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Jones v. Corus Bankshares

April 6, 2010


The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge


Plaintiff Todd L. Johnson brings this securities fraud class action against defendants Corus Bankshares, Inc. ("Corus"), Corus's Chief Executive Officer, Robert J. Glickman ("Glickman"), and Corus's Chief Financial Officer, Tim H. Taylor ("Taylor"), for violating sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), as well as SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The suit is brought on behalf of all purchasers of Corus's common stock between January 25, 2008 and January 30, 2009. During that period, plaintiff claims that Corus made numerous false and misleading statements about its lending practices, capital position, and loan loss reserves, and that these statements artificially inflated the price of Corus common stock.

Corus moves to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on the ground that plaintiff has failed to meet the pleading requirements of Federal Rule 9(b) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4 ("PSLRA"). For the reasons discussed below, the motion is granted in part and denied in part.

I. Legal Standard

A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint, not its merits. See, e.g., Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In resolving a Rule 12(b)(6) motion, all well-pleaded allegations in the complaint are taken as true, and all reasonable inferences are drawn in favor of the nonmoving party. See, e.g., McMillan v. Collection Prof'ls, Inc., 455 F.3d 754, 758 (7th Cir. 2006). Dismissal is warranted under Rule 12(b)(6) only where the plaintiff can prove no set of facts in support of his claims that would entitle him to relief. See, e.g., Goren v. New Vision Intern., Inc., 156 F.3d 721, 726 (7th Cir. 1998).

Since plaintiff alleges fraud under section 10(b), his complaint is subject to the heightened pleading requirements of Federal Rule 9(b). Last Atlantis Capital LLC v. AGS Specialist Partners, 533 F. Supp. 2d 828, 830 (N.D. Ill. 2008). Rule 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). As the Seventh Circuit has put it, Rule 9(b) requires a party to allege "the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).

Claims asserted under the Exchange Act are also subject to the pleading requirements of the PSLRA. Under the PSLRA, a private securities complaint alleging a false or misleading statement must: "(1) specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading, and (2) state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007) (quotation marks omitted). Thus, summarizing the inquiry that must be undertaken in deciding a Rule 12(b)(6) motion to dismiss a section 10(b) claim, the Supreme Court has explained:

First, faced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must, as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true.... Second, courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice. The inquiry, as several Courts of Appeals have recognized, is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.... Third, in determining whether the pleaded facts give rise to a "strong" inference of scienter, the court must take into account plausible opposing inferences.... [T]he inference of scienter must be more than merely "reasonable" or "permissible" -- it must be cogent and compelling, thus strong in light of other explanations. A complaint will survive, we hold, only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.

Id. at 322-24 (citations omitted).

With these principles in mind, I now turn to a consideration of Corus's motion to dismiss plaintiff's complaint.

II. Discussion

Plaintiff's complaint alleges that Corus violated section 10(b) of the Exchange Act, which makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Section 10(b) is implemented by SEC Rule 10b-5, which provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

Thus, "[i]n order to state a claim for a private cause of action under Rule 10b-5, a plaintiff must allege: (1) the defendant made a false statement or omission (2) of material fact (3) with scienter (4) in connection with the purchase or sale of securities (5) upon which the plaintiff justifiably relied (6) and that the false statement proximately caused the plaintiff's damages." Tricont'l Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 842 (7th Cir. 2007) (quotation marks omitted).

Plaintiff contends that Corus made several false or misleading statements throughout the class period. Broadly speaking, the complaint alleges that Corus misrepresented the nature and extent of its financial troubles and its ability to survive the downturn affecting the economy at the time. In particular, plaintiff cites Corus's statement that it would continue to originate a "significant number" of new loans with "very good... credit quality" in 2008, Compl. ¶ 8; that Corus "continued to have a strong capital position," id. ¶ 10, and would be able to "absorb any losses," id. ¶¶ 29, 34, 42; that Corus's collateral would maintain its value, and that its loans were "conservatively underwritten," id. ¶¶ 11, 34; and that Corus's "loan loss reserves [we]re adequate" and "estimated in accordance with... GAAP," id. ¶¶ 42, 44. In addition, plaintiff points to Glickman's characterization of Corus's balance sheet as "fortress-like," id. ¶¶ 6, 16, 41, and his statement that Corus possessed "strong liquidity" during the period in question, id. ¶¶ 41, 42. Plaintiff seeks to hold Corus, Glickman, and Taylor liable for these allegedly fraudulent statements. In what follows, I consider plaintiff's claims against each of the defendants separately.

A. Corus

I first examine plaintiff's claims against Corus. Corus argues that the complaint must be dismissed for two reasons: first, because the statements on which plaintiff's fraud claims are based are not false or misleading; and second, because plaintiff has failed to adequately allege that Corus's statements were made with scienter. I am not persuaded on either point.

1. Statements Regarding Corus's Reserves

Corus first contends that plaintiff's complaint fails because none of the statements identified in the complaint is false or misleading. In making this argument, Corus divides the statements in question into two groups: (1) those pertaining to the alleged adequacy of its reserves; and (2) those regarding other aspects of Corus's business. Here, I consider Corus's arguments with respect to the first class of statements; in the next section, I discuss Corus's arguments concerning the second class.

Corus begins by arguing that the complaint fails to allege particularized facts to support his claim that Corus failed to adequately increase its reserves for credit losses during the class period. According to Corus, this effectively eviscerates plaintiff's suit, because if Corus's reserves were not deficient, there is no reason to think that any of its statements about the adequacy of its reserves was false; and if Corus's statements about its reserves were not false, they plainly cannot form the basis for a fraud action.

Corus's argument goes wrong from the outset by attempting to assimilate plaintiff's suit here to the suit at issue in DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990). There, purchasers of Continental Illinois Bank's securities filed suit against the bank's outside auditor, Ernst & Young. The complaint alleged that Continental had failed to increase its reserves quickly enough and that before the plaintiffs purchased their stock, Ernst & Young "became aware that a substantial amount of the receivables reported in Continental's financial statements were likely to be uncollectible." Id. at 626 (quotation marks omitted). The Seventh Circuit upheld the case's dismissal, holding that the plaintiffs had failed to allege fraud with sufficient specificity. Writing for the court, Judge Easterbrook explained:

Investors seeking relief under Rule 10b-5 have to distinguish their situation from that of many others who are adversely affected by business reverses. This complaint fails to do so. You cannot tell from reading it why the DiLeos believe that the problems were so apparent that reserves should have been jacked up before the end of 1983 -- why failure to increase the reserves amounted to "fraud".....

The story in this complaint is familiar in securities litigation. At one time the firm bathes itself in a favorable light. Later the firm discloses that things are less rosy. The plaintiff contends that the difference must be attributable to fraud. "Must be" is the critical phrase, for the complaint offers no information other than the differences between the two statements of the firm's condition. Because only a fraction of financial deteriorations reflects fraud, plaintiffs may not proffer the different financial statements and rest. Investors must point to some facts suggesting that the difference is attributable to fraud. That ingredient is missing in the DiLeos' complaint. It presents nothing other than the change in the stated condition of the firm to suggest that E & W was so much as negligent in auditing Continental's financial statements. Rule 9(b) required the district court to ...

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