City of Roseville Employees' Retirement System v. Sterling Financial Corp. (963 F. Supp. 2d 1092, 2013)

United States District Court for the Eastern District of Washington 2013-08-05

Banks and Banking

Citations

Full opinion text

ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

EDWARD F. SHEA, Senior District Judge.

I. INTRODUCTION

This matter comes before the Court on Defendants Sterling Financial Corporation (“Sterling”), Harold B. Gilkey, and Daniel G. Byrne’s (collectively, “Defendants”) Motion to Dismiss Consolidated Complaint, ECF No. 46. Defendants ask the Court to dismiss Plaintiff City of Roseville Employees’ Retirement System’s consolidated class action complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim upon which relief may be granted. Also pending before the Court are Defendants’ Request for Judicial Notice and Notice of Incorporation by Reference, ECF No. 50, and Defendants’ Second Request for Judicial Notice and Notice of Incorporation by Reference, ECF No. 59. Having thoroughly reviewed the pleadings, the documents filed in connection with the instant motions, and applicable authority, the Court is fully informed and now enters the following Order.

II. BACKGROUND

A. Factual History

This putative class-action lawsuit alleges securities fraud on behalf of all persons who acquired Sterling’s publicly traded securities between July 23, 2008, and October 15, 2009 (the “Class Period”). Consol. Compl. (“C.C”) ¶1, ECF No. 29, at 1. Plaintiff alleges that Sterling and its top officers violated the Securities and Exchange Act of 1934 (the “Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4, and Securities and Exchange Commission (SEC) Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Id. Plaintiff asserts that Defendants issued materially false and misleading representations about Sterling’s financials, its overall financial health, its loan portfolio, and its approach to risk assessment and underwriting, with either intent to deceive or deliberate recklessness about the potential falsity of their representations. On behalf of the proposed class, Plaintiff seeks to recover all losses incurred from trading in shares of Sterling’s stock during the Class Period. C.C. ¶ A, at 92.

1. The Parties

Plaintiff City of Roseville Employees’ Retirement System (“Roseville”) has been appointed as lead Plaintiff in this consolidated class-action lawsuit. Id. ¶24, at 9; ECF No. 14. The complaint alleges that Plaintiff purchased Sterling’s securities during the Class Period and incurred losses as a result of Defendants’ fraudulent conduct. C.C. ¶ 24, at 9.

Defendant Sterling is a bank holding company which primarily operates through two subsidiaries: Sterling Savings Bank and Golf Savings Bank. Id. ¶ 2, at 1. Sterling Savings Bank is the largest commercial bank headquartered in Washington, and one of the largest regional community banks in the western United States. Id. Sterling offers banking products and services, including mortgage lending and construction financing, to individuals, businesses, and other commercial entities. Id. Sterling is headquartered in Spokane, Washington, and trades under the ticker symbol “STSA.” Id.

The other named Defendants are Harold B. Gilkey and Daniel G. Byrne (collectively, the “Individual Defendants”). Id. ¶ 1. Defendant Gilkey co-founded Sterling in 1983, and at all times relevant to the complaint, he was the Chairman of Sterling’s Board of Directors and the company’s Chief Executive Officer (CEO). Id. ¶ 26, at 9. Defendant Byrne joined Sterling in 1983, and at all relevant times, he was Sterling’s Chief Financial Officer (CFO) and Executive Vice President of Finance. Id. ¶ 27, at 10. Plaintiff alleges that because of their positions and responsibilities with Sterling, the Individual Defendants controlled Sterling’s public communications and financial reports and were aware that material information was being withheld from investors. Id. ¶ 28.

2. Sterling’s Aggressive Growth Strategy

Since its inception in 1983, Sterling pursued an aggressive growth strategy to become “the leading bank in the western United States.” Id. ¶3, at 1. Over the course of 23 years, Sterling acquired 13 other banks. Id. In 2006 and 2007 alone, Sterling acquired four separate financial institutions, collectively valued at $567.2 million. Id. By December 31, 2007, Sterling maintained over $12 billion in assets and more than 175 depository banking offices, making it the largest commercial bank headquartered in Washington. Id. at 2.

In the years preceding the Class Period, Sterling substantially increased the size of its portfolio of construction loans. Id. ¶ 4. Sterling focused on construction loans because the amounts loaned were typically larger, and due to higher interest rates and yields, the loans were far more lucrative than individual mortgage loans. Id. ¶ 5. From 2004 to 2007, Sterling’s portfolio of construction loans increased by 350%-from $653 million to $2.9 billion. Id. ¶ 4. During that time, construction loan originations accounted for roughly 50% of Sterling’s total loan originations each year. Id.

Unlike individual mortgages, which usually consist of a single borrower acquiring one property, construction loans often involve multi-unit projects of much greater size and cost. Id. ¶ 5. These projects, which often require constructing a residential property from the ground up, are subject to additional layers of risk, including construction delays, cost overruns, and the borrower’s inability to sell the property or units once developed. Id. Sterling consistently disclosed the riskier aspects of these loans in its SEC filings, cautioning that “a downturn in the local economies or real estate markets could negative impact Sterling’s banking business,” and that Sterling was “likely to experience higher levels of loan losses [on construction loans] than it would on residential mortgage loans.” Id. ¶ 30, at 11; Ex. Q to Decl. of Douglas W. Greene (“Greene Deck”), EOF No. 51-17, at 83-84. Sterling’s warnings proved prescient.

3. Sterling’s Response to the Great Recession

By 2006, the explosion in home mortgage financing and real estate development, which had so dominated the early part of the decade, began to falter. See In re Fannie Mae 2008 Sec. Litig., 742 F.Supp.2d 382, 391 (S.D.N.Y.2010) (“In 2006, the demand for housing dropped abruptly and home prices began to fall.”). This downturn persisted, widened, and eventually began to affect the residential construction market in 2007. Id. ¶ 120, at 47. Before long, the national and global financial markets began to feel the effects. See Blodgett v. Shelter Mortg. Co., LLC, No. CIV-10-2233-PHX-MHB, 2013 WL 495501, at *18 (D.Ariz. Feb. 8, 2013) (observing that this “time frame [is] commonly referred to as the ‘Great Recession’ — a period of marked global economic decline beginning in December of 2007”).

Sterling was not immune from the effects of the Great Recession. Although the Pacific Northwest — where many of Sterling’s financed projects were concentrated — initially weathered the storm far better than other regional housing markets, it soon caught up with the national trend. See C.C. ¶¶ 103-04, at 40-41. By November 2008, the decline in residential home values in the Puget Sound region had started to mirror — and even, in some cases, exceed — the declines in other regions. Id.

Sterling experienced significant financial difficulty as a result. Before the Great Recession began, “the economy was growing at a rapid pace and borrowers of construction loans were flush with cash due to a booming real estate market.” Id. ¶ 72, at 26. Sterling therefore had every reason to be optimistic about its loan portfolio and unconcerned about its low rate of defaulted loans. But by 2007 and 2008, “as the real estate and credit markets collapsed and the U.S. economy entered a full-blown recession, this trend completely reversed itself.” Id. ¶ 74. For the five fiscal quarters preceding the Class Period — the last three quarters of 2007 and the first two quarters of 2008 — Sterling began to see a marked increase in loans “no longer performing in accordance with the terms of the original loan agreement” (known as non-performing loans, or “NPLs”). Id. ¶¶ 35-36, at 14. During that time, the amount of total NPLs increased steadily from $33 million to $303 million. Id. ¶ 36. This increase was driven, in large part, by construction-related NPLs, which rose during the same period from $9 million to $253 million. Id. ¶ 37.

Between 2Q08 and 2Q09, Sterling continued to report large specifically, construction NPLs, which had increased from $253 million in 2Q08 to nearly $595 million by 2Q09. Compare id. ¶ 37, at 14 (2Q08 amounts), with id. ¶ 90, at 35 (2Q09 amounts). Default rates and charge-offs increased, and Sterling was forced to absorb large losses on its balance sheets because of its increasingly deteriorating loan portfolio. Ex. T to Greene Decl., ECF No. 51-20, at 123.

Sterling announced its 2Q08 financial results on July 22, 2008, the day before the beginning of the Class Period. C.C. ¶ 60, at 22. The next day, during Sterling’s July 23, 2007 earnings call addressing those results, Defendants expressed guarded optimism about the worsening global financial markets and Sterling’s overall condition. For example, Defendant Gilkey acknowledged that Sterling was “indeed navigating through a very difficult financial storm,” and Defendant Byrne indicated that, as to Sterling’s future outlook, “[t]he wider than normal guidance [on future earnings per share] reflects the uncertainty surrounding a couple of factors that will influence our performance [including] the level of classified and nonperforming assets over the next two quarters and the severity of charge-offs we anticipate in these categories.” Ex. B to Greene Decl., ECF No. 51-2, at 15-16. At the same time, Defendants indicated reason for optimism, based on their assumption that “the economy in the Pacific Northwest will begin to slow but will remain stronger than the national economy.” Id. at 16. Defendant Gilkey also stated that Sterling’s credit team was “confident [it had] identified most of our credits that are either distressed or could become distressed.” Id. at 17. Similar representations followed in Sterling’s announcement of 3Q08 financial results. See, e.g., Ex. C. to Greene Decl., ECF No. 51-3, at 19-26 (excerpts from Sterling’s October 22, 2008 earnings call addressing 3Q08 financials).

On January 13, 2009, two weeks before announcing its 4Q08 and FY08 financial results, Sterling pre-disclosed that it planned to take a record $230 million provision for credit losses “relating] to worsening economic conditions, the continued stress on real estate values, increasing levels of both classified and non-performing assets[,] and higher net charge-offs.” Ex. L to Greene Decl., ECF No. 51-12, at 55. Sterling announced that it anticipated a net loss for both the fiscal quarter and the fiscal year because of the increased provisioning. Id. In its January 27, 2009 press release announcing 4Q08 and FY08 financial results, and on the January 28, 2009 earnings call, Sterling also indicated that it had “modified its methodology for determining the fair value of loans being tested for impairment during the quarter [by] excluding the potential cash flows from certain guarantors.” Exs. D & M to Greene Decl., ECF Nos. 51-1 & 51-13, at 29 & 59.

In 2009, Sterling issued press releases regarding 1Q09 and 2Q09 financial results, and it held quarterly earnings calls with market analysts. During the 1Q09 earnings call, Defendant Gilkey acknowledged that while “recessions tend to come late to the Pacific Northwest ... and tend to be shallower than the average for the whole nation,” the recession had clearly begun impacting the region. Ex. E to Greene Decl., ECF No. 51-5, at 33. Sterling also recorded a $65.8 million loss provision, well above the $30-$37 million provisions taken in each of the first three quarters of 2008. Ex. N to Greene Decl., ECF No. 51-14, at 63. Defendant Gilkey acknowledged that, “[g]iven the economic uncertainties!,] it is difficult to determine when provisioning will begin to return to more normalized levels.” Id. Sterling also began to see increasing signs of impaired loans outside its residential construction portfolio. Ex. E to Greene Decl., ECF No. 51-5, at 33.

In Sterling’s July 24, 2009 earnings call discussing 2Q09 results, Defendant Gilkey expressed optimism that “local economies are bouncing along the bottom and are nearing a stabilized level.” Ex. F to Greene Decl., ECF No. 51-6, at 36. He reported “steady progress” in resolving Sterling’s credit issues in its residential construction loan portfolio, and that NPAs within that segment had begun to recede in many of its markets. Id. Nonetheless, he also acknowledged that “determining the economic bottom and the quality of the economic recovery are difficult.” Id.

All told, Sterling was profoundly affected by the economic collapse. By December 31, 2009, Sterling’s total assets had declined from $12.8 billion, at the end of the prior year, to $10.9 billion. Ex. T to Greene Decl., ECF No. 51-20, at 123.

4. Departure of Sterling Executives and Intervention by Federal & State Banking Regulators

On October 14, 2009, Sterling announced that Defendant Gilkey had stepped down from his positions as Chairman of the Board, CEO and President of Sterling, and that Heidi Stanley had stepped down from her positions as Chairman of the Board and CEO of Sterling Savings Bank. C.C. ¶¶ 183-84, at 72. The next day, Sterling announced that it had entered into a stipulated Cease & Desist Order (CDO) with the Federal Deposit Insurance Corporation (FDIC) and the Washington State Department of Financial Institutions (DFI). Id. ¶ 11, at 4. Although the CDO stipulated that Sterling did not admit or deny any of the allegations contained therein, the CDO reflected the FDIC and DFI’s determination “that they had reason to believe that [Sterling] had engaged in unsafe or unsound banking practices and violations of law and/or regulations.” Id. ¶ 134; FDIC Order, Ex. A to C.C., ECF No. 29-1, at 96-97. Specifically, the CDO directed Sterling to desist from practices such as “operating with inadequate board of directors oversight,” “operating with inadequate capital in relation to the kind and quality of assets held,” “operating with a large volume of poor quality loans,” and “operating in such a manner as to produce operating losses.” C.C. ¶ 137, at 54. Sterling was directed to “restore all aspects of the Bank to a safe and sound condition.” Id. ¶ 138.

According to Plaintiff, investors were stunned by the “double-whammy” — the departure of Ms. Stanley and Defendant Gil-key, followed by the announcement of the CDO the next day. Id. ¶ 180, at 71. On October 22, 2009, approximately one week after the conclusion of the Class Period, Sterling announced its 3Q09 financial results, which included losses of $8.93 per share. Id. ¶ 181.

5. Sterling’s Share Price During the Class Period

On July 23, 2008, the first day of the Class Period, Sterling’s stock price increased from $5.88 to $7.76 per share following Sterling’s previous-day announcement of 2Q08 financial results. Id. ¶ 221, at 84. This 32% increase markedly outperformed Sterling’s peer group index, which only increased 1.8% that same day. Id. Sterling’s stock price continued to fluctuate, but after Sterling filed its 2Q08 financial results with the SEC on Friday, August 8, 2008, Sterling’s stock price increased 6% that day and 18% the following Monday, closing at over $10 per share. Id. ¶ 223, at 85.

In the two months that followed, Sterling’s stock price rose to a high of $14.72 per share, which, according to Plaintiff, resulted from the market’s reliance on Defendants’ misleading 2Q08 representations. Id. However, by November 24, 2008, Sterling’s stock price had fallen to between $4-$5 per share. Id. ¶ 224.

Sterling’s stock price continued to fluctuate, increasing substantially following Sterling’s announcement of preliminary approval to receive additional funding from the U.S. Government, id., but losing nearly half its value (to $3.40 per share) after Sterling pre-announced its record 4Q08 loss provision on January 13, 2009, id. ¶ 225, at 85-86. Sterling’s stock price hovered between $2-$5 per share for most of 2009. Id. ¶227, at 86-87. Following the twin announcements on October 14-15, 2009, of executive departures and the issuance of the FDIC’s CDO, Sterling’s stock price dropped more than 25% and closed at $1.20 per share, 92% less than its Class Period high of $14.72. Id. ¶ 228, at 87.

B. Procedural History

Plaintiff initially filed its complaint for violations of federal securities laws on December 11, 2009. ECF No. 1. On February 9, 2010, Plaintiff sought appointment as lead plaintiff in the lawsuit; Plaintiff also asked the Court to approve its selection of Coughlin Stoia Geller Rudman & Robbins LLP as lead counsel and Lukins & Annis as liaison counsel. ECF Nos. 7 & 13. The Court granted Plaintiffs motion. ECF No. 14.

On June 18, 2010, Plaintiff filed the Consolidated Complaint on behalf of the putative class. ECF No. 29. On August 30, 2010, Defendants moved to dismiss the complaint. ECF No. 46.

In connection with their opening memorandum and accompanying declaration, Defendants asked the Court to take judicial notice of certain documents and to treat certain documents as incorporated by reference into the Consolidated Complaint. ECF No. 50. Also, in connection with their subsequent reply memorandum and accompanying declaration, Defendants again sought judicial notice and incorporation by reference. ECF No. 59. After several scheduling conflicts were resolved, the Court heard argument on the pending motions on March 2, 2011. ECF No. 78. At the time, the motion to dismiss was taken under advisement. Id. Since that time, with the Court’s leave, Defendants have submitted a supplemental memorandum, ECF No. 91, and both Plaintiff and Defendants have submitted notices of supplemental authority, ECF Nos. 94 & 92, respectively.

III. LEGAL STANDARDS

A. Motion to Dismiss

Federal Rule of Civil Procedure 12(b)(6) permits a defendant to seek dismissal of a complaint that “fail[s] to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). When considering a motion to dismiss, the Court must afford a presumption of truthfulness to all material factual allegations and construe those allegations in the light most favorable to the plaintiff. See Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1229 (9th Cir.2004) (citing Burgert v. Lokelani Bernice Pauahi Bishop Trust, 200 F.3d 661, 663 (9th Cir.2000)). However, the Court is “not required to accept legal conclusions cast in the form of factual allegations if those conclusions cannot be reasonably drawn from the facts alleged.” See Clegg v. Cult Awareness Network, 18 F.3d 752, 755 (9th Cir.1994) (internal citations omitted).

If the Court dismisses the complaint, it must decide whether to grant leave to amend. Denial of leave to amend is “improper unless it is clear that the complaint could not be saved by any amendment.” Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir.2005).

B. Specific Legal Standards Governing Plaintiffs Claims

Plaintiff identifies two claims in the Consolidated Complaint: first, Plaintiff claims that all Defendants violated § 10(b) of the Exchange Act and corresponding SEC Rule 10b-5; and second, Plaintiff claims that the Individual Defendants violated § 20(a) of the Exchange Act. The legal standards governing these claims are discussed separately below.

1. Claim I: § 10(b) and SEC Rule 10b-5

Section 10(b) of the Exchange Act makes it unlawful for any person to

use or employ, in connection with the purchase or sale of any security registered on a national securities exchange ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b). SEC Rule 10b-5, promulgated pursuant to the Exchange Act, makes it unlawful to, inter alia, “make any untrue statement of a material fact or to omit ... a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b).

To sufficiently plead a primary violation of [SEC] Rule 10b-5 based on misstatements, a plaintiff must adequately allege the following: “1) a material misrepresentation or omission by the defendant [‘falsity’]; 2) scienter; 3) a connection between the misrepresentation or omission and the purchase or sale of a security; 4) reliance on the misrepresentation or omission; 5) economic loss; and 6) loss causation.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir.2012) (citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008)). Moreover, when such a claim is brought, the complaint must also satisfy the significantly heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the PSLRA. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir.2009). Rule 9(b) requires that any party alleging fraud must “state with particularity the circumstances constituting fraud,” Fed.R.Civ.P. 9(b), which means the pleading party must specifically “identify ] the statement] at issue[,] what is false or misleading about the statement,] and why the statement ][was] false or misleading at the time [it] was made.” Rigel, 697 F.3d at 876. The PSLRA requires a plaintiff to “state with particularity both the facts constituting the alleged violation and the facts evidencing scienter.” Id. (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)).

2. Claim II: § 20(a)

Section 20(a) of the Exchange Act imposes joint and several liability for violations of § 10(b) and its underlying regulations, including SEC Rule 10b-5, on a company’s “controlling” individuals:

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 to 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). “Thus, a defendant employee of a corporation who has violated the securities laws will be jointly and severally liable to the plaintiff, as long as the plaintiff demonstrates ‘a primary violation of federal securities law’ and that ‘the defendant exercised actual power or control over the primary violator.’ ” Zucco Partners, 552 F.3d at 990 (quoting No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp. (America West), 320 F.3d 920, 945 (9th Cir.2003)). Although this inquiry is usually an “intensely factual question,” Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir.1996), § 20(a) claims may be summarily dismissed if a plaintiff fails to sufficiently plead a primary violation of § 10(b). Zueco Partners, 552 F.3d at 990. Thus, at this stage of the proceedings, Plaintiffs § 20(a) claim rises and falls with its § 10(b) claim.

C. Consideration of Extrinsic Evidence

In general, “a district court may not consider any material beyond the pleadings in ruling on a [Rule] 12(b)(6) motion.” Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir.1994), overruled on other grounds, Galbraith v. Cnty. of Santa Clara, 307 F.3d 1119 (9th Cir.2002). There are, however, two relevant exceptions that apply to this ease. First, a court may take judicial notice of matters of public record. Fed.R.Evid. 201(b)(2); see also Mack v. South Bay Beer Distribs., 798 F.2d 1279, 1281 (9th Cir.1986). Second, a court may consider extrinsic documents that have been incorporated into the pleadings by reference. Branch, 14 F.3d at 453. These are each distinct concepts, see Busey v. P.W. Supermarkets, Inc., 368 F.Supp.2d 1045, 1049 (N.D.Cal.2005), therefore each is discussed separately below.

1. Incorporation by Reference

The doctrine of incorporation by reference allows “a district court to consider documents ‘whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the plaintiffs pleading.’ ” In re Silicon Graphics, Inc. Sec. Litig. (SGI), 183 F.3d 970, 986 (9th Cir.1999) (quoting Branch, 14 F.3d at 454). Because these documents have essentially been adopted as part of the complaint, the Court may consider them without converting the motion to dismiss into a motion for summary judgment. See Branch, 14 F.3d at 454. Once a document is deemed incorporated by reference, the entire document is assumed to be true for purposes of a motion to dismiss, and both parties — and the Court — are free to refer to any of its contents. See Malin v. XL Capital Ltd., 499 F.Supp.2d 117, 131 (D.Conn.2007), aff'd on other grounds, 312 Fed.Appx. 400 (2d Cir.2009).

2. Judicial Notice

Courts may take judicial notice of information “not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b). Courts routinely take judicial notice of such things as public SEC filings, corporate press releases, and documented accounting rules. See, e.g., In re Copper Mountain Sec. Litig., 311 F.Supp.2d 857, 864 (N.D.Cal.2004); Plevy v. Haggerty, 38 F.Supp.2d 816, 821 (C.D.Cal.1998); In re Asyst Techs., Inc. Deriv. Litig., No. C-06-4669, 2008 WL 2169021, at *1 n. 1 (N.D.Cal. May 23, 2008) (observing that “judicial notice is appropriate for SEC filings, press releases, and accounting rules” because such documents “are matters of public record” (internal quotations omitted)).

IV. DISCUSSION

A. Defendants’ Motions for Judicial Notice & Incorporation by Reference

In connection with their opening memorandum in support of the motion to dismiss, Defendants have submitted a supporting declaration by Douglas W. Greene, counsel for Defendants, ECF No. 51. Defendants attached twenty-eight exhibits to Mr. Greene’s declaration, consecutively identified as Exhibits A-Z, and AA-BB. Separately, Defendants ask the Court to take judicial notice of certain exhibits and to deem other exhibits incorporated by reference into the Consolidated Complaint. ECF No. 50. Additionally, in connection with their reply memorandum in support of the motion to dismiss, Defendants submitted a supporting declaration by Britton F. Davis, counsel for Defendants, ECF No. 57. Defendants attached eight additional exhibits to Mr. Davis’s declaration, consecutively identified as Exhibits CC-JJ. Again, Defendants ask the Court to take judicial notice of certain exhibits and to deem other exhibits incorporated by reference into the Consolidated Complaint. ECF No. 59.

Plaintiff does not object to 1) Defendants’ argument concerning the incorporation-by-reference doctrine, 2) the specific exhibits Defendants identifies as referenced in the Consolidated Complaint, or 3) the authenticity of any of the exhibits Defendant has provided. See ECF No. 55 (objecting only to the Court’s consideration of the truthfulness, rather than the existence, of certain exhibits to be judicially noticed). Accordingly, this unopposed portion of Defendants’ motions are granted, and the Court hereby deems Exhibits AG, I-S, U-V, X-Y, AA, and CC-GG incorporated by reference.

As to the issue of judicial notice, Plaintiff claims that the exhibits for which Defendants are requesting judicial notice may-only be considered to the extent that such documents exist, not for the truthfulness of the statements contained therein. On this point, Plaintiff is correct. See Klein v. Freedom Strategic Partners, 595 F.Supp.2d 1152, 1157 (D.Nev.2009) (“When a court takes judicial notice of a public record, ‘it may do so not for the truth of the facts recited therein, but for the existence of the [record], which is not subject to reasonable dispute over its authenticity.’ ”) (quoting Lee v. City of Los Angeles, 250 F.3d 668, 690 (9th Cir.2001)). To the extent Defendants rely on case law to the contrary, they mistakenly conflate the doctrine of incorporation by reference with the separate concept of judicial notice. Cf., e.g., United States v. Ritchie, 342 F.3d 903, 908 (9th Cir.2003) (acknowledging that a district court may assume that the contents of a document incorporated by reference “are true for purposes of a motion to dismiss”); In re Downey Sec. Litig. (Downey II), No. CV 08-3261-JFW, 2009 WL 2767670, at *6 n. 4 (C.D.Cal. Aug. 21, 2009) (same). Defendants have not cited any authority which permits the Court to assume the truthfulness of the contents of documents for which it takes judicial notice (as opposed to documents incorporated by reference).

In any event, in resolving the instant motion to dismiss, the Court finds it unnecessary to consider the truthfulness of the judicially noticeable documents Defendants have submitted. Instead, the Court decides the motion by taking judicial notice of the fact that such documents exist. In other words, to the extent the documents contain out-of-court representations, the Court takes judicial notice of the fact that the representations were made, but does not take judicial notice of the truthfulness of such representations. Accordingly, Defendants’ requests for judicial notice and incorporation by reference are granted in part and denied in part.

B. Defendants’ Motion to Dismiss

Defendants ask the Court to dismiss Plaintiffs claims for two principal reasons. First, Defendants contend that Plaintiff has failed to identify a false or misleading statement by Defendants that was false at the time the statement was made. Second, Defendants contend that Plaintiff has failed to raise a strong inference of scienter.

As set forth below, the Court finds that Plaintiff fails to identify a specific false or misleading representation sufficient to state a claim for securities fraud. Further, considering Plaintiffs allegations of scienter both individually and holistically, the Court finds that the complaint does not give rise to a strong inference of scienter. Because Plaintiff fails to satisfy the PSLRA’s pleading requirements with respect to both falsity and scienter, the Consolidated Complaint must be dismissed.

1. Falsity

To properly allege falsity, a securities fraud complaint must “specify each statement alleged to have been misleading, [state] the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, ... state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1); all facts on which that see also Rigel, 697 F.3d at 877; Zueco Partners, 552 F.3d at 990-91. When a plaintiff relies on two statements which contain material differences as evidence of falsity, the plaintiff must plead specific facts explaining why the difference between the two statements “is not merely the difference between two permissible judgments, but rather the result of a falsehood.” In re GlenFed, Inc., Sec. Litig., 42 F.3d 1541, 1549 (9th Cir.1994) (en banc), superseded by statute on other grounds, 15 U.S.C. § 78u-4(b)(1), as recognized in Ronconi v. Larkin, 253 F.3d 423, 429 n. 6 (9th Cir.2001). Alternatively, when a plaintiff relies on an omission of fact as evidence of falsity, the plaintiff cannot simply show that the omission was material; instead, the plaintiff must show that the omission actually renders other statements misleading. Rigel, 697 F.3d 869, 880 n. 8 (citing Matrixx Initiatives, Inc. v. Siracusano, — U.S. -, 131 S.Ct. 1309, 1322, 179 L.Ed.2d 398 (2011)). In other words, an Rule 10b-5 does not have “an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary ‘to make ... [other] statements [that were] made, in the light of the circumstances under which they were made, not misleading.’” Matrixx, 131 S.Ct. at 1321 (citing 17 C.F.R. § 240.10b-5(b)).

Inherent in the concept of falsity is the requirement of contemporaneousness. To viably plead a false or misleading statement, Plaintiff must “set forth, as part of the circumstances constituting fraud, an explanation as to why the disputed statement was untrue or misleading when made.” Id. (emphasis in original). The fact that a statement is later discovered to be untrue does not mean that, by default, the statement was untrue at the time it was made. As the Ninth Circuit has explained:

[T]here is no reason to assume that what is true at the moment plaintiff discovers it was also true at the moment of the alleged misrepresentation, and that therefore simply because the alleged misrepresentation conflicts with the current state of facts, the charged statement must have been false. Securities fraud cases often involve some more or less catastrophic event occurring between the time the complained-of statement was made and the time a more sobering truth is revealed (precipitating a drop in stock price). Such events might include, for example, a general decline in the stock market, a decline in other markets affecting the company’s product, a shift in consumer demand, the appearance of a new competitor, or a major lawsuit. When such an event has occurred, it is clearly insufficient for plaintiffs to say that the later, sobering revelations make the earlier, cheerier statement a falsehood.

Id. at 1548. Without evidence of contemporaneous falsity, an allegation of a misleading representation, which entirely rests on later contradictory statements, constitutes an impermissible attempt to plead fraud by hindsight. See Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978) (“In sum, the complaint is an example of alleging fraud by hindsight. For the most part, plaintiff has simply seized upon disclosures made in later annual reports and alleged that they should have been made in earlier ones.”).

Even if a plaintiff demonstrates that a specific statement by a defendant meets the PSLRA’s three requirements for falsity, see 15 U.S.C. § 78u-4(b)(1), the PSLRA “carves out a safe harbor from liability if the statements at issue were forward-looking and accompanied by meaningful risk warnings.” Copper Mountain, 311 F.Supp.2d at 866 (citing 15 U.S.C. § 78u-5(c)). This “safe harbor” provision is a statutory analog of the common law “bespeaks caution” doctrine, “which allows a court to rule as a matter of law that [a] defendant’s forward-looking statements contained enough cautionary language or risk disclosure to protect against liability.” Id. (citing Provenz v. Miller, 102 F.3d 1478, 1493 (9th Cir.1996)). Pursuant to the PSLRA, the Court must consider any statement cited in the complaint and any cautionary statement accompanying such statement in evaluating a motion to dismiss. See 15 U.S.C. § 78u-5(e).

Turning to the instant motion, Plaintiff identifies a number of representations about Defendants’ business practices, as well as purported “red flags” about increasing risk in Sterling’s loan portfolio, all of which occurred prior to the beginning of the Class Period, but all of which Plaintiff asserts should have placed Defendants on notice about the need for additional safeguards. With regard to Defendants’ representations made within the Class Period, Plaintiff identifies four categories of allegedly false or misleading statements by Defendants: 1) quarterly and annual financial data, including press releases, conference calls, and investor presentations in which such data was discussed; 2) representations that Sterling maintained a “safe and sound” banking practice; 3) representations about Sterling’s risk exposure, quality of loans, adequacy of reserves, underwriting standards, and management of troubled assets; and 4) representations about the adequacy of Sterling’s capital position and the need for additional capital. Each of these categories is discussed in detail below.

a. Statements Before the Class Period

A significant portion of the Consolidated Complaint focuses on Defendants’ preClass Period conduct and statements. Plaintiff begins by highlighting general trends about Sterling’s pre-Class Period financial performance, and in particular, the increasing risk of its loan portfolio. Plaintiff also cites to certain aspects of Sterling’s financial results, including the following:

1. Between 2004 and 2007, Sterling rapidly and significantly grew its portfolio of residential construction loans, which were inherently risky and more likely to experience higher levels of losses than other types of loans, C.C. ¶¶ 29-32, at 10-13;

2. Despite the ongoing credit crisis, in 2008, Sterling ignored risks and still originated $602 million in construction loans, although much less than the $2.3 and $2.2 billion in such loans originated in the previous two years, id. ¶ 33, at 13;

3. In the five fiscal quarters preceding the Class Period, Sterling’s NPAs, NPLs, and construction-related Classified Assets all increased substantially, in some cases, by more than 800%, id. ¶¶ 36-40, at 14-15; in particular, nonperforming construction loans increased by 2600% from 2Q08 to 2Q09 (from $9 million to over $253 million), id. ¶ 37, at 14, and delinquency rates also increased, id. ¶¶ 41-43, at 16;

4. Despite these trends, Sterling’s principal reserve used to account for loan losses — referred to as its Allowance for Loan Losses (or “ALL” reserves) — did not increase at the same rate as its NPAs and NPLs, and as a result, the ratio of ALL reserves to NPAs/NPLs declined, id. ¶¶ 44-47, at 16-17.

Plaintiff compares these results to Defendants’ public statements in press releases and earnings calls in connection with Sterling’s quarterly financial results, including statements about Sterling’s ability to manage loss exposure, id. ¶ 50, at 18-19, Sterling’s “cautious approach toward residential construction underwriting,” id. ¶ 51, at 19, Defendants’ belief of the adequacy of Sterling’s loss allowance, id., and their knowledge of the individual loans and borrowers, which gave them greater insight into risk management, id. ¶ 51-54, 19-20.

The Court finds it unnecessary to consider whether any of these allegations establish falsity or scienter, because all of the statements alleged in paragraphs 29-56 of the Consolidated Complaint occurred before — in some cases, substantially before — the Class Period. “As the class period defines the time during which defendants’ fraud was allegedly alive in the market, statements made ... before or after the purported class period are irrelevant to plaintiff’s] fraud claims.” In re Clearly Canadian Sec. Litig., 875 F.Supp. 1410, 1420 (N.D.Cal.1995); see also Sharenow v. Impac Mort’g Holdings, Inc., 385 Fed.Appx. 714, 716 (9th Cir.2010) (unpublished) (affirming dismissal of §§ 10(b) and 20(a) claims because the “alleged violations are not sufficiently tied to the class period”).

Although there are numerous other paragraphs in the complaint that reference pre-Class Period statements and documents, the Court finds it unnecessary to list each of them. Should Plaintiff avail itself of the opportunity to file an amended complaint, Plaintiff cannot rely on preClass Period statements to show falsity.

b. Sterling’s Financial Results

Plaintiff alleges that, at the conclusion of each fiscal quarter during the Class Period, Sterling issued materially false and misleading financial results. Plaintiff alleges that those financial results were in turn discussed on investor conference calls, in investor presentations, and in various SEC filings. Plaintiff also alleges that because these false statements were included in Sterling’s financial reports, the Individual Defendants’ quarterly certifications of Sterling’s financial results — pursuant to § 302 of the Sarbanes-Oxley Act of 2002 — -were also false and misleading.

To support these allegations of falsity, Plaintiff rests on several assertions. Plaintiff contends that Defendants 1) “materially understated Sterling’s NPAs and Classified Assets and overstated its income and earnings” by improperly deferring amounts due to future periods, thereby avoiding having to contemporaneously report the underlying loans as nonperforming; 2) ignored red flags and failed to account for rapidly increasing risks; and 3) deliberately manipulated Sterling’s quarterly Provision for Credit Losses (PCL), thereby keeping ALL reserves artificially low, concealing rising risk, and inflating income and earnings. Having considered each of these allegations in detail, as set forth below, the Court finds that Plaintiff failed to sufficient plead falsity with respect to Sterling’s financial results.

i. Understated NPAs & Classified Assets

Plaintiff contends that in 2008, despite the fact that $2.17 billion of Sterling’s construction loan portfolio was contractually due, “Sterling only received approximately $1.01 billion in payments during the entire year, meaning construction borrowers failed to pay over $1.16 billion in principal contractually due in 2008.” C.C. ¶ 75, at 27. Plaintiff repeats a similar allegation for 2009. Id. ¶ 88, at 30. Plaintiff contends these unpaid construction loans should have been — and were not— disclosed as Classified Assets and/or NPAs. Id. ¶ 76, at 27-28. Accordingly, Plaintiff contends that this allegedly deliberate act of concealment had a cascading effect: Sterling’s financial reports overstated loan receivables and understated NPAs, id. ¶ 77, at 28, which in turn allowed Defendants to under-record PCLs and maintain artificially low ALL reserves, id., which in turn resulted in an overstatement of Sterling’s reported pretax net income and earnings per share, id. ¶ 78.

In addition, Plaintiff relies on Sterling’s SEC Form 10-K reports from year-end FY07 and FY08. Plaintiff contends that in the FY07 filing, which was six months before the Class Period began, Sterling reported $657 million in principal payments due during the period between 2009 and 2012; however, in its FY08 filing, Sterling reported principal payments of $2.08 billion in 2009 alone. Plaintiff asserts that this difference in amounts provides compelling evidence that Sterling improperly deferred payments due in 2008 to 2009, to avoid having to report the defaulted payments as NPAs in 2008. Id. ¶ 81, at 29-30. Plaintiff argues that the failure to account for massive underpayments, coupled with deferral of loan payments from 2008 to 2009, demonstrates the falsity of Defendants’ statements concerning Sterling’s financial results.

Plaintiffs allegations suffer from several fatal flaws. First, Plaintiff fails to show that its calculations are entitled to a presumption of truth. As Defendant points out, all of Plaintiffs allegations regarding alleged underpayment of loans in 2008 and 2009 rest on Plaintiffs comparison of “Principal Payments Due” to “Total Payments Received.” See, e.g., id. ¶ 75, at 27 (2008); id. ¶83, at 30-31 (2009). While Defendants publicly reported the amount of principal payments due in their annual SEC filings, see, e.g., Ex. Q & R to Greene Decl., ECF Nos. 51-17 & 51-18, at 81 & 97, Defendants do not appear to ever have disclosed the amount of total payments received in any given fiscal year for construction loans. Plaintiff does not indicate the origin of this data or explain how it was calculated. Defendants attempt to divine a source for the data, stating that Plaintiff has “backed in” to the calculation by relying on reported construction loan originations and principal outstanding due on construction loans. Defs’ Mem. Supp. Mot. Dismiss (“Mot.”), ECF No. 48, at 19-20. Defendants explain the math and provide an example, which appears to match the amounts pled by Plaintiff. Mot. at 20 n. 5. Defendants also illustrate why they believe Plaintiffs math is faulty. Id. at 19-21.

Plaintiff does not refute Defendants’ assertion about how “Total Payments Received” was calculated, but instead contends that Defendants have raised a factual dispute that cannot be resolved at this stage of the pleading. The Court disagrees. At the very least, Defendants have properly pointed out that Plaintiffs allegations about improper accounting practices apparently rest on unsubstantiated — and more importantly, undocumented— assumptions about how the numbers add up. The Court need not resolve a factual dispute to determine that the complaint fails to sufficiently allege how Plaintiff determined “Total Payments Received,” upon which its allegations are founded. Absent an identified source for this data, the Court cannot determine whether Plaintiff’s calculations are actual facts — entitling Plaintiff to a presumption of truthfulness — or mere speculation, which does not. See, e.g., SGI, 183 F.3d at 985 (“In the absence of such specifics, we cannot ascertain whether there is any basis for the allegations .... ”). If Plaintiff files an amended complaint, Plaintiff must fully identify the source for this data and must set forth its calculations. Plaintiff must also justify why its calculations should be entitled to a presumption of truthfulness.

Second, as to Plaintiffs assertion regarding the “improper” deferral of loan payments from FY08 to FY09, Plaintiff fails to allege why such a practice would render Plaintiffs financials false or misleading. The complaint concludes that the practice was misleading, but it does not explain how. Accounting terms have precise definitions, and it therefore must follow that if Defendants abided by those definitions in calculating their balance sheets, Plaintiff has not identified an affirmative false representation. Plaintiff may instead be seeking to allege that Defendants’ failure to explicitly report these deferrals constitutes an actionable omission; however, the complaint contains no indication why an additional statement would be necessary to avoid making other statements not materially misleading. The Court cannot tell from the complaint whether the alleged payment-deferral practice, if it occurred, would be a permissible business judgment by Defendants, or whether it would violate an accounting standard or regulatory rule with which Defendants purported to comply, thereby rendering it false.

Third, Plaintiff fails to identify a single loan which Defendants improperly deferred, or for which payment was not timely received. Instead, Plaintiff relies exclusively on Defendants’ own financial data, which was timely reported by Defendants, discussed repeatedly on conference calls and at investor presentations, and “promptly digested” by the market. C.C. ¶ 237, at 90. Plaintiff has cited no authority for the proposition that a company has reported false information when the very information upon which the plaintiff relies to demonstrate such falsity was contemporaneously publicized — by the company.

Finally, Plaintiff does not contest Defendants’ assertion that Sterling’s independent auditors consistently provided unqualified opinions for Sterling’s financial results. Moreover, Plaintiff does not contest that the FDIC has never required Sterling to restate any of its financials, despite FDIC’s issuance of the CDO and its unilateral power to force companies to restate inaccurate financials. See 12 U.S.C. § 1818(b); see also Nolte v. Capital One Fin. Corp., 390 F.3d 311, 316 (4th Cir.2004) (“Had Federal Regulators determined that Capital One’s past practices were deficient, they could have applied corrective measures retroactively and forced the company to restate its earnings to reflect retroactive adjustments.”); XL Capital, 499 F.Supp.2d at 148 (noting that “although misreported financial data are clearly false statements of fact ... there is no allegation here there has been any restatement of any financial statement or that any auditor or actuary has qualified or withdrawn its opinion” (internal citations and quotations omitted)); In re 2007 Novastar Fin., Inc. Sec. Litig., No. 07-0139-CV-W-ODS, 2008 WL 2354367, at *3 (W.D.Mo. June. 4, 2008) (unpublished) (“[I]t is noteworthy that nobody — the SEC, Novastar’s auditors, or anyone else — has suggested Novastar should or must restate its financial reports.”).

For these reasons, the Court finds that Plaintiffs contention — that Defendants improperly deferred payments and failed to account for missing payments in reporting its troubled assets — does not satisfy the pleading standards imposed by the PSLRA.

ii Ignorance of “Red Flags” and Increasing Risk

In paragraphs 87 through 96 of the Consolidated Complaint, Plaintiff alleges facts in support of its allegation that Defendants ignored “red flags” and increasing signs of deterioration in the loan portfolio. Plaintiff identifies a number of downward trends between 2Q07 and 2Q08 (outside the Class Period), C.C. ¶ 87, at 32, and compares the increasing rate of NPAs, NPLs, and delinquencies with Sterling’s reserve allowance during the Class Period, id. ¶ 89-96, at 33-38. Plaintiff contends that Defendants should have accounted for the increasing risk “by increasing its ALL Reserves and [PCL] to adequate levels,” but that instead, Defendants “kept ALL Reserves and [PCL] artificially low to conceal risk.” Id. ¶ 88, at 33.

Setting aside for the moment the conclusory nature of this allegation, it appears that Plaintiff conflates two of the four reasons it gave for why Defendants’ financial results constituted false statements: Defendants’ ignorance of risk factors and Defendants’ manipulation of reserves. See id. ¶ 68, at 24-25. To the extent Plaintiff suggests that the ignorance of these risk factors allowed Defendants to manipulate or understate reserve levels, thereby rendering Sterling’s financial statements to be false and misleading, this assertion is discussed (and rejected) in the following section. Beyond that, Plaintiff does not identify any other reason why Defendants’ alleged ignorance of risk factors, even if true, supports its claim that Sterling’s financial statements were misleading.

In fact, Plaintiff’s argument is entirely based on financial information Sterling publicly and contemporaneously reported. Thus, “all of the information alleged to constitute ‘red flags’ ... were matters of public knowledge.” City of Omaha, Neb. Civilian Empl. Ret. Sys. v. CBS Corp., 679 F.3d 64, 69 (2d Cir.2012). As Plaintiff alleges, this “information was promptly digested” by the market and “reflected” in Sterling’s stock price. C.C. ¶237, at 90.

Plaintiff provides no authority to support the notion that a company’s ignorance and failure to respond to market conditions, standing alone, somehow constitutes an actionable false or misleading statement. In fact, there is substantial authority to the contrary. See, e.g., Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 479, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977) (noting that when Congress enacted § 10(b), it “did not seek to regulate transactions which constitute no more than internal corporate mismanagement”); In re Impac Mortg. Holdings, Inc. Sec. Litig., 554 F.Supp.2d 1083, 1087 (C.D.Cal.2008) (concluding that corporate mismanagement “is not actionable fraud”). As currently pled, the Defendants’ alleged failure to respond to market conditions does not support Plaintiffs allegation of falsity.

Hi. Manipulation of ALL Reserves & PCL

Plaintiff also alleges that Sterling maintained artificially low ALL reserves, id. ¶ 89, at 33, and at several points, reduced its quarterly PCL (as compared to the previous quarter), despite increasing risk in its loan portfolio, id. ¶¶ 97-100, at 38-39. Plaintiff contends that “[t]hese facts evidence an intentional attempt to falsify Sterling’s financial results and conceal risk.” Id. ¶ 100, at 39. Plaintiff does not argue that Sterling’s financial statements i.e., that Sterling actually maintained different reserve levels than it claimed in its public filings. Instead, Plaintiff argues that Sterling’s reserves were simply too low, and that they were not increased with sufficient speed or in sufficient quantity. Plaintiff thus contends that Sterling’s financial statements created a false impression with investors.

To support its contention that Sterling improperly manipulated reserve levels, Plaintiff states that Defendants were aware of Sterling’s recent past financial performance, including numerous indicators of deterioration in its loan portfolio, id. ¶ 87, at 32, at the time Defendants publicly reported Sterling’s ALL reserves and PCL. Plaintiff also states that Defendants were aware, during each quarter in which they recorded a PCL and reported their ALL reserves, that NPLs, NPAs, Classified Assets, and delinquencies were continuing to increase, and that despite these increases, Defendants failed to increase ALL reserves by a corresponding amount. Id. ¶¶ 90-96, at 35-38. Lastly, Plaintiff alleges that on two separate occasions, in 2Q08 and 1Q09, Sterling recorded a PCL that was less than the PCL recorded in the previous quarter. Id. ¶ 97, 100, at 38-39.

“If properly pled, overstating of revenues may state a claim for securities fraud .... ” In re Daou Sys., Inc., 411 F.3d 1006, 1016 (9th Cir.2005). To support such a claim, however, Plaintiff must include “such basic detail[] as the approximate amount by which revenues and earnings were overstated .... ” Id. (internal quotations omitted).

The Ninth Circuit provided instructive guidance on the issues of loss reserves in a 1993 securities fraud case in which near-identical claims of reserve manipulation were raised. See In re Wells Fargo Sec. Litig., 12 F.3d 922 (9th Cir.1993), superseded by statute on other grounds, 15 U.S.C. § 78u-4(b)(1), as recognized in Howard v. Everex Sys., Inc., 228 F.3d 1057, 1063-64 (9th Cir.2000). In Wells Fargo, the plaintiffs alleged that the company “intentionally or recklessly understated its loan loss reserves in an effort to inflate corporate earnings (and therefore earnings per share), and then disseminated financial statements reflecting this misallocation to the public and to the SEC____” Id. at 926. While acknowledging that the company’s financial statement contained accurate data about the level of its reserves, the Ninth Circuit determined that the plaintiffs could state a plausible claim by identifying “some omission of material fact necessary to make Wells Fargo’s literally accurate reporting of the size of its reserve not misleading.” Id.

In holding that the plaintiffs had sufficiently identified the omission of material information, the Ninth Circuit noted that plaintiffs had 1) specifically identified a number of “[a]lleged problem loans, of which Wells Fargo was ‘on notice’ prior to the start of the Class Period and failed properly to disclose,” id.; and 2) provided dollar amounts by which Wells Fargo’s reserves and nonperforming assets were understated. Id. Distinguishing the case from others in which similar claims of understated loan loss reserves have been found insufficient, the Ninth Circuit concluded the plaintiffs sufficiently alleged a “deliberate failure to disclose the status of certain specific loans extended to identified borrowers.” Id. at 927 (emphasis added). Such “specific misrepresentations or material nondisclosures” differentiate actionable securities fraud from inactionable corporate mismanagement. Id. at 927-28 (citing cases illustrating the difference).

When viewed in light of Wells Fargo, it becomes clear that Plaintiffs claims here do not rise to the level of securities fraud. As a basis for a securities fraud claim, Plaintiffs theory of reserve manipulation fails for several reasons.

First, Plaintiff does not identify the exact amount by which reserves were allegedly understated, a basic detail that is required for Plaintiff to state a claim. True, the Consolidated Complaint creates the appearance of specifically-pled amounts by which reserve levels were understated. See C.C. ¶¶ 77-80, at 28-29. But data is only as good as the assumptions upon which it rests, and in this case, Plaintiffs data lacks sufficient factual foundation. For example, Plaintiff contends that ALL reserves were understated by $149.5 million in 2008. Id. ¶ 77, at 28. But to arrive at this figure, Plaintiff relies on its calculation of the alleged amount by which NPAs were understated, a calculation which the Court has already found too conclusory. See part IV.B.1.b.i, supra. Plaintiff also relies on a ratio of construction NPLs to construction-related ALL reserves at the end of 2008, which, when multiplied by the volume of alleged understated NPAs, yields Plaintiffs figure of $149.5 million. However, Plaintiff fails to provide any factual basis for its conclusion that this ratio is the proper method of determining an adequate amount of ALL reserves. And even if it were an adequate method of determining ALL reserves, Plaintiffs complaint is entirely devoid of support for the notion that this ratio-based method is so universally accepted, Defendants’ failure to employ it constitutes a material misrepresentation.

“A company is not required to set its reserve at any predetermined percentage of receivables.” In re Alamosa Holdings, Inc., 382 F.Supp.2d 832, 854 (N.D.Tex.2005). Plaintiff, however, relies exclusively on ratios of reserves to other financial data — for example, a ratio of ALL reserves to NPAs during the Class Period by each fiscal quarter. C.C. ¶ 94, at 37.

Moreover, Plaintiff’s own calculations reveal large inconsistencies, rendering those calculations unreliable and suspect. For example, at one point, Plaintiff suggests that ALL reserves should have been $149.5 million higher in 2008. Id. ¶ 77, at 28. But then, expressing doubt over the validity of its own calculations, Plaintiff asserts a ratio of ALL reserves to Classified Assets, multiplied by the alleged amount of understated Classified Assets in 2008, yields yet another correct amount of understated ALL reserves: $58 million. Id. ¶ 80, at 29. Plaintiff asserts that these calculations demonstrate “Defendants’ improper accounting manipulations,” which “materially misrepresented Sterling’s financial results[.]” Id. On the contrary, this is not a specific allegation of accounting error: it is guesswork.

Plaintiff essentially argues that the Court (and Defendants) should take their pick of ratio, because the fact that Defendants employed neither demonstrates falsity. This argument demonstrates that, at least as currently pled, neither ratio-based reserve-setting method proposed by Plaintiff has the sort of reliability and acceptance such that Defendants’ failure to employ it renders stated reserves to be misleading. Cf. Stack v. Lobo, 903 F.Supp. 1361, 1368-69 (N.D.Cal.1995) (finding allegations of understated reserves “to be inadequate because [plaintiffs] did not name any ‘less creditworthy’ customers or explain why any such customers would have been unlikely to pay their bills [and instead] relied solely on statistics regarding sales and accounts receivable that could have been indicative of numerous factors other than fraud”). In short, Plaintiffs contentions of understated reserves amount to a “conclusory allegation masquerading as fact,” which “will not suffice in a claim sounding in fraud.” Alamosa Holdings, 382 F.Supp.2d at 854.

The second reason why Plaintiffs claim for understated reserves fails is that Plaintiff does not sufficiently plead that the allegedly insufficient reserve levels were a product of deliberate fraudulent manipulation, as opposed to the exercise of legitimate business judgment. If Plaintiff can identify at least two alterna