Citations
- 782 F. Supp. 2d 364
Full opinion text
MEMORANDUM OPINION AND ORDER
KEITH P. ELLISON, District Judge.
Pending before the Court in this securities fraud class action lawsuit are the following motions and related pleadings:
(1) Deloitte & Touche LLP’s motions to dismiss the (redacted) amended consolidated preferred stock purchaser complaint (Docket Entry No. 181) and for judicial notice (Docket Entry No. 182), to which plaintiffs filed a response (Docket Entry No. 211) and sur-reply (Docket Entry No. 240), and to which defendant filed a reply (Docket Entry No. 230) and an update (Docket Entry No. 242);
(2) RBC Capital Markets Corporation’s motion to dismiss the (redacted) amended consolidated preferred stock purchaser complaint (Docket Entry No. 183) and memorandum in support (Docket Entry No. 184), to which plaintiffs filed a response (Docket Entry No. 211) and a surreply (Docket Entry No. 240), and to which defendant filed a reply (Docket Entry No. 224);
(3) Russell McCann’s motion to dismiss the second consolidated amended plaintiffs filed a response (Docket Entry No. 210) and a sur-reply (Docket Entry No. 239), and to which defendant filed a reply (Docket Entry No. 226);
(4) Russell McCann’s motion to dismiss the (redacted) amended consolidated preferred stock purchaser complaint (Docket Entry No. 187) and joint appendix (Docket Entry No. 190) and supplemental appendix (Docket Entry No. 231), to which plaintiffs filed a response (Docket Entry No. 211) and a sur-reply (Docket Entry No. 240), and to which defendant filed a reply (Docket Entry No. 227);
(5) Lewis S. Ranieri’s motion to dismiss the (redacted) amended consolidated preferred stock purchaser complaint and the second consolidated amended complaint (Docket Entry No. 188) and joint appendix (Docket Entry No. 190) and supplemental appendix (Docket Entry No. 231), to which plaintiffs filed a response (Docket Entry No. 211) and a sur-reply (Docket Entries No. 239, 240), and to which defendant filed a reply (Docket Entry No. 228);
(6) The motion to dismiss the (redacted) amended consolidated preferred stock purchaser complaint filed by Lawrence Chimerine, David M. Golush, James A. Howard, Alan E. Master, Robert A. Perro, William Rhodes, and John B. Selman (Docket Entry No. 189) and joint appendix (Docket Entry No. 190) and supplemental appendix (Docket Entry No. 231), to which plaintiffs filed a response (Docket Entry No. 211) and a sur-reply (Docket Entry No. 240), and to which defendants filed a reply (Docket Entry No. 229);
(7) Anthony Nocella’s motion to dismiss the second consolidated amended complaint (Docket Entry No. 191), to which plaintiffs filed a response (Docket Entry No. 210) and defendant filed a reply (Docket Entry No. 233); and
(8) Anthony Nocella’s motion to dismiss the (redacted) amended consolidated preferred stock purchaser complaint (Docket Entry No. 192) and supplemental appendix (Docket Entry No. 231), to which plaintiffs filed a response (Docket Entry No. 211) and a sur-reply (Docket Entry No. 240), and to which defendant filed a reply (Docket Entry No. 232).
The parties also filed various post-submission letters and briefs. (Docket Entries No. 246, 247, 251-254, 257-262.) Defendant Nocella’s motion for leave of court to file his post-submission brief (Docket Entry No. 254) is GRANTED. Defendant Deloitte & Touche’s request for judicial notice (Docket Entry No. 182) is GRANTED.
Based on consideration of the motions, the responses, the replies and sur-replies, the exhibits, public government agency documents, the post-submission letters and briefs, and the record, and after hearing argument of counsel, the Court GRANTS the motions to dismiss for the reasons that follow.
I. BACKGROUND AND CLAIMS
This is a consolidated class action lawsuit brought by two sets of investors: the purchasers of the common stock of Franklin Bank Corp. (the “Bank” for purposes of these proceedings), who acquired their stock between January 31, 2007, and May 19, 2008, and are represented by lead plaintiff, the Franklin Investor Group (the “Plaintiffs”), and the purchasers of the preferred stock of the Bank, who acquired their stock between January 31, 2007, and August 6, 2008, and are represented by lead plaintiff, the Harold Roucher Trust U/A DTD 9/21/72 (the “Preferred Stock Purchasers”).
Franklin Bank was a state-chartered savings and loan institution purchased by defendants Lewis S. Ranieri and Anthony Nocella in April of 2002. Ranieri and Nocella initiated a rapid growth strategy for the Bank and, for purposes of this lawsuit, operated without significant financial difficulties until 2007, when real estate, mortgage, and financial markets nationwide were showing sharp downturns. The Bank, with a strategy focused on asset growth concentrated in 1-4 family residential loans and acquisition, development, and construction loans funded with wholesale funding, began experiencing financial difficulties in 2007, and the price of plaintiffs’ common and preferred stock progressively deteriorated until it became essentially worthless when the Bank was shut down by state banking authorities in November of 2008. The Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver for the Bank for purposes of liquidation. As part of its investigation of the Bank’s failure under the Federal Deposit Insurance Act, the FDIC, through the Office of Inspector General, released a Material Loss Review in July of 2009 (the “OIG Report”), concluding that the Bank’s failure was due, at least in part, to bank management’s high-risk business strategy and weak risk management practices and controls. Blame was also placed on a declining economic environment and ineffective FDIC supervision.
From 2003 through early 2008, the Bank filed various annual and quarterly financial statements required by federal law, issued press releases regarding the Bank, and participated in public investor conference calls. It made a public offering of its preferred stock in 2006. The FDIC regularly examined the Bank, issuing a report of examination (“ROE”) for each visit, and conducted quarterly off-site monitoring. These documents, reports, and other written statements, including statements of confidential witnesses, comprise the sources for the various federal securities law violations alleged by plaintiffs in this lawsuit.
Plaintiffs assert claims against the defendants under Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange Act of 1934, and under Sections 11 and 15 of the Securities Act of 1933, seeking damages for the loss in value of their shares.
A. The Franklin Investor Group
In their second consolidated amended complaint (the “Complaint”) (Docket Entry No. 167), the Plaintiffs bring claims under Section 10(b), Rule 10b-5, and Section 20(a) against defendants Ranieri, Nocella, and Russell McCann, who were directors or officers of the Bank during all times relevant to this lawsuit.
Plaintiffs allege the following securities law violations in the Complaint:
(1) Count One: the defendants violated section 10(b) and Rule 10b-5 by carrying out a plan, scheme, and course of conduct which was intended to, and did, deceive Plaintiffs and the investing public; artificially inflating and maintaining the market price of the Bank’s common stock; and causing Plaintiffs to purchase the stock at artificially inflated prices that did not reflect the stock’s true value. Defendants concealed adverse information about the Bank’s operations, financial condition, and performance, and engaged in fraud and deceit, knowingly or with reckless disregard for the truth, and made material misrepresentations or omissions of fact.
(2) Count Two: the defendants were controlling persons of the Bank under Section 20(a) by virtue of their high-level positions with the Bank, participation in and awareness of the Bank’s operations and intimate knowledge of the Bank’s actual performance, their power to influence and control the Bank’s decision making, including the content of public and governmental communications, their direct involvement in day-to-day operations of the Bank at the highest levels, and their presumed power to control or influence the acts and transactions giving rise to the 10(b) claims.
Plaintiffs claim that, as a result of defendants’ wrongdoings, their stock became worthless.
B. The Preferred Stock Purchasers
In their amended consolidated preferred stock purchaser complaint (the “Roucher Complaint”) (Docket Entry No. 168; redacted version, Docket Entry No. 217), the Preferred Stock Purchasers bring claims under Section 10(b), Rule 10b-5, and Section 20(a) against Nocella, McCann, and Ranieri, and against Lawrence Chimerine, David M. Golush, James A. Howard, Alan E. Master, Robert A. Perro, William Rhodes, John B. Selman (collectively the “Directors”). They further bring 10b claims against Deloitte & Touche (“Deloitte”), Section 11 claims under the Securities Act of 1933 against RBC Capital Markets Corporation (“RBC”), and Section 11 and Section 15 claims against Nocella, McCann, Ranieri, and the Directors.
The Preferred Stock Purchasers assert the following claims in the Roucher Complaint:
(1) Count One: the defendants (except Deloitte) filed a materially false and misleading registration statement for the Bank’s sale of the preferred stock. RBC, as underwriter for the preferred stock offering, issued the materially false and misleading registration statement, and failed to conduct adequate due diligence.
(2) Count Two: the defendants Nocella, McCann, Ranieri, and the Directors were controlling persons of the Bank by virtue of their positions as senior officers and directors and their power to control the Bank’s corporate actions and transactions giving rise to 10(b) violations. They did not make a reasonable investigation and had no reasonable grounds to believe that the registration statement was true and without omissions of material fact.
(3) Count Three: the defendants (except RBC) knew, or recklessly disregarded, material adverse non-public information about the Bank’s financial results and business conditions and failed to disclose such information, and participated in the misleading statements, releases, reports, and other public representations as to the Bank.
(4) Count Four: the defendants Nocella, McCann, Ranieri, and the Directors were controlling persons of the Bank by virtue of their senior executive or director positions and had the power and authority to cause the Bank to engage in 10(b) violations.
The Preferred Stock Purchasers claim that, as a result of these wrongdoings, their stock became worthless.
The defendants seek dismissal of the Plaintiffs’ claims in the Complaint and the Preferred Stock Purchasers’ claims in the Roucher Complaint under Rule 12(b)(6) for failure to satisfy the Private Securities Litigation Reform Act (“PSLRA”) heightened pleading requirements for securities fraud cases, and under Rule 9(b) of the Federal Rules of Civil Procedure for failure to plead properly a fraud case. The defendants also seek dismissal of the claims based on expiration of the applicable one and two year statutes of limitation provided by the Securities Act of 1933 and the Securities Exchange Act of 1934, respectively.
II. THE APPLICABLE LEGAL STANDARDS
A. Section 10(b) and Rule 10b-5
Under Section 10(b) of the Securities Exchange Act of 1934, 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 ... (b) To 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, ..'. 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.
Similarly, SEC Rule 10b-5, promulgated pursuant to Section 10(b), 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 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.
To state a private 10(b) claim, a plaintiff must allege the following:
(1) a material misrepresentation or omission by the defendant;
(2) scienter;
(3) a connection between the misrepresentation or omission and the purchase or sale of a security;
(4) reliance upon the misrepresentation or omission;
(5) economic loss; and
(6) loss causation.
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008); Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005); R2 Invs. LDC v. Phillips, 401 F.3d 638, 641 (5th Cir.2005).
To be actionable, a misrepresentation of a fact, or an omission of a fact, must be material. The misrepresentation of a fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision. Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). For an omission to be material, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available. Id. at 232, 108 S.Ct. 978. Materiality is not judged in the abstract, but in light of the surrounding circumstances. Rubinstein v. Collins, 20 F.3d 160, 168 (5th Cir.1994). Under Fifth Circuit construction, the appropriate inquiry is whether, under all the circumstances, the statement or omitted fact is one that a reasonable investor would consider significant in making the decision to invest, “such that it alters the total mix of information available about the proposed investment.” Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1445 (5th Cir.1993).
Section 10(b) and Rule 10b-5 do not protect investors against negligence or corporate mismanagement, Indiana Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 535 (5th Cir.2008), and under the PSLRA, it is not enough to particularize false statements or fraudulent omissions made by a defendant. Rather, to establish a 10(b) claim, a private plaintiff must prove that the defendant acted with scienter, a mental state embracing intent to deceive, manipulate, or defraud. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Scienter, in the context of securities fraud, is defined as “an intent to deceive, manipulate, or defraud or that severe recklessness in which the danger of misleading buyers or sellers is either known to the defendant or is so obvious that the defendant must have been aware of it.” Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 207 (5th Cir.2009).
A plaintiff may meet his scienter pleading obligation by pleading facts giving rise to a strong inference of reckless or conscious misconduct. Nathenson v. Zonagen, Inc., 267 F.3d 400, 425 (5th Cir.2001). Under the PSLRA, the Court considers whether all the facts and circumstances, taken together, give rise to a strong inference of scienter. Tellabs, Inc., 551 U.S. at 322-23, 127 S.Ct. 2499; Abrams v. Baker Hughes Inc., 292 F.3d 424, 431 (5th Cir.2002). To qualify as “strong” within the meaning of the statute, an inference of scienter must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of non-fraudulent intent. Tellabs, Inc., 551 U.S. at 309, 127 S.Ct. 2499.
The Fifth Circuit recognizes that a plaintiff may meet the scienter requirement by showing that, with respect to the statement or omission, the defendant acted either intentionally or with severe recklessness. In Rosenzweig v. Azurix Corp., the Fifth Circuit held that “severe recklessness” is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even excusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.
332 F.3d 854, 866 (5th Cir.2003). See also Nathenson, 267 F.3d at 408.
Pleadings of scienter may not rest on the inference that a defendant must have been aware of the misstatements based on his positions with the company, Shaw Group, 537 F.3d at 535, nor does corporate mismanagement, standing alone, give rise to a viable 10(b) claim. Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1070 (5th Cir.1994). Conclusory assertions that a defendant “should have known” about internal corporate problems based merely on his position or status within the corporation will not suffice to establish scienter. Abrams, 292 F.3d at 432. A plaintiff cannot meet his burden of pleading scienter without stating any facts showing that a defendant’s alleged statement was belied by his actual knowledge of contradictory facts or by facts so obvious that the defendant had to have been aware of it. See Tuchman, 14 F.3d at 1069. A plaintiff cannot charge a defendant with intentionally misleading investors about facts the defendant may have become aware of after making an allegedly misleading statement. Plotkin v. IP Axess Inc., 407 F.3d 690, 698 (5th Cir .2005).
Although allegations of motive and opportunity, standing alone, will not suffice to meet the scienter requirement, allegations of motive and opportunity may meaningfully enhance the strength of the inference of scienter. Shaw Group, 537 F.3d at 533. To demonstrate motive, a plaintiff must show “concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Merely alleging facts that lead to a strained and tenuous inference of motive is insufficient to satisfy the pleading requirement.” Id., at 543. Allegations that a defendant was motivated to commit fraud to enhance his position or compensation or to raise capital are also inadequate, because “the executives of virtually every corporation in the United States would be subject to fraud allegations.” Abrams, 292 F.3d at 434. Allegations of motives that are possessed by almost all corporate executives do nothing to enhance pleadings of scienter. “Scienter in a particular case may not be footed solely on motives universal to corporate executives,” such as the desire to maintain the company’s credit ratings or maintain high stock prices to increase its value. Shaw Group, 537 F.3d at 544. See also Tuchman, 14 F.3d at 1068 (holding that motive to inflate stock price and value of defendants’ investments was insufficient to establish scienter under Rule 9(b)).
Plaintiffs need not allege motive for a 10(b) claim in order to survive a Rule 12(b)(6) motion to dismiss. The Supreme Court recognizes that, while motive can be a relevant consideration, and personal financial gain may weigh heavily in favor of an inference of scienter, the absence of a motive is not fatal. Tellabs, Inc., 551 U.S. at 325, 127 S.Ct. 2499.
Moreover, the Fifth Circuit does not allow a “group pleadings approach” to establishing scienter; the court must look only to the state of mind of the individual who made or issued the statement or furnished information for use in the statement, and not to the collective knowledge of the corporation’s officers and employees acquired in the course of their employment. See Shaw Group, 537 F.3d at 534. The complaint must specifically connect individual defendants to the statements or omissions, otherwise it will fail under the PSLRA’s heightened pleading standard. Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 287 (5th Cir.2006). Corporate statements can be connected to a particular officer if plaintiffs allege the officer signed the document in which the statement appears or they adequately allege the officer’s involvement in creating the document. Id.
The Fifth Circuit has never required a plaintiff to present direct evidence of scienter in order to withstand dismissal of his securities claims. Goldstein v. MCI WorldCom, 340 F.3d 238, 246 (5th Cir.2003). Circumstantial evidence can support a strong inference of scienter under the PSLRA. Nathenson, 267 F.3d at 410. Conclusory allegations, however, will not suffice to plead scienter, nor may a court conduct a piecemeal analysis of the alleged facts and circumstances. Rather, the court must view the totality of the alleged facts and circumstances as a whole to determine whether they raise a strong inference of scienter. Abrams, 292 F.3d at 430-31.
Further, the mere publication of inaccurate accounting figures, or a failure to follow generally accepted accounting principles (“GAAP”), without more, does not establish scienter. Shaw Group, 537 F.3d at 534; Melder v. Morris, 27 F.3d 1097, 1103 (5th Cir.1994). The nature of accounting problems that lead to restatement of a company’s financials, for instance, can “easily arise from negligence, oversight, or simply mismanagement, none of which rise to the standard necessary to support a securities fraud action.” Abrams, 292 F.3d at 433. In Shushany v. Allwaste, Inc., the Fifth Circuit held that plaintiffs failed to state a fraud claim based on accounting irregularities because
the complaint did not identify who in particular was instructing the employees to make the arbitrary accounting adjustments, what particular adjustments were made, how those adjustments were improper in terms of reasonable accounting practices, how those adjustments were incorporated into [the defendant’s] financial statements, and if incorporated, whether those adjustments were material in light of All-waste’s overall financial position. Although we need not identify which of these deficiencies, standing alone, might render the complaint insufficient under Rule 9(b), we hold that altogether, they do.
992 F.2d 517, 522 (5th Cir.1993). Nor does the fact that the defendant executed a statutorily-required Sarbanes-Oxley Act (“SOX”) certification establish scienter. Cent. Laborers’ Pension Fund v. Integrated Elec. Servs., Inc., 497 F.3d 546, 555 (5th Cir.2007). To infer scienter from SOX certifications, there must be facts establishing that the officer who signed the certification had a “reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other ‘red flags,’ that the financial statements contained material misstatements or omissions.” Shaw Group, 537 F.3d at 545.
Allegations regarding scienter that are derived from confidential sources detract from their weight in the scienter analysis, and courts must discount allegations from confidential sources. Shaw Group, 537 F.3d at 535. At the very least, the confidential sources must be described with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged. Id.; ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 353 (5th Cir.2002).
To determine whether a plaintiff has alleged facts that give rise to the requisite strong inference of scienter, the court must consider plausible, non-culpable explanations for the defendants’ conduct, as well as inferences favoring the plaintiff. Tellabs, Inc., 551 U.S. at 324, 127 S.Ct. 2499. The inference that a defendant acted with scienter
need not be irrefutable, i.e., of the ‘smoking gun’ genre, or even the ‘most plausible of competing inferences.’ ... Yet the inference of scienter must be more than merely ‘reasonable’ or ‘permissible’ — it must be cogent and compelling, thus strong in light of other explanations.
Id. In short, a complaint will survive only if, when all the allegations in the complaint are taken as true, a reasonable person would deem the inference of scienter at least as strong as any opposing inference. Id., at 326, 127 S.Ct. 2499. Further, omissions and ambiguities count against an inference of scienter, as a plaintiff must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. Id. While the court will view a complaint in toto when considering whether a strong inference of scienter has been pleaded, each allegation of fraud must individually meet the particularity requirements of the PSLRA.
B. Sections 11 Liability
Under Section 11 of the Securities Act of 1933, entitled “Civil liabilities on account of false registration statement,”
(a) In case any part of the registration statement ... contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue—
(1) every person who signed the registration statement;
(5) every underwriter with respect to such security.
15 U.S.C. § 77k. Section 11 was enacted to assure compliance with the disclosure requirements of the 1933 Securities Act by imposing a stringent standard of liability on parties who play a direct role in a registered offering. Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Thus, the provision imposes liability if any part of a registration statement or prospectus contains certain untrue statements or omissions.
The elements of a Section 11 claim are: (1) an omission or misstatement (2) of a material fact required to be stated or necessary to make other statements made not misleading. Krim, 989 F.2d at 1445. As with 10(b) claims, a fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision. Basic Inc., 485 U.S. at 234, 108 S.Ct. 978. For an omission to be material, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available. Id. This Court must determine whether the information allegedly omitted or misrepresented in the prospectus was material, in the sense that it would have altered the way a reasonable investor would have perceived the total mix of information available in the prospectus as a whole. Krim, 989 F.2d at 1445.
A defendant’s actual knowledge of the falsity is not an element of a Section 11 claim and, generally, scienter does not have to be established. Herman & MacLean, 459 U.S. at 382, 103 S.Ct. 683. If a plaintiff purchased a security issued pursuant to a registration statement, he need only show existence of a material misstatement or omission to establish a prima facie case; liability against the issuer or underwriter is virtually absolute, even for innocent misstatements. Id.
C. Sections 15 Liability
Under Section 15 of the Securities Act of 1933 regarding liability of controlling persons,
Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 111 of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
15 U.S.C. § 77o. The term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. 17 C.F.R. § 230.405.
To state a claim for Section 15 control person liability, a plaintiff must allege that a primary violation was committed and that the defendant directly or indirectly controlled the violator. Kapps v. Torch Offshore, Inc., 379 F.3d 207, 221 (5th Cir.2004). Control can be established by demonstrating that the defendant possessed the power to direct or cause the direction of the management and policies of a person through ownership of voting securities, by contract, business relationships, interlocking directors, family relations, or the power to influence and control the activities of another. In re Dynegy, Inc. Securities Litigation, 339 F.Supp.2d 804, 828 (S.D.Tex.2004). In this circuit, a plaintiff need not allege that the controlling person actually participated in the underlying primary violation to state a claim for control person liability. G.A. Thompson & Co. Inc. v. Partridge, 636 F.2d 945, 958 (5th Cir.1981). However, a plaintiff must allege some facts beyond a defendant’s position or title that show the defen dant had actual power or control over the controlled person. Dennis v. General Imaging, Inc., 918 F.2d 496, 509-510 (5th Cir.1990).
Although worded differently, the control person liability provisions of Section 15 of the 1933 Act and Section 20(a) of the 1934 Act, below, are interpreted similarly. Abbott v. Equity Group, Inc., 2 F.3d 613, 619 n. 15 (5th Cir.1993); In re Dynegy, 339 F.Supp.2d at 828.
D. Section 20(a) Liability
Under Section 20(a) of the Securities Exchange Act of 1934,
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
15 U.S.C. § 78t(a). Section 20(a), or “control person” liability, is a secondary liability provision, and it is necessary that a primary violation be established before liability under Section 20(a) arises. ABC Arbitrage, 291 F.3d at 348 n. 57. Thus, the failure of a plaintiff to state adequately a 10(b) claim for primary securities fraud violations constitutes a failure to state a claim for control person liability under Section 20(a). Blackwell, 440 F.3d at 288.
E. Safe Harbor Provision for Forward-Looking Statements
With regard to misstatements, the PSLRA establishes a “safe harbor” protecting a forward-looking statement from liability where such a statement is made by a natural person, unless defendants prove that it was made with actual knowledge that the statement was false and misleading. 15 U.S.C. § 78u-5(c)(l)(A).
A statement is forward looking if it is:
(A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items;
(B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer;
(C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission;
(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C); [or]
(E) any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a forward-looking statement made by the issuer[.]
15 U.S.C. § 78u-5(i)(1)(A).
The safe harbor protects individuals and corporations from liability for forward-looking statements that prove false if the statement is “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement” or where the forward-looking statement is immaterial. 15 U.S.C. § 78u-5(c)(l)(A)(i) and (ii). Where the forward-looking statement is not accompanied by cautionary language, a plaintiff must demonstrate that the defendant made the statement with “actual knowledge” that it was “false or misleading.” 15 U.S.C. § 78u-5(c)(l)(B). The safe harbor provision does not apply where the defendants knew at the time that they were issuing statements that the statements contained false and misleading information and thus lacked any reasonable basis for making them.
Vague, optimistic statements, however, are not actionable. Allegations that amount to little more than corporate “cheerleading” are puffery, projections of future performance not worded as guarantees, and are not actionable under federal securities law because no reasonable investor would consider such vague statements material and because investors and analysts are too sophisticated to rely on vague expressions of optimism rather than specific facts. Krim, 989 F.2d at 1446. Additionally, “it is well-established that generalized positive statements about a company’s progress are not a basis for liability.” Nathenson, 267 F.3d at 419. As such, statements that are predictive in nature are actionable only if they were false when made. Shushany, 992 F.2d at 524. However, the materiality of predictions is analyzed on a case-by-case basis. ABC Arbitrage, 291 F.3d at 359.
F. Pleadings
Because Plaintiffs and the Preferred Stock Purchasers assert 10(b) violations against the defendants, they must satisfy the heightened pleading requirements of Rule 9(b), Federal Rules of Civil Procedure, and the PSLRA. See Lormand v. U.S. Unwired, Inc., 565 F.3d 228 (5th Cir.2009). See also Tellabs, Inc., 551 U.S. at 322, 127 S.Ct. 2499 (noting that the PSLRA’s twin goals are to curb frivolous, lawyer-driven litigation, while preserving investors’ abilities to recover on meritorious claims). Rule 9(b) requires a plaintiff to plead fraud with particularity, including specific allegations of the time, place, and content of the misrepresentations, the identity of the persons making the misrepresentations, and what the person who made those misrepresentations gained from making the statements. Shushany, 992 F.2d at 521. The PSLRA provides, in relevant part, that,
In any private action arising under this chapter in which the plaintiff alleges that the defendant—
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; 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); see also TXU Corp., 565 F.3d at 207.
Under the PSLRA, a plaintiff must “specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading!.]” 15 U.S.C. § 78u-4(b)(l)(B). For each act or omission alleged to be false or misleading, the plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” in making the statement. 15 U.S.C. § 78u-4(b)(2); Shaw Group, 537 F.3d at 533.
In ABC Arbitrage, the Fifth Circuit held that, in order to meet the requirements of the PSLRA and Rule 9(b), a plaintiff pleading a false or misleading statement or omission as the basis of a 10(b) claim must:
(1) specify each statement alleged to have been misleading;
(2) identify the speaker;
(3) state when and where the statement was made;
(4) plead with particularity the contents of the false representation;
(5) plead with particularity what the person making the misrepresentation obtained thereby; and
(6) explain the reason or reasons why the statement is misleading; ie., why the statement is fraudulent.
291 F.3d at 350. These allegations constitute the “who, what, when, where, and how” required under Rule 9(b) and the PSLRA. Id.
Rule 9(b) of the Federal Rules of Civil Procedure requires that, “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. P. 9(b). In pleading fraud with particularity, the Fifth Circuit requires that a plaintiff, “at a minimum, include the time, place, and contents of the false representations, as well as identify the speaker who made the misrepresentation and what that person obtained thereby.” Shushany, 992 F.2d at 521. A dismissal for failure to plead fraud with particularity as required by Rule 9(b) is a dismissal on the pleadings for failure to state a claim. Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 361 (5th Cir.2004). What constitutes particularity will necessarily differ with the facts of each case. Guidry v. Bank of LaPlace, 954 F.2d 278, 288 (5th Cir.1992).
Further, general allegations, which lump all defendants together failing to segregate the alleged wrongdoing of one from those of another, do not meet the requirements of Rule 9(b). The Court will reject the “group pleading” approach and instead look to the state of mind of the individual corporate official or officials “who make or issue the statement (or order or approve it or its making or issuance, or who furnish information or language for inclusion therein, or the like) rather than generally to the collective knowledge of all the corporation’s officers and employees acquired in the course of their employment.” Shaw Group, 537 F.3d at 533.
The pleading of a Section 11 claim, on the other hand, requires only notice pleading under Rule 8 of the Federal Rules of Civil Procedure, rather than the detailed pleading mandated by Rule 9(b) or the PSLRA. Kapps, 379 F.3d at 210.
G. Limitations
Under 28 U.S.C. § 1658(b)(1), a complaint asserting 10(b) claims is timely if filed no more than two years after a plaintiff discovered the facts constituting the violation. A cause of action accrues (1) when the plaintiff did in fact discover, or (2) when a reasonably diligent plaintiff would have discovered, the facts constituting the violation, whichever comes first. Merck & Co., Inc. v. Reynolds, 559 U.S. -, 130 S.Ct. 1784, 1789, 176 L.Ed.2d 582 (2010). The facts constituting the violation include the fact of scienter, “a mental state embracing intent to deceive, manipulate, or defraud.” Id., at 1790.
In Merck, the Supreme Court determined that the fact of scienter constitutes an important and necessary element of a 10(b) violation, so that discovery of the violation includes discovery of facts related to scienter. Id., at 1796. The Court expressly rejected an argument that facts tending to show a materially false or misleading statement (or material omission) are sufficient to establish scienter for purposes of limitations. The Court further rejected an argument that “inquiry notice” can trigger commencement of limitations prior to actual discovery of the facts of scienter. Id., at 1797 (“Because the statute contains no indication that the limitations period should occur at some earlier moment before ‘discovery,’ when a plaintiff would have begun investigating, we cannot accept [defendant’s] argument.”) (original emphasis). In short, the Court declined to read an “inquiry notice” exception into the limitations statute:
We conclude that the limitations period in § 1658(b)(1) begins to run once the plaintiff did discover or a reasonably diligent plaintiff would have ‘discover[ed] the facts constituting the violation’ — whichever comes first. In determining the time at which ‘discovery’ of those ‘facts’ occurred, terms such as ‘inquiry notice’ and ‘storm warnings’ may be useful to the extent that they identify a time when the facts would have prompted a reasonably diligent plaintiff to begin investigating. But the limitations period does not begin to run until the plaintiff thereafter discovers ‘the facts constituting the violation,’ including scienter — irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.
Id., at 1798.
A different statutory scheme governs limitations for claims brought under Section 11 of the Securities Act of 1933 for false statements or omissions regarding registration statements and offers to sell securities. Under Section 13 of the Securities Act of 1933,
No action shall be maintained to enforce any liability created under section 77k or 111 (a)(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence[.]
15 U.S.C. § 77m. Violations of sections 77k or 77l (a)(2) do not involve the element of scienter, and discovery of scienter is not a factor in a limitations issue.
To determine when the one-year Section 13 limitations period begins to run, courts apply the doctrine of constructive or inquiry notice. The statute of limitations commences when the plaintiff has actual knowledge of the facts giving rise to his claims or has notice of facts that, in the exercise of reasonable diligence, should have led to such knowledge. See In re Dynegy, Inc., 339 F.Supp.2d at 826. In Jensen v. Snellings, the Fifth Circuit held that,
A plaintiff who has learned of facts which would cause a reasonable person to inquire further must proceed with a reasonable and diligent investigation, and is charged with knowledge of all facts such an investigation would have disclosed. Investors are not free to ignore ‘storm warnings’ which would alert a reasonable investor to the possibility of fraudulent statements or omissions in his securities transactions.
841 F.2d 600, 607 (5th Cir.1988) (citations omitted). The term “storm warnings” is used by courts to describe circumstances that trigger the duty of inquiry because they should suggest to an investor of ordinary intelligence that he has been wronged. The test for “storm warnings” is an objective one, based on whether a “reasonable investor of ordinary intelligence would have discovered the information and recognized it as a storm warning.” See Dynegy, Inc., 339 F.Supp.2d at 845-46.
As noted by the district court in Dynegy, Inc., courts do not agree on precisely what constitutes a storm warning, and that among the circumstances found to constitute a storm warning are disclosures in the media, a sudden drop in stock price, filing for bankruptcy, an SEC investigation, and warnings in a prospectus. Id. An investor need not have notice of the entire wrong being perpetrated to be on inquiry notice. Id. Nevertheless, the facts relied upon to support inquiry notice must rise to a level of more than mere suspicion; they must be “sufficiently confirmed or substantiated” to a point at which the defendants are incited to investigate. Id. Moreover, the information constituting storm warnings must be such that it relates directly to the misrepresentations and omissions the plaintiffs later allege in their action against the defendants. Id.
Deciding when a plaintiff is on inquiry notice requires the development of facts. Courts may weigh facts differently, and the determination is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6). Id., at 847. However, where the facts needed for determination of when a reasonable investor of ordinary intelligence would have been aware of the existence of a wrongdoing can be gleaned from the complaint and agency filings that are integral to the complaint, resolution of the issue on a motion to dismiss is appropriate. Id. In the context of dismissal, defendants bear a heavy burden in establishing that the plaintiff was on inquiry notice as a matter of law. Inquiry notice exists only when uncontroverted evidence irrefutably demonstrates when a plaintiff discovered or should have discovered the fraudulent conduct.
H. Rule 12(b)(6)
To survive a motion to dismiss, a complaint must contain sufficient factual allegations, accepted as true, to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. It follows that, where the well pleaded facts do not permit the Court to infer more than the mere possibility of misconduct, the complaint has alleged— but it has not shown — that the plaintiff is entitled to relief. Id., at 1950; see also Fed. R. Civ. P. 8(a)(2). Although well pleaded factual allegations must be taken as true, the Court does not “accept as true conclusory allegations, unwarranted factual inferences, or legal conclusions.” See Integrated Elec. Servs., Inc., 497 F.3d at 550.
In considering a Rule 12(b)(6) motion to dismiss, a court must limit itself to the contents of the pleadings, with two exceptions. In Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir. 2000), the Fifth Circuit approved the district court’s consideration of certain documents attached to the motion to dismiss. The Fifth Circuit restricts such consideration to documents that are referenced in the complaint and are central to the plaintiffs claim. Scanlan v. Tex. A & M Univ., 343 F.3d 533, 536 (5th Cir.2003). In securities cases, courts may also take judicial notice of the contents of public disclosure documents that are required by law to be filed with governmental agencies such as the SEC and are actually filed with the agency; however, these documents may be considered only for the purpose of determining what statements they contain, and not for proving the truth of their contents. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 & n. 1 (5th Cir.1996).
In the usual case under Rule 12(b)(6), the Court must draw all reasonable inferences in favor of the plaintiff. However, for scienter only, and as required by the PSLRA, the Court must take into account plausible inferences opposing as well as supporting a strong inference of scienter. Tellabs, 551 U.S. at 314, 127 S.Ct. 2499. Accordingly, for purposes of a Rule 12(b)(6) motion to dismiss, a “strong” inference of scienter is one at least as compelling as any opposing inference of non-fraudulent intent. Id.
III. ANALYSIS OF MOTIONS TO DISMISS THE COMPLAINT
A. Defendant Lewis S. Ranieri
Defendant Lewis S. Ranieri was one of the two original purchasers of the Bank in April of 2002, and remained a director of the Bank and Chairman of the Board of Directors of Franklin during all times relevant to this lawsuit. In his motion to dismiss (Docket Entry No. 188), Ranieri contends that Plaintiffs fail to allege facts that raise a strong inference that he knew, or was severely reckless in not knowing, of the falsity of certain statements that Plaintiffs allege he made, and that a strong inference of scienter is not stated. Ranieri additionally complains that Plaintiffs failed to allege with the required specificity the material misrepresentations or omissions made by Ranieri and to give reasons why each statement is misleading or fraudulent.
For the reasons shown below, the motion to dismiss (Docket Entry No. 188) is GRANTED and Plaintiffs’ 10b and Section 20(a) claims against Ranieri are DISMISSED WITH PREJUDICE.
1. Material Misrepresentations
In their response and sur-reply to the motion to dismiss, and in response to Ranieri’s arguments that no specific misleading statements made by him were alleged, Plaintiffs assert that the following assertions in the Complaint constitute material misstatements or omissions by Ranieri during the November 26, 2007, conference call:
(1) “These are obviously difficult times, but I and the management are very experienced at this. We have gone through these cycles before. I think you know our backgrounds and we believe that we can shepherd this institution through this cycle as we have done others and do the best for we, the shareholders.”
(2) “We don’t run this as [a] sort of employment center for management and board. The object here is for shareholders, me included.”
(3) “[M]y job is to guard the place.”
(4) “We have had two of our builders file bankruptcy in the last couple of weeks. Fortunately, we are — and we looked at this hard, we remain well collateralized in those two positions even after the market declined.”
(5) “We remain well capitalized by all standards.”
(6) “We believe we are adequately reserved, we have looked at this very hard.”
(7) Ranieri failed to disclose during the conference call that Countrywide Financial had defaulted on a warehouse line of credit "with the Bank and was experiencing delinquencies on its high-risk loans held as collateral by the Bank.
(8) Ranieri signed the Bank’s 2006 Form 10-K, which was materially false and misleading because the Bank announced in 2008 that financials for fiscal year 2006 and the first three quarters of 2007 would need to be restated.
Plaintiffs fail to allege a reason or reasons why each of these particular statements as to Ranieri was false and/or misleading at the time it was made. To the contrary, Plaintiffs group together all of the defendants’ false statements made during the November 26, 2007, conference call, press release, and Form 8-K, and allege collective reasons why the statements were materially false and misleading. (Docket Entry No. 167, pp. 40^11.) Contrary to Plaintiffs’ assertions, this does not satisfy the requirement that, for each false or misleading statement, they are to explain the reason or reasons why the statement was misleading, and what the defendant obtained thereby.
Further, the first three of the above quoted statements are too broad and generalized to be actionable and are instead non-actionable puffery as a matter of law. Statements are non-actionable puffery if they are “of the vague and optimistic type that cannot support a securities fraud action ... and contain no concrete factual or material misrepresentation.” Southland Sec. Corp., 365 F.3d at 372 (ellipsis in original). Ranieri’s statements of his belief that they could “shepherd” the Bank through the then-current downward market cycle, that his job was to “guard the place,” and that the Bank was not an “employment center for management and board,” were positive affirmations or opinions of his belief in the Bank and an acknowledgment of his responsibilities to the shareholders, and were so vague and lacking in specificity that no reasonable investor could find them important in the total mix of information. See Basic Inc., 485 U.S. at 231-32, 108 S.Ct. 978 (“[T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”); see also ABC Arbitrage, 291 F.3d at 359 (dismissing section 10(b) claims finding no materiality for statements in financial reports projecting double digit sales growth). Projections of future performance generally are not actionable under the securities laws, unless they were false when made. Shushany v. Allwaste, Inc., 992 F.2d 517, 524 (5th Cir.1993).
Plaintiffs do not allege a reason or reasons why Ranieri’s statement of his belief that the Bank was adequately reserved was false and/or misleading at the time it was made. Nor does it give rise to an inference of scienter that the Bank increased its reserves at some point after Ranieri’s statement, or that the FDIC found the Bank undercapitalized just prior to its collapse in late 2008. (OIG Report, p. 1.) According to the OIG Report, the Bank’s asset quality appeared strong, its capital adequate, and its liquidity sufficient during the times it received composite examination ratings of “2.” Id., p. 18. Plaintiffs’ generalized allegations that Ranieri’s statements regarding adequate capitalization and reserves were false because the Bank subsequently collapsed do not stand as allegations that the statements were false when made.
Plaintiffs fare no better in their allegations that Ranieri failed to disclose certain adverse information regarding Countrywide Financial during the November 26, 2007, conference call. Plaintiffs allege that Ranieri should have disclosed during the conference call that the Bank had provided a $150 million line of credit to Countrywide Financial, collateralized by Countrywide Financial’s mortgage loans which included subprime mortgages. Plaintiffs do not, however, allege facts showing that Ranieri knew as of that date that the Countrywide Financial mortgage loans being held by the Bank as collateral included subprime mortgage loans.
Regardless, as shown below, Plaintiffs fail to allege facts giving rise to a strong inference of scienter that Ranieri acted with an intent to deceive, manipulate, or defraud, or was severely reckless, regarding the alleged misrepresentations or omissions.
2. Scienter
Plaintiffs assert that the following factual allegations in the Complaint establish a strong inference of scienter as to Ranieri:
(1) the Bank’s announcement of a proposed restatement in August 2008;
(2) Craig Wolfe’s letter of February 19, 2008 (the “Whistleblower Letter”);
(3) statements of confidential witnesses;
(4) minutes of a January 3, 2007, Board of Directors meeting;
(5) FDIC examination reports (as evinced through the OIG Report); and
(6) the 2009 OIG Report.
In Tellabs, Inc., the Supreme Court prescribed a three step approach to reviewing scienter allegations in a Rule 12(b)(6) motion to dismiss a federal securities fraud pursuant to the PSLRA. 551 U.S. at 322-323, 127 S.Ct. 2499. First, the allegations pleaded must, as in any federal motion to dismiss, be taken as true. Id., at 322, 127 S.Ct. 2499. Second, courts may consider documents incorporated in the complaint by reference and matters subject to judicial notice. Id. The facts must be evaluated collectively, not in isolation, to determine whether a strong inference of scienter has been pleaded. Third, a court must take into account plausible inferences opposing as well as supporting a strong inference of scienter. Id., at 323, 127 S.Ct. 2499. The inference of scienter must ultimately be cogent and compelling, not merely reasonable or permissible. Id. In short, a complaint will survive a 12(b)(6) motion, even with acceptance of all factual allegations as true, “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 324, 127 S.Ct. 2499.
The critical issue in a motion to dismiss based on insufficient allegations of scienter is whether the allegations of fraud contained in a plaintiffs complaint are sufficiently connected to each of the defendants such that a strong inference of scienter on their part is appropriate. Goldstein, 340 F.3d at 249. In determining whether a plaintiffs allegations support a strong inference of scienter, the court must consider all facts, circumstances, and allegations in toto. Id., at 246; Abrams, 292 F.3d at 431 (holding that the allegations should not be read in isolation, but taken together as a whole to see if they raise the necessary strong inference of scienter). See also Nathenson, 267 F.3d at 425. Under the Supreme Court’s decision in Tellabs, a court must take into account plausible inferences opposing as well as supporting a strong inference of scienter, and the inference of scienter must ultimately be cogent and compelling, and not merely reasonable or permissible. 551 U.S. at 309, 127 S.Ct. 2499; see also Shaw Group, 537 F.3d at 533.
In the instant case, Plaintiffs fail to set forth allegations sufficient to support an inference of scienter that is at least as compelling as plausible non-culpable inferences, and a strong inference of scienter is not established. The Court must look only to the state of mind of the individual who made or issued a complained-of statement or furnishes information for use in the statement, and not to the collective knowledge of the corporation’s officers and employees acquired in the course of their employment. See Shaw Group, 537 F.3d at 534.
In attempting to establish the required strong inference of scienter as to Ranieri, Plaintiffs expressly rely on the FDIC’s statement in the OIG Report that, “Franklin’s [Board of Directors] allowed bank management to pursue a high-risk business strategy without adequate risk management practices and controls,” and that both “management and the [Board of Directors] did not provide for internal controls and information systems that would ensure timely and accurate financial reporting.” (Docket Entry No. 239, p. 7.) Reference to these failings on the part of management and the Board of Directors, however, falls far short of showing scienter as to Ranieri; that is, that he spoke with an intent to deceive, manipulate, or defraud or that severe recklessness in which the danger of misleading buyers or sellers was either known to the defendant or was so obvious that the he must have been aware of it. TXU Corp., 565 F.3d at 207. Even so, in considering whether the statements or actions can be afforded a non-fraudulent intent under Tellabs, it is clear that Ranieri had utilized an aggressive business strategy from the start, with an eye to realizing quick growth for the Bank. His goals for achieving fast growth and profitability are well-recognized corporate goals, and show neither an intent to deceive, manipulate, or defraud, nor severe recklessness in the making of any alleged misstatement attendant to his goals for the Bank.
Nor does the fact that the Bank announced the need for a restatement in August 2008 demonstrate scienter as to Ranieri. The nature of accounting problems that lead to restatement of a company’s financials, for instance, can “easily arise from negligence, oversight, or simply mismanagement, none of which rise to the standard necessary to support a securities fraud action.” Abrams, 292 F.3d at 433. Because Plaintiffs fail to set forth factual allegations sufficient to comply with the pleading requirements of Shushany, 992 F.2d at 522, the Court cannot consider the announcement of the proposed restatement as establishing scienter as to Ranieri. Plaintiffs set forth no factual allegations with particularity giving rise to a strong inference that Ranieri acted with an intent to deceive, manipulate, or defraud, or acted with severe recklessness, regarding accounting and related problems leading to the announced need for a restatement in August of 2008. See Lormand, 565 F.3d at 251; Shaw Group, 537 F.3d at 533.
Further, the Whistleblower Letter of February 19, 2008, does not evince scienter as to Ranieri. In his letter, Craig Wolfe, in his capacity as Vice President of Loss Mitigation for the Bank, outlined his observations of purported violations of SEC rules, GAAP, and SOX at the Bank and management’s failures to correct the problems. However, the letter made no reference to Ranieri, an