Opinion ID: 2982178
Heading Depth: 2
Heading Rank: 2

Heading: Application to Plaintiffs' Allegations

Text: On appeal, plaintiffs pursue only three of the nine categories of alleged misstatements or omissions identified by the district court.
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.
Plaintiffs’ second argument is based on defendants’ statements in the PPM and three SEC filings between May 6 and November 10, 2009, that the Bank was “well capitalized.” Plaintiffs assert that these statements were false or misleading because defendants failed to disclose that they were engaged in the “risky business practices” that were the subject of the OFIR investigation. This theory is fundamentally flawed.4 As the district court noted, the description “well capitalized” is a term of art under applicable federal banking regulations. See 12 C.F.R. § 325.103. Those regulations establish four financial classifications based on a bank’s total risk-based capital ratio: “well capitalized,” “adequately capitalized,” “undercapitalized,” and “significantly undercapitalized.” Id. These labels either apply 4 Defendants are also correct when they point out (Appellees’ Brief at 20 n.13) that plaintiffs did not base their “well capitalized” claim on the OFIR report and “risky business practices” theory before the district court. Rather, they based it on the allegation that defendants failed to disclose “massive losses” that the Bank was suffering. 11 No 13-1444 Dailey v. Medlock or they don't; if the bank meets the regulatory criteria to be “well capitalized,” then it cannot be false or misleading for it to so describe itself. Importantly, plaintiffs do not allege that the Bank did not meet these regulatory criteria at the time it described itself as “well capitalized.” Rather, they allege that the statement was misleading given that the Bank was being investigated by the OFIR for allegedly poor business practices. This argument confuses apples and oranges: such allegedly poor business practices speak to a general assessment of the integrity of the bank’s operations, a question separate from whether the Bank's then-current capital profile qualified it as “well capitalized” in the eyes of the government. In fact, the PPM specifically stated that the term “well capitalized” was being used pursuant to “applicable regulatory capital guidelines.” Moreover, as the district court noted, the statement that the Bank was “well capitalized” was placed in the context of both its need for additional capital as well as the poor economic forecast: The primary purpose of this offering is to strengthen our capital position. While we remained “well capitalized” as of March 31, 2009 under applicable regulatory capital guidelines, the market outlook for continuing weak economic conditions requires that we take all necessary steps to achieve higher capital levels that will position us to remain strong throughout the remainder of the current industry crisis. “The context of statements is often telling.” City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 672 (6th Cir. 2005) (citation omitted). In fact, it bears noting that eleven of the PPM’s twenty-three pages are devoted to a discussion of the risks related to CCB’s business and the Bank itself. These are not boilerplate cautionary statements. Rather, these pages detail adverse business conditions specific to CCB based on its high-risk loan portfolio; they forecast a continued deterioration in loan delinquencies, credit 12 No 13-1444 Dailey v. Medlock losses, and profits; they note that a change in the regulatory “capitalization” rating would impair the Bank’s borrowing position; and they explain in detail that the Series B Preferred Stock offered through the PPM was junior to all other indebtedness such that its holders would be “last in line” in the event the Bank went into bankruptcy, liquidation, or wind-up. Finally, when the Bank’s capital profile changed such that it qualified only as “adequately capitalized,” it accurately reported that change in its Fourth Quarter 2009 filings in March 2010. The district court thus correctly concluded that this allegedly false or misleading statement fails to support a Rule 10b-5 claim.
Plaintiffs’ third argument in support of their Rule 10b-5 claim is premised on the statement in the PPM that the Bank’s operations are “subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations.”5 On its face, this is obviously an accurate statement – banks are indeed subject to a plethora of laws and regulations. Nonetheless, plaintiffs argue that this statement was “designed to mislead” them because defendants did not disclose that they were violating laws and regulations and were under investigation by the OFIR. 5 The district court correctly noted that this statement from the PPM was not identified in the First Amended Complaint as an allegedly false or misleading statement upon which plaintiffs premised their claims. Instead, plaintiffs appear to have first zeroed in on the statement in their response in opposition to the motion to dismiss. The district court nonetheless addressed this theory, so we do likewise on appeal. 13 No 13-1444 Dailey v. Medlock The district court properly rejected this theory. First, the above statement merely says that the Bank is “subject” to laws and regulations; it does not state that the Bank believes it is in compliance with such laws. Even if it did, this Circuit’s precedent holds that a generic claim of legal compliance, absent any specifics, does not form the basis for a misrepresentation actionable under Rule 10b-5 and does not require the disclosure of allegedly illegal activities. See Omnicare, 583 F.3d at 945–47; see also Kushner v. Beverly Enters., Inc., 317 F.3d 820, 826–27 (8th Cir. 2003) (statement that company was in “substantial compliance” with Medicare regulations did not support Rule 10b-5 claim where plaintiffs failed to allege particular facts demonstrating that defendants then knew of scheme which violated those regulations). Moreover, while plaintiffs reference the OFIR investigation, they do not plead what, if any, laws or regulations defendants violated such that a statement of legal compliance (again, which defendants did not make) would have been false or misleading. Cf. Bridgestone, 399 F.3d at 672–73 (finding statement regarding safety of company’s tires to be actionable where company had actual knowledge of internal tests regarding tire failures). For these reasons, the district court properly held that these allegations did not sufficiently plead a statement actionable under Rule 10b-5.