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Branca v. Paymentech, Inc.

United States District Court, N.D. Texas, Dallas Division
Feb 8, 2000
Civil Action No. 3:97-CV-2507-L (N.D. Tex. Feb. 8, 2000)

Summary

finding that allegations against "defendants" which did not "identify the speaker" did not satisfy Fed.R.Civ.P. 9(b)

Summary of this case from FIDEL v. AK STEEL HOLDING CORP.

Opinion

Civil Action No. 3:97-CV-2507-L

February 8, 2000


MEMORANDUM OPINION AND ORDER


Before the court is Defendants' Motion to Dismiss Plaintiffs' Second Amended Class Action Complaint, filed November 20, 1998. After careful consideration of the motion, response, reply, the voluminous supplemental filings submitted by the parties., and the applicable law, the court grants Defendants' Motion to Dismiss and dismisses Plaintiffs' claims with prejudice.

I. Factual and Procedural Background

Plaintiffs are a class of persons who purchased common stock of Defendant Paymentech, Inc. ("Paymentech") during the period between January 22, 1997 and September 24, 1997. Paymentech is a corporation whose business involves the processing of electronic payments. Paymentech's business includes processing bank card transactions, issuing commercial card products, processing commercial card payments and information, and providing third-party credit and debt authorization services to financial institutions, sales agents, and merchants. Defendant Pamela Patsley ("Patsley") was President and Chief Executive Officer of Paymentech during the class period. Patsley is a CPA who worked for a large accounting firm before joining Paymentech. Defendant David Truetzel ("Truetzel) served as Paymentech's Chief Financial Officer and Secretary during the class period.

Plaintiffs allege that during the class period, Paymentech issued false and misleading statements concerning its second, third, and fourth quarter 1997 financial results. These statements were purportedly made to "create the appearance of growth" and meet analyst expectations, thus artificially inflating the price of Paymentech's stock. Plaintiffs allege that in addition to benefitting the Defendants directly, the inflated stock price also helped ensure the closing a merger between Paymentech, First USA, Inc. ("First USA") and Banc One Corporation ("Banc One") (the "Merger"). According to Plaintiffs, Paymentech was not yielding the revenue and income growth that it represented when it reported record results and continued growth. Plaintiffs maintain that Paymentech's financial health was overstated due to gains it achieved on undisclosed, one-time, unusual and related-party transactions in the last three quarters of the 1997 fiscal year. Plaintiffs further contend that Paymentech overstated its fourth-quarter and year-end results because it failed to record an additional $21.5 million in pre-tax charges and other expenses. Defendants later revealed these facts, which showed that Paymentech had actually incurred a loss in the fourth quarter of 1997.

Plaintiffs also have alleged claims based on statements made by Defendants with respect to the impact of the Merger on Paymentech. Prior to the Merger, Paymentech was a majority-owed subsidiary of First USA. They contend that Paymentech's business was already stagnating and that the Merger had a negative effect on Paymentech's business. Defendants maintained that the Merger would have no effect on Paymentech's customer relationships, but Plaintiffs state that the Merger negatively impacted Paymentech because its new majority shareholder was Banc One, a competitor of many of Paymentech's customers. According to Plaintiffs, these customers were reluctant to share their confidential information with Paymentech in light of Paymentech's new ownership.

On September 24, 1997, Paymentech negatively revised its financial results and disclosed problems related to its core business. Paymentech's stock price tumbled to $16 3/8 per share from $34 1/8 per share at the beginning of the class period. Plaintiffs filed this lawsuit on October 10, 1997, alleging claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), codified in relevant part at 15 U.S.C. § 78j(b) and 78t(a). This is Plaintiffs' third attempt to plead their case. Plaintiffs have amended their pleadings twice since they originally filed this lawsuit, filing an amended complaint on April 6, 1998, and again amending their pleadings on September 2, 1998. Defendants now move to dismiss Plaintiffs' Second Amended Class Action Complaint ("Complaint") filed September 2, 1998.

II. Applicable Pleading Standards

Defendants move to dismiss the Complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6), for failure to plead fraud with particularity pursuant to Fed.R.Civ.P. 9(b), and for failure to adequately plead scienter as required by the Private Securities Litigation Reform Act of 1995 ("PSLRA").

A. Pleading Requirements of Rules 12(b)(6), 9(b) and the PSLRA

The court cannot dismiss Plaintiffs' claims under Rule 12 (b)(6) unless it appears beyond doubt that they can prove no set of facts entitling them to relief Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Coates v. Heartland Wireless Communications, Inc., 26 F. Supp.2d 910, 913-14 (N.D. Tex. 1998) ("Coates I"). The Plaintiffs' factual allegations are accepted as true when considering a Rule 12(b)(6) motion to dismiss. Buckley v. Fitzsimmons, 509 U.S. 259, 261 (1993); Blackburn v. City of Marshall, 42 F.3d 925, 931 (5th Cir. 1995). The court, however, will not accept conclusory allegations in the complaint as true. Kaiser Aluminum Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982), cert. denied, 459 U.S. 1105 (1983); Robertson v. Strassner, 32 F. Supp.2d 443, 445 (S.D. Tex. 1998); Zuckerman v. Foxmeyer Health Corp., 4 F. Supp.2d 618, 621 (N.D. Tex. 1998).

To survive dismissal, Plaintiffs must have alleged facts that show they are entitled to relief on their substantive causes of action. Section 10(b) of the Exchange Act makes it unlawful for a person to:

use or employ, in connection with the purchase or sale of any security. . . 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). In relevant part, Rule 10b-5 makes it unlawful for any person, directly or indirectly, to:

make any untrue statement of 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. . . in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. To state a claim for securities fraud in violation of section 10(b) and Rule 10b-5, a plaintiff must allege (1) a misrepresentation or omission; (2) of a material fact; (3) made with the intent to defraud; (4) on which the plaintiff relied; and (5) which proximately caused the plaintiffs injury. Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir. 1997); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994); Cyrak v. Lemon, 919 F.2d 320, 325 (5th Cir. 1990). In cases such as this one, where a plaintiff alleges a "fraud on the market" theory, it is not necessary for the plaintiff to prove individual reliance on the false or misleading statement. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1112-14 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990); Coates I, 26 F. Supp.2d at 914 n. 1; Zuckerman, 4 F. Supp.2d at 621. Instead, a plaintiff may show that he indirectly relied on the statements by relying on the integrity of the market price of the stock. Id.

Because section 10(b) claims are fraud claims, the plaintiff must also satisfy the pleading requirements imposed by Fed.R.Civ.P. 9(b). Melder v. Morris, 27 F.3d 1097, 1100 (5th Cir. 1994); Tuchman, 14 F.3d at 1067. Rule 9(b) requires certain5 minimum allegations in a securities fraud case, namely the specific time, place, and contents of the false representations, along with the identity of the person making the false representation and what the person obtained thereby. Melder, 27 F.3d at 1100; Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th Cir. 1993). This application of the heightened pleading standard of Rule 9(b) provides defendants with fair notice of the plaintiffs' claims, protects them from harm to their reputation and goodwill, reduces the number of strike suits, and prevents plaintiffs from filing baseless claims and then attempting to discover unknown wrongs. Melder, 27 F.3d at 1100; Tuchman, 14 F.3d at 1067.

The PSLRA has further reinforced this particularity requirement with respect to pleading securities fraud claims. Coates I, 26 F. Supp.2d at 914. The PSLRA provides that

the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
15 U.S.C. § 78u-4 (b)(1). To satisfy Rule 9(b) and the PSLRA, a plaintiff must plead specific facts and avoid reliance on conclusory allegations. Tuchman, 14 F.3d at 1067; Coates I, 26 F. Supp.2d at 915. The PSLRA further requires that any allegations on information and belief that a particular statement is misleading or fraudulent must state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4 (b)(1); Robertson, 32 F. Supp.2d at 446; Coates I, 26 F. Supp.2d at 915.

Plaintiffs' second claim alleges violations of section 20(a) of the Exchange Act. This section defines controlling person liability, providing that:

[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter. . . shall also be liable jointly and severally with and to the same extent as such controlled person. . . .
15 U.S.C. § 78t(a). Where a primary violation by the "controlled person" has not been adequately pleaded, the court should also dismiss a section 20(a) claim. Coates I, 26 F. Supp.2d at 923.

B. Scienter Requirement

In addition to the aforementioned pleading requirements, plaintiffs asserting securities fraud claims must allege facts demonstrating scienter. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 (5th Cir. 1996); Tuchman, 14 F.3d at 1068; Zuckerman, 4 F. Supp.2d at 622. Scienter is "a mental state embracing intent to deceive, manipulate, or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976); Lovelace, 78 F.3d at 1018. To adequately plead scienter, the plaintiff must set forth specific facts to support an inference of fraud. Lovelace, 78 F.3d at 1018; Tuchman, 14 F.3d at 1068. The PSLRA requires that "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4 (b)(2). When a complaint fails to plead scienter in conformity with the PSLRA, dismissal is required. 15 U.S.C. § 78u-4 (b)(3)(A); Coates v. Heartland Wireless Communications, Inc., 55 F. Supp.2d 628, 634 (N.D. Tex. 1999) (" Coates II").

Since the enactment of the PSLRA, its effect upon previously-established standards for pleading scienter has been debated in the federal courts. This case is no different. Here, Plaintiffs urge the court to affirm the use of the Second Circuit's well-entrenched test for determining whether scienter has been properly pleaded. Under this standard, a securities fraud plaintiff may adequately plead a "strong inference" of scienter by (1) identifying circumstances indicating conscious or reckless behavior by defendants; or (2) allege facts showing a motive to commit fraud and a clear opportunity to do so. In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 269 (2d Cir. 1993), cert. denied, 511 U.S. 1017 (1994); Robertson, 32 F. Supp.2d at 447 n. 4. Pre-PSLRA, the Fifth Circuit adopted and applied this standard to section 10(b) claims. Tuchman, 14 F.3d 1061 at 1068; Coates II, 55 F. Supp.2d at 642; Zuckerman, 4 F. Supp.2d at 622. Plaintiffs argue that this standard survived the enactment of the PSLRA, and that therefore they can survive dismissal here by showing either conscious behavior or recklessness, or motive and opportunity to commit fraud. While the Fifth Circuit has not squarely confronted this issue, a number of courts both in and out of this circuit have agreed with Plaintiffs' position. See, e.g., In re Advanta Corp. Securities Litigation, 180 F.3d 525, 534-35 (3d Cir. 1999); Press v. Chemical Investment Svcs. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999); Coates II, 55 F. Supp.2d at 642; Robertson, 32 F. Supp.2d at 447; Zuckerman, 4 F. Supp.2d at 623; STI Classic Fund v. Bollinger Industries, Inc., 1996 WL 885802 (N.D. Tex. 1996).

"Plaintiffs' Brief in Opposition to Defendants' Motion to Dismiss Plaintiffs' Second Amended Class Action Complaint ("Plaintiffs' Brief) at p. 10.

The PSLRA did not govern in Williams, a Fifth Circuit case that was filed prior to its effective date. 112 F.3d at 178. Although the PSLRA was not implicated in that case, the court did express, in dicta, its opinion that the PSLRA adopted the same pleading standard previously applied by the Fifth Circuit. Id.

Not surprisingly, Defendants take the opposite position, maintaining that the continued validity of the motive and opportunity test is "questionable" following the enactment of the PSLRA, and that a heightened pleading standard became effective when the PSLRA was adopted. Although they recognize that the Fifth Circuit has yet to consider the issue, Defendants correctly note that a number of courts have held that a strong inference of scienter can no longer be raised by alleging nothing more than motive and opportunity to commit fraud. The court's own research, in addition to the supplemental filings submitted by the parties, reveals that since the parties originally briefed the issue, several courts of appeal have reached the same conclusion. See, e.g., In re Comshare, Inc. Securities Litigation, 183 F.3d 542, 551 (6th Cir. 1999) (facts showing motive and opportunity are inadequate to establish scienter where it is not also shown that defendant acted knowingly, recklessly, or with the requisite state of mind); In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, 979 (9th Cir. 1999) (Congress rejected motive and opportunity test in favor of higher pleading standard requiring "deliberate recklessness"); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1283 (11th Cir. 1999) (PSLRA did not codify the motive and opportunity test); Greebel v. FTP Software, Inc., 194 F.3d 185, 197 (1st Cir. 1999) (pleading motive and opportunity does not satisfy requirements of PSLRA). See also In re Paracelsus Corp. Sec. Litig., 61 F. Supp.2d 591, 598 (S.D. Tex. 1998) (same).

Brief in Support of Defendants' Motion to Dismiss Plaintiffs' Second Amended Class Action Complaint ("Defendants' Brief") at pp. 8-9.

Id. at p. 9, citing In re Glenayre Technologies, Inc. Sec. Litig., 982 F. Supp. 294, 298 (S.D.N.Y. 1997); Novak v. Kasaks, 997 F. Supp. 425, 430 (S.D.N.Y. 1999); In re Baesa Sec. Litig., 969 F. Supp. 238, 242 (S.D.N.Y. 1997).

While it is true that Congress did not codify the motive and opportunity test in the body of the PSLRA, the court holds that a plain reading of the statute does not preclude its use as a pleading standard in a section 10(b) case. To determine whether Congress intended to adopt a particular pleading standard when it enacted the PSLRA, the court first looks to the plain language of the statute. Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 570 (1982); United Svcs. Automobile Assn. v. Perry, 102 F.3d 144, 146-47 (5th Cir. 1996). Absent any contrary definition, the court assumes that Congress intended the words in the statute "to carry their ordinary, contemporary, common meaning." United States v. Gray, 96 F.3d 769, 774 (5th Cir. 1996), cert. denied, 520 U.S. 1129 (1997); Robertson, 32 F. Supp.2d at 447-48. The language of section 78u-4(b)(2) simply does not restrict Plaintiffs to a particular standard of pleading; rather, it only requires that they "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4 (b)(2). The statute does not elaborate further on this language, or purport to alter any evidentiary standards that previously applied to section 10(b) claims.

Prior to the adoption of the PSLRA, the Fifth Circuit permitted the pleading of scienter by allegations showing motive and opportunity to commit fraud. Tuchman, 14 F.3d at 1068. Because the PSLRA did not amend or alter existing pleading standards, the court joins those other courts who have recognized the continuing validity of the motive and opportunity test for pleading scienter. See, e.g., Advanta, 180 F.3d at 534-35; Press, 166 F.3d at 537-38; Coates II, 55 F. Supp.2d at 642; Robertson, 32 F. Supp.2d at 447; Zuckerman, 4 F. Supp.2d at 623; STI Classic Fund, 1996 WL 885802 at *1; Epstein v. Itron, Inc., 993 F. Supp. 1314, 1320-22 (E.D. Wash. 1998). Therefore, where facts showing motive and opportunity to commit fraud raise a "strong inference that the defendant acted with the required state of mind," the PSLRA's pleading requirements are satisfied and dismissal is not warranted. The court will apply the motive and opportunity standard in its analysis of Plaintiffs' Second Amended Complaint ("Complaint").

III. Defendants' Motion to Dismiss

Defendants move to dismiss Plaintiffs' Complaint, contending that the Complaint is deficient because it does not satisfy the particularity requirements of the PSLRA and Rule 9(b), and additionally because Plaintiffs have not adequately pleaded facts raising a strong inference of scienter. Each of these contentions will be addressed separately below.

A. Particularity Requirements of the PSLRA

If allegations regarding an alleged misstatement or omission are based on information and belief, the plaintiff must "state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4 (b)(1). Defendants argue that Plaintiffs have failed to state with particularity all facts upon which their information and belief pleading is based, and that therefore the court should dismiss Plaintiffs' Complaint pursuant to 15 U.S.C. § 78u-4 (b)(3)(A). In the Complaint, Plaintiffs state that the allegations pertaining to themselves and their counsel are made on personal knowledge, and that all other allegations in the Complaint are "based upon the investigation undertaken by and under the supervision of plaintiffs' counsel." Plaintiffs describe the investigation and the sources of their information as follows:

Complaint at p. 1.

[t]his investigation included, among other things, a review of public filings by Paymentech, Inc., . . . with the SEC, analyst reports concerning the Company, information concerning the trading of the Company's stock, press releases issued by the Company, media reports about the Company, meetings with consultants, and the review and analysis of documents filed with the Judicial District Court in Dallas County, Texas in the matter of First USA Management Resources. Inc. et al. v. Golder Thoma Cressey Fund III. L.P., Cause No. DV-998-00413 (Dallas Co. TX June 1998). Plaintiffs believe that further substantial evidentiary support will exist for the allegations set forth below after a reasonable opportunity for discovery.

Id. at pp. 1-2.

This statement, as set forth in the initial paragraphs of Plaintiffs' Complaint, establishes that Plaintiffs have pled their case mainly on information and belief, as permitted by the Federal Rules of Civil Procedure. Fed.R.Civ. p. 11(b) (pleading permitted based on a person's knowledge, or information and belief, formed after "reasonable inquiry"). The Complaint is thus subject to the requirements presented by the PSLRA, specifically section 78u-4(b)(1), which requires that all facts supporting information and belief allegations be stated with particularity.

The court notes that other courts have held that pleading based on "investigation of counsel" is the equivalent of pleading based on personal knowledge. See In re PETsMART, Inc. Sec. Litig., 61 F. Supp.2d 982, 989 (D. Ariz. 1999); Queen Uno Ltd. Partnership v. Coeur D' Alene Mines Corp., 2 F. Supp.2d 1345, 1354 (D. Cob. 1998). These courts have held litigants who allege facts based on "investigation of counsel" to a pleading standard requiring even higher particularity by identifying (1) each misleading statement; (2) the reason or reasons why the statement is misleading; and (3) as to each statement, those facts giving rise to a strong inference that the defendants acted with scienter. Id. Here, the statement made in the Complaint concerning counsel's investigation is strikingly similar to that made in the complaint at issue in PETsMART, 61 F. Supp.2d at 989 n. 2, which raises the question of whether the heightened standard should similarly be applied in this case. Although the court does not necessarily agree with those courts that have held that the "investigation of counsel" is tantamount to personal knowledge, the court need not reach this question because the Complaint in this case specifically states that the only allegations based on personal knowledge are those pertaining to Plaintiffs and their counsel, Complaint at p. 1. Therefore, the court will presume that Plaintiffs intended to plead the remaining factual allegations based on information and belief and will not consider holding Plaintiffs to the higher standard imposed when facts are pleaded based on personal knowledge.

Defendants contend that Plaintiffs have not satisfied the PSLRA's standard for pleading facts based on information and belief. Specifically, Defendants argue that Plaintiffs' description of their counsel's investigation in this case constitutes no more than a boilerplate allegation that does not satisfy the particularity requirement of 15 U.S.C. § 78u-4 (b)(1). According to Defendants, Plaintiffs should be required to specifically identify the public filings, reports, and press releases they reviewed, as well as the consultants they worked with in forming their beliefs. Defendants also maintain that Plaintiffs should be required to describe in the Complaint all other steps they took in the course of their investigation.

Plaintiffs respond that they have sufficiently stated particular facts upon which their information and belief allegations are formed. The court agrees that with respect to Defendants' various statements and public filings concerning Paymentech's financial results, Plaintiffs have adequately pleaded with particularity those facts that cause them to believe Defendants' statements were untrue. Specifically, the Complaint identifies the September 24, 1997 press release announcing the revisions made to Paymentech's financial results. Plaintiffs' identification of this specific statement is adequate to establish the basis of their information and belief regarding the alleged falsity of Defendants' prior statements regarding Paymentech's profits and earnings. Coates I, 926 F. Supp.2d at 917.

Complaint at ¶ 57.

With respect to the other statements in the Complaint, the court finds that Plaintiffs have not pleaded with sufficient particularity the facts supporting their information and belief allegations. The PSLRA requires Plaintiffs to plead particular facts that have led them to believe that the statements identified by Plaintiffs as material misrepresentations are indeed untrue. Although Plaintiffs' long-winded and detailed 60-page Complaint identifies numerous statements (other than the statements regarding Paymentech's financial results) allegedly made by Defendants in various public filings, press releases, and in other contexts, Plaintiffs have not met their duty to plead "with particularity" the facts supporting their belief that these statements are actually misrepresentations that are actionable under section 10(b). Plaintiffs' general statement that the allegations in the Complaint are based on public filings, news articles, press releases, analyst reports, and meetings with consultants does not sufficiently identify the facts upon which Plaintiffs' beliefs are based. Coates I, 26 F. Supp.2d at 917; Novak, 997 F. Supp. at 431. Plaintiffs have not identified the particular articles, releases, filings, documents, or other information, including the substance of the meetings with their consultants, that would support their allegations that Defendants made false representations in violation of section 10(b). For this reason, dismissal of Plaintiffs' Complaint is mandated by the PSLRA. 15 U.S.C. § 78u-4 (b)(3)(A); McNamara v. Bre-X Minerals Ltd., 57 F. Supp. 396, 405 (RD. Tex. 1999); Paracelsus, 61 F. Supp.2d at 595; Coates I, 26 F. Supp.2d at 923.

B. Rule 9(b) Pleading Requirements

Plaintiffs' securities fraud claims are also subject to the special pleading requirements found in Fed.R.Civ.P. 9(b), which requires them to plead their fraud claim with particularity. Pleading fraud with particularity requires a party to "specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent. Williams, 112 F.3d at 177-78; Tuchman, 14 F.3d at 1068. With few exceptions, the Complaint alleges somewhat vague and conclusory allegations against "defendants" or "Paymentech and the Individual Defendants". These statements do not identify the speaker and instead constitute an attempt to use "group pleading" in order to allege fraud. Under the "group pleading" doctrine, plaintiffs may rely on a presumption that statements in prospectuses, press releases, and other company-generated documents are the collective work of those individuals directly involved in the company's daily management. Coates I, 26 F. Supp.2d at 915.

See, e.g. Complaint at ¶¶ 27, 28, 36, 37, 43, 51.

Whether the group pleading doctrine is still viable under the PSLRA is currently a matter of debate. Several courts have held that group pleading survives the enactment of the PSLRA. See In re Miller Indus., Inc. Sec. Litig., 12 F. Supp.2d 1323, 1329 (N.D. Ga. 1998); In re Stratosphere Corp. Sec. Litig., 1 F. Supp.2d 1096, 1108 (D. Nev. 1998); In re BankAmerica Corp. Sec. Litig., 1999 WL 1211839, *7 (E.D. Mo. 1999). Other courts have concluded that the group pleading presumption is no longer viable after the passage of the PSLRA. See Coates I, 26 F. Supp.2d at 915-16; Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350 (S.D. Cal. 1998); Marra v. Tel-Save Holdings, Inc., 1999 WL 317103, *5 (E.D. Pa. 1999).

In Coates I, the court reasoned that because the PSLRA requires plaintiffs to set forth facts raising a strong inference that each defendant acted with the required state of mind, group pleading is inconsistent with this section of the statute as well as the PSLRA's policy of protecting defendants from unwarranted claims and strike suits. 26 F. Supp.2d at 916; 15 U.S.C. § 78u-4 (b)(2). The court further stated that "[i]t is nonsensical to require that a plaintiff specifically allege facts regarding scienter as to each defendant, but to allow him to rely on group pleading in asserting that the defendant made the statement or omission." Id. The court in Allison reached a similar conclusion for the same reasons, holding that group pleading was suspect because the "judicial presumption" of group pleading could not "be reconciled with the statutory mandate that plaintiffs must plead specific facts as to each act or omission by the defendant." 999 F. Supp. at 1350. Although other courts have reached a contrary result, the court respectfully disagrees with those decisions, and adopts the reasoning in Coates I and Allison that bars the use of group pleading techniques in PSLRA cases. Furthermore, Plaintiffs' prolific use of the terms "defendants" and "Paymentech and the Individual Defendants" does not sufficiently plead fraud with particularity as required by Rule 9 (b) and applicable Fifth Circuit case law. See Williams, 112 F.3d at 177-78; Tuchman, 14 F.3d at 1068. For these additional reasons, Plaintiffs' Complaint must be dismissed.

C. Scienter Requirement

In addition to the above-discussed pleading requirements, Plaintiffs must also plead scienter in accordance with the requirements established in the PSLRA, which states that "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4 (b)(2). In a section 10(b) case, the "required state of mind" is scienter, defined as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst Ernst, 425 U.S. at 913 n. 12; Tuchman, 14 F.3d at 1067.

A review of Plaintiffs' Complaint shows that Plaintiffs have attempted to plead scienter through the following allegations: 1) that "Defendants" or particular Defendants acted knowingly should have known, or were reckless in not knowing that particular representations were false, or that material facts were concealed or omitted, or that Defendants "falsely" made particular statements; 2) that Defendant Truetzel resigned for "personal reasons" on the last day of the class period; 3) that Defendants misled investors because they were motivated to ensure that the First USA — Banc One Merger closed; 4) that Defendants failed to follow generally accepted accounting principles ("GAAP") and, more specifically, failed to break out revenues in specific ways so as to report certain transactions and charges; 5) that given the magnitude of the revisions made to Paymentech's financial results, Defendants knew or recklessly disregarded the inaccuracies in the financial results that were initially reported; 6) that Defendants' positions within the company made them privy to information that would have told them false statements were being made; 7) that Patsley held a significant amount of Paymentech stock during the class period, and also received significant stock options as part of her compensation package; 8) that Defendants and other senior officers of Paymentech were motivated to see the Merger close in order to increase the amount and transferability of their holdings of Paymentech and First USA stock; and 9) that Patsley and other unnamed Paymentech officers were motivated to ensure that the Merger took place because they would receive loan forgiveness for loans made to them by First USA for the purchase of stock in Paymentech's initial public offering ("IPO"). Some of these allegations are pleaded according to the motive and opportunity theory, while others assert conscious behavior or recklessness. Defendants move to dismiss Plaintiffs' Complaint, arguing that none of these theories adequately alleges scienter, regardless of which pleading standard applies. The court will begin by examining Plaintiffs' "motive and opportunity" allegations.

See, e.g., Complaint at ¶¶ 5, 8, 9, 37.44, 45, 52, 73, 74, 83.

Id. at ¶¶ 7, 17, 61.

Id. at ¶¶ 25, 51(d)(ii) and (v), 77.

Id. at ¶¶ 36, 37, 40, 41 42, 43, 44, 51, 64, 65, 66.

Id. at ¶ 74.

Id. at ¶¶ 19, 73.

Id. at ¶¶ 75-76.

Id. at ¶ 77.

Id. at ¶ 78.

1. Motive and Opportunity a. Allegations Related to the Merger

Several of Plaintiffs' scienter allegations center on the theory that Defendants were motivated to commit fraud because they wanted to ensure the completion of the First USA-Banc One Merger. Defendants make two salient points, both of which indicate that Plaintiffs' motive allegations related to the Merger do not adequately establish motive. First, Plaintiffs have pleaded throughout their Complaint facts which emphasize the negative effect the Merger would have on Paymentech's performance, specifically that once First USA was acquired by Banc One, Paymentech's customer base would deteriorate because the banks that comprise Paymentech's customer base would be hesitant to share confidential information with Banc One, a competitor. Secondly. Plaintiffs have pleaded no facts showing that the Merger's terms were in any way dependent on Paymentech's stock price, or that the Merger would not close unless the stock price remained at a certain level.

The court agrees that Defendants would not logically be motivated to push for a merger that they allegedly knew would cause significant harm to Paymentech and its stock value. This is particularly true considering that, according to the Complaint, Patsley took a large portion of her compensation in stock options, and held a considerable amount of Paymentech stock. Moreover, the Complaint states no facts showing that Paymentech's stock price would have had any effect on the Merger whatsoever. Plaintiffs' allegations with respect to the Merger do not adequately plead scienter.

b. Patsley's Compensation

Plaintiffs further allege that Patsley was motivated to inflate falsely the price of Paymentech's stock because she owned a large number of shares and because she took a significant portion of her compensation in stock options. The Fifth Circuit has held that allegations regarding executive compensation, without more, do not sufficiently plead a motive to commit securities fraud. See Melder, 27 F.3d at 1103; Tuchman, 14 F.3d at 1068-69; accord Acito v. Imcera Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995). The other inference of fraudulent intent that could be drawn from these facts would relate to allegations of insider trading. Plaintiffs have pleaded no facts regarding Patsley's trading activity during the class period. Therefore, the facts pleaded concerning Patsley's compensation do not raise an inference that she acted with fraudulent intent.

2. Conscious Misbehavior or Recklessness a. Boilerplate Assertions

Throughout the Complaint, Plaintiffs state in a conclusory fashion that Defendants "knew," "should have known," "were reckless" in not knowing, and "falsely" stated particular facts. This type of conclusory recitation "fails to provide the specific facts upon which an inference of conscious behavior may be based." Melder, 27 F.3d at 1102. Here, Plaintiffs have pleaded no facts indicating that at the time the allegedly false statements were made, Defendants had actual knowledge of contradictory facts, and thus their Complaint does not state a claim for securities fraud. See Tuchman, 14 F.3d at 1069; Coates I, 26 F. Supp.2d at 920. Similarly, rote and conclusory allegations of recklessness do not support an inference of intent to defraud. Melder, 27 F.3d at 1103-04; Coates II, 55 F. Supp.2d at 641. Plaintiffs have not adequately pleaded scienter through these allegations.

See Footnote 9.

b. Failure to Follow GAAP

Plaintiffs also attempt to plead scienter through their assertions that Defendants failed to follow generally accepted accounting principles in several Form 10-Q's and one press release (the "July 23rd Press Release"). The term "generally accepted accounting principles" encompasses a wide range of acceptable procedures. Lovelace, 78 F.3d at 1021; Godchaux v. Conveying Techniques, Inc., 846 F.2d 306, 315 (5th Cir. 1988). Accordingly, as a general rule, failure to follow GAAP, without more, does not adequately plead scienter. Id. at 1020; Melder, 27 F.3d at 1103; Comshare, 183 F.3d at 553. To establish scienter, "the party must know that it is publishing materially false information, or the party must be severely reckless in publishing such information." Lovelace, 78 F.3d at 1020. Plaintiffs contend that the following facts raise a strong inference of fraud with respect to the alleged GAAP violations: that Truetzel and Patsley have professional backgrounds in accounting, that due to their positions at Paymentech, they had "unfettered access" to Paymentech's internal financial information, that Paymentech had previously disclosed one-time transactions although it did not do so in financial statements issued during the class period, and that the magnitude of the revisions made to Paymentech's financial results establishes that Defendants knowingly concealed the GAAP violations.

The Complaint alleges that Patsley is a CPA who worked for a large public accounting firm before joining First USA, and that Truetzel was Paymentech's Chief Financial Officer. Complaint at ¶¶ 7, 16, 17.

Allegations that a party knew or should have known that false representations were being made merely by virtue of his position within a company are, as a matter of law, insufficient to plead scienter. Melder, 27 F.3d at 1103. "Claims of securities fraud cannot rest on speculation and conclusory allegations." Comshare, 183 F.3d at 553; San Leandro Emergency Med. Plan v. Philip Morris Cos., 75 F.3d 801, 813 (2d Cir. 1996). This rule would similarly apply to Plaintiffs' contention that Patsley and Truetzel's accounting and finance training raises an inference that they knowingly misstated Paymentech's financial results.

Furthermore, that one-time transactions had been reported differently in prior periods and the alleged "magnitude" of the GAAP errors do not raise a "strong inference" that Defendants knowingly or recklessly misled the investing public. It is a common occurrence for public companies to revise their financial results. Goldberg v. Household Bank, F.S.B., 890 F.2d 965, 967 (7th Cir. 1989). In this case, Paymentech's revisions did not reveal less earnings than previously reported, but instead broke its earnings out in more detail than it had before. The fact remains that even after the revisions, the initial statements made by Defendants were accurate with respect to the amount of Paymentech's earnings during the class period. Furthermore, Paymentech's statements with respect to its revenue growth continued to be accurate, albeit Paymentech was growing at a rate slower than that initially reported. While management's initial decision not to segregate one-time transactions and other events that contributed to Paymentech's earnings may be considered mismanagement or poor judgment, an inference of fraudulent intent is not raised thereby. Allegations that statements made in one report should have been revealed earlier do not indicate conscious misbehavior or recklessness. Comshare, 183 F.3d at 553-54; Stevelman v. Alias Research, Inc., 174 F.3d 79, 84 (2d Cir. 1999). Overall, Plaintiffs' allegations of GAAP violations do not sufficiently plead scienter by Defendants.

c. Truetzel's Resignation

Plaintiffs cannot adequately raise an inference of scienter by relying on the fact that Truetzel resigned at the end of the class period, when Paymentech' s revised financial results were announced. With respect to Truetzel's resignation, the Complaint states that Truetzel resigned for personal reasons and nothing more. While it is clear that Plaintiffs wish to imply that Truetzel's departure was related to his alleged accounting malfeasance, they have pleaded no facts whatsoever to support this inference. These allegations simply do not support any inference of scienter.

D. Section 10(b) Claim for Guiding Analysts

Defendants have also moved to dismiss Plaintiffs' section 10(b) claim for guiding analysts. Corporate defendants may be held liable under section 10(b) for providing false or misleading information to securities analysts. Robertson, 32 F. Supp.2d at 450; Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir. 1997); Warshaw v. Xoma Corp., 74 F.3d 955, 959 (9th Cir. 1996). In this case, the vast majority of Plaintiffs allegations that Defendants improperly inflated Paymentech's stock price by guiding and influencing securities analysts consists of boilerplate contentions that these unnamed analysts "relied in substantial part on information provided by [Paymentech)," that unidentified Paymentech executives had a practice of communicating regularly with analysts and "to provide detailed "guidance' to these analysts," and that the "investment community and, in turn, investors relied and acted upon" the information disseminated through the analysts. These conclusory allegations do not state a claim for guiding analysts as a matter of law. Suna v. Bailey Corp., 107 F.3d 64, 73 (1St Cir. 1997); Raab v. General Physics Corp., 4 F.3d 286, 288 (4th Cir. 1993); Time Warner, 9 F.3d at 264.

Complaint 6 ¶ 81.

Id. at ¶ 82, 83.

Id. at ¶ 84.

The only specific set of facts on which this claim is based concerns an analyst conference hosted by Paymentech in May 1997 Plaintiffs' allegations regarding the May 1997 analyst conference are that analysts were given a report and shown a slide presentation prepared by Paymentech that highlighted Paymentech's plans for a target of 20-25% ongoing net revenue growth, a review of the first and second quarter financial results, and other unspecified "financial information."

Id at ¶ 46.

Id.

Defendants contend that the facts pleaded in support of this claim fail to state a claim for guiding analysts. This claim is subject to Rule 9(b) pleading requirements in that Plaintiffs must specify the alleged fraudulent statements, identify the speaker, state where and when the statements were made, and explain why the statements were fraudulent. Suna, 107 F.3d at 73. Here, Plaintiffs have not sufficiently identified the speaker by stating who gave the slide presentation. The only specific statement identified by Plaintiffs with respect to the May 1997 analyst conference was that Paymentech had plans for a target of 20-25% revenue growth. For two reasons, Plaintiffs have not pleaded facts showing why this statement was false. First, Plaintiffs state a few pages later in the Complaint that Paymentech actually experienced 24% revenue growth for the third quarter 1997 Secondly, the statement alleged in Plaintiffs' Complaint reveals Paymentech's plans for a certain rate of revenue growth, rather than a representation of what its revenue growth actually would be. Plaintiffs have not pleaded facts showing that Paymentech untruthfully told those present at the May 1997 analyst conference what its plans were. Moreover, Plaintiffs' use of the word "target" reflects their understanding that the projected revenue growth announced at the analyst conference was a goal set by the company, not a concrete representation of actual revenues. For these reasons, Plaintiffs have failed to state a claim for guiding analysts.

Id at ¶ 51(c).

E. Section 20(a) Claim

Plaintiffs' final claim is a claim for control person liability arising under section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). A claim for control person liability cannot be maintained unless an underlying violation by the controlled person is shown. Here, Plaintiffs have failed to adequately plead a violation by Paymentech, the controlled person. For this reason, their section 20(a) claim must also be dismissed. Coates II, 55 F. Supp.2d at 645; Coates I, 26 F. Supp.2d at 923.

IV. Conclusion

The decision to allow amendment of the pleadings is within the sound discretion of the district court. Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th Cir. 1994). In determining whether to allow an amendment of the pleadings, the court considers the following: undue delay in the proceedings, undue prejudice to the opposing parties, timeliness of the amendment, and futility of the amendment. See Foman v. Davis, 371 U.S. 178, 182 (1962); Chitimacha Tribe of Louisiana v. Harry L. Laws Co., Inc., 690 F.2d 1157, 1163 (5th Cir. 1982).

Plaintiffs have now had three opportunities to plead this lawsuit. Three bites at the apple is more than adequate opportunity to plead an action, if one exists, under the applicable law. The court believes that permitting a fourth pleading attempt would be an inefficient use of the parties' and the court's resources, would cause unnecessary and undue delay, and would be futile. For the reasons stated herein, Defendants' Motion to Dismiss Plaintiffs' Second Amended Class Action Complaint is granted, and Plaintiffs' claims are dismissed with prejudice. Judgment will be entered by separate document.

It is so ordered this 8th day of February, 2000.


Summaries of

Branca v. Paymentech, Inc.

United States District Court, N.D. Texas, Dallas Division
Feb 8, 2000
Civil Action No. 3:97-CV-2507-L (N.D. Tex. Feb. 8, 2000)

finding that allegations against "defendants" which did not "identify the speaker" did not satisfy Fed.R.Civ.P. 9(b)

Summary of this case from FIDEL v. AK STEEL HOLDING CORP.
Case details for

Branca v. Paymentech, Inc.

Case Details

Full title:RAFFAELE BRANCA, CARL C. CONRAD, and MICHAEL P. FUCHS, et al., Plaintiffs…

Court:United States District Court, N.D. Texas, Dallas Division

Date published: Feb 8, 2000

Citations

Civil Action No. 3:97-CV-2507-L (N.D. Tex. Feb. 8, 2000)

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