District Of Connecticut Dismisses Securities Class Action Against A Consumer Financial Services Company, Certain Of Its Officers And Directors And Its Underwriters, Holding That Plaintiffs Failed To Adequately Allege Any Material Misrepresentations
On March 31, 2020, Judge Victor A. Bolden of the District of Connecticut dismissed a putative securities class action against a provider of private label credit cards (the “Company”), certain of its officers and directors, and its underwriters in connection with a notes offering. In re Synchrony Financial Sec. Litig., No. 3:18-cv-1818 (VAB) (D. Conn. Mar. 31, 2020). Plaintiffs alleged violations of Section 11 of the Securities Act of 1933 (the “Securities Act”) by all defendants, as well as Section 15 of the Securities Act against the individual defendants. Plaintiffs also alleged violations of Sections 10(b), 20A, and 20(a) of the Securities and Exchange Act of 1934 (the “Exchange Act”) by the Company and certain of the individual defendants. The Court granted defendants’ motion to dismiss the Amended Complaint in its entirety with prejudice.
The Company provides private label and “general purpose co-brand credit cards” through a collaboration with retailers and consumer brands. According to the Amended Complaint, the Company’s retail partnerships were the “cornerstone” of its business because retailers sought to partner with the Company to increase sales and marketing and to encourage customer loyalty through branded credit cards. According to the Amended Complaint, retail partners shared in the gains from their partnership that “flowed” from customers’ fees, interest payments and other charges on their credit accounts, so long as the economic performance of the program exceeded a contractually-defined threshold.
Plaintiffs alleged that the Company “loosened its underwriting standards to boost growth,” which allegedly resulted in loans to “subprime borrowers” that generated a “pool of bad loans,” loan losses, and charge-offs. According to plaintiffs, the Company responded by “drastically” tightening its underwriting standards,” causing reduced revenues, thereby harming its most lucrative retail partnership with its “most important retail partner” (the “Retail Partner”). Plaintiffs alleged that the Retail Partner “was incentivized to encourage [the Company] to grant subprime customers access to credit,” as it would increase the Retail Partner’s sales and fees under the partnership because the retailer allegedly “focuse[d] a significant portion of [its] store credit card business . . . on subprime borrowers.”
According to the Amended Complaint, the Company and certain of the individual defendants made materially false and misleading statements about the Company’s underwriting practices, which artificially inflated the Company’s securities prices, ultimately leading to a stock drop when the truth allegedly was partially revealed on an April 28, 2017, earnings call. Plaintiffs further alleged misrepresentations concerning the “resulting decrease in near-prime and subprime customers” related to the Company’s underwriting practices, the “pushback” the Company received from retail partners, and the Company’s relationships with its retail partners.
In support of their Exchange Act claims, plaintiffs alleged that the Company misled investors regarding its decision to tighten its underwriting standards from mid-2016 through early 2017. Plaintiffs alleged that despite these changes, the Company and certain of the individual defendants continued to reiterate that “underwriting remained ‘consistent’ and ‘disciplined’” and that any changes were “surgical in nature,” and that such misstatements were repeated in filings to the SEC. Specifically, plaintiffs alleged that the Company’s CEO and CFO repeatedly emphasized that the Company continued to experience “‘strong growth’ in loan receivables” and reassured investors at conferences and company presentations in early 2017 that the Company had not “changed [its] underwriting significantly over the past 9-12 months.” Plaintiffs also alleged that, as a result of these misstatements, the Company’s stock price was artificially inflated. In April 2017, the Company allegedly made a “partial corrective disclosure,” announcing poor results for Q1 2017 due to its “souring loan portfolio”—however, plaintiffs alleged that the CEO and CFO continued to reiterate that underwriting practices were consistent and that any changes made were “pretty surgical in nature” and done to “tighten up” the model.
Further, relying on information purportedly from former employees, plaintiffs also alleged that the Company made misleading statements and omissions about the effect the changes to the underwriting model had on its relationship with its partners, including the Retail Partner. Specifically, plaintiffs alleged that the Retail Partner, which “historically had one of the lowest requirements for credit approvals across all of [the Company’s] portfolios,” was unhappy with the changes to the underwriting model which led to fewer credit card approvals for its subprime customers. Plaintiffs alleged the Retail Partner gave “pushback . . . on [the Company’s] credit decisions.” Plaintiffs further alleged that the Company’s CEO and CFO dismissed analyst concerns over potential tension between retailers and the Company and reiterated that the agreements between the parties “completely aligned” their interests and that the Company was “not getting any pushback on credit.” In response to questions about partnership renewals, the CEO allegedly stated that she was confident the Company would continue its partnerships, despite being aware that the Retail Partner was dissatisfied and had considered replacing the Company as its branded credit card partner. In late July 2018, the Retail Partner announced the end of its partnership with the Company, and the Company’s stock dropped 10.3%, which plaintiffs alleged was fully attributable to the “undisclosed material facts” about the Company’s deteriorating relationship with the Retail Company. The Company’s stock further dropped in November 2018 after the Retail Partner sued the Company alleging breach of contract.
In addition to the Exchange Act claims, plaintiffs also brought Securities Act claims against all defendants, alleging “a series of materially untrue statements and omissions” in the Company’s “registration statement, preliminary prospectus, prospectus, and other public filings” misled investors about its “stable asset quality” and that the “credit environment remained favorable during 2016,” along with other statements that suggested the Company was not anticipating changes to its underwriting strategy.
The Court first considered the Exchange Act claims. Defendants argued that plaintiffs failed to adequately plead actionable misrepresentations or scienter, contending that the Amended Complaint amounts to conclusory assertions and anecdotes from former “low-level” employees. The Court agreed, holding that plaintiffs failed to meet the heightened pleading standards of the PLSRA with respect to statements in the period at issue prior to April 28, 2017. The Court held that the alleged misstatements “standing alone or viewed together with [the] other allegations [would not be] material misrepresentations on which a reasonable investor would rely, given the broader context of all the publicly disclosed information.” In so holding, the Court noted that plaintiffs failed to demonstrate that the Company’s statements about its “stable asset quality” were false, and observed that the Company noted in its 2016 Form 10-K that its results and growth “were contingent on factors not yet known.” The Court further held that plaintiffs failed to plead with particularity that defendants’ statements about its “consistent” and “disciplined” underwriting strategy would have been misleading to a reasonable investor, or that such generic statements were false or could have “invite[d] reasonable reliance.” The Court noted that, in fact, the Company “regularly disclosed” on earnings calls and in documents that it consistently modified its underwriting standards “based on the specific program and various factors.” Finally, the Court observed that “many of the cited statements, taken out of context from more extensive and detailed earnings calls or public disclosures, would [be] inactionable puffery or opinion,” particularly as reasonable investors would be informed of defendants’ modifications to their underwriting strategy given the “total mix” of information available to them.
Turning to the alleged misstatements made on or after April 28, 2017, the Court agreed with defendants that many of the statements were inactionable puffery or opinion. The Court noted that certain defendants’ positive statements about its partnership with the Retail Partner, and of the potential renewal with the Retail Partner, were not materially misleading because warnings were provided on earnings calls about the “increased competition for renewals” and defendants’ “lack of clairvoyance” regarding potential renewals with the Retail Partner “simply does not constitute securities fraud.” The Court further held that statements that the Company’s interests were “completely aligned” with its retail partners would not be misleading to reasonable investors as such statements were generic and vague and would not lead to reliance “especially when viewed in the ‘total mix’ of available information.” Finding that all of plaintiffs’ Exchange Act claims failed to adequately allege any material misrepresentations, the Court dismissed these claims as well as plaintiffs’ Section 20A and 20(a) claims, finding no predicate violations of the Exchange Act under which control-person violations could be established.
The Court next considered plaintiffs’ Securities Act claims. As a threshold matter, the Court observed that although plaintiffs “disavow[ed] and disclaim[ed] any allegations of fraud” with respect to their Section 11 claims, the Court disagreed, finding that plaintiffs failed to “differentiate their asserted negligence claims” from their fraud claims. Citing Second Circuit precedent, Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004), the Court held that because plaintiffs’ Section 11 claims sounded in fraud, they were subject to the heightened pleading standards under Rule 9(b) of the Federal Rules of Civil Procedure—which require claims brought under Section 11 “when premised on averments of fraud” to be pled with particularity. The Court held that plaintiffs’ Section 11 claims failed because they “d[id] not plead any new alleged misstatements that have not already been rejected by the Court” in its analysis of the Exchange Act claims and for failing to “rise to the level of a material misrepresentation.” Defendants also argued that plaintiffs’ claims were time barred because they were subject to a one-year statute of limitations under Section 11 and plaintiffs failed to bring their claims within this period. The Court agreed with defendants’ argument that, assuming the truth of plaintiffs’ allegation that defendants “admitted” on the April 28, 2017, earnings call that certain statements were false, the Section 11 claims had not been filed within the one-year statute of limitations. The Court fully rejected plaintiffs’ argument that this disclosure did not trigger the statute of limitations as a result of an alleged “continuing fraud” by defendants, observing that plaintiffs’ “own allegations establish that this [first partial] corrective disclosure date” is the date on which they had constructive notice of their claims and plaintiffs failed to bring their Section 11 claims within the one-year period. The Court therefore dismissed the Section 11 claims in their entirety as time barred. The Court similarly dismissed plaintiffs’ Section 15 claims, having found no predicate violations of the Securities Act under which control-person liability could be established.
Lastly, the Court rejected plaintiffs’ request for leave to amend, noting that although plaintiffs made “extensive allegations, [their] claims lack a strong basis in law or fact . . . making any further amendment futile.” The Court also noted that plaintiffs were already previously provided the opportunity to amend their complaint “with greater specificity” and no further amendment could cure their pleading defects. The Court thus dismissed the entire case with prejudice.