ 116 n.4, 117 n.5, 119 n.6). 

Plaintiffs further allege that each individual defendant “held a position from which he

would have been aware of the true facts and misleading disclosures.” (Consol. Compl. ¶ 72). As

a result of the individual defendants’ positions during the class period, plaintiffs argue that they

should have known that the company’s delinquency rates were being manipulated in order to

ensure completion of ABFS’ quarterly securitizations. 

Plaintiffs allege defendants’ scienter is also evidenced by the short time period between

the company’s May 1, 2003 announcement of results for the third quarter of fiscal year 2003 in

which the company announced that its delinquency rate “continued to outperform the subprime

industry,” (Consol. Compl. ¶ 100), and the May 15, 2003 filing of a Form 10-Q in which it

disclosed that it had undertaken “a significant increase in the usage of deferment and forbearance

arrangements, which impact the aging status of loans for purposes of delinquency reporting.” 

(Consol. Compl. ¶ 102). Plaintiffs assert that defendants’ scienter is further evidenced by the

June 26, 2003 filing in which the company stated that it was moving away from its securitization

business. (Consol. Compl. ¶¶ 6, 107) (“These transactions represent our move toward less

reliance on quarterly publicly underwritten securitizations, in favor of whole loan sales for cash

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 9 of 40
-10-

which will allow us to streamline operations, offer a broader product line and capture strategic

efficiencies.”) 

In their complaint, plaintiffs also allege that defendants’ scienter can be established

through their sales of ABFS stock during the class period. (Consol. Compl. ¶¶ 115-120). 

However, in their opposition to defendants’ motion to dismiss, plaintiffs concede that the stock

transactions referring to shares held by Santilli and Mandia in the complaint “were in fact gifts of

or other types of transactions” which cannot be used to establish scienter. (Ps’ Opp. at 36 n.19)

Instead, plaintiffs assert that only Kaufman’s stock sales can be used to establish his scienter. 

They allege Kaufman sold a total of 223,846 shares of ABFS common stock worth $2,899,783

during the class period, or 82.96% of his holdings of the company’s stock. (P’s Opp. at 37. C.f.

Consol. Compl. ¶ 116 (alleging Kaufman sold 118,548 shares of ABFS common stock worth

$1,405,123 during the class period)). Plaintiffs further assert that neither Kaufman nor the other

individual defendants had sold shares of ABFS stock in the four years prior to the class period. 

(Consol. Compl. ¶¶ 116-117, 119). 

III. STANDARD OF REVIEW

A Rule 12(b)(6) motion to dismiss examines the sufficiency of the complaint. Conley v.

Gibson, 355 U.S. 41, 45 (1957). In determining the sufficiency of the complaint I must accept all

the plaintiff’s well-pleaded factual allegations as true and draw all reasonable inferences

therefrom. Graves v. Lowery, 117 F.3d 723, 726 (3d Cir. 1997). 

The Federal Rules of Civil Procedure do not require a claimant to set out in detail

the facts upon which he bases his claim. To the contrary, all the Rules require is

“a short and plain statement of the claim” that will give the defendant fair notice

of what the plaintiff’s claim is and the grounds upon which it rests.

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 10 of 40
-11-

Id., quoting Conley, 355 U.S. at 47. I will not inquire as to whether the plaintiff would ultimately

prevail, but only whether he is entitled to offer evidence to support his claims. See Oatway v.

Am. Int’l Group, Inc., 325 F.3d 184, 187 (3d Cir. 2003). “Thus [I will] not grant a motion to

dismiss ‘unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of

his claim which would entitle him to relief.’” Graves, 117 F.3d at 726, quoting Conley, 355 U.S.

at 45-46. 

Because plaintiffs make claims of securities fraud, Federal Rule of Civil Procedure 9(b)

and the PSLRA “impose independent threshold pleading requirements that, if not met, support

dismissal apart from Rule 12(b)(6).” In re Rockefeller Ctr. Props., Inc. Sec. Litg., 114 F.3d 1410,

1429 (3d Cir. 1997). A securities fraud claim may be dismissed under Rule 9(b) and the PSLRA

even if it would survive scrutiny under Rule 12(b)(6). The requirements of Rule 9(b) and the

PSLRA are discussed in detail below. 

IV. SECTION 10(B) CLAIMS

A. Applicable Law

Section 10(b) of the Exchange Act makes it unlawful “to use or employ, in connection

with the purchase or sale of any security registered on a national securities exchange . . . any

manipulative or deceptive device or contrivance in contravention of such rules and regulations as

the Commission may prescribe as necessary or appropriate in the public interest or for the

protection of investors.” 15 U.S.C. § 78j(b). Rule 10b-5, promulgated under Section 10(b)

provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means

or instrumentality of intestate commerce, or of the mails or of any facility of any

national securities exchange, 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 11 of 40
-12-

(a) To employ any device, scheme, or artifice to defraud, 

(b) To make any untrue statement of a material fact or to omit to state a material

fact necessary in order to make the statements made, in the light of the

circumstances under which they were made, not misleading, or 

(c) To engage in any act, practice or course of business which operates or would

operate as a fraud or deceit upon any person, 

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. To state a claim for securities fraud under Section 10(b), plaintiffs must

establish that defendants, “(1) made a misstatement or an omission of a material fact (2) with

scienter (3) in connection with the purchase or sale of a security (4) upon which the plaintiff

reasonably relied and (5) that the plaintiff’s reliance was the proximate cause of his or her

injury.” In re Ikon Office Solutions, Inc. Sec. Litig., 277 F.3d 658, 666 (3d Cir. 2002). 

Federal Rule of Civil Procedure 9(b) requires that “the circumstances constituting fraud . .

. be stated with particularity.” Although courts must be sensitive to a situation in which the

factual information is in the defendant’s control, in securities fraud cases, Rule 9(b) is to be

“rigorously applied.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417-18 (3d Cir.

1997). The PSLRA, 15 U.S.C. § 78u, adds an additional requirement, providing that “the

complaint shall, with respect to each act or omission alleged to violate this chapter, state with

particularity facts giving rise to a strong inference that the defendant acted with the required state

of mind.” 15 U.S.C. § 78u-4(b)(2). A plaintiff may establish this scienter requirement “either (a)

by alleging facts to show that defendants had both motive and opportunity to commit fraud, or

(b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or

recklessness.” Burlington Coat Factory, 114 F.3d at 1418. As with the other allegations of

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 12 of 40
-13-

fraud, the facts that give rise to a strong inference of scienter must be alleged with particularity,

meaning that plaintiffs must plead “the who, what, where, when, and how: the first paragraph of

any newspaper story.” In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999).

“Unless Plaintiffs in securities fraud actions allege facts supporting their contentions of

fraud with the requisite particularity mandated by Rule 9(b) and the [PSLRA], they may not

benefit from inferences flowing from vague or unspecific allegations - inferences that may

arguably have been justified under a traditional Rule 12(b)(6) analysis.” In re Rockefeller

Center, 311 F.3d at 224.

Section 20(a) of the Exchange Act creates liability for “[e]very person who, directly or

indirectly, controls any person liable” for an independent violation of the Exchange Act. 15

U.S.C. § 78t. Because claims under Section 20(a) are derivative, “[a] plaintiff cannot maintain a

claim under Section 20(a) without meeting the pleading requirements for a primary violation of

the Act.” In re The Loewen Group Inc. Secs. Litig., No. 98-6740, 2003 U.S. Dist. LEXIS 15680,

at *57 (E.D. Pa. 2003) (Loewen I). 

B. Alleged Fraudulent Scheme

Defendants argue that plaintiffs fail to plead the existence of the purported fraudulent

scheme to artificially lower the number of delinquent loans with the requisite factual

particularity. In In re The Loewen Group Inc. Sec. Litig., No. 98-6740, 2004 U.S. Dist. LEXIS

16601, at * 34 (E.D. Pa. Jul. 16, 2003) (Loewen II), I held that a plaintiff who alleged that

accounts receivable were materially overstated failed to plead with sufficient particularity:

because the complaint [did] not include details about when and to what level the

accounts receivable should have been written down, when and to what level the

allowance should have been changed, why the allowance made by the corporation

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 13 of 40
-14-

was unreasonable in light of the cancellations experienced, and how many

accounts ultimately were uncollectible. 

Here, although plaintiffs have specifically identified a number of statements that they

allege are false or misleading, defendants assert that, like the allegations in Loewen II, plaintiffs’

complaint is defective because, among other things, it fails to specify (1) the amount by which

any delinquency rate was allegedly understated during the class period; (2) the number of

accounts where forbearance or deferment agreements were implemented; the total value of the

accounts where such agreements were used and why the use of such agreements was improper;

(3) the number or identity of the accounts for which ABFS purportedly accepted bad checks,

when bad checks were allegedly accepted and who knew the checks were bad; (4) the number or

identity of the accounts where ABFS allegedly wrongfully extended additional credit to loan

holders, the amount of money allegedly wrongfully extended in additional credit and who knew

the company was wrongfully extending additional credit; (5) the number of accounts and amount

of money held in the accounts where forbearance or deferment agreements were entered into in

violation of the allegedly applicable FFIEC guidelines; (6) the number of accounts and amount of

money held in accounts where loan “re-aging” techniques were applied that subsequently became

delinquent; or (7) the details regarding the allegedly inflated “interest income” ABFS received

from its securitizations. Defendants concede that plaintiffs need not have pled all of these facts

in order to survive a motion to dismiss, but argue that plaintiffs’ failure to plead any of these

facts with particularity is a strong indication that the allegedly fraudulent scheme to improve

ABFS’ loan delinquency ratios did not exist. 

Plaintiffs counter that 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 14 of 40
-15-

“[a]s long as the allegations of fraud reflect precision and some measure of

substantiation, the complaint is adequate.” . . . While allegations of time, place

and date certainly meet this requirement, . . . allegations that set forth the details

of the alleged fraud may also meet these requirements, and plaintiffs “are free to

use alternative means of injecting precision and some measure of substantiation

into their allegations of fraud.” 

(Ps’ Opp. at 15, quoting Paraschos v. YBM Magnex Int’l, Inc., No. 98-6444, 2000 U.S. Dist.

LEXIS 3820, at *25 (E.D. Pa. Mar. 29, 2000) (citations omitted)). They argue that the complaint

satisfies the particularity requirements of the PSLRA and Rule 9(b) because it pleads the “who,

what, when, where and, how” of the fraud. In re Advanta, 180 F.3d at 534. 

1. Confidential Witnesses

Plaintiffs allege that the accounts of their confidential witnesses illustrate the improper

practices defendants used to manipulate the company’s delinquency ratios, thus providing the

level of detail required to meet the heightened pleading requirements of the PSLRA, Rule 10b-5

and Federal Rule of Civil Procedure 9(b). In Loewen II I held that 

[w]e will . . . not necessarily disregard averments of fact based on anonymous

sources. If the averments are particularized, if they provide circumstantial

assurance that “a person in the position occupied by the source would possess the

information alleged,” we will consider them as part of the constellation of facts

alleged for why the defendants’ statement is false or misleading. 

Loewen II, 2004 U.S. Dist. LEXIS 16601, at * 28-29, quoting In re ATI Technologies, Inc., Sec.

Litig., 216 F. Supp. 2d 418, 432-33 (E.D. Pa. 2002). I find that the confidential witnesses’

allegations are not sufficiently particularized to meet the pleading requirements of Rule 9(b) and

the PSLRA. 

Unlike in Loewen II, where I found that plaintiffs did not provide sufficient information

to establish that its confidential sources were in a position to possess the information alleged,

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 15 of 40
-16-

Loewen II, 2004 U.S. Dist. LEXIS 16601, at * 29, 35, here plaintiffs have alleged sufficient

information regarding the positions of their confidential witnesses within the company and the

time frames for their employment to allow me to consider their averments. However, the

allegations of plaintiffs’ confidential witnesses are not sufficiently precise to meet the heightened

pleading requirements of Rule 9(b) and the PSLRA. In California Public Employees’ Retirement

System v. Chubb Corp., 394 F.3d 126, 153 (3d Cir. 2004), affirming the District Court’s decision

granting defendants’ motion to dismiss plaintiffs’ securities fraud complaint, the Court of

Appeals for the Third Circuit held that plaintiffs allegations failed to meet the pleading

requirements for claims of securities fraud where the Second Amended Complaint failed to

“identify the data, or source of data, used to arrive at its calculations” and where plaintiffs did not

“provide any particulars regarding the amount by which reserves were distorted, or how much

revenue was improperly recognized.” 

Here, confidential witness 1, a collections supervisor, alleges that collectors at the

company were expected to use information obtained from borrowers in previous months such as

bank routing numbers in order to falsify payments from delinquent borrowers. He makes no

specific allegations however as to when or with what frequency such practices were used and

does not allege that he himself ever engaged in such practices. In Loewen I, I held that similar

detail was necessary for allegations in the complaint to meet the heightened pleading

requirements for a securities fraud action. Loewen I, 2003 U.S. Dist. LEXIS 15680, at * 30-31,

35 (holding the heightened pleading requirements were not met where “[p]laintiffs have not

pleaded the amount by which any acquisition was overvalued, the time and amount by which any

asset should have been written down, who knew the assets were overvalued or what information

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 16 of 40
-17-

was available to defendants that should have alerted them to the need for a write-down.”). The

allegations of confidential witness 2 also lack sufficient particularity to meet the requirements of

Rule 9(b) and the PSLRA. Although he/she alleges that ABFS avoided loan delinquencies by

rolling amounts past due onto the backs of mortgage loans, he/she makes no allegations as to

how often past due amounts were rolled onto the backs of loans or what percentage of loans

ultimately were saved from delinquency using this technique. Confidential witness 3 makes no

specific allegations of wrongdoing at ABFS and only makes allegations regarding the close

relationship between senior executives at the company and the loan servicing units of its

subsidiaries. Similarly, confidential witness 4 makes no allegations of fraudulent activities by

any of the defendants. Instead his/her allegations refer to defendant Santilli’s interest in “getting

the [delinquency ratio] number where they wanted it to be” and Santilli’s attendance at meetings

where delinquency numbers were discussed. Plaintiffs do not allege that confidential witness 4

made any statements to support their allegations that the delinquency ratio numbers were attained

through the use of fraudulent practices. The averments of confidential witness 5 also lack

sufficient particularity to meet the pleading requirements of the PSLRA and Rule 9(b). Although

plaintiffs allege that confidential witness 5 stated that ABFS employees knowingly accepted bad

checks to satisfy the company’s delinquency goals, he did not provide any information regarding

the frequency with which bad checks were accepted or the number of actually delinquent loans

that were made current through the acceptance of bad checks. Confidential witness 5's averment

that ABFS ignored the FFIEC guidelines similarly lacks particularity. Although he/she is alleged

to have said that the company was aggressive in its use of forbearance and deferral agreements,

he/she provided no specific details as to how often the FFIEC guidelines were violated due to the

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 17 of 40
-18-

aggressive use of these agreements or how many loans were subjected to aggressive re-aging

techniques. Confidential witness 5 also provided no specific details about the correlation

between the award of cash bonuses to collectors who met their monthly delinquency goals and

their use of improper practices to improve their delinquency numbers. C.f., Freed v. Universal

Health Servs., No. 04-1233, 2005 U.S. Dist. LEXIS 7789, at *26-27 (E.D. Pa. May 3, 2005)

(holding a complaint failed to plead facts which would support the inference that defendants

were engaging in accounting fraud with the particularity demanded by the PSLRA because it did

“not state when and to what level bad debt should have been recognized, when and to what level

bad debt reserves should have been changed, or how many accounts ultimately were

uncollectible”). Accordingly, I find that the statements of the confidential witnesses alleged in

the Consolidated Complaint fail to meet the level of particularity required to support the

inference that defendants were engaged in a fraudulent scheme to underreport the number of

delinquent loans held by the company. 

Plaintiffs argue that, taken as a whole, the accounts of the confidential witnesses

corroborate one another, demonstrating their reliability. However, where the accounts of the

confidential witnesses taken alone are not sufficiently particularized to meet the requirements of

Rule 9(b) and the PSLRA, plaintiffs cannot overcome a lack of particularity by citing to the

allegations of the confidential witnesses as a group. 

Citing to a large number of varied sources may in some instances help provide

particularity, as when the accounts supplied by the sources corroborate and

reinforce one another. . . . Cobbling together a litany of inadequate allegations

does not render those allegations particularized in accordance with Rule 9(b) or

the PSLRA. Consequently, Plaintiffs’ argument that particularity is established by

looking to the “accumulated amount of detail” that their unparticular source

allegations provide when considered as a whole is unavailing. 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 18 of 40
-19-

California Public Employees’ Retirement System v. Chubb Corp., 394 F.3d 126, 155-56 (3d Cir.

2004).

2. FFIEC Guidelines

In Burlington Coat Factory, 114 F.3d at 1417-18, the Court of Appeals held that “[w]here

plaintiffs allege that defendants distorted certain data disclosed to the public by using

unreasonable accounting practices, we have required plaintiffs to state what the unreasonable

practices were and how they distorted the disclosed data.”

Plaintiffs allege that ABFS’ lending practices were covered by the FFIEC guidelines and

that defendants violated these guidelines when the company used forbearance and deferment

agreements to manipulate its loan delinquency ratios. The FFIEC is responsible for setting

standards for certain regulation of “financial institutions.” See 12 U.S.C. §§ 3301 et seq. 

Defendants argue that ABFS did not fall within the statutory definition of a financial institution

and that therefore its loan servicing procedures were not covered by the FFIEC guidelines. The

statute defines a financial institution as a “commercial bank, a savings bank, a trust company, a

savings association, a building and loan association, a homestead association, a cooperative bank

or a credit union.” 12 U.S.C. § 3302(3). 

I find that even if plaintiffs can prove that the FFIEC guidelines were applicable to the

company they have not pled sufficient facts to support their allegations that the company violated

the guidelines. Although plaintiffs cite to confidential witness 5's allegation that “ABF[S]

ignored these guidelines and was very aggressive in its use of forbearance and deferral

agreements,” (Consol. Compl. ¶ 41), he or she did not support his/her allegation with any facts to

show how ABFS actually violated the guidelines. Plaintiffs make no allegations as to the

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 19 of 40
-20-

number of times the company used deferral or forbearance agreements for the same borrower

within a twelve-month period, how many accounts were affected by the use of multiple deferral

or forbearance agreements, or how the company’s alleged violations of the FFIEC guidelines

affected its overall delinquency results. Plaintiffs’ reliance on the FFIEC guidelines is therefore

not probative of whether defendants engaged in any improper conduct. See, e.g., Burlington

Coat Factory, 114 F.3d at 1417-18, Freed 2005 U.S. Dist. LEXIS 7789, at *25-27. 

C. Alleged Misleading Statements and Omissions

Even if plaintiffs had pled sufficient facts to establish the existence of a fraudulent

scheme to manipulate defendants’ reported delinquency ratios, they have not established that

defendants’ allegedly false and misleading statements or omissions were material. Before I can

consider the materiality of defendants’ statements, however, I must consider whether they can be

held liable for statements made after October 16, 2002 and whether the individual defendants can

be held liable for statements not personally attributed to them under the group pleading doctrine. 

1. Liability for Material Statements or Omissions Made After October 16, 2002

Defendants argue that because no named plaintiff traded shares of ABFS stock after

October 16, 2002 all claims based on representations made after that date must be dismissed. 

Prior to class certification, “the action is one between the [named plaintiffs] and the defendants.” 

Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 659 (3d Cir. 1998). “Named

plaintiffs who represent a class must allege and show that they personally have been injured, not

that injury has been suffered by other, unidentified members of the class to which they belong

and which they purport to represent.” Lewis v. Casey, 518 U.S. 343, 357 (1996) (internal

quotations and citations omitted). In Klein v. General Nutrition Companies, Inc., 186 F.3d 388,

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 20 of 40
-21-

345 (3d Cir. 1999), the Court of Appeals for the Third Circuit held that where the plaintiffs failed

to allege valid claims for securities fraud based on statements made before they purchased their

GNC stock, they could not rely on statements made after their stock purchases as a basis for

liability. However, the named plaintiffs assert that they should be allowed to show reliance

on statements issued after they made the last of their ABFS stock purchases because the

statements made after they had purchased their shares were made in furtherance of defendants’

common scheme to defraud. See Nicholas v. Poughkeepsie Sav. Bank/FSB, No. 90-1607

(RWS), 1990 U.S. Dist. LEXIS 12677, at * 15-16 (S.D.N.Y. Sept. 27, 1990) (holding on a

motion to dismiss that named plaintiff could rely on statements made by defendants following

her purchase as a basis for her claims because the statements were part of a “common scheme to

defraud”). Plaintiffs further assert that the Court’s holding in Klein does not apply in this

instance because plaintiffs have alleged valid claims based on statements made by defendants in

advance of their own ABFS stock purchases. 

I agree with defendants that plaintiffs must allege that they personally have been injured

by defendants’ allegedly false and misleading statements. In this instance, plaintiffs must

therefore allege valid claims for securities fraud based on statements made by defendants before

they themselves purchased their ABFS stock and cannot rely solely on statements made by

defendants after October 16, 2002 to establish their claims. However, if plaintiffs do allege valid

claims based on statements made before they purchased their ABFS stock, an issue I will

consider in detail below, I will not dismiss their allegations regarding defendants’ post-purchase

statements provided that they are evidence of a common scheme to defraud. 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 21 of 40
-22-

2. Group Pleading Doctrine and Liability of Individual Defendants 

for Allegedly False and Misleading Statements

In attributing the allegedly misleading statements and omissions in the company’s

quarterly press releases and SEC filings to the individual defendants, plaintiffs seek the benefit of

the “group pleading” doctrine. Under the group pleading doctrine, 

the identification of the individual sources of statements is unnecessary when the

fraud allegations arise from misstatements or omissions in group-published

documents, such as annual reports, prospectuses, registration statements, press

releases, or other ‘group published information’ that presumably constitute the

collective actions of those individuals involved in the day-to-day affairs of the

corporation. 

Winer Family Trust v. Queen, No. 03-4318, 2004 U.S. Dist. LEXIS 19244, at * 17 (E.D. Pa.

Sept. 27, 2004) (citations omitted). Defendants argue that all claims against the individual

defendants based on statements attributed to “ABFS” or to another individual should be

dismissed because the “group pleading” doctrine was abrogated by the enactment of the PSLRA . 

Plaintiffs assert that the individual defendants should be held liable for all of the allegedly false

and misleading statements because the group pleading doctrine survived the enactment of the

PSLRA and because the individual defendants directly participated in the alleged fraudulent

scheme by permitting ABFS to issue the statements. 

The Court of Appeals for the Third Circuit has not ruled on whether the group pleading

doctrine survived the enactment of the PSLRA and district courts in this Circuit are divided on

the issue. In Winer, the most recent district court decision in this Circuit to address the issue of

the group pleading doctrine, the Court held that “[t]he majority of district courts in this Circuit

have held that the group pleading doctrine did not survive the enactment of the PSLRA.” Id.

Courts that have held the group pleading doctrine was abrogated by the PSLRA have followed

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 22 of 40
3Defendants note that the Court of Appeals for the Fifth Circuit, the only Circuit Court of

Appeals to have examined whether group pleading was abrogated by the PSLRA concluded that

it was. Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 364 (5th Cir. 2004). 

-23-

the reasoning of the District Court for the Southern District of California in Allison v. Brooktree

Corp., 999 F. Supp. 1342, 1350 (S.D. Cal. 1998), quoted in Marra v. Tel-Save Holdings, Inc.,

No. 98-3145, 1999 U.S. Dist. LEXIS 7303, at * 14 (E.D. Pa. May 19, 1999) which explained that

“to permit a judicial presumption as to particularity simply cannot be reconciled with the

statutory mandate that plaintiffs must plead specific facts as to each act or omission by the

defendant.” See also P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 142 F. Supp. 2d 589,

619-20 (D.N.J. 2001) (noting that if the group pleading doctrine is viable after enactment of the

PSLRA, “the requirement to plead scienter with particularity as to each defendant is

meaningless”). I agree with this reasoning and find that, without allegations connecting

individuals to allegedly misleading statements or omissions made in group published documents,

this doctrine can no longer be used to create liability for individuals under Section 10(b) and

Rule 10b-5.3 See In re Home Health Corp. of Am. Sec. Litig., No. 98-834, 1999 U.S. Dist.

LEXIS 1230, at * 65 (E.D. Pa. Jan. 29, 1999) (“The court agrees that the group published

information doctrine is inconsistent with the PSLRA’s pleading requirements, and thus, that

specific allegations as to the actions and scienter of each defendant are necessary.). 

Plaintiffs may therefore still allege upon information and belief that an individual

defendant is liable for a misleading statement made in a group published document if the

complaint states with particularity all facts on which the belief that the statement was made by

the individual defendant is based. See 15 U.S.C. § 78u-4(b)(1). 

For instance, if the alleged misleading statement appears in a press release issued

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 23 of 40
4The Court in In re Aetna assumed that the group pleading doctrine remained viable, but

held that

[a]s a prerequisite for group pleading that involves an outside director, operational

involvement on the part of the outside director must be pled. . . . Allegations that

the outside director merely held a position on a committee that is responsible for

overseeing the corporation's financial or disclosure activities are insufficient under

the group pleading doctrine.

In re Aetna, 34 F. Supp. 2d at 949, citing In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th

Cir. 1995).

-24-

by a company discussing financial performance, a plaintiff could plead on

information and belief that the chief financial officer is responsible for making the

statement if the plaintiff can plead with specificity why the officer's position

directly involves such duties or why a specific corporate policy requires that the

chief financial officer make such releases. 

Coates v. Heartland Wireless Communications, Inc., 26 F. Supp. 2d 910, 916 n.2 (N.D. Tex.

1998), quoted in Winer, 2004 U.S. Dist. LEXIS 19244, at *18. I will therefore consider whether

plaintiffs have sufficiently pled a connection between each individual defendant and the allegedly

misleading statements made in ABFS’ press releases and quarterly filings

i. Kauffman

Plaintiffs have alleged a direct connection between defendant Kaufmann and three of the

alleged false and misleading statements or omissions cited by plaintiffs in the complaint, the

company’s October 10, 2000 Form 10-K, the company’s September 28, 2001 Form 10-K and the

company’s September 20, 2002, all of which are alleged to have been “signed by the Individual

Defendants.” (Consol. Compl. ¶¶ 59, 76, 90). In In re Aetna Securities Litigation, 34 F. Supp.

2d 935, 949 (E.D. Pa. 1999), the Court dismissed claims against an outside director because

plaintiffs’ allegations concerning his involvement with the company’s operational affairs were

“merely conclusory” and therefore “insufficient.”4 Although plaintiffs allege that Kaufmann,

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 24 of 40
-25-

along with the other individual defendants, was

privy to non-public information concerning its business, finances, products,

markets and present and future business prospects via access to internal corporate

documents, conversations and connections with other corporate officers and

employees, attendance at management and Board of Directors meetings and

committees thereof and via reports and other information provided to [him] in

connection therewith,

(Consol. Compl. ¶ 18), these allegations are not sufficiently specific to meet the heightened

pleading requirement of the PSLRA. See In re Advanta, 1998 U.S. Dist. LEXIS 10189, at *24-

25 (citations omitted) (“A director, officer, or even the president of a corporation often has

superior knowledge and information, but neither the knowledge nor the information invariably

attaches to those positions, . . . and plaintiffs have not pointed to specific reports, circulated

among defendants, which contained the adverse information defendants are charged with

knowing.”). Plaintiffs have made no allegations as to whether Kaufman had positions on audit,

executive or other committees responsible for overseeing the corporation's financial and

disclosure activities which would provide a direct connection between him and the allegedly

misleading statements. I will therefore grant defendants’ motion to dismiss with respect to the

claims against Kaufman under Count One of the Consolidated Complaint. 

ii. Mandia

Like Kaufman, defendant Mandia is alleged to have possessed non-public information

regarding the company’s business, finances, products, markets and business prospects as a result

of his position with ABFS. Unlike Kaufman, however, Mandia was the company’s Chief

Financial Officer. In addition to the company’s October 10, 2000 Form 10-K, the company’s

September 28, 2001 Form 10-K and the company’s September 20, 2002 Form 10-K, all of which

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 25 of 40
5As noted above, I must first consider whether plaintiffs state a valid claim against

Mandia based on the statements he signed before October 16, 2002. Only then may I consider

the statements filed with the SEC after that date. 

-26-

are alleged to have been “signed by the Individual Defendants,” Mandia is also alleged to have

signed the company’s quarterly Form 10-Qs between February 2000 and May 2003,5 all of which

are alleged by plaintiffs to contain materially false and misleading statements and omissions. 

(Consol Compl. ¶¶ 46, 52, 63, 66, 71, 80, 84, 87, 94, 98,102). In an announcement of the

company’s fourth quarter and fiscal year financial results, on October 10, 2000, Mandia is also

alleged to have stated that “our well-below average delinquency rate of 2.91% continues to

distinguish our Company. Down 27 basis points from the rate at March 31, 2000, our

delinquency rate remains one of the lowest in the industry.” (Consol. Compl. ¶ 58). 

Although plaintiffs do not allege that Mandia’s position as CFO required him to do more

than sign the company’s Form 10-Ks and 10-Qs, viewing the facts in the light most favorable to

plaintiffs, it is reasonable to find that Mandia was responsible for the information contained in

the SEC filings because of the nature of his position. See, e.g. In re Home Health Corp, 1999

U.S. Dist. LEXIS 1230, at * 61–62 (holding plaintiffs stated a claim against defendant CFO

where CFO was listed as a contact person on allegedly misleading press releases, and was a

signatory to the allegedly misleading Form 10-K). The group pleading doctrine

is valid where it is almost certain that given the high level position of the officer

within the company and the nature of the published writing that he or she would

have been involved directly with writing the document or approving its content

and that the officer was privy to information concerning the accuracy of the

statements within the document.

In re U.S. Interactive, Inc. Sec. Litig., No. 01-522, 2002 U.S. Dist. LEXIS 16009, at * 15 (E.D.

Pa. Aug. 23, 2002). Indeed, for SEC filings made after July 30, 2002 Mandia was required to

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 26 of 40
-27-

sign the company’s SEC filings and certify that the statements made therein were not misleading

under the Sarbanes-Oxley Act. See . 18 U.S.C. § 1350 (“Each periodic report containing

financial statements filed by an issuer with the Securities Exchange Commission . . . shall be

accompanied by a written statement by the chief executive officer and chief financial officer (or

equivalent thereof) of the issuer.”). 

A more difficult question is whether Mandia can be also be held liable for allegedly

misleading statements or omissions in ABFS’ announcements of financial results. (Consol.

Compl. ¶¶ 44, 62, 65, 69, 74, 79, 82, 86, 89, 92, 96, 100). Plaintiffs do not allege that Mandia

was required to prepare the announcements as a function of his position or that Mandia was

otherwise connected to these announcements. However, plaintiffs do allege that each

announcement was “reaffirmed” by the Form 10-Qs filed with the SEC. Because I have already

found that it may be reasonable to hold Mandia liable for the information contained in the Form

10-Qs, by extension it is also reasonable to hold him liable for the same information contained in

the company’s announcements of financial results. See In re Reliance Sec. Litig, 91 F. Supp. 2d

706 (D. Del. 2000) (“Although the complaint does not attribute any specific misstatement to

these defendants, the wrong complained of . . . is the kind of matter that these defendants may

have been personally responsible for overseeing.”). 

For the purposes of a motion to dismiss, I must therefore consider each alleged

misstatement or omission in the company’s announcements of financial results, the statements in

the company’s October 10, 2000, September 28, 2001 and September 20, 2002 Form 10-Ks,

ABFS’ quarterly Form 10-Qs filed between February 2000 and May 2003, and the statement

Mandia made on October 10, 2000 in connection with the company’s fourth quarter financial

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 27 of 40
-28-

results to determine whether plaintiffs have stated a claim against Mandia under Rule 10b-5. 

However, I will dismiss the claims against Mandia related to the company’s press releases cited

in paragraphs 47, 55, 67 and 72 of the Consolidated Complaint because plaintiffs have not made

sufficient allegations to connect Mandia to the allegedly misleading statements contained therein. 

iii. Santilli

As with Kaufman and Mandia, defendant Santilli is alleged to have possessed non-public

information regarding the company’s business, finances, products, markets and business

prospects as a result of his position with ABFS. As the company’s Chairman, CEO, President,

COO and Director, plaintiffs allege Santilli possessed non-public information regarding the

company’s business, finances, products, markets and business prospects. Santilli’s position

alone is not sufficient to establish his liability for allegedly misleading statements attributed to

the company. See Marra, 1999 U.S. Dist. LEXIS 7303, at * 15-16 (“Plaintiffs must properly

plead wrongdoing as to each individual defendant and cannot merely rely on the individuals’

positions or committee memberships within the Tel-Save organization.”). However, plaintiffs’

Consolidated Complaint contains numerous allegations that directly attribute misstatements and

omissions of material fact to Santilli. As with the other individual defendants, Santilli is alleged

to have signed the company’s October 10, 2000 Form 10-K, the company’s September 28, 2001

Form 10-K and the company’s September 20, 2002 Form 10-K. In accordance with the

requirements of the Sarbanes-Oxley Act, Santilli also signed and certified ABFS’ November 14,

2002, February 14, 2003 and May 15, 2003 Form 10-Qs. Plaintiffs also cite to many comments

directly attributed to Santilli in the company’s announcements of financial results and press

releases. (¶¶ 45, 48, 51, 54, 70, 71, 72, 75, 83, 86, 93, 97, 100). Because plaintiffs have

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 28 of 40
-29-

established a significant connection between Santilli and the allegedly misleading statements in

the company’s SEC filings, announcements of financial results and press releases, I must analyze

each alleged misstatement or omission to determine whether plaintiffs have stated a claim against

Santilli for securities fraud under Rule 10b-5. See Winer, 2004 U.S. Dist. LEXIS 19244, at *19-

20 (holding plaintiff’s allegations directly attributing statements in company’s press releases to

an individual defendant required the court to analyze those alleged misstatements under Rule

10b-5. 

3. Materiality

Plaintiffs have not established that there is a substantial likelihood that the statements or

omissions in defendants’ SEC filings and press releases “would have been viewed by the

reasonable investor as having significantly altered the total mix of information available to the

investor.” In re NAHC, Inc. Sec. Litig, 306 F.3d 1314, 1330 (3d Cir. 2002), citing Basic Inc. v.

Levinson, 485 U.S. 224, 231-232 (1988). “The materiality question asks of each statement: is

the allegedly false statement, in the context in which it was publicized, ‘information that would

be important to a reasonable investor in making his or her investment decision.’” Loewen I.,

2003 U.S. Dist. LEXIS 15680, at * 44 (citation omitted). Materiality is a mixed question of law

and fact and “[o]nly if the alleged misrepresentation or omissions are so obviously unimportant

to an investor that reasonable minds cannot differ on materiality is it appropriate for the district

court to rule that the allegations are inactionable as a matter of law.” Weiner v. Quaker Oats Co.,

129 F.3d 301, 317 (3d Cir. 1997) (quotation omitted). 

“Obviously there can be no securities fraud liability for a true statement.” Loewen I,

2003 U.S. Dist. LEXIS 15680, at * 41. Defendants argue that plaintiffs have not produced

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 29 of 40
-30-

evidence to establish that ABFS’ reported financial results were false. As an example,

defendants cite paragraph 47 of plaintiffs’ Consolidated Complaint which challenges the

information contained in a press release reporting the value of ABFS’ loan originations for its

fiscal quarter ending March 31, 2000 and the closing of a $235 million mortgage loan

securitization. Plaintiffs do not allege facts to demonstrate that the company did not, in fact,

close a $235 million loan securitization or that ABFS failed to originate loans in the amount

reported. 

Plaintiffs counter that their allegation is not that defendants’ statements were false on

their face, but that the information they contained was misleading because defendants were only

able to achieve their reported financial results by manipulating their delinquency ratios. 

Plaintiffs further argue that “failures to disclose sufficient information to render statements

actually made not misleading” are actionable under Rule 10b-5. Hoxworth v. Blinder, Robinson

& Co., 903 F.2d 186, 200 n.19 (3d Cir. 1990). They assert that “whenever defendants mentioned

their securitizations and/or delinquency rates, they had an affirmative duty to disclose the fact

that they attained low delinquency rates by employing [ ] improper practices . . . .” (P’s Opp. at

21). However, as noted above, plaintiffs have not pled sufficient facts to establish that

defendants’ use of forbearance and deferment agreements was improper. Defendants’ alleged

failure to disclose how their lower than industry average delinquency ratios were attained is

therefore not actionable under Rule 10b-5. 

Further, many of the allegedly misleading statements cited by plaintiffs in their complaint

explicitly refer to the company’s work with borrowers to “cure” their loan delinquencies prior to

foreclosure, undercutting plaintiffs’ allegation that ABFS’ SEC filings and press releases were

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 30 of 40
6On a motion to dismiss filed pursuant to Rule 12(b)(6) the materials at which I may look

are limited. Burlington Coat Factory, 114 F.3d at 1424-25. I may consider a document not cited

in or attached to the complaint only if it is “integral to or explicitly relied upon in the complaint.” 

Id. at 1426, quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir. 1996). 

-31-

misleading because they failed to disclose that ABFS was using forbearance agreements and

deeds in lieu of foreclosure to improve its delinquency ratio. In the January 27, 2000 press

release cited by plaintiffs as starting the class period, the Company announced record results for

its second fiscal quarter and six months ended December 31, 1999. The press release also cited a

statement by defendant Mandia, who said, “[b]ased on our proactive efforts working with

borrowers who are delinquent, more than half of the delinquent loans ‘cure’ without ever going

into foreclosure.” (Ds’ Mot. to Dis. Ex. G at 3).6 While not referencing the techniques used to

“cure” the delinquent loans, Mandia’s statement at least alerted investors that ABFS’ initial

delinquency rate may have been significantly higher than that reported after the company

undertook its “proactive efforts” to work with delinquent borrowers. 

Even more strongly weighing against plaintiffs’ allegations that defendants’ statements

were materially misleading, the Forms 10-K filed on October 10, 2000, and September 28, 2001

explicitly disclosed ABFS’ use of “work-out arrangements” with delinquent borrowers,

explaining:

In addition, after a loan or lease becomes 61 days delinquent, our loss mitigation

unit becomes involved. Our loss mitigation unit tries to reinstate a delinquent

loan or lease, seek a payoff, or occasionally enter into a modification agreement

with the borrower to avoid foreclosure. All proposed work-out arrangements are

evaluated on a case-by-case basis, based upon the borrower’s past credit history,

current financial status, cooperativeness, future prospects and the reasons for the

delinquency.

(Consol. Compl. ¶¶ 59, 76). The September 20, 2002 Form 10-K similarly explained:

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 31 of 40
-32-

When a loan becomes 45 to 60 days delinquent for a home equity loan or 90 days

delinquent for a business purpose loan, it is transferred to a specialist in the

collections department. The specialist tries to reinstate a delinquent loan, seek a

payoff, or enter into a forbearance or other agreement with the borrower to avoid

foreclosure. All proposed arrangements are evaluated on a case-by-case basis,

based on, among other things, the borrower’s past credit history, current financial

status, cooperativeness, future prospects and the reasons for the delinquency.

(Consol. Compl.¶ 90). Investors thus had some notice of defendants’ use of re-aging techniques

to improve the company’s reported delinquency ratio. 

Defendants further argue that many of the alleged misstatements plaintiffs challenge in

the Consolidated Complaint are immaterial puffery. “Vague and general statements of optimism

that constitute no more than ‘puffery’ and are understood by reasonable investors as such” will

not support a claim of securities fraud. In re Advanta, 180 F.3d at 538. Statements are

immaterial when they are so exaggerated or so vague that reasonable investors would not rely on

them in considering the total mix of available information. Hoxworth, 903 F.2d at 200, citing

TSC Industries Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). “The theory behind not holding

defendants liable for puffery is that reasonable investors would consider the source of such

optimism and consequently not allow it to affect unduly their opinion of the stock.” Loewen I,

2003 U.S. Dist. LEXIS 15680, at * 42. Statements that plaintiffs allege to be misleading and

which defendants assert are mere puffery include the following:

In April 2000, defendant Santilli said, 

I am very proud of the way this organization has focused its energies on answering

the needs of our target markets. This achievement demonstrates that, even during

a period of interest rate tightening by the Federal Reserve our needs-based, retail

origination strategy is not only working, but thriving. Our business lending and

consumer mortgage divisions deserve credit of an outstanding month and quarter.

(Consol Compl. ¶48). In June 2000, defendant Santilli said, 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 32 of 40
-33-

I am very proud that we have been able to maintain our pace of securitizations for

ten straight quarters, and now have more than $2 billion in securitized loans . . . . 

These accomplishments demonstrate our continued focus on credit quality, the

application of uniform underwriting standards, and our retail origination strategy. 

These practices are critical to our ongoing success, and central to our strategy of

managed growth. 

(Consol. Compl. ¶ 54). In June 2001, defendant Santilli said, “We are particularly pleased with

the demand shown for the certificates in this securitization, and the quality of purchasers that we

were able to attract.” (Consol. Compl. ¶72). Three months later, in September 2001, he

explained, “We firmly believe our accomplishments come from combining the demand for our

products with significant investments in training, new technology and the ongoing development

of one of the most sophisticated portfolio management tools in the industry.” (Consol. Compl. ¶

75). In January 2002, Santilli said, 

We believe the fact that we were able to maintain our earnings momentum during

a period of declining interest rates and economic conditions, including increased

prepayment activity, demonstrates our commitment to doing business the right

way every day, from the origination process through to the careful servicing of our

portfolio. 

(Consol. Compl. ¶ 83). Santilli further noted the importance of its loan servicing techniques in

April 2002, explaining “Our historical record supports our core belief that collections are every

bit as important as originations to deliver success in this business. We believe it’s really what

sets us apart.” 

Santilli’s optimistic statements are typical of those which have been held by the courts to

constitute nothing more than puffery. In In re U.S. Interactive, 2002 U.S. Dist. LEXIS 16009, at

*45-46 (emphasis in original), the Court held that a statement by the chairman of the board that

“As we evaluate ourselves and prepare ourselves for this next phase, we realize and celebrate that

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 33 of 40
-34-

we are the leader right now in the telecom industry in enabling the customer value chain. . . . We

think that right now our ability to leverage that with a change in the market place gives us an

edge, and that’s what we want” was no more than puffery. 

All public companies praise their products and their objectives. Courts

everywhere ‘have demonstrated a willingness to find immaterial as a matter of law

a certain kind of rosy affirmation commonly heard from corporate managers and

numbingly familiar to the marketplace – loosely optimistic statements that are so

vague, so lacking in specificity, or so clearly constituting the opinions of the

speaker, that no reasonable investor could find them important to the total mix of

information available. 

In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570-71 (6th Cir. 2004), quoting Shaw v. Digital

Equip. Corp., 82 F.3d 1194, 1217 (1st Cir. 1996). Read in context with all of the information

available to investors, defendants’ alleged misleading statements are immaterial. Beyond

Santilli’s optimistic statements, the company’s publications also alerted investors to the fact that

the company faced challenges in maintaining its low delinquency rates due to changes in

economic conditions. For example, the company’s February 14, 2002 Form 10-Q stated that

“[t]he increase in delinquencies and delinquency percentages was mainly due to the continued

decline in economic conditions and the seasoning of the managed portfolio. As the managed

portfolio continues to season we expect the delinquency rate to continue to increase.” 

Plaintiffs argue that even statements of puffery such as the opinions and predictions made

by Santilli may be actionable under the securities laws “if the speaker does not genuinely and

reasonably believe them.” In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 378 (3d Cir.

1993). They assert that the statements at issue here are actionable because defendants knew that

Santilli’s statements and the other statements released about the company’s delinquency ratios,

securitizations and financial results were untrue because they knew that the company’s

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 34 of 40
-35-

delinquency rates were being improperly manipulated. However, as already noted, plaintiffs

have not pled sufficient information in the Consolidated Complaint to establish that there was a

fraudulent scheme to improve the company’s delinquency ratios. Plaintiffs therefore have not

established that defendants could not have reasonably believed in the truthfulness of their

statements at the time they were made. “[L]iability does not attach merely because ‘at one time

the firm bathes itself in a favorable light’ but later the firm discloses that things are less rosy.’” In

re Advanta, 180 F.3d at 538, quoting DiLeo, 901 F.2d at 627. Plaintiffs have not established that

the statements or omissions in defendants’ SEC filings and press releases were false or materially

misleading. 

D. Scienter

Even if plaintiffs had established that defendants’ statements or omissions were false or

materially misleading, they have not met the PSLRA’s requirements for pleading scienter. Under

the PSLRA, a complaint must “state with particularity facts giving rise to a strong inference that

the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). In the Third

Circuit, a plaintiff may establish this strong inference “either (a) by alleging facts to show that

defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that

constitute strong circumstantial evidence of conscious misbehavior or recklessness.” Burlington

Coat Factory, 114 F.3d at 1418. Plaintiffs’ Consolidated Complaint alleges that defendants’

scienter is evidenced by their stock sales during the class period and also by the individual

defendants’ positions within the company. 

Insider stock sales that are unusual or suspicious in timing or amount may create an

inference of scienter. In re Advanta 180 F.3d at 540. As noted above, although the Consolidated

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 35 of 40
-36-

Complaint alleges suspicious stock sales by defendants Santilli and Mandia, plaintiffs have now

withdrawn their allegations regarding Santilli and Mandia’s alleged sales. Plaintiffs continue to

assert that defendant Kaufman’s sales were unusual and suspicious in timing and amount and that

they are therefore indicative of scienter. Defendants argue that the Consolidated Complaint fails

to establish Kaufman’s opportunity to commit fraud. In order to satisfy the opportunity prong of

the motive and opportunity test, plaintiffs must allege that Kaufman had the opportunity to cause

the defendants to make the allegedly materially misleading statements and omissions in the

company’s press releases and SEC filings. As noted above, plaintiffs have not pled sufficient

information to support their allegations that defendant Kaufman, an outside director, was an

active participant in the alleged fraudulent scheme. As such, the allegations regarding his stock

sales are insufficient to meet the pleading requirements for scienter under the PSLRA. See, e.g.,

In re Aetna., 34 F. Supp. 2d. at 956 (dismissing claims against outside director for failure to

allege opportunity). 

While insider sales are one way to prove scienter, they are not required. However,

plaintiffs’ other allegations of scienter are also inadequate. “[B]lanket assertions of motive and

opportunity . . . [and] catch-all allegations that defendants stood to benefit from wrongdoing and

had the opportunity to implement a fraudulent scheme are no longer sufficient, because they do

not state facts with particularity or give rise to a strong inference of scienter.” In re Advanta, 180

F.3d at 535. Plaintiffs must allege “a concrete and personal benefit to the individual defendants

resulting from [the alleged fraudulent scheme].” GSC Partners CDO Fund v. Washington, 368

F.3d 228, 237 (3d Cir. 2004), quoting Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001). 

Plaintiffs have not cited any authority from this Circuit to support their assertion that their

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 36 of 40
-37-

allegations that defendants engaged in fraud to maintain their compensation packages and other

benefits derived from the company’s success are sufficient to demonstrate defendants’ motive. 

Plaintiffs’ allegations of generalized motives such as the company’s need to complete its debt

securitizations, incentive compensation and defendants’ desire to protect their executive

positions are insufficient to meet the pleading requirements for scienter. See GSC Partners, 368

F.3d at 238 (holding allegation that corporation would have been unable to acquire a company

without the successful issuance of notes and would have been unable to sell the notes at or near

the price sought had the company’s true financial condition been revealed was insufficient to

establish motive); In re Alpharma Sec. Litig., 372 F.3d 137, 152-53 (3d Cir. 2004) (holding

allegations of a desire to increase stock prices, were insufficient to establish scienter); In re

Digital Island Sec. Litig., 357 F.3d 322, 331 (3d Cir. 2004), quoting Phillips v. LCI Int'l, Inc.,

190 F.3d 609, 622-23 (4th Cir. 1999)(“Assertions that a corporate officer or director committed

fraud in order to retain an executive position . . . simply do not, in themselves, adequately plead

motive”). Loewen II, 2004 U.S. Dist. LEXIS 16601, at * 62 (“the desire to maintain a high credit

rating is not sufficient, however, to satisfy the requirement for pleading motive”). 

Plaintiffs also appear to plead scienter by including allegations of recklessness or

conscious behavior by defendants. 

A reckless statement is one involving not merely simply or even inexcusable

negligence, but an extreme departure from the standards of ordinary care, and

which presents a danger of misleading buyers or sellers that is either known to the

defendant or is so obvious that the actor must have been aware of it. We also note

that scienter can be alleged by stating with particularity facts giving rise to a

strong inference of conscious wrongdoing, such as intentional fraud or other

deliberate illegal behavior

In re Advanta, 180 F.3d at 535 (citations and internal quotations omitted). The Consolidated

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 37 of 40
-38-

Complaint fails to plead conscious wrongdoing by any of the defendants with the required level

of specificity. Plaintiffs allege that the individual defendants had knowledge of the alleged

fraudulent scheme because it was essential to the company’s “core operations.” However,

plaintiffs have not met their burden of alleging facts that the individual defendants’ positions

were such that they were consciously involved in a scheme to defraud investors. 

There are no allegations in the Consolidated Complaint to support the alleged conscious

or reckless wrongdoing by defendant Kaufman as his alleged stock sales do not represent “an

extreme departure from the standards of ordinary care” in the absence of additional allegations

showing that he had knowledge of the alleged fraudulent scheme. The Consolidated Complaint

similarly lacks allegations that defendant Mandia was aware of a scheme to fraudulently use loan

re-aging techniques in order to improve the company’s loan delinquency ratio. While plaintiffs

have included more specific allegations pertaining to defendant Santilli’s role in the alleged

fraudulent scheme, none of the allegations are sufficient to establish the required “strong

inference” that he acted with the required state of mind. Although Santilli is alleged to have

attended meetings where delinquency numbers were discussed and he is alleged to have taken an

interest in getting the delinquency ratio numbers to a desired level, there are no allegations to

connect him to the use of fraudulent practices in order to manipulate the company’s delinquency

ratios. Plaintiffs may not establish scienter by pleading “a bare inference that a defendant ‘must

have had’ knowledge of the facts.” In re Advanta, 180 F.3d at 539. The facts pled to support

plaintiffs’ scienter allegations are therefore insufficient to support a claim of securities fraud and

the Consolidated Complaint will be dismissed. 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 38 of 40
-39-

V. CLAIMS UNDER SECTION 20(A)

Section 20(a) of the Exchange Act creates liability for “[e]very person who, directly or

indirectly, controls any person liable” for an independent violation of the Exchange Act. 15

U.S.C. § 78t. Because claims under Section 20(a) are derivative, “[a] plaintiff cannot maintain a

claim under Section 20(a) without meeting the pleading requirements for a primary violation of

the Act.” Loewen I., 2003 U.S. Dist. LEXIS 15680. Because the Consolidated Complaint fails

to plead the alleged fraudulent scheme with the requisite level of particularity, fails to establish

that there is a substantial likelihood that defendants’ allegedly false statements would have been

material to a reasonable investor and fails to plead that the individual defendants acted with the

requisite strong inference of scienter, I will also dismiss Plaintiffs’ claims under Section 20(a). 

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 39 of 40
IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

:

IN RE AMERICAN BUSINESS : CIVIL ACTION

FINANCIAL SERVICES, INC. : NO. 04-0265

SECURITIES LITIGATION :

:

ORDER

AND NOW, this 2nd day of June, 2005, after considering defendants’ motion to dismiss,

lead plaintiffs’ opposition thereto, defendants’ reply brief and for the reasons set forth in the

accompanying memorandum, it is ORDERED that defendants’ motion is GRANTED and the

Consolidated Complaint is DISMISSED as to defendants Anthony J. Santilli, Richard Kaufman

and Albert W. Mandia with leave to amend pursuant to Rule 9(b) of the Federal Rules of Civil

Procedure and the Reform Act. Any amended complaint must be filed within twenty (20) days

from the date of this Order. 

s/Thomas N. O’Neill, Jr.

 

THOMAS N. O'NEILL, JR., J.

Case 2:04-cv-00265-TON Document 31 Filed 06/02/05 Page 40 of 40