Opinion ID: 2982178
Heading Depth: 3
Heading Rank: 2

Heading: “Well Capitalized”

Text: 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.