Citations
- 282 F. Supp. 3d 1074
Full opinion text
JON S. TIGAR, United States District Judge
Before the Court are the Motions to Dismiss the Consolidated Amended Verified Stockholder Derivative Complaint filed by defendants John D. Baker II, Elaine L. Chao, John S. Chen, Lloyd H. Dean, Elizabeth A. Duke, Susan E. Engel, Enrique Hernandez, Jr., Donald M. James, Cynthia H. Milligan, Federico F. Peña, James H. Quigley, Judith M. Runstad, Stephen W. Sanger, Susan G. Swenson, and Suzanne M. Vautrinot (collectively, the "Director Defendants"), ECF No. 144, Timothy J. Sloan, ECF No. 139, Carrie Tolstedt, ECF No. 140, Michael J. Loughlin, ECF No. 141, and John R. Shrewsberry, ECF No. 143. The Court will grant the motions in part and deny them in part.
I. BACKGROUND
This is a shareholder derivative action on behalf of Wells Fargo & Company ("Wells Fargo") against the company's officers, directors, and senior management. ECF No. 83, Consolidated Amended Verified Stockholder Derivative Complaint ("Compl.") ¶ 64. Plaintiffs allege that, "[f]rom at least January 1, 2011 to the present ('the Relevant Period'), Defendants knew or consciously disregarded that Wells Fargo employees were illicitly creating millions of deposit and credit card accounts for their customers, without those customers' knowledge or consent." Id. ¶ 1.
A. Wells Fargo's Cross-Selling and Alleged Fraudulent Account-Creation Scheme
Plaintiffs allege that Wells Fargo, "under Defendants' watch, ... defrauded their customers in an attempt to drive up 'cross-selling,' i.e., selling complementary Wells Fargo banking products to prospective or existing customers." Id. As summarized by Plaintiffs:
To achieve their publicly touted goal of selling eight products per household-referred to as the 'Great Eight' or 'Gr-eight' initiative-Defendants imposed strict quotas regulating the number of products Wells Fargo bankers must sell. Those quotas translated into unrelenting pressure on bankers to open numerous accounts per customer. Bank employees were thus driven to engage in unlawful account-creation practices. And because Wells Fargo's success in cross-selling was central to its financial results and market participants' assessment of the Company, Defendants were also highly motivated to foster and perpetuate those unlawful practices. Indeed, the goal of Wells Fargo's high pressure cross-selling strategy was to show leadership in cross-selling, and, most importantly drive up the Bank's share price ... result[ing] in enormous compensation for the Bank's executives.
Id. ¶ 2.
Plaintiffs allege that Wells Fargo's Officers and Directors either knew or should have known about the allegedly fraudulent cross-selling practices as early as 2007, when the Board's Audit and Examination Committee and then-Chairman and CEO John Stumpf "received letters from an employee discussing how the Gr-Eight Initiative created a high pressure sales culture that resulted in 'unethical and illegal activity,' including 'routine deception and fraudulent exploitation of [Wells Fargo's] clients.' " Id. ¶ 22. Plaintiffs further allege that Defendants were on notice of the fraudulent practices based on (1) complaints as early as 2008 through Wells Fargo's "EthicsLine" service related to "gaming" and "sales incentives"; (2) a 2008 whistleblower lawsuit by an employee related to creation of fake brokerage accounts; (3) several wrongful termination and employment discrimination lawsuits filed as early as 2009 that included allegations of unethical practices; (4) investigations and inquiries by the Office of the Comptroller of the Currency ("OCC") and the Consumer Financial Protection Bureau ("CFPB") as early as 2012; and (5) a December 21, 2013 article in the Los Angeles Times that detailed the fraudulent account creation and the internal policies and pressure that led to it. Id. ¶¶ 22-38.
Plaintiffs allege that "[n]otwithstanding that knowledge ... neither Stumpf nor the other Defendants disclosed the improper activities to the public, and instead continued to tout their purported success in cross-selling, including reporting artificially inflated cross-selling metrics." Id. ¶ 17. Wells Fargo's SEC filings and annual reports not only included these allegedly inflated cross-selling metrics, but repeatedly emphasized the importance of these metrics and its cross-selling strategy to Wells Fargo's financial performance and business model. See id. ¶¶ 124-140.
According to Plaintiffs, Defendants participated in preparing and signed onto the following public filings, which Plaintiffs allege contained false or misleading statements and "artificially inflated reported retail bank household cross-sell metric for each reporting period":
Filing Date Cross-Sell Signed by Metric 1Q 2011 10-Q May 6, 2011 5.79 Stumpf, Sloan 2Q 2011 10-Q August 5, 2011 5.84 Stumpf, Sloan 3Q 2011 10-Q November 8, 2011 5.91 Stumpf, Sloan 2011 10-K February 28, 2012 5.92 Stumpf, Sloan, Baker, Chao, Chen, Dean, Engel, Hernandez, Milligan, Peña, Runstad, Sanger, Swenson 1Q 2012 10-Q May 8, 2012 5.98 Stumpf, Sloan 2Q 2012 10-Q August 7, 2012 6.00 Stumpf, Sloan 3Q 2012 10-Q November 6, 2012 6.04 Stumpf, Sloan 2012 10-K February 27, 2013 6.05 Stumpf, Sloan, Baker, Chao, Chen, Dean, Engel, Hernandez, James, Milligan, Peña, Runstad, Sanger 1Q 2013 10-Q May 8, 2013 6.10 Stumpf, Sloan 2Q 2013 10-Q August 7, 2013 6.14 Stumpf, Sloan 3Q 2013 10-Q November 6, 2013 6.15 Stumpf, Sloan 2013 10-K February 26, 2014 6.16 Stumpf, Sloan, Baker, Chao, Dean, Engel, Hernandez, James, Milligan, Peña, Quigley, Runstad, Sanger, Swenson 1Q 2014 10-Q May 7, 2014 6.17 Stumpf, Sloan 2Q 2014 10-Q August 6, 2016 6.17 Stumpf, Shrewsberry 3Q 2014 10-Q November 5, 2014 6.15 Stumpf, Shrewsberry 2014 10-K February 25, 2014 6.17 Stumpf, Shrewsberry, Baker, Chao, Chen, Dean, Duke, Engel, Hernandez, James, Milligan, Peña, Quigley, Runstad, Sanger, Swenson 1Q 2015 10-Q May 6, 2015 6.13 Stumpf, Shrewsberry 2Q 2015 10-Q August 5, 2015 6.13 Stumpf, Shrewsberry 3Q 2015 10-Q November 4, 2015 6.13 Stumpf, Shrewsberry 2015 10-K February 24, 2016 6.11 Stumpf, Shrewsbeny, Baker, Chao, Chen, Dean, Duke, Engel, Hernandez, James, Milligan, Peña, Quigley, Sanger, Swenson, Vautrinot 1Q 2016 10-Q May 4, 2016 6.09 Stumpf, Shrewsberry 1Q 2016 10-Q August 3, 2016 Not reported Stumpf, Shrewsberry
Id. ¶ 367 (footnotes omitted).
B. The Moving Defendants
1. Officer Defendants
Defendant John G. Stumpf served as Wells Fargo's CEO from June 2007 until his resignation on October 12, 2016. Id. ¶ 70. He was also a director between June 2006 and January 2010, when he became Chairman of the Board. Id. According to the complaint, Mr. Stumpf admitted in testimony before Congress that he learned of the problem of opening of fraudulent accounts as early as 2013, and that he was "made aware, generally, of issues" related to cross-selling as early as 2011. Id. ¶ 258-260. In addition to his public statements to investors in conference calls and other public fora-statements chronicled extensively throughout the complaint-Mr. Stumpf signed all of Wells Fargo's quarterly and annual SEC filings from 2011 to 2016, which, according to Plaintiffs, contained false or misleading information regarding cross-selling metrics. Id. ¶ 367. Plaintiffs allege that throughout the relevant period, Mr. Stumpf "sold or otherwise disposed of 7,067,446 shares of Wells Fargo common stock for a total of $343,638,237.78," and "netted over $51.8 million in gains" from the sale of an additional 5,432,400 shares he sold to Wells Fargo at an artificially inflated price using his employee stock options. Id. ¶ 383-84.
Defendant Timothy J. Sloan became Wells Fargo's CEO following Stumpf's resignation in October 2016. Id. ¶ 71. Prior to that time, he served as Wells Fargo's President and COO, a position he assumed in November 2015. Id. He served as Senior Executive Vice President of the Wholesale Banking group from February 2011 to May 2014, Senior Executive Vice President and Chief Administrative Officer from September 2010 to February 2011. Id. Like Mr. Stumpf, Mr. Sloan repeatedly emphasized the importance of cross-selling to Wells Fargo's business and touted the company's "record-breaking achievements" in products-per-household metrics. Id. ¶ 138-39 (discussing company's focus on "cross-sell capability" and noting employee tenure as the "secret sauce of cross-sell"), ¶ 329 n. 166 (noting "record-breaking achievements" in cross-sell metrics), ¶ 331-31 (touting Wells Fargo's ability to generate fee income from assets as "the highest in the industry," noting that "we're good at cross-sell"), ¶ 336 (touting "increase[d] cross-sell" and "risk management discipline"). Plaintiffs allege that throughout the relevant period, Mr. Sloan "sold or otherwise disposed of 2,512,359 shares of Wells Fargo common stock for a total of $119,530,828.37," and "netted over $20.7 million in gains" from the sale of an additional 1,585,188 shares he sold to Wells Fargo at an artificially inflated price using his employee stock options. Id. ¶ 388-89.
Defendant Carrie Tolstedt served as Senior Executive Vice President of the Community Banking division from June 2007 to July 2016, after which she transitioned to retirement and left the company. Id. ¶ 72. The Community Banking segment "was the Company's largest segment during the Relevant Period, and focuses on diversified financial products and services to customers and small businesses ...." Id. ¶ 69. This segment also appears to be where the fraudulent account creation was most prevalent. See id. ¶ 223 (OCC supervisory letter requesting that Wells Fargo "address the governance of sales practices within its Community Banking division"); 261 (Board monitored "sales integrity" in Community Banking division). Throughout the relevant time period, Ms. Tolstedt made several public statements about the importance of Wells Fargo's cross-sell model. Id. ¶¶ 4, 137 (stating at an analyst conference that "the cross-sell model ... drives revenue"); 129 (describing cross-selling as "the core of [Wells Fargo's] customer-centric strategy"); 332 (stating that "cross-sell model is more important than it has ever been before" and discussing goal of 8 accounts per customer); 350 (touting success in "retail bank household cross-sell" metrics). Plaintiffs allege that Ms. Tolstedt approved Wells Fargo's Store Manager Incentive Plan, dated January 2008, which put pressure on bank employees to meet sales goals and encouraged fraudulent account creation. Id. ¶ 147. Wells Fargo's 2014 and 2015 Proxy Statements praised Ms. Tolstedt's leadership of the Community Banking division and recommended approval of substantial incentive compensation awards in each year. Id. ¶ 268-69. Plaintiffs allege that throughout the relevant period, Ms. Tolstedt "sold or otherwise disposed of 2,482,857 shares of Wells Fargo common stock for a total of $118,622,860.27" and "netted over $13.6 million in gains" from the sale of an additional 1,016,591 shares she sold to Wells Fargo at an artificially inflated price using her employee stock options. Id. ¶ 386-87.
Defendant Michael Loughlin was a Senior Executive Vice President at Wells Fargo beginning July 2011, and, before that, served as the Chief Risk Officer beginning 2006. Id. ¶ 174. In that role, Mr. Loughlin "overs[aw] all risk-taking activities at Wells Fargo, including credit, market, operational, and compliance." Id. Plaintiffs allege that throughout the relevant period, Mr. Loughlin "sold or otherwise disposed of 999,921 shares of Wells Fargo common stock for a total of $47,607,897.93," and "netted over $3.9 million in gains" from the sale of an additional 317,353 shares he sold to Wells Fargo at an artificially inflated price using his employee stock options. Id. ¶ 390-91.
Defendant John R. Shrewsberry served as Wells Fargo's Senior Vice President and CFO since May 2014, and, before that, served as head of Wells Fargo Securities beginning 2009. Id. ¶ 73. At investor conferences in 2014, Mr. Shrewsberry characterized Wells Fargo's cross-selling business model as "legendary," noting that it was a critical part of the company's business model and provided a "sustainable long-term advantage[ ]." Id. ¶ 136, 139, 349. When the alleged fraudulent account-creation scheme came to light and Wells Fargo was sued by the Los Angeles City Attorney, Mr. Shrewsberry stated at another investor conference in 2015 that "none of [Wells Fargo's] internal systems for getting feedback [regarding the problematic account creation and cross-selling] have been tripped until this [lawsuit] came along," and that he did not see the issue of cross-selling or the lawsuit as "a real threat." Id. ¶ 193.
2. The Director Defendants
The Director Defendants during the relevant time period include: John D. Baker II (director since January 2010); Elaine L. Chao (director from July 2011 to January 2017); John S. Chen (director since September 2006); Lloyd H. Dean (director since June 2005); Elizabeth A. Duke (director since January 2015); Susan E. Engel (director since May 1998); Enrique Hernandez (director since January 2003); Donald M. James (director since January 2009); Cynthia H. Milligan (director since July 1992); Federico F. Peña (director since November 2011); James H. Quigley (director since October 2013); Judith M. Runstad (director from May 1998 to April 2016); Stephen W. Sanger (director since 2003); Susan G. Swenson (director since November 1998); and Suzanne M. Vautrinot (director since February 2015). Id. ¶¶ 76-91.
As shown below, Plaintiff alleges that each of the Director Defendants led or participated in a board committee responsible for oversight of the allegedly fraudulent banking practices:
Director/Defendant Audit and Corporate Governance Human Examination Responsibility and Resources Risk Nominating Baker X X Chao X Chen X Dean X X X X Duke X Engel X Hernandez X X James X Milligan X X X Pena X X X X Quigley X X Runstad X X Sanger X X X Swenson X X Vautrinot X
Id. ¶ 102.
The Audit and Examination Committee is tasked with oversight of "the integrity of the Company's financial statements and the adequacy and reliability of disclosures to stockholders, including management activities related to ... internal controls." Id. ¶ 103. The Risk Committee is responsible for "overseeing all key risks facing the company," and among other things "maintaining a strong risk culture," "establishing protocols and processes for issue escalation and reporting," and monitoring "enterprise-wide incentive based compensation practices that are consistent with the safety and soundness of the Company and do not encourage excessive risk taking." Id. ¶ 106. The Human Resources Committee is responsible for overseeing the compensation strategy for executive officers, reviewing the Company's stock ownership and retention guidelines, and "implementation of risk-balancing and risk management methodologies for incentive compensation plans and programs for senior executives ...." Id. ¶ 107. The Corporate Responsibility Committee is responsible for advising the Board and management on "strategies that affect the Company's role and reputation as a socially responsible organization," including monitoring the company's relationship with customers. Id. ¶ 109. The Governance and Nominating Committee is responsible for "oversee[ing] the Company's reputation and risk and engagement with stockholders" and for ensuring recommending "corporate governance guidelines." Id. ¶ 110.
Plaintiffs generally allege that the Director Defendants failed to adequately safeguard Wells Fargo's interests and compliance with applicable laws, encouraged and failed to address the fraudulent account creation scheme, and caused the company to issue purportedly false and misleading quarterly and annual reports and proxy statements. See id. at 83-134.
C. Procedural History
Based on the misconduct alleged above, several entities filed shareholder derivative complaints in this district, which have since been consolidated into a single action. ECF Nos. 39, 70. The Court appointed Lieff Cabraser Heimann & Bernstein and Saxena White as Co-Lead Counsel. ECF No. 70.
In the consolidated complaint, Plaintiffs assert the following causes of action: (1) breach of fiduciary duty (against all Defendants); (2) unjust enrichment (against all Defendants); (3) breach of fiduciary duty for insider selling and misappropriation of information (against the Insider Selling Defendants); (4) violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9 (against the Director Defendants); (5) violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 (against all Defendants); (6) violation of Section 20A of the Exchange Act (against Insider Selling Defendants); (7) violations of Section 29(b) of the Exchange Act (against all Defendants); (8) violation of Section 25402 of the California Corporations Code (against the Insider Selling Defendants); (9) violation of Section 25403 of the California Corporations Code (against the Director Defendants); (10) corporate waste (against the Director Defendants); (11) contribution and indemnification (against Defendants Stumpf, Shrewsberry, Sloan, and Tolstedt). Id. ¶¶ 524-596. Plaintiffs seek declaratory relief, damages, injunctive relief, restitution, and attorneys' fees. Id. at 185-86.
On March 17, 2017, nominal Defendant Wells Fargo moved to dismiss the Complaint pursuant to Rule 12(b)(6) and Rule 23.1 on the ground that Plaintiffs failed to adequately plead demand futility. ECF No. 99. By order dated May 4, 2017, the Court granted the motion with respect to Plaintiffs' claims under California Corporations Code Section 25403 -as "[t]here is no private right of action" under that statute-but denied the motions in all other respects. ECF No. 129. In denying the motions, the Court concluded that "[t]he extensive and detailed allegations in the complaint plausibly suggest[ed] that a majority of the Director Defendants" had "consciously disregarded an obligation to be reasonably informed about the business and its risks or consciously disregarded the duty to monitor and oversee the business." Id. at 15 (quoting In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 125 (Del. Ch. 2009) ). The Court specifically noted that the following "red flags" supported its conclusion: (1) the Congressional testimony of Mr. Stumpf regarding the Board's knowledge of the company's issues with cross-selling; (2) communications between employees and Board members regarding the allegedly fraudulent activity; (3) the various lawsuits against the company that included allegations of impropriety in account creation; (4) the Los Angeles Times article documenting the fraudulent account creation scheme; (5) regulatory interventions by government agencies; (6) widespread employee terminations seemingly aimed at silencing whistleblowers; and (7) the importance of cross-selling as stated in Wells Fargo's financial reports. See id. at 15-24. These facts "collectively ... support[ed] an inference that a majority of the Director Defendants consciously disregarded their fiduciary duties despite knowledge regarding widespread illegal account-creation activities, and ... that there is a substantial likelihood of director oversight liability." Id. at 24.
On June 5, 2017, the Director Defendants and Defendants Sloan, Tolstedt, Loughlin, and Shrewsberry filed motions to dismiss the Consolidated Amended Verified Stockholder Derivative Complaint under Federal Rule of Civil Procedure 12(b)(6). ECF Nos. 139, 140, 141, 143, 144.
Defendant Stumpf did not file his own motion, but filed a notice of joinder in portions of the other Defendants' briefs. ECF No. 145. The Director Defendants generally contend that Plaintiffs' "puzzle" style pleading fails to state a claim with the requisite particularity under Section 10(b) and Rule 10b6, Plaintiffs fail to adequately plead loss causation or allege actionable misrepresentations to support their Section 14(a) claims, and that Plaintiffs do not allege a particular fraudulent contract in support of their Section 29(b) claim. ECF No. 144. The Officer Defendants make similar arguments, and argue in addition that Plaintiffs do not adequately allege specific misrepresentations or scienter on the part of each individual defendant, and instead make blanket allegations about the defendant group as a whole. On July 5, 2017, Plaintiffs filed an omnibus opposition addressing all the pending motions to dismiss. ECF No. 151. Defendants filed their replies on July 26, 2017.
II. REQUEST FOR JUDICIAL NOTICE
Defendant Sloan requests that the Court take judicial notice of two court filings from a related case pending in Superior Court for the State of California, In re Wells Fargo & Company Derivative Litigation, CGC 15-554407 (Cal. Super. Ct.). ECF No. 139-2. These include (1) a Consolidated Shareholder Derivative Complaint brought on behalf of Wells Fargo shareholders against current and former Wells Fargo officers and directors, filed in San Francisco Superior Court on January 11, 2017, ECF No. 139-1 at 4-88; and (2) a May 10, 2017 order by Judge E.A. Karnow in the same case, sustaining a number of demurrers with leave to amend, ECF No. 139-1 at 90-103.
The Court "must take judicial notice if a party requests it and the court is supplied with the necessary information." Fed. R. Evid. 201(c)(2). A matter may be judicially noticed if it is either "generally known within the territorial jurisdiction of the trial court" or "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b). Under Ninth Circuit law, courts may properly take notice of court orders and other matters of public record. Reyn's Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n. 6 (9th Cir. 2006). Moreover, "documents publicly filed in [a] prior suit are proper subjects of judicial notice"). Chrisanthis v. United States, No. C 08-02472 WHA, 2008 WL 4848764, at *1 (N.D. Cal. Nov. 7, 2008).
The Court will take notice of these documents, as each is a public court filing. However, the Court will not take notice of any disputed facts in either the complaint or Judge Karnow's order. Lee v. City of Los Angeles, 250 F.3d 668, 689-90 (9th Cir. 2001).
III. LEGAL STANDARD
A. The Dual Pleading Requirements
Section 10(b) of the Securities Exchange Act of 1934 prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. To establish a violation of Section 10(b), a plaintiff must plead: (1) a material misrepresentation or omission made by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008).
On a motion to dismiss, the Court accepts the material facts alleged in the complaint, together with reasonable inferences to be drawn from those facts, as true. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). However, "the tenet that a court must accept a complaint's allegations as true is inapplicable to threadbare recitals of a cause of action's elements, supported by mere conclusory statements." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Moreover, while a plaintiff generally need only plead "enough facts to state a claim to relief that is plausible on its face" to survive a motion to dismiss, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), "[s]ecurities fraud class actions must meet the higher, exacting pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act ('PSLRA')." Oregon Pub. Employees Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 604 (9th Cir. 2014).
Under the PSLRA and Rule 9(b), a complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" with respect to each alleged false statement or omission, and a party must "state with particularity the circumstances constituting fraud or mistake." 15 U.S.C. § 78u-4(b)(2)(A) ; Fed. R. Civ. P. 9(b) ; see also Oregon Pub. Employees Ret. Fund, 774 F.3d at 605. "In order to show a strong inference of deliberate recklessness, plaintiffs must state facts that come closer to demonstrating intent, as opposed to mere motive and opportunity." In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999), abrogated on other grounds by, S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008). If the complaint does not satisfy the PSLRA's pleading requirements, the Court must grant a motion to dismiss the complaint. 15 U.S.C. § 78u-4(b)(3)(A).
B. Falsity and Materiality
The PSLRA provides that "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)(B). For statements to be actionable under the PSLRA, they must be both false or misleading and material. A statement or omission is misleading under the PSLRA and Section 10(b) of the Exchange Act "if it would give a reasonable investor the impression of a state of affairs that differs in a material way from the one that actually exists." Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008).
A false or misleading statement or omission is material if 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." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). "To plead materiality, the complaint's allegations must 'suffice to raise a reasonable expectation that discovery will reveal evidence satisfying the materiality requirement, and to allow the court to draw the reasonable inference that the defendant is liable.' " Reese v. Malone, 747 F.3d 557, 568 (9th Cir. 2014) (quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 131 S.Ct. 1309, 1312, 179 L.Ed.2d 398 (2011) ). " 'Although determining materiality in securities fraud cases should ordinarily be left to the trier of fact, conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim.' " Id. (quoting In re Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010) ).
C. Scienter
The required state of mind under the PSLRA is a "mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n.12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In order to adequately establish scienter, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A).
The "strong inference" required by the PSLRA "must be more than merely 'reasonable' or 'permissible'-it must be cogent and compelling, thus strong in light of other explanations." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). "A court must compare the malicious and innocent references cognizable from the facts pled in the complaint, and only allow the complaint to survive a motion to dismiss if the malicious inference is at least as compelling as any opposing innocent inference." Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009). In evaluating whether a complaint satisfies the "strong inference" requirement, courts must consider the allegations and other relevant material holistically, not "scrutinized in isolation." In re VeriFone Holdings, 704 F.3d 694, 701 (9th Cir. 2012).
Deliberate or conscious recklessness constitutes intentional conduct sufficient to satisfy the scienter requirement. "An actor is deliberately reckless if he had reasonable grounds to believe material facts existed that were misstated or omitted, but nonetheless failed to obtain and disclose such facts although he could have done so without extraordinary effort." Reese, 747 F.3d at 569 (quoting In re Oracle Corp. Sec. Litig., 627 F.3d 376, 390 (9th Cir. 2010) (internal alterations omitted)). "[T]he ultimate question is whether the defendant knew his or her statements were false, or was consciously reckless as to their truth or falsity." Gebhart v. SEC, 595 F.3d 1034, 1042 (9th Cir. 2010). "Facts showing mere recklessness or a motive to commit fraud and opportunity to do so provide some reasonable inference of intent, but are not independently sufficient." Reese, 747 F.3d at 569 (quoting In re Silicon, 183 F.3d at 974 ).
IV. DISCUSSION
Defendants move to dismiss Plaintiffs' complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). All Defendants move to dismiss Plaintiffs' claims under Section 10(b) and Rule 10b5, and the derivative claims under Section 29(b) and Section 20A. The Director Defendants also move to dismiss Plaintiffs' claims for breach of fiduciary duty under Section14(a). Defendants Sloan, Tolstedt, Shrewsberry, and Loughlin (collectively, the "Officer Defendants") move to dismiss Plaintiffs' claims for breach of fiduciary duty under Delaware law, insider trading under California Law, and claims for unjust enrichment, contribution and indemnification. The Court addresses each in turn.
A. Claims Under Section 10(b) and Rule 10b-5
To survive a motion to dismiss, Plaintiffs must plausibly allege: (1) a material misrepresentation or omission made by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Stoneridge Inv. Partners, LLC, 552 at 157, 128 S.Ct. 761. Defendants generally challenge the sufficiency of the complaint with respect to the first two of these elements. The Director Defendants contend that Plaintiffs fail to plead their claim under Section 10(b) with the requisite particularity. ECF No. 144 at 10-11. The Officer Defendants similarly contend that Plaintiffs do not allege material misrepresentations to support their Section 10(b) claim, and do not allege facts supporting an inference of scienter. See ECF No. 139 at 13-14, ECF No. 140 at 11-17, ECF No. 141 at 12-13, ECF No. 143 at 16-17.
1. Material and Misleading Statements by the Director Defendants
The Director Defendants assert that "[t]he Complaint fails to allege with sufficient particularity the specific statements made by the Independent Directors that are alleged to have been false or misleading, the reasons for falsity, or the 'who, what, when, where, and how' of the supposed fraud.' " ECF No. 144 at 10. They characterize the complaint as "impermissible 'puzzle' or 'shotgun' pleading" that forces defendants to identify the allegedly misleading statements and match the statements up with reasons they are misleading. Id. The Director Defendants note that the vast majority of the allegations in the complaint refer generally to "Defendants," without "delineat[ing] which actions were taken by which Defendant." Id. at 12. Though the Director Defendants acknowledge that Plaintiffs allege misstatements in Wells Fargo's SEC filings, and that the Director Defendants signed the Wells Fargo 10-K filings from 2011 to 2015, they argue that Plaintiffs "fail to identify with particularity which statements in those SEC filings were supposedly false and why." Id. at 11. Moreover, the Director Defendants argue that Plaintiffs' reliance on the "group pleading" doctrine to assign individual statements in the SEC filings to all Director Defendants, without facts regarding each individual's role in the alleged misstatement, is inconsistent with the PSLRA. See id. at 12 n. 4 (because of Plaintiffs' reliance on "group pleading" doctrine, "which alleged misstatements the Independent Directors are responsible for is completely opaque."). In sum, according to the Director Defendants, the complaint consists of a "morass of ambiguity ... followed by eleven claims for relief." ECF No. 144 at 12.
Plaintiffs counter that "the Complaint provides a clear roadmap of Plaintiffs' Section 10(b) claims." ECF No. 151 at 19. Plaintiffs argue that the complaint includes extensive allegations regarding Wells Fargo's misrepresentations in SEC filings regarding cross-sell metrics. Plaintiffs point to the chart at paragraph 367 of the complaint, which identifies SEC filings from the class period that the Director Defendants signed. Id. According to Plaintiffs, each of these filings included cross-sell metrics that were allegedly "artificially inflated as a result of the unauthorized creation of millions of accounts," as well as false or misleading statements concerning these metrics. Id. In their opposition, Plaintiffs identify two statements in Wells Fargo's SEC filings that were allegedly false and misleading. First, Plaintiffs point to "[t]he representation in Wells Fargo's 2013 Form 10-K that the Company 'ended the year as America's most profitable bank' and 'achieved record cross-sell across the Company' ...." Id. at 20, citing Compl. ¶ 344. Second, Plaintiffs point to Wells Fargo's statement in its 2014 Form 10-K that its "ability to grow primary customers is important ... because these customers ... have higher cross-sell and are more than twice as profitable as non-primary customers." Id. at 21, quoting Compl. ¶ 358. According to Plaintiffs, both statements were materially false and misleading because they were based on artificially inflated cross-sell metrics. Id. at 20-21.
Plaintiffs also argue that the complaint adequately alleges that the Director Defendants made false or misleading statements in Wells Fargo's SEC filings and annual reports related to risk-management processes and internal controls. Plaintiffs note that the 2013 and 2014 Annual Reports, which were incorporated by reference into the Form 10-K filings, touted Wells Fargo's focus on "the financial success of [its] customers" and its management of "operational risk" in line with "regulatory requirements." Id. at 22, quoting Compl. ¶ 372-74, nn. 183-85. Plaintiffs point to representations in the 2015 Annual Report regarding Wells Fargo's "adherence to regulatory guidelines" and how its compensation scheme discouraged employees from taking "inappropriate risk ... that is not in the best interest of customers." Id. at 23, quoting Compl. ¶ 375-76. According to Plaintiffs, these statements were false and misleading because Wells Fargo's "risk controls and oversight policies ... were not strong and robust but were rather ... weak and near-nonexistent" and because Wells Fargo's compensation scheme actually encouraged employees to engage in illegal behavior, according to the findings of the OCC in its Consent Order. Id. at 23-24.
Plaintiffs also defend their repeated reference to the collective knowledge and actions of all "Defendants" and their use of incorporation by reference, both of which the Director Defendants cite as evidence that Plaintiffs have impermissibly engaged in shotgun pleading. ECF No. 151 at 25. Plaintiffs argue that the Court has already declined to engage in a "director-by-director" analysis with respect to demand futility, and the same logic dictates that the Court would not do so with respect to the instant motion. Id.; ECF No. 129 at 17 n. 8 ("Because Plaintiffs allege that the Board as a whole or specific committees within the Board had knowledge of the illegal account-creation scheme, the Court does not evaluate demand futility on a director-by-director basis."). And Plaintiffs note that the use of incorporation by reference does not make a complaint subject to dismissal for shotgun pleading. Espinosa v. Blumercury, Inc., No. 16-cv-07202-JST, 2017 WL 1079553, at *5 (N.D. Cal. Mar. 22, 2017) ("a complaint does not employ impermissible shotgun pleading just because it re-alleges by reference all of the factual paragraphs preceding the claims for relief.").
On reply, the Director Defendants argue that the "group pleading" doctrine on which Plaintiffs rely to hold the Director Defendants liable for statements not specifically attributable to them "is not compatible with the PSLRA ...." ECF No. 154 at 9. They point to numerous cases in which courts in this circuit have declined to apply the doctrine in light of the stricter pleading requirements of the PSLRA. See id. at 9 (citing In re Cadence Design Sys., Inc. Sec. Litig., 692 F.Supp.2d 1181, 1193 (N.D. Cal. 2010) (group pleading doctrine "has been rejected by a majority of district courts in this circuit and this district")).
The Court finds that Plaintiffs have plausibly alleged that the Director Defendants made material and misleading statements through their participation in and approval of Wells Fargo's public filings.
First, the complaint adequately identifies the allegedly false and misleading statements made by the Director Defendants and does not engage in shotgun pleading. As the Court already observed in denying the prior motions to dismiss based on demand futility, the complaint includes "extensive and detailed allegations" that the Director Defendants knew of the improper account creation scheme by 2014, and that they made disclosures in SEC filings that they knew were false or misleading as of the time they were made. ECF No. 129 at 29. Indeed, Plaintiffs identified specific statements in the SEC filings that they allege to be false or misleading-namely, the cross-selling metrics that were reported in all quarterly and annual filings and statements in those filings regarding Wells Fargo's success at cross-selling and its risk-management controls. See, e.g., Compl. ¶¶ 124-45; ECF No. 151 at 19-26. For example, in the complaint Plaintiffs cite to a disclosure in Wells Fargo's 2013 annual report, stating that the company's "cross-sell strategy" would "facilitate growth in both strong and weak economic cycles." Compl. ¶ 133. The complaint also cites to the products per household cross-selling metrics reported in annual reports between 2011 and 2015. Compl. ¶ 144. Plaintiffs allege these metrics and statements about the contribution of cross-selling to the company's financial performance were misleading because of the company's illicit account-creation scheme. The complaint identifies such statements in nearly all of Wells Fargo's SEC filings over the relevant period, and includes a table that shows which Defendants signed, and are thus presumed to have made the statements in, each filing. Id. ¶ 367. Thus, the Court rejects the Director Defendants' suggestion that they cannot tell from the complaint "which allegedly false or misleading statements he or she is being accused of making ...." ECF No. 144 at 12.
Second, the Court rejects the Director Defendants' arguments that Plaintiffs' claims should be dismissed for relying on the "group pleading" doctrine. Plaintiffs do purport to rely on "the group pleading doctrine ... to render Defendants responsible for statements as to which they are not explicitly identified as the speaker or signatory." Compl. ¶ 404-410. Under this doctrine, "plaintiffs are allowed to plead claims for fraud against officers of the corporation using group pleading presumptions that the fraud was the collective action of the officers." Thomas v. Magnachip Semiconductor Corp., 167 F.Supp.3d 1029, 1047 (N.D. Cal. 2016) (quoting In re Ross Sys. Sec Litig., No. C-94-0017 DLJ, 1994 WL 583114 at *5-6 (N.D. Cal. July 21, 1994) ). The Director Defendants correctly note that, in the absence of guidance from the Ninth Circuit, a majority of courts in the district have held that the doctrine is inconsistent with the strict pleading requirements of the PSLRA. Kelley v. Rambus, Inc., No. C 07-1238JFHRL, 2008 WL 5170598, at *6 (N.D. Cal. Dec. 9, 2008), aff'd, 384 Fed.Appx. 570 (9th Cir. 2010) ("Previously, the so-called 'group pleading' doctrine permitted an inference that certain documents and statements were the collective work of individuals with 'direct involvement' in high-level operations.... The group pleading doctrine was eliminated by the PSLRA."). The Court agrees that Plaintiffs cannot prevail on their Section 10(b) claims purely under a group pleading theory.
However, Plaintiffs do not exclusively rely on this doctrine. Compl. ¶ 404 ("While this Complaint identifies Defendant signatories or speakers with respect to the false or misleading statements identified above (see ¶¶ 320-81), the group pleading doctrine also applies to render Defendants responsible for statements as to which they are not explicitly identified as the speaker or signatory.") (emphasis added). Plaintiffs principally allege that the Director Defendants are liable because they signed SEC filings with material and misleading information. This allegation is sufficient, and does not depend on the viability of the group pleading doctrine. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 (9th Cir. 2000) (director who "signs a SEC filing containing misrepresentations, 'make[s]' a statement so as to be liable as a primary violator under § 10(b)"); Thomas, 167 F.Supp.3d at 1047-48 (rejecting argument that the holding in Howard should not be extended to outside directors who do not have "ultimate authority" over the contents of the filings); Cho v. UCBH Holdings, Inc., No. C 09-4208 JSW, 2011 WL 3809903, *9 (N.D. Cal. May 17, 2011) ("Based on Plaintiffs' allegations that each of the Director Defendants signed the 20078 10K ... the alleged misstatements are attributable to the Director Defendants."). And Plaintiffs do more than simply allege liability based on a signature. They allege that each of the Director Defendants was part of a specific committee whose general responsibilities would have afforded members knowledge regarding the illicit account creation scheme, and knowledge that the statements in the public filings were false or misleading. See Compl. ¶ 102 (table showing Board committee membership for each Director Defendant during the relevant period); id. at ¶¶ 103-10 (describing oversight role of each committee).
Thus, the Court concludes that Plaintiffs adequately allege that the Director Defendants made false and misleading statements for purposes of their Section 10(b) claims.
2. Material and Misleading Statements by the Officer Defendants
Mr. Sloan argues that "[a]ll but one of the allegations in the Complaint particular to Mr. Sloan refer to statements he made about the value of cross-selling and the bank's achievement of cross-sell growth." ECF No. 139 at 8. This, according to Mr. Sloan, is insufficient, because, as the Court and regulatory agencies have found, "cross-selling is not inherently improper." Id. at 9; see ECF No. 129 at 2 ("[T]hese allegations regarding the importance of cross-selling and the simultaneous rise in cross-selling and sales integrity issues would not be sufficient on their own to establish conscious inaction on the part of the Board."). Finally, Mr. Sloan argues that "Plaintiffs plead no facts in support of any assertion that unauthorized account creation had a material impact on the bank's reported cross-sell performance." ECF No. 139 at 14.
Plaintiffs counter that Mr. Sloan made at least two materially false or misleading statements during the relevant period. First, at an analyst conference, Mr. Sloan emphasized the importance of cross-selling to the company's financial performance. Compl. ¶ 335. Second, Mr. Sloan's statement in May 2014 that the "secret sauce" of Wells Fargo's cross-selling success was tenure of employees was materially false and misleading because over the relevant period Wells Fargo allegedly terminated "thousands" of employees as a result of their creation of fraudulent accounts. Id. ¶ 336; ECF No. 151 at 14-15. Plaintiffs also allege that Mr. Sloan signed at least 13 of Wells Fargo's quarterly and annual SEC filings over the relevant period. Compl. ¶ 367. In doing so, Plaintiffs allege that "Sloan [falsely] attested in certifications under the Sarbanes-Oxley Act of 2002 ('SOX') that the financial information contained in the filings was true and did not omit material facts, and that the Company's internal and disclosure controls were effective." ECF No. 151 at 14, citing Compl. ¶ 379.
For the reasons discussed above with respect to the Director Defendants, the Court concludes that Plaintiffs adequately allege that Mr. Sloan is responsible for false and misleading information in Wells Fargo SEC filings, including specifically the cross-selling metrics that Plaintiffs allege were artificially inflated. Howard, 228 F.3d at 1061. Moreover, while statements regarding the general importance of cross-selling to Wells Fargo's performance may not have been false and misleading, Plaintiffs plausibly allege that Mr. Sloan's statement regarding the importance of employee tenure to cross-selling was false and misleading when made, given the termination of thousands of Wells Fargo employees involved in cross-selling. And the allegedly artificially inflated cross-sell metrics were material, given Wells Fargo's own numerous statements about the importance of cross-selling to its financial performance and the fact that, according to the CPFB Consent Order, the account-creation scheme resulted in cross-sell figures "based on 1,534,280 unauthorized deposit accounts and 565,443 unauthorized credit-card accounts." Compl. ¶ 321(e). The fact that a critical performance metric was based on a significant number of fraudulent accounts would certainly "give a reasonable investor the impression of a state of affairs that differs in a material way from the one that actually exists." Berson, 527 F.3d at 985.
Defendant Carrie Tolstedt notes that she is only alleged to have made three misstatements: (1) statements at a 2012 Investor Day presentation touting Wells Fargo's products per customer metrics, and noting that "8 cross sells can be done"; (2) statements at a 2014 Investor Day presentation that the company was "bullish on cross-sell," that the goal of 8 products per customer was attainable, and that cross-selling results in a "better deal and greater value" for customers; (3) statements at a 2016 Investor Day presentation that the company's cross-selling scheme was meant to "satisfy[ ] customers' needs and help[ ] them succeed financially." ECF No. 140 at 8-9. She argues that the statements that can be directly attributed to her are nothing more than "puffing" or "subjective assessments" of past and future performance, which are not actionable representations under Section 10(b).
Id. at 15. Ms. Tolstedt notes that, as she is not alleged to have signed any Wells Fargo SEC filings, she cannot be liable for other misstatements not directly attributable to her. Id. at 12.
Plaintiffs, while acknowledging that mere puffery may not give rise to liability under Section 10(b), contend that Ms. Tolstedt's statements were more than just puffery, as they are "capable of objective verification and, when considered in context, misleading." ECF No. 151 at 28. Specifically, Plaintiffs argue that Ms. Tolstedt's statements regarding the value to customers of Wells Fargo's cross-selling practices and her statements that Wells Fargo would be able to achieve its goal of 8 products per customer were both materially false and misleading. Id. at 28-29.
As Plaintiffs note, the line between puffery and a misleading statement is often indistinct, and requires an analysis of the context in which the statements were made. Mulligan v. Impax Labs., Inc., 36 F.Supp.3d 942, 966 (N.D. Cal. 2014). "Even a statement of opinion or an expression of corporate optimism may be deemed actionable in certain circumstances because 'there is a difference between enthusiastic statements amounting to general puffery and opinion-based statements that are anchored in 'misrepresentations of existing facts.' " Id. (quoting In re Bank of Am. Corp. Sec., Derivative, & ERISA Litig., 757 F.Supp.2d 260, 310 (S.D.N.Y.2010) ).
Given this context, Plaintiffs adequately allege that Ms. Tolstedt's statements were materially false or misleading when made. Plaintiffs allege that Ms. Tolstedt was at all relevant times a senior executive in the Community Banking division, Wells Fargo's largest division and the one where the fraudulent cross-selling practices were alleged to have taken place. See Compl. ¶¶ 30, 69, 72. Plaintiffs further allege that Ms. Tolstedt was involved in developing the group's cross-selling strategy, including approving a store manager incentive plan that Plaintiffs allege placed undue pressure on Wells Fargo employees and contributed to the fraudulent account-creation. See id. ¶ 147. Plaintiffs also allege that Ms. Tolstedt, as head of the Community Banking group, oversaw risk management function within the group, which conducted oversight on "sales-integrity issues." Id. ¶ 161. Given this context, Plaintiffs adequately allege that Ms. Tolstedt's statements regarding the past and future success of Wells Fargo's cross-selling and its commitment to providing value for customers were both material and false or misleading.
Defendant John Shrewsberry contends that while Plaintiffs identify three statements attributable to him in their complaint, they do not sufficiently allege that these statements were materially false or misleading. ECF No. 143 at 10, 16. Plaintiffs argue that Mr. Shrewsberry (1) was CFO during 2014, "when the Company's cross-selling metrics reached its highest levels"; (2) described Wells Fargo's cross-selling capabilities as "legendary"; (3) "signed SOX certifications in SEC filings, certifying the adequacy of the Company's internal controls and falsely claiming he had no knowledge of fraud at the Company, notwithstanding the series of major lawsuits and regulatory investigations that occurred just before and after he assumed the role of CFO"; and (4) provided public statements in response to the Los Angeles Times article suggesting that Wells Fargo's "internal systems" had not been tripped until the article came out. ECF No. 151 at 15-16. Plaintiffs also allege that Mr. Shrewsberry signed Wells Fargo's SEC filings, with allegedly inflated cross-sell metrics, from Q1 2014 to Q2 2016. Compl. ¶ 367.
Plaintiffs sufficiently allege numerous false and misleading statements by Mr. Shrewsberry. First, just as the Director Defendants, Mr. Shrewsberry is liable for false and misleading statements identified by Plaintiffs in any SEC filings he signed. Second, Plaintiffs allege that, throughout the relevant period, the reason Wells Fargo's cross-selling metrics remained high was because of the illicit account-creation scheme that Wells Fargo management encouraged. As the Court has previously noted, Plaintiffs have plausibly alleged that the Board and Wells Fargo senior management, and certainly a company CFO, should have known-based on any of a number of "red flags"-that the company's cross-selling practices were fraudulent. See ECF No. 129 at 23-27. Thus, Mr. Shrewsberry's statement regarding Wells Fargo's "legendary" cross-sell capabilities and his statements regarding the Los Angeles Times article were false, or at a minimum, misleading, and gave shareholders a different impression of Wells Fargo than was warranted based on facts known to management. Berson, 527 F.3d at 985.
Defendant Michael Loughlin contends that "the complaint includes no allegation that Mr. Loughlin had knowledge of any 'material adverse non-public information,' made or caused to be made any false or misleading statements, or otherwise possessed the required scienter for th[e] [Section 10(b) ] claim." ECF No. 141 at 13. Plaintiffs do not appear to allege in the complaint that Mr. Loughlin made any false or misleading statements during the relevant period or signed any SEC filings containing such information. Nor do Plaintiffs identify any such statements in their opposition, except to suggest that Mr. Loughlin may be liable for Wells Fargo's public statements under the group pleading doctrine. See ECF No. 151 at 16. As the Court has already held that, in the absence of other factual allegations, Plaintiffs cannot maintain a Section 10(b) claim solely under the group pleading doctrine, the Court will dismiss Plaintiffs' claims against Mr. Loughlin under Section 10(b).
Thus, the Court concludes that Plaintiffs adequately allege facts showing that Defendants Sloan, Tolstedt, and Shrewsberry each made materially false or misleading statements, but that they do not allege a material false or misleading statement by Defendant Loughlin.
3. Scienter
In its prior order, the Court concluded that, with respect to the Director Defendants, "the Plaintiffs have successfully pleaded facts giving rise to a strong inference of scienter for purposes of their 10(b) claims." ECF No. 129 at 31. Thus, the Court need only resolve whether Plaintiffs' have adequately alleged scienter as to the Officer Defendants. The Officer Defendants generally contend that the complaint does not allege facts showing that each individual defendant knowingly made false statements, and therefore does not adequately plead scienter for purposes of the Section 10(b) claims.
Defendant Sloan argues that even "[a]ssuming ... that any one of the[ ] [statements attributed to him] was actually false, Plaintiffs fail to plead sufficient facts to support an inference that Mr. Sloan knew it was false." ECF No. 139 at 13-14 (emphasis omitted). Mr. Sloan contends that Plaintiffs do not allege any facts suggesting that Mr. Sloan knew that the cross-sell metrics may have been inflated. Id. at 14. Ms. Tolstedt contends that, since the investigation into the account-creation scheme did not occur until one year after her last allegedly misleading statement, the "substantial passage of time eliminates any inference of scienter with respect to the [cross-selling] figures offered by Ms. Tolstedt." ECF No. 155 at 11-12. She further notes that there are no facts in the complaint suggesting that Ms. Tolstedt knew about the "red flags" the Court relied on in making its determination regarding scienter for the Director Defendants, and, in any event, many of these red flags occurred after her last allegedly misleading statement in 2014. Id. at 12. Mr. Shrewsberry argues that the only allegations regarding his knowledge of the allegedly fraudulent account-creation scheme relate to his 2015 public statements regarding the lawsuit filed by the Los Angeles City Attorney, and thus no inference of scienter could be drawn from his statements prior to that time. ECF No. 143 at 18. Mr. Shrewsberry argues that Plaintiffs' allegations regarding his SOX disclosures and certifications do not show he had actual knowledge of the alleged fraud in the Community Banking division, and thus Plaintiffs have not adequately alleged scienter. Id.
Plaintiffs counter that "[t]he Officer Defendants' scienter challenge rests on an erroneously narrow view of what Plaintiffs need to plead." ECF No. 151 at 42. They contend that no authority requires them to plead facts showing that each Officer Defendant knew of the full extent of the fraudulent account-creation scheme and that this fraud led to artificial inflation of cross-sell metrics. Id. Instead, according to Plaintiffs, "[w]here, as here, Plaintiffs' claims arise from a pervasive and undisputed fraud going to the core of the Company's business, it is reasonable to infer senior executives knew about, or at least '[r]ecklessly turn[ed] a 'blind eye' to,' the stream of red flags alerting them that employees were committing fraud to meet otherwise unattainable sales goals and that the Company's risk-management processes and internal controls were not sufficient to prevent or curtail those practices." Id. at 34 (quoting In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 708 (9th Cir. 2012) ). Plaintiffs also note that Defendants Tolstedt and Shrewsberry both admit to having knowledge about the alleged fraud at least as of the date of publication of the Los Angeles Times article. Id. at 43.
The Court agrees with Plaintiffs. In determining that Plaintiffs adequately pleaded scienter for the Director Defendants, the Court noted that the following factual allegations "plausibly suggest[ed] that a majority of the Director Defendants knew about the widespread illegal activity by 2014": (1) Defendant Stumpf testified before Congress that the Board was made aware of "issues" related to fraudulent account-creation by 2011, and by 2014 or 2015 had "connected the dots on customer harm"; (2) from 2011 forward, the Board's Audit and Examination Committee received periodic reports on the activities of Wells Fargo's Internal Investigations Group, which would have reviewed EthicsLine complaints; (3) consumer lawsuits regarding violation of whistleblower protection laws and the action filed by the Los Angeles City Attorney's Office; (4) the Los Angeles Times article regarding the fraudulent account-creation scheme; (5) intervention by government regulatory agencies, including the OCC and CFPB; and (6) widespread termination of employees due to unauthorized account creation. ECF No. 129 at 17-27.
While it is true that not all of these red flags apply to the Officer Defendants, the Court's logic applies with equal-if not greater-force to those defendants. Just as it is implausible that the Director Defendants were unaware of the account-creation scheme given the extent of the alleged fraud and the number of red flags, it is implausible that Wells Fargo's senior management, involved in the day-to-day operations of the bank and with greater access to the underlying cross-sell metrics and employee whistleblower complaints than independent board members, was unaware of the alleged fraud. Ms. Tolstedt, as head of the group at the center of the fraudulent account-creation allegations, not only would have had access to the cross-sell metrics for her group, but would have had access to any complaints by employees in her group regarding the pressures created by the incentive schemes that she approved. Compl. ¶ 30, 69, 72, 147. Mr. Sloan spoke extensively about Wells Fargo's success at cross-selling and the purported value these practices provided for customers, made public statements about Wells Fargo's financial performance and the importance of cross-selling to that performance, and provided insight to analysis about the "secret sauce" of the company's cross-selling success. Id. ¶ 345, 351, 351. Plaintiffs allege that, following hearings on the allegedly fraudulent practices, two United States Senators wrote a letter expressing great skepticism that Mr. Sloan had no knowledge of the fraudulent account-creation scheme that occurred under his watch as CFO. Id. ¶ 443. Mr. Shrewsberry was a CFO, with access to data regarding cross-sell metrics, and was knowledgeable enough regarding the alleged fraudulent account-creation scheme to publicly comment on the merit of the Los Angeles City Attorney's lawsuit and make what may have been an objectively false statement that Wells Fargo's "internal systems" had not been tripped until the Los Angeles Times article was published. Id. ¶ 193-94. These allegations plausibly suggest that each of Defendants Sloan, Tolstedt, and Shrewsberry either "knew his or her statements were false, or was consciously reckless as to their truth or falsity." Gebhart, 595 F.3d at 1042.
And even if Plaintiffs failed to allege facts showing each individual Officer Defendant had the requisite state of mind, the core operations doctri