On February 11, 2022, the United States District Court for the District of Connecticut denied a motion to dismiss a putative securities class action asserting claims under the Securities Exchange Act of 1934 (“Exchange Act”) against a consumer financial services company that issues private-label credit cards and certain of its executives.
In re Synchrony Fin. Sec. Litig., No. 3:18-CV-1818 (VAB), 2022 WL 427499 (D. Conn. Feb. 11, 2022). As discussed in
our prior post the Court had previously dismissed the action in its entirety, including with respect to claims under the Securities Act of 1933 (“Securities Act”). The Court of Appeals for the Second Circuit upheld the dismissal of the Securities Act claims and certain of the Exchange Act claims but remanded for further proceedings regarding one challenged statement—that the company misrepresented the alleged “pushback” it had received from retail partners with respect to its underwriting standards.
Id. at *2. On remand, the district court held that plaintiffs adequately alleged falsity, scienter, and loss causation with respect to the remaining challenged statement.
Plaintiffs alleged that the company’s former CEO made a material misstatement on an earnings call when asked if the company was “getting any pushback” as it tightened its underwriting standards for subprime borrowers. In response, the CEO allegedly emphasized the company’s close partnership with retailers and stated, “we are not getting any pushback on credit.”
Id. at *4. Plaintiffs alleged that the company had, in fact, received significant pushback from a major retail partner, and that at the time of the CEO’s statement she had been traveling to meetings with the partner with “increased frequency” in order “to mitigate the impact of alarming feedback … that the relationship was doomed,” and the retail partner had been soliciting bids from rival card issuers for the first time.
Id. at *6. The Second Circuit determined that the challenged statement regarding “pushback” amounted to a representation that the company had not received any negative reaction or opposition to changes in its underwriting standards.
Id.
On remand, the district court rejected defendants’ argument that the challenged statement was not material because it was “merely noted that [the company’s] partners were generally in agreement that they do not want to put credit in the hands of people who cannot handle it and were not pushing back on credit in that sense,” and the CEO had stated on the same earnings call that the company “would not be commenting on any renewal negotiations with particular retailers.”
Id. at *4-5. Recognizing that “reasonable minds could differ” as to the importance of the statement, the Court—applying the Second Circuit’s interpretation of the “pushback” statement as meaning that the company had not received any negative reaction or opposition from retail partners to changes in its underwriting practices—agreed with plaintiffs that it was plausible that investors could view any resistance from the company’s retail partners to tightened underwriting standards as significant to an investment decision, and that knowledge of the major retail partner’s “resistance” would have “altered the ‘total mix’ of information” available to investors.
Id. at *6. Further, the Court rejected defendants’ argument that the challenged statement was protected by the “bespeaks caution” doctrine due to disclosures warning of the risk of partner termination because, the Court concluded, plaintiffs had alleged that the risk had already materialized.
Id.
With respect to scienter, the Court determined that plaintiffs sufficiently alleged scienter regarding the company’s CEO, which was then imputed to the company. The Court pointed to allegations the Second Circuit relied on in reversing the Court’s prior dismissal order, including in particular the allegation that the CEO had traveled with “increased frequency” in the period immediately prior to the challenged statement due to “alarming feedback” that the company’s relationship with the retailer was “doomed.”
Id. at *8. The Court determined that these allegations were sufficient “to support an inference of recklessness.”
Id. at *10. Moreover, the Court rejected defendants’ arguments that risk disclosures could overcome allegations of scienter and that the analyst’s question and the CEO’s response were imprecise or ambiguous in a way that might undercut an inference of scienter.
Id. at *9-10.
The Court also determined that plaintiffs had sufficiently alleged loss causation, which the Court noted was “not a heavy” burden.
Id. at *11. The Court explained that one alleged corrective disclosure—a news report indicating that the company’s retail partner was considering moving its credit card business and was “dissatisfied with the [c]ompany because it wanted [the company] to approve a higher percentage of applicants”—revealed information that was concealed by the alleged false statement.
Id. at *11-12. The Court also observed that, at the motion-to-dismiss stage, plaintiffs did not need to prove that a particular corrective disclosure was the only possible cause for a decline in the company’s stock price, but were only required to “raise a reasonable inference that the alleged concealment caused an ‘ascertainable’ portion of the alleged loss.”
Id. at *13. Thus, the Court concluded that, based on a “liberal reading” of plaintiffs’ complaint, there was an insufficient basis for defendants’ argument that, as of the time of the news report, investors were aware of the financial decline of the company and chose to invest anyway.
Id.
