Opinion ID: 2982178
Heading Depth: 3
Heading Rank: 1

Heading: Valuation Allowance

Text: Plaintiffs’ first argument is based on the following statement in the PPM: “We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations.” Plaintiffs do not allege that this statement is false on its face. Rather, they theorize 8 No 13-1444 Dailey v. Medlock that the statement “indicates” that CCB was “actually maintaining ‘adequate levels of capital’ throughout 2009.” They then argue that this implication was rendered false and/or misleading because defendants failed to disclose, in the PPM or its supplements, the valuation allowance3 that was taken at the end of 2009. One cannot disclose an event which has not yet occurred. Plaintiffs' theory is thus really that defendants knew that the allowance would be taken but they failed to disclose that information. While plaintiffs make an assertion of such actual knowledge in their appellate brief, the FAC itself alleges no facts, much less “highly particularized facts,” to support that contention. Plaintiffs allege only generally that defendants were “aware” of “significant, unreported losses,” but they do not allege that defendants had decided that the valuation loss would be taken or when, or even that any projections had been made which would make such a decision probable. Indeed, as defendants note, as late as November 13, 2009, when CCB filed its Form 10-Q for the third quarter, CCB discussed in detail the analysis underlying the decision to take a valuation allowance, management's application of those factors to CCB's performance through the end of 3 A “valuation allowance” should be taken, under accounting standards, when a company determines that, “based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of deferred tax assets will not be realized in the future.” In re Fannie Mae 2008 Sec. Litig., 742 F. Supp. 2d 382, 409 (S.D.N.Y. 2010) (internal quotation marks omitted). “This is a very subjective standard.” Id.; see also Valuation Allowance, wikinvest (Nov. 5, 2013, 11:53 AM EDT), http://www.wikinvest.com/wiki/Valuation_Allowance (“If a company expects there is more than 50% chance it will not be able to realize some of its deferred tax assets (because its future income won't be large enough to take full advantage of these tax breaks), it must report a valuation allowance to account for this. . . . A valuation allowance depends a great deal on management assumptions - who's to say how high a company's future profits will be, and therefore whether the company will be able to take advantage of its deferred tax assets?”). 9 No 13-1444 Dailey v. Medlock September 2009, and the fact that CCB had determined not to take a valuation allowance for that quarter. CCB also stated, however: The deferred tax assets will be analyzed quarterly for changes affecting if the asset can be realized, and there can be no guarantee that a valuation allowance will not be necessary in future periods. Should a valuation allowance be necessary in future periods, it could further adversely affect our financial position and results of operations. This 10-Q was filed approximately one month before plaintiffs began executing the agreements to purchase CCB stock. With no facts alleged to support the contention that defendants had prior knowledge that a valuation allowance would be taken for the fourth quarter of 2009, plaintiffs make the ipso facto assertion that the mere fact that it ultimately was taken demonstrates such knowledge. It is hard to imagine a clearer example of alleging “fraud by hindsight.” See La. Sch. Emps.' Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 484 (6th Cir. 2010) (“Finding scienter based on such allegations would be equivalent to ‘the classic fraud by hindsight case where a plaintiff alleges that the fact that something turned out badly must mean defendant knew earlier that it would turn out badly.’”) (citation omitted). Plaintiffs' reliance on Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011), and its predecessor opinion, does not advance their cause. Plaintiffs string together several quotations from these two cases, one of which mentions a valuation allowance, and conclude by quoting the court’s statement that it was “uncontested” that the defendants there made “false statements.” However, the fact that the company in that case had taken a valuation allowance was mere background – the court did not 10 No 13-1444 Dailey v. Medlock discuss it in relation to its determination that plaintiffs had adequately pleaded their securities claim and, more specifically, scienter. Further, unlike in this case, the plaintiffs in Frank pleaded specific sources of information from which defendants would have gained actual knowledge that their public statements concerning the company's operations were in conflict with the actual facts. Frank, 646 F.3d at 959–61. The complaint here lacks such factual allegations regarding the valuation allowance. Therefore, the district court correctly held that plaintiffs’ allegations concerning the valuation allowance failed to state a securities fraud claim.