Citations
- 123 F. Supp. 3d 236
Full opinion text
OPINION AND ORDER
GUSTAVO A. GELPÍ, District Judge.
Lead Plaintiffs (“Plaintiffs”), Jensine Andresen, Ken M. Nimmons, and Morde-chai Hakim, bring this putative class action lawsuit on behalf of a class of investors against the holding company of Doral Bank (“Doral Bank” or the “Bank”), Doral Financial Corporation (“Doral”), and several current and prior company executives, Glen R. Wakeman (“Wakeman”), Robert E. Wahlman (“Wahlman”), Penko Ivanov (“Ivanov”), David Hooston (“Hooston”), Enrique R. Ubarri-Baragano (“Ubarri”), and Christopher C. Poulton (“Poulton”) (all defendants collectively referred to as “Defendants” and the latter company executives collectively referred to as the “Individual Defendants”). The Consolidated Class Action Amended 'Complaint (“complaint”) alleges that Plaintiffs purchased common stock of Doral between April 2, 2012 and May 1, 2014 (the “class period”) at prices that were artificially inflated by Defendants’ false and misleading statements made in violation of sections 10(b) and 20(a) of the of 1934 Securities Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission . (“SEC”), 17 C.F.R. § 240.10b-5. (Docket No. 53.)
Despite the extensiveness of the complaint, rounding out at 122 pages and comprising of 328 paragraphs, the substantive allegations can be boiled down to the contention that, during the class period, Defendants violated securities laws when they engaged in a scheme to misrepresent Doral’s regulatory compliance, thus artificially inflating the company’s actual worth in two ways. First, Plaintiffs claim that Doral misrepresented the quality of its loan portfolio by failing to publically disclose that it had been deliberately understating its appropriate loan reserves, known as the Allowance for Loan and Lease Losses (the “ALLL”), and by failing to disclose the systematic and widespread deficiencies in its procedures for determining its ALLL. (Id. ¶¶ 4-6, 8.) The ALLL provides an accurate representation of a lender’s present financial status by approximating the portion of the lender’s loan portfolio that is impaired or is otherwise not likely to be collected in the future. This in turn significantly affects the lender’s value. Second, Plaintiffs claim that Defendants failed to disclose the known, material risk that the Puerto Rico Treasury Department (“Treasury Department”) and the Federal Deposit Insurance Corporation (“FDIC”) would disallow the inclusion of the largest single component of Doral’s capital, a $229,884,087 tax receivable, into its Tier 1 capital. (Id. ¶ 7.) This fraudulent scheme, Plaintiffs claim, led to inflated stock prices, which ultimately plummeted when Doral announced on March 18, 2014 that it would not be able to timely file its 2013 financial results due to a material weakness in its internal control over its financial reporting and then subsequently announced on May 1, 2014 that the FDIC would not allow Doral to. include the tax receivable as part of its capital. (Id. ¶¶ 9 — 13.)
Presently before the court is Defendants’ motion to dismiss Plaintiffs’ complaint pursuant to the Private Securities Litigation Reform Act of 1996 (“PSLRA”) and Federal Rules of Civil Procedure 9(b) and 12(b)(6), in which they argue that Plaintiffs fail to state a single claim under the applicable federal securities laws upon which relief can be granted. (Docket No. 56.) Plaintiffs opposed said motion to dismiss. (Docket No. 58.) Defendants, in turn, replied to Plaintiffs’ opposition. (Docket No. 62.) Plaintiffs then surreplied to Defendants’ opposition. (Docket No. 64.) Thereafter, Doral filed a voluntary petition under Chapter II of Title 11 of the United States Bankruptcy: Code, 11 U.S.C. §§ 101 et seq., and, as such, the case against Doral was automatically stayed. (See Docket No. 65.) Plaintiffs” case against the Individual Defendants continues, however, and the court will" consider whether the complaint sufficiently states a claim upon which relief can be granted against those defendants.
After reviewing the pleadings and pertinent law, and taking into consideration the procedural posture of this case, the Court GRANTS in part and DENIES in part Defendants’ Motion to Dismiss at Docket No. 56 as to the Individual Defendants.
I. The Parties
Plaintiffs are stock holders who purchased Doral common stock during the class period. (Docket No. 53 ¶ 18.) Doral is a diversified financial services company incorporated in San Juan, Puerto Rico that engaged in retail banking; mortgage banking, investment banking activities, institutional securities, and insurance agency operations. (Id. ¶¶ 19, 38.)
Defendant Wakeman is, and was throughout the class period, Doral’s Chief Executive Officer (“CEO”), President, and a Director of the Bank, (Id. ¶ 20.) Defendant Wahlman also served as Doral’s Chief Financial Officer (“CFO”), Chief Investment Officer, Chief Accounting Officer, an Executive Vice President, and a Director of the Bank during the class period. (Id. ¶ 21.) Defendant Ivanov served as Doráis Interim CFO between May 17, 2013 and October 3, 2013. (Id. ¶ 22.) Defendant Hooston joined Doral as Executive Vice President of Finance on July 1, 2013, pending ■ regulatory approval of his appointment as permanent CFO, and, on October .3, 2013, Hooston was appointed CFO and an Executive Vice President. (Id, ¶ 23.) On October 6, 2014, after the end of the class period, Doral announced that Hooston had been placed on “paid administrative leave.” (Id.) Defendant Ubarri is, and was throughout the class period, Doral’s Chief Compliance Officer, General Legal Counsel, and an Executive Vice President. (Id.. ¶ 24.) Defendant Poulton is, and- was throughout the class period, Dor-áis Chief Business Development Officer and an Executive Vice President. (Id. If 25.) . . ...
II. Background
In articulating the following facts of -this case, the court recites such facts as alleged in the complaint, resolving any ambiguities in Plaintiffs’ favor. See Ocasio-Hernández v. Fortmo-Burset, 640 F.3d 1, 5 (1st Cir.2011).
A. Doral Financial Corporation
Doral is the holding company for Doral Bank, which provided retail banking services to the general public and institutions, primarily in Puerto Rico. (Docket No. 53 ¶¶ 19, 40.) The.. Individual Defendants were the chief officers of Doral and the Bank. (Id. ¶¶ 20-25.) As of December 31, 2013, Doral Bank'operated a network of twenty-two branches located in Puerto Rico and eight branches in New York and Florida. (Id. ¶ 40.) Through these branches, the Bank engaged in consumer and commercial lending, including residential mortgage lending, consumer' loans, and commercial real estate and construction loans. (Id. ¶ 41.) Doral’s stock was pub-, lically traded on the_ New York Stock Exchange (“NYSE”) and as of April 30, 2014, it.had more than 6.6 million shares of common stock outstanding. (Id. ¶ 19.)
Doral Bank’s lending activities in Puerto Rico were focused on the origination of residential mortgage loans. (Id. ¶ 42.) The operations of the Bank in the rest of the United States focused on the mortgage banking business and the purchase of assigned interests in senior credit facilities. (Id.) The Bank also offered deposit products and other retail banking services and. sold or securitized a portion of the residential mortgage loans it originates. (Id.)
In the years leading up to the class period, Doral’s operations were in disarray and -the Bank was struggling to regain profitability following a massive restatement thát was announced in February, 2006, which stemmed from spurious mortgage sales between it and, among others, FirstBank, which settled a securities fraud lawsuit arising out of those transactions for $74.25 million. (Id. ¶ 3.) As a result of its financial struggles, on April 2, 2012, the first day-of the class period, the FDIC notified Doral that it considered the Bank to be in -“troubled condition.” ■ (Id. ¶ 67.) As a- bank holding company, Doral was subject to supervision and examination by federal and local banking regulators, including the FDIC, the Federal Reserve Bank of New York (the “FRBNY”), and the Office of the Commissioner of Financial Institutions of Puerto Rico (the “PR Commissioner”). (Id. ¶ 43.) Approximately four months later, August 8, 2012, Doral disclosed this information and announced that the Bánk had entered into the “Consent Order” with the FDIC and the PR Commissioner that imposed operational restrictions and regulatofy requirements on Doral to get it back on track to becoming successful again. (Id.) Thereafter, on September, 13, 2012, Doral announced that it had entered into a similar written agreement with the FRBNY (the “Written Agreement”) that replaced and superseded an existing cease and desist order entered into with the Board of Governors of the Federal Reserve System on March 16, 2006. (7&¶75.)
To best understand the specific requirements of the Consent Order, the Written Agreement, and the specific allegations in this case, it is helpful to first explain the basic accounting rules and principles underlying those agreements.
B. Relevant Principles Regarding the Federal Regulation of Banks
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), federal banking regulators must take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. (Id. ¶ 44.) The relevant capital metrics for these requirements are the “Total Risk-Based Capital Ratio,” the “Tier 1 Risk-Based Capital Ratio,” and the “Tier 1 Leverage Ratio.” (Id. ¶45.) At least half of a bank’s Total'Risk-Based Capital must be comprised of Tier 1 Capital,' which may include 'common equity, retained earnings, minority interests in unconsolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock (in the case óf a bank holding company), minus goodwill, and certain other intangible assets. (Id. ¶ 46.) The remainder may consist of Tier 2 Capital, which may include a limited amount of subordinated debt, other preferred stock, certain other instruments, and a limited amount of loan and lease loss reserves. (Id.) The FDIC assesses the above metrics for banks by dividing certain assets by the bank’s credit risks, thereby arriving at ratios that it uses to determine if a bank is “well-capitalized,” “adequately capitalized,” “undercapital-ized,” “significantly undercapitalized,”- or “critically undercapitalized.” (Id. ¶ 49.)
The FDICIA generally prohibits a bank from making any capital distribution or paying a dividend or management fee to its holding company if the bank would thereafter be undercapitalized. (Id. ¶ 62.) Undercapitalized banks are also subject to growth limitations and restrictions on borrowing from-the Federal Reserve System and are required to submit capital, restoration plans to federal banking regulators. (Id.) If ,a bank fails to . timely submit an acceptable plan, it is treated as if it were significantly undercapitalized. (Id.) Significantly undercapitalized banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, orders to reduce- total assets' and orders to cease the, receipt of deposits. (Id.) Critically undercapitalized banks are subject to appointment of- a receiver or conservator. (Id.)
Furthermore, under FDIC regulations adopted pursuant to the FDICIA, banks that are not well-capitalized are.prohibited from accepting new, rolling over, or renewing brokered deposits in the absence of a waiver from the FDIC, and are prohibited from paying attractive interest rates on the brokered deposits they currently hold. (Id. ¶¶ 53, 55.) Brokered deposits constitute any deposit with an interest rate of more than seventy-five basis points above prevailing market rate, which includes certificates of deposit and money market deposits. (Id. ¶ 54.) Even with such a waiver, a bank that is merely adequately capitalized may not pay an interest rate on any brokered deposits in excess of seventy-five basis points above prevailing market rates. (Id. ¶ 55.)
With respect to lending activities, pursuant to Generally Accepted Accounting Principles (“GAAP”), banks are required to maintain an ALLL to reflect the difference, if any, between the principal balance of a loan and the present value of its projected cash flows, observable fair value, or collateral value. (Id. ¶ 57.) In other words, banks are required to maintain an allowance that it could use in the event that any of its impaired loans are not collected upon. An impaired loan is one for which it is probable that the lender will not collect all amounts due under the contractual terms of the loan. (Id.) The ALLL is established and maintained via a provision for loan and lease losses (“PLLL”), to account for any impaired loans and constitutes a charge against the bank’s earnings. (Id.) In light of the critical importance of ALLL to a lending institution’s financial statements, on December 13, 2006, the FDIC and the Board of Governors of the Federal Reserve System, together with other banking regulators, jointly issued a policy statement that stated, in part, that:
The ALLL represents one of the most significant estimates in an institution’s financial statements and regulatory reports. Because of its significance, each institution has a responsibility for developing, maintaining, and documenting a comprehensive, systematic, and consistently applied process for determining the amounts of the ALLL and the provision for loan and lease losses (PLLL). To fulfill this responsibility, each institution should ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the institution’s stated policies and procedures, management’s best judgment and relevant supervisory guidance.
As of the end of each quarter, or more frequently if warranted, each institution must analyze the collectability of its loans and leases held for investment ... and maintain an ALLL at a level that is appropriate and determined in accordance with GAAP. An appropriate ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.
(Id. ¶ 58); Board of Governors of the Federal Reserve System, Interagency Policy Statement on the Allowance for Loan and Lease Losses (Dec. 13, 2006), available at http://www.federalreserve.gov/boarddocs/ srletters/2006/SR0617al.pdf.
C. Doral’s Consent Order With the FDIC
In sum, the Consent Order required the Bank to: (1) implement a comprehensive ALLL policy and methodology; (2) obtain a waiver from the FDIC before accepting, renewing or rolling over brokered deposits; (3) implement an independent loan review program; (4) implement a revised appraisal compliance program; and (5) maintain a higher amount of capital than was otherwise necessary to be considered well-capitalized under the applicable regulations. (Id. ¶ 5.) The requirements set forth in the Consent Order assured investors that Doral and the Bank would thereafter take measures to strengthen the Bank’s ALLL policy and methodology. (Id, ¶ 6.)
Specifically, the Consent Order required, inter alia, that Doral submit a capital plan within sixty days detailing the manner in which the Bank would maintain a Tier 1 Leverage Ratio of at least eight percent, a Tier 1 Risk-Based Capital Ratio of at least ten percent, and a Total Risk-Based Capital Ratio of at least twelve percent — compared to the five percent Tier 1 Leverage Ratio, six percent Tier 1 Risk-Based Capital Ratio, and ten percent Total Risk-Based Capital Ratio that are generally required for a bank to be considered well-capitalized under the FDICIA. (Id. ¶ 69.) Furthermore, Doral Bank was -required to immediately notify the FDIC Regional Director and the PR Commissioner in the event any capital ratio falls below the minimum required by the approved capital plan, and within sixty days thereafter either: (1) increase capital in an amount sufficient to comply with the capital ratios as set forth in the approved Capital Plan; or (2) submit to the FDIC Regional Director and the PR Commissioner a Contingency Plan for the sale, merger, or liquidation of the Bank in the event the primary sources of capital are not available within 120 days. (Id. ¶ 70.)
The agreement required the Bank to: (1) “establish a program of independent loan review that will provide for a periodic review of the Bank’s loan portfolio and the identification and categorization of problem credits”; and (2) among other things, implement “a mechanism for reporting ... no ... less than quarterly, the information developed” through the loan review program “to the Board.” (Id. ¶ 72.) The requirement that the Bank establish an independent loan review program (from which the ALLL is derived) and ensure that loan review information reached the Board assured investors that Defendants would implement measures to make sure that Doral maintained an adequate ALLL. (Id. ¶ 73.) The Consent Order also required the Bank to “revise its appraisal compliance program, including enhancing the Bank’s appraisal policy to capture risk management and internal controls that ensure that appraisals are obtained in a timely maimer ... and that appraisals contain appropriate valuation approaches to support assigned values,” which likewise assured investors that Defendants would implement measures to make sure that Doral maintained an adequate ALLL. (Id. ¶ 74.)
D. Doral’s Written Agreement With the FRBNY
The Written Agreement with the FRBNY imposed operational restrictions and regulatory requirements on Doral similar to those imposed by the Consent Order. (Id. ¶ 76.) Pertinently, the Written Agreement required that Doral submit to the FRBNY an acceptable written plan to maintain sufficient capital at Doral on a consolidated basis, including maintaining compliance with the capital adequacy guidelines for the Bank issued by the FDIC, which took into account, inter alia, the adequacy of the Bank’s ALLL. (Id.) The agreement further required Doral to establish programs, policies and procedures acceptable to the FRBNY relating to credit risk management practices, credit administration (including developing procedures to ensure that appraisals conform to accepted standards and developing enhanced appraisal review procedures to ensure the quality and timeliness of appraisals), loan grading (including developing standards and criteria for assessing the credit quality of loans), asset improvement, other real estate owned, allowance for loan and lease losses, internal audit, and accounting and internal controls (including taking necessary actions to ensure that accounting and financial reporting functions are staffed by qualified personnel and that management and the board receive timely and accurate reports necessary to correct weaknesses and deficiencies associated with accounting and financial reporting). (Id.) Doral was also to provide quarterly progress reports to the FRBNY on its compliance with the Written Agreement. (Id.)
Similar to the Consent Order, the Written Agreement also required Doral to “establish an [ALLL] methodology ... consistent with relevant supervisory guidance, including the Interagency Policy Statements on' the Allowance for Loan and Lease Losses, dated ... December 13, 2006” and “submit to the [FRBNY] an acceptable written program for maintenance of an adequate ALLL.” (Id.) The agreement required Doral’s program to include policies and procedures to ensure adherence to the ALLL methodology, provide for periodic reviews of the ALLL by the board of directors on at least a quarterly calendar basis, and to provide up-dátes to the ALLL methodology as appropriate. (Id. ¶ 77.) It required the board of directors to maintain written documentation of its review, including the factors considered and conclusions reached by Doral in determining the adequacy of the ALLL and to remedy an deficiency found in the ALLL during the'quarter that it is discovered, prior to the filing of any required regulatory reports. (Id.) Lastly, the agreement required. Doral to submit to the FRBNY, within sixty days after the end'of each calendar quarter, a written report regarding the board of directors’ quarterly review of .the ALLL. and a description of any changes to the methodology used in determining the amount of ALLL for that quarter. (Id.)
E; Doral’s 2012 Closing Agreement with the Treasury Department
In addition to the two aforementioned agreements, Doral had also entered into an agreement with the Treasury Department on March 26, 2012 (the “2012 Closing Agréement”). (Id. ¶ 116.) The 2012 Closing Agreement, which Doral announced at the start of the class period, replaced and superseded a 2006 agreement (the “2006 Closing Agreement”) that followed in the wake of the massive restatement of Doral’s financial results for the five year period ending December 31, 2004. (Id. ¶ 116.) In connection with the spurious mortgage sales mentioned above, Doral retained a portion of the interest to be paid on the mortgages, known as intefest-only strips, or “IOs,” and booked a gain on the sale of the mortgages. (Id. ¶ 117.) In fact, Doral did not truly sell the mortgages, but instead was simply borrowing money which was collateralized by the mortgages. (Id.) Through side deals and oral agreements, Doral provided the purchaser with full recourse rights, thereby rendering the transactions loans, rather than sales. (Id.) After this scheme was uncovered and Doral was forced to restate its financial results and reverse the income from the spurious sales, Doral claimed that it had overpaid more than $162 million in taxes, and was entitled to a reimbursement from the Treasury Department. (Id. ¶ 118.)
Thereafter, on September 26, 2006, Doral and the Treasury Department entered into the 2006 Closing Agreement. (Id. ¶ 119.) In lieu of claiming a reimbursement of the allegedly overpaid taxes, the parties agreed that Doral would have the right to recognize a deferred tax asset in the amount of $889,723,361, and to gradually amortize that sum against its tax liability over a fifteen year period. (Id.) Six years later, on March 26, 2012, Doral and the Treasury Department entered into the 2012 Closing Agreement, in which Doral represented that as of that date, it had amortized $123,443,072 of the $889,723,361 deferred tax asset in prior tax returns, leaving a balance of $766,280,289. (Id. ¶ 120.). According to Doral, it entered into the 2012 Closing Agreement because it was apparent that Doral “would not be able to realize the full value of its tax asset before it expired,” and, notably, Doral “could not use the tax asset to satisfy [its regulatory]" capital requirements.” (Id. ¶ 121.)
The 2012 Closing Agreement voided the $766,280,289 balance of amortization, and instead provided, in pertinent part, as follows:
[Doral and the Treasury Department] hereby agree to recognize the value of the unamortized-10 adjusted basis as a tax overpayment not recovered by [Doral] for the period covered by the restatement, ‘ amounting to $229,884,087 as of January 1, 2011. This overpayment of taxes will be treated as a pre-payment of income tax by [Doral] and can be apportioned among and used by any [Doral subsidiary] to offset income taxes due to the Puerto Rican Government ... in future years, either through reductions of estimated income taxes or through refunds over a period of 5 years, upon proper claim by Doral.
(Id. ¶ 122.) According to Doral, the $229,884,087 amount was arrived at by applying the lowest possible tax contribution payable on' the amortizable balance of $766,280,289 — 30% rather than 39%, as provided by the Internal Revenue Code of 1994, which was in effect for the years in question. (Id. ¶ 123.) This agreement addressed the “pressing public interest! ]” of “keeping the banking system capitalized,” according to Doral. (Id. ¶ 124.) For its part, Doral agreed to aid the Puerto Rico economy by expanding its home preservation and commercial development program by up to $70 million. (Id.) Following the 2012 Closing Agreement, Doral recognized the $229,884,087 as a tax receivable and included the tax receivable in its Tier 1 Capital. (Id. ¶ 125.)
F. Th$ Alleged Fraudulent Scheme
Despite the significant problems identified by Doral’s regulators, the directives set forth in the aforementioned Consent Order and Written Agreement assured Doral’s investors that Doral and the Bank would develop and implement a sound and comprehensive.ALLL policy and methodology, implement a mechanism for independent loan review, and reporting, and enhance the appraisal programs — all information from which the ALLL was derived. (Id. ¶ 78.) Furthermore, the 2012 Closing Agreement assured ■ investors that Doral maintained an adequate amount of capital throughout the class period. (Id. ¶¶ 121— 124.) However, Plaintiffs allege that-during the class period, when Doral represented to the investing public that it and the Bank were in full compliance with the terms set forth in those agreements, it was in fact engaging in a concerted effort to intentionally disobey the terms ■ of the agreements to disguise the Bank’s actual worth and its increasingly dire financial prospects. (Id. ¶¶ 78,126-130.)
Plaintiffs allege, almost' exclusively through accounts of confidential former employees of. Doral, that unbeknownst to investors, Defendants deliberately understated Doral’s ALLL prior to and . during the class period by, inter alia, booking assets in later periods and not fixing or updating material deficiencies in Doral’s internal control of its. financial reporting, in order to inflate the Bank’s regulatory capital ratios. (Id. ¶ 82.) By understating Doral’s ALLL and ignoring the deficiencies in its internal control of its financial reporting, Defendants correspondingly overstated Doral’s net income, which in turn, overstated its capital and artificially, inflated its .regulatory capital ratios. (Id.) In addition, Plaintiffs allege that Doral falsely represented to the Treasury Department the balance of amortization of its deferred tax asset at the time of the 2012 Closing Agreement and that "it did. not actually'overpay its taxes in the amount of $152 million. (Id. ¶¶ 126-30.) As a result, Doral fraudulently obtained a larger tax receivable than it was entitled and there was a significant risk that the Treasury Department would discover Doral’s. scheme and back out of the agreement. (Id ¶¶ 126, ■ 128.) This resulted in the Treasury Department' later claiming that the Agreement is null and void, which then caused the FDIC to disallow Doral to include the almost $230 million tax receivable in its Tier 1 capital. (Id)
G. The Securities Fraud, Claims
Plaintiffs claim that in light of Defendants’ fraudulent scheme to disguise the Bank’s actual worth, Defendants repeatedly issued false and misleading statements to the investing public regarding the accuracy of the Bank’s ALLL and PLLL and the material risk that the Treasury Department would seek to void the 2012 Closing Agreement. (Id ¶ 102.) Specifically, while making some disclosures about the material deficiencies of Doral’s system of internal control over . its financial reporting, particularly those controls associated with its reporting of its ALLL and PLLL, Plaintiffs claim that Defendants were unremittingly optimistic about Doral’s financial state, failed to disclose the systemic and widespread nature of those problems, that they had been deliberately understating Doral’s ALLL and PLLL, and falsely represented that Doral’s policy of calculating and accounting for its ALLL was consistent with the requirements of GAAP. (See, e.g., id. ¶¶ 61, 233, 235, 238, 240, 242, 244, 246, '248.) Furthermore, Plaintiffs claim that Defendants had numerous opportunities to disclose to the investing public that there was a material risk that the Treasury Department would seek to void the 2012 Closing Agreement and thus not recognize the almost $230 million tax receivable, leaving the institution without the adequate Tier 1 capital to remain well-capitalized. (See, e.g., id. ¶ 135-36, 144-45.)
Taken from annual and quarterly SEC filings, accompanying press releases, and conference calls with investors and analysts, Plaintiffs present the allegedly false and misleading statements in more than fifty-seven pages of the complaint with extensive block quotes. (See Docket No. 53 ¶¶ 133-268.) These statements purport to describe the current financial state of Doral and the Bank, including its ALLL model and the loan and appraisal data, and its compliance with the Consent Order and Written Agreement. (Id.)
Plaintiffs allege that the Individual Defendants knew that the statements made were false and misleading by citing observations and beliefs of confidential former employees of Doral regarding the Individual Defendants’ involvement in the alleged fraudulent scheme, “by virtue of [the Individual Defendants’] receipt of information reflecting the true facts regarding Doral, their control over, and/or receipt and/or modification of Doral’s allegedly materially misleading statements and/or their associations with [Doral] which made them privy to confidential proprietary information concerning Doral,” and because of the internal reporting structure of Doral and the high ranking positions that the Individual Defendants held. (Id. ¶¶ 83-101, 290-94.) Plaintiffs also point to insider stock trades by three of the Individual Defendants and salary increases for four of the Individual Defendants as evidence of Defendants’ motivation to engage in the scheme and issue false and misleading statements. (Id. ¶¶ 302-04.)
The complaint then alleges that when Defendants’ misrepresentations and fraudulent conduct were disclosed to investors and the market, Doral’s common stock plummeted as a direct result. (Id. ¶¶ 269-73, 306-15.) Specifically, Plaintiffs aver that when Doral announced on March 18, 2014 that it needed to delay the filing of its annual 10-K report for the year ending December 31, 2013 due to “a material weakness in its internal control over financial reporting as of December 31, 2013, related to the review of the underlying data and mathematical model supporting its [ALLL] and the related [PLLL],” and admitted that its “internal control over financial reporting and disclosure controls and procedures were ineffective as of December 31, 2013,” the price of Doral common stock fell $1.13 per share, or more than 9%, from a closing price of $12.30 per share on March 17, 2014, to close at $11.17 per share on March 18, 2014. (Id. ¶¶ 112, 269-70, 308.) Thereafter, in response to the release of Doral’s 2013 10-K that indicated it had understated its ALLL and needed to make a substantial out-of-period increase to its PLLL, suffered from widespread internal control deficiencies, and had not addressed the-problems with its ALLL policy and methodology as required by the Consent Order and the Written Agreement, the price of Doral common stock tumbled 6.8%, from a closing price of $11.65 per share on' Friday, March 21, 2014, to close at $10.76 per share on Monday, March 24, 2014. (Id. ¶¶ 274; 309-11.)
The stock continued to decline over the next four trading days, as the market digested these adverse announcements, closing at $8.59 per share on March 28, 2014— a total decline of 25.6%, (Id.) Finally, Plaintiffs aver that when Doral disclosed on May 1, 2014 that the FDIC was no longer allowing the Bank to include the almost $230 million tax receivable in, its Tier 1 capital, the price of Doral common stock plummeted 62%, from a closing price of $9.82 per share on May 1, 2014, to close at $3.73 per share on May 2, 2014, on unusually heavy trading volume of more than 2.37 million shares traded — erasing more than $141 million in market capitalization from the stock’s class period high. (Id. ¶¶ 275-77, 315.)
III. Procedural History
On May 14, 2014, Robert Blue filed a complaint against Doral and the Individual Defendants on behalf of all purchasers of Doral common stock between April 2, 2012 and May 1, 2014. (Docket No. 1) On August 1, 2014, the court approved the plaintiffs’ stipulation of the appointment of Jen-sine Andresen, Ken M. Nimmons, and Mordechai Hakim as the lead plaintiffs. (Docket Nos. 19 and 21.) Thereafter, on November 6, 2014, Plaintiffs filed the Consolidated Class Action Amended Complaint, alleging that Doral and the Individual Defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the SÉC. (Docket No. 53.)
Defendants then timely moved to dismiss the complaint for failure to state a claim upon which relief can be granted, contending that Plaintiffs have failed to adequately allege actionable material misrepresentations or omissions, a- strong-inference of scienter, loss causation,' and control-person liability. (Docket No. 56.) Plaintiffs opposed said motion to dismiss. (Docket No. 58.) Defendants, in return, replied to Plaintiffs’ opposition. (Docket No. 62.) Plaintiffs then surreplied to Defendants’ opposition. (Docket No. 64.) Thereafter, Doral filed a voluntary petition under Chapter 11 of Title 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 1101 et seq., and, as such, the case against Doral was automatically stayed. (See Docket No. 65.) Plaintiffs’ case against the Individual Defendants continues, however, and the court will consider whether the complaint sufficiently states a claim upon which relief can be granted against those defendants.
IV. Standard of Review
First, as with any inquiry under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court must “isolate and ignore statements in the complaint that simply offer legal labels and conclusions or merely rehash cause-of-action elements.” Schatz. v. Republican State Leadership Comm., 669 F.3d 50, 55 (1st Cir.2012); Second, the court must then' “take the complaint’s well-pled (i.e., non-conelusory, non-speculative) facts as true, drawing all reasonable inferences in the pleader’s favor.” Id. (citing Ocasio-Hernández, 640 F.3d at 12 which discusses Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). To survive a motion to dismiss, á complaint must, allege facts sufficient to demonstrate “a plausible entitlement to relief.” Twombly, 550 U.S. at 559, 127 S.Ct. 1955; see also ACA Fin. Guar. Corp. v. Advest, Ina, 512 F.3d 46, 58 (1st Cir.2008). In asserting a securities fraud claim, the plaintiff has the burden of proving six elements: “(1) a material misrepresentation -or omission; (2) scienter, or a wrongful state of mind; (3) in connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.” Fire & Police Pension Ass’n of Colorado v. Abiomed, Inc., 778 F.3d 228, 240 (lst.Cir.2015) (quoting In re Genzyme Corp. Sec. Litig., 754 F.3d 31, 40 (1st Cir.2014)).
However, “[a]s with all allegations of fraud, a plaintiff must plead the circumstances of the fraud with particularity, pursuant to Rule 9(b)” of the Federal Rules of Civil Procedure. Hill v. Gozani, 638 F.3d 40, 55 (1st Cir.2011) (citing ACA Fin. Guar., 512 F.3d at 58). The federal courts have long acknowledged that “litigation under Rule 10b-5 presents, a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general.” Hill, 638 F.3d at 54. As such, consistent with the requirements of Rule 9(b), the court must apply the heightened pleading standard required by the PSLRA. See 15 U.S.C. § 78u-4(b)(1); In re Cabletron Sys., Inc., 311 F.3d 11, 27-28 (1st Cir.2002). Under the PSLRA, a' securities fraud complaint must ■“ ‘specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading,' and .... the statements alleged to be misleading must be misleading to a material degree;” Id. (quoting 15 U.S.C. § 78u-4(b)(1)). To plead scienter, the complaint must also “state with particularity facts giving rise to a strong inference that the defendant acted With the requisite state of mind” as opposed to a mere plausible or reasonable inference. 15 U.S.C. § 78u-4(b)(2); In re Cabletron Sys., Inc., 311 F.3d at 27-28. “This last requirement alters the usual contours of a Rule 12(b)(6) ruling because, while a court continues to give all reasonable inferences to plaintiffs, - those inferences supporting scienter must be strong ones.” , In re Cabletron Sys., Inc., 311 F.3d at 28 (citing 15 U.S.C. § 78u-4(b)(2) and Greebel v. FTP Software, Inc., 194 F.3d 185, 196-97, 201 (1st Cir.1999)).
In evaluating the adequacy of a securities fraud complaint, “ ‘the PSLRA does not require plaintiffs to plead evidence.’ Nevertheless, a significant amount of ‘meat’ is needed on the ‘bones’ of the complaint.” Hill, 638 F.3d at 56 (quoting ACA Fin. Guar., 512 F.3d at 63). “Courts should look at the complaint as a whole and weigh competing inferences in a comparative evaluation of plaintiffs allegations and alternative inferences from those allegations.... If there are equally strong inferences for and against scienter, then the tie goes to the plaintiff.” Simon v. Abiomed, Inc., 37 F.Supp.3d 499, 512-13 (D.Mass.2014) aff'd sub nom. Fire & Police Pension Ass’n of Colorado v. Abiomed, Inc., 778 F.3d 228 (1st Cir.2015) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) and New Jersey Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 45 (1st Cir.2008)).
V. Discussion
Section 10(b) of the Securities Exchange Act of 1934' makes it unlawful' to “use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b); see also Tellabs, 551 U.S. at 318, 127 S.Ct. 2499. Pursuant to this law, SEC Rule 10b-5 implements Section 10(b) by making it unlawful:
(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. As noted above, the six elements of a 10b-5 claim are: “(1) a material misrepresentation or omission; (2) scienter, or a wrongful state of mind; (3) in connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.” Abiomed, 778 F.3d at 240.
Claims brought under Section 20(a) of the Act, 15 U.S.C. § 78t(a), are derivative of 10b-5 claims. Hill, 638 F.3d at 53. Specifically, once any “person” is found liable for violating the Securities Exchange Act’s substantive provisions,
[e]very 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.
Id. (quoting 15 U.S.C. § 78t(a)),
In moving to dismiss Plaintiffs’ complaint, Defendants argue .that the complaint fails to adequately allege actionable material misrepresentations or omissions, a strong inference of scienter, loss causation, and control-person liability. (Docket No. 56.) Defendants challenge the adequacy of the complaint by systematically going through each of those arguments in order, starting with the issue of whether Plaintiffs sufficiently allege any material misrepresentations or omissions on part of the Defendants. (Id. at 17-42.)
A. Whether the Complaint Alleges Actionable Material Misrepresentations or Omissions
The first question for the court is whether the complaint sufficiently alleges misleading statements or omissions by the Individual Defendants in the SEC filings, accompanying-press releases, and conference calls, and the reasons why they are misleading. As described- above, Plaintiffs’ primary allegation is that Defendants repeatedly issued false and misleading statements to the investing public regarding the accuracy- -of the Bank’s ‘ALLL and PLLL and Doral’s 'capital' levels, particularly concerning the tax receivable from the Treasury Department, and its internal financial controls because they were engaging in a scheme to inflate Doral’s capital and disguise .its dire financial status. The statements- can .be generally summarized as stating: •’ (1) 'that- Doral Bank was in compliance with all regulatory requirements and was considered well-capitalized under the two agreements with its regulators; (2) the amounts of its ALLL and PLLL and how the Bank arrived at these figures; (3) that Doral was taking a more conservative approach with respect to its ALLL model; (4) that there was a material weakness in its internal controls over financial reporting relating to the completeness and valuation of its ALLL and PLLL, but the Bank was remedying the problem; (5) that all financial statements were in compliance with GAAP; and (6) that the tax receivable of almost $230 million from the 2012 Closing Agreement was greatly benefiting the bank and boosting its capital. (See, e.g., Docket No. 53 ¶¶ 137-39,143-49,155-59.)
Examples of these statements are as follows:
1. At the start of the class period, Defendants represented in Doral’s 2011 annual SEC 10-K form, filed on March 30, 2012, that “[a]s of December 31, 2011, Doral Bank was in compliance with all regulatory requirements” and “was considered a well-capitalized bank for purposes of [the FDICIA].” (Id. ¶ 133.) The 2011 10-K set forth Doral’s and the Bank’s regulatory capital ratios, in comparison to the requirements of the FDI-CIA, as significantly higher than the well capitalized minimum requirements. (Id.)
2. The 2011 10-K also stated that Dor-áis provisions for loan and lease losses for the quarter and full year ended December 31, 2011 were $9.914 million and $67.525 million respectively, and Doral’s ALLL was $102.609 million as of December 31, 2011. (Id. ¶ 137.)
3. Defendants further disclosed in the 2011 10-K that Doral had “material weaknesses in [its] internal control over financial reporting” concerning the failure to “maintain effective controls over the completeness and valuation of its [ALLL] and the related [PLLL].” (Id. ¶ 103.) Specifically, the 2011 10-K explained that Doral had not maintained effective controls to reasonably assure: (1) that residential second mortgages and commercial real estate loan valuations were obtained and processed accurately so that the property value updates received were either reflected as charge-offs, or reflected in the ALLL in a timely manner; and (2) that the ALLL was adequately reviewed and the underlying data was properly reconciled. (Id.) As a result of the control déficiency, Doral had reduced the ALLL by $10.1 million in its 2011 financial statements from the amount previously reported in the Company’s January 19, 2012 earnings release. (Id.)
4. Defendants disclosed that they had “performed additional analysis and other post-closing procedures to ensure that the financial statements were prepared in accordance with [GAAP]” and concluded “that the financial statements included in [the 2011 10-K] fairly presented], in all material respects, the Company’s financial condition ... for the periods presented.” (Id. ¶ 139.) Defendants also assured investors that Doral was “expeditiously” implementing a series of “remediation efforts” to address both material weaknesses. (Id. ¶ 104.)
5. In its financial report on Form 10-Q for the first quarter of 2012, which was signed and certified by Defendants Wakeman and Wahlman, Doral reported that it was in compliance with all applicable regulatory capital requirements, that it exceeded the thresholds for well-capitalized banks, that its performance for that quarter was primarily due to the income tax benefit from the 2012 Closing Agreement, and then explained the implications of the tax receivable. (Id. ¶¶ 148-49,151.)
6.On May 16, 2012, the day following the filing of the first quarter 10-Q, Defendants held a conference call with analysts and investors, during which Defendant Wakeman stated that “Doral is solid and is well positioned in the difficult Puerto Rico market” following “a substantial increase in capital, as well as a substantial increase in credit reserves.” (Id. ¶ 155.) Wakeman provided additional commentary on the 2012 Closing Agreement, in pertinent part, as follows: We reached an important agreement with the government of Puerto Rico regarding our deferred tax assets. The agreement covers the portion of the deferred tax assets that was created through a prior overpayment related to Doral’s legacy trading business. Now we have previously referred to this asset as the I/O VTA and over the past several months we worked with the government of Puerto Rico to simplify the tax agreement that was signed in 2005.
The new agreement replaces the old one and acknowledges the asset as what it, in fact, is — an overpayment of tax. Therefore, the tax asset is now recognized as a receivable which is no longer tied to future earnings.
Now this is an important transaction for us and it produced two clear benefits in the first quarter. The first benefit relates to earnings. We eliminated a reserve of $112 million, which we had carried against this asset. This elimination of reserve flowed through our financial statements as a gain in the first quarter.
The second benefit relates to capital. Under the previous agreement less than $10 million of the DTA was included in Tier 1 capital. As the asset is now a receivable and no longer tied to future earnings, the entire amount of the asset, $228 million, is Tier 1 capital. (Id.)
7. Furthermore, in its first quarter 10-Q, Doral reported that the material weaknesses identified in the 2011 Form 10-K still had not been remedi-ated- and that although “the Company’s disclosure controls and procedures were not effective as of March 31, 2013,” and “[Doral] ha[d] identified ... material weaknesses in its system of internal control over financial reporting,” Defendants had “taken reasonable steps to ascertain that the financial information contained the in [the first quarterly report] was presented “in accordance with [GAAP].” (Id. ¶¶ 105,153.)
8. The second quarterly Form 10-Q contained a discussion substantially similar to one contained in its first quarterly form 10-Q, that stated that “[i]n the agreement, the Commonwealth of Puerto Rico states that as of March 26, 2012 it has a payable to Doral of approximately $230.0 million resulting from past Doral tax payments (prepaid tax), and that Doral has the right to use the amount due from the Commonwealth of Puerto Rico to offset future Doral tax obligations, or that Doral may claim a refund that the Commonwealth of Puerto Rico may pay over a five-year period],]” and emphasizing that the “agreement clearly states and recognizes the source of the amount of past taxes paid by Doral, and the Commonwealth of Puerto Rico’s obligation to return the overpayments to Doral.” (Id. ¶ 169.)
9. The report also noted that Doral had adopted a “notably more conservative view of the financial effects of the current and estimated future economic and regulatory environment in which Doral’s businesses operates” and that “during the first half of 2012, management reviewed its ALLL estimate assumptions and calculations and adopted a more conservative outlook as to future loan performance considering the uncertain economic and regulatory. environments,. The resulting changes in estimate are reflected in the June .30, 2012 allowance for loan and lease losses.” {Id. ¶ 171.)
Plaintiffs claim that all of the alleged statements were materially false and misleading-because Defendants misrepresented and failed to disclose that:
(a) Defendants had inflated Doral’s capital by deliberately understating Doral’s ALLL and PLLL;
(b) numerous undisclosed problems undermined the accuracy of Doral’s ALLL and PLLL, including issues with the ALLL model and the loan and appraisal data from which the ALLL was derived;
(c) Doral and the Bank were not in compliance with the Consent Order and the Written Agreement, including those provisions related to the "ALLL and loan review and appraisal programs;
(d) Doral’s financial results, including its ALLL and PLLL, were not fairly presented in conformity with GAAP;
(e) the internal control deficiency that had resulted in the out-of-period adjustments was not an isolated issue, but instead, was indicative of systematic and widespread internal control deficiencies and numerous undisclosed problems that undermined the accuracy of Doral’s ALLL and PLLL; and
(f) there was' a material risk that the Treasury Department would seek to void the 2012 Closing Agreement and thus the Bank would not have adequate Tier 1 Capital to remain well-capitalized and comply with the Consent Order,
{See, e.g., id. ¶¶ 233, 235, 238, 240, 242, 244, 246, 248.)
Upon reviewing these allegations, due to Plaintiffs’ thorough articulation of the time, place, and content of each statement, it becomes clear that this case in large part turns on the reasons why the statements are misleading. “Á statement cannot be intentionally misleading if the defendant did not have sufficient information at the relevant time to form an evaluation that there was a need to disclose certain information and to form an intent not to disclose it.” New Jersey Carpenters, 537 F.3d at 45. For example, failing to disclose that Defendants had inflated Doral’s capital by deliberately understating its ALLL and PLLL cannot constitute a material omission if the complaint does not sufficiently allege that Defendants did in fact intentionally understate the ALLL and PLLL.
The First Circuit has long required “a securities fraud plaintiff to explain why the challenged statement or omission is misleading by requiring that the complaint ... provide some factual support for the allegations of the fraud.” Greebel, 194 F.3d at 193 (internal quotation marks omitted). Indeed, in the present case, Plaintiffs argue that at the heart of their ALLL claim is the “continued and pervasive ALLL-related problems that persisted [were] part of Defendants’ systematic fraud.” (Docket No. 58 at 27.) As such, this requires Plaintiffs to “not only allege the time, place, and content of the alleged misrepresentations with specificity, but also the factual allegations that would support a reasonable inference that adverse circumstances existed at the time of the offering, and were known and deliberately or recklessly disregarded by defendants.” Greebel, 194 F.3d at 193-94.
Therefore, because Plaintiffs rely upon Defendants’ fraudulent scheme for the reasons why the statements are alleged to be misleading, the court will assume, arguendo, that Defendants engaged in the alleged scheme and then move onto the question of whether a jury reasonably could find that said statements were false or misleading given the particular context alleged. See Geffon v. Micrion Corp., 249 F.3d 29, 36 n. 6 (1st Cir.2001) (“It is ultimately a question for the trier of fact, here the jury, whether statements are false or misleading so as to be actionable under 10b-5’”). The court will follow this structure because Plaintiffs use mostly thé same alleged facts to show that Defendants engaged in the fraudulent scheme as they do to support their claim of scienter, i.e., that Defendants “made the challenged statements with a conscious intent to defraud or with a high degree of recklessness.” Abiomed, 778 F.3d at 241. As such, to analyze the purported fraudulent scheme and then later Defendants’ state of mind in making those statements would require a significant amount of overlap in the court’s analysis. The court will examine in more detail those statements that are alleged to be misleading based upon other statements made by Defendants.
In to moving to dismiss, Defendants do not challenge the particularity of Plaintiffs’ articulation of the statements, nor do they challenge the materiality of them. They do, however, argue that many .the. many disclosures Defendants made throughout the class period negates a jury’s, ability to find material misrepresentations of material facts or omissions. (See Docket No. 56 at 8-38.) With these thoughts in mind, the court will analyze the disclosures made to the public by Defendants during the class period. The court notes, however, that for the sake brevity and -because this case rests on scienter, it will not articulate the alleged statements in full.
1. Analysis of the Statements
A fact is material if it there is 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.” In re Cabletron Sys., Inc., 311 F.3d at 34 (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)). “A statement can be.‘false or incomplete’ but not actionable ‘if the misrepresented-fact is otherwise insignificant.’” City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 756-57 (1st Cir.2011). In the present case, the Individual Defendants do not'challenge the materiality of the aforementioned statements;--rather,-they challenge whether the statements indeed ‘ contained any misrepresentations and omissions. Further, it is well-established that • Section 10(b) does not create an affirmative duty to disclose any and all material information. In re Genzyme Corp. Sec. Litig., 754 F.3d at 41 (citing In re Bos. Scientific Corp. Sec. Lit.,’ 686 F.3d 21, 27 (1st Cir 2012)). Rather, a duty to disclose information earlier omitted arises only where affirmative statements were made and the speaker “fail[ed] to reveal those facts that are needed so that what was revealed would not be so incomplete as to mislead.” In re Genzyme Corp. Sec. Litig., 754 F.3d at 41. As such, “[e]ven a voluntary disclosure of information that a reasonable investor would consider material must be complete and accurate.” Hill, 638 F.3d at 57 (internal quotation marks omitted). This obligation, however, “does not mean that by revealing, one fact ..., one must reveal all others that, too, would be interesting, market-wisé;, a company must reveal only those facts that are needed so that what was revealed would not be so incomplete as to mislead.” Id, (internal quotation marks omitted and emphasis in original).
a. Failing to Disclose That Defendants Inflated Doral’s Capital by Understating its ALLL.
Plaintiffs claim that each time Defendants commented on Doraí’s capital levels, specifically concerning its PLLL and ALLL, in the numerous annual and quarterly SEC filings, press releases, and conference calls, the description of fits basis for determining the amount of those reserves and the amount themselves were materially false and misleading because Defendants misrepresented and failed to disclose, that the ALLL and PLLL were deliberately understated. (E.g., Docket No. 53 ¶¶ 138, 147, 152, 160, 166, 172, 185, 190.) As discussed above in.part V,A of this opinion, whether the Defendants’ failure to disclose that they inflated Doral’s capital by deliberately understating its ALLL and PLLL constitutes a material omission requires an analysis of Plaintiffs’ confidential source information and other scienter allegations. Therefore, for purposes of this section, the court will assume, arguendo, that the Individual Defendants did purposefully understate Doral’s ALLL and PLLL levels.
Assuming that all of the Individual Defendants did indeed purposefully understate Doral’s ALLL and PLLL and then submitted SEC filings followed by press releases and conference calls that discussed Doral’s capital levels and leverage ratios as significantly higher than the well-capitalized minimum requirements without disclosing that those amounts and the descriptions of how they were obtained were flawed due to the Individual Defendants’ fraud, the court finds that a jury reasonably could find that said disclosures were so incomplete as to mislead the public. By representing to the public that Doral’s capital levels, ALLL, and PLLL were all in good shape and describing how they achieved the amounts when in fact the Individual Defendants were' fraudulently inflating these numbers, Plaintiffs allege actionable materially misleading statements. See Hill, 638 F.3d at 57 (noting “Rule 10b-5 requires that, when a company speaks, it cannot omit any facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading” and that “[e]ven a voluntary disclosure of information that a reasonable investor would consider material must be complete and accurate”).
The dispositive question concerns the Individual Defendants’ state of mind at the time of making the disclosures, which the court will address, infra. .
b. Misrepresenting and failing to Disclose Numerous Problems That Undermined the Accuracy of Doral’s ALLL and PLLL
The complaint also claims that Doral failed to disclose in its SEC filings, press releases, and conference calls throughout the class period the numerous problems that undermined its internal controls related to the accuracy of its ALLL and PLLL, including issues with the ALLL model and the loan and appraisal data from which the ALLL was derived. (E.g., Docket No. 53 ¶¶ 138, 154, 166, 180, 190.) Also at the heart of Plaintiffs’ reasons as to why the statements were misleading are their allegations relating to the alleged fraudulent scheme to manipulate Doral’s capital levels. (Docket Nos. 58 at 25-26; 64 at 12-15.) In moving to dismiss, not only do Defendants challenge the sufficiency of the fraud allegations, but they also posit that said claim is impossible to reconcile with the history of Doral’s disclosures during the first half of the class period until March 13, 2013. (Docket Nos. 56 at 12; 62 at 11-12.) Specifically, Defendants highlight that Doral repeatedly disclosed at regular intervals up until it filed its 2012 Form 10-K report on March 13, 2013 that there were deficiencies in its ALLL procedures and calculations, as well as material weaknesses in its internal controls. (Id.) Plaintiffs respond by arguing that none of Defendants’ disclosures revealed that the internal control deficiencies were far more systematic and widespread than portrayed because these problems resulted from Defendants’ .systematic fraudulent scheme. (Docket Nos. 58 at 18-19; 64 at 12-13.)
i. Statements Made From April 2, 2012 to March IS, 201S
An examination of the disclosures reveals that until under March 13, 2013, the Individual Defendants did indeed disclose that there were material weaknesses in their internal controls over the completeness and valuation of its ALLL and PLLL. For example, in the 2011 Form 10-K, Defendants disclosed:
The Company did not maintain effective controls over the completeness and valuation of its allowance for loan and lease losses and the related provision for loan and lease losses.... These control defi