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City of Roseville Employees' Retirement System v. Sterling Financial Corp.

United States District Court, E.D. Washington

August 5, 2013

CITY OF ROSEVILLE EMPLOYEES' RETIREMENT SYSTEM, individually and behalf of all other similarly situated, Plaintiff,
v.
STERLING FINANCIAL CORPORATION; HAROLD B. GILKEY; and DANIEL G. BYRNE, Defendants

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For City of Roseville Employees Retirement System, Individually and on Behalf of All Others Similarly Situated, Plaintiff: Christopher Paul Seefer, LEAD ATTORNEY, PRO HAC VICE, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Karl P Barth, LEAD ATTORNEY, Hagens Berman Sobol Shapiro LLP, Seattle, WA; Laura J Black, LEAD ATTORNEY, Lukins & Annis, PS, Spokane, WA; Michael James Hines, LEAD ATTORNEY, Lukins & Annis PS - SPO, Spokane, WA.

For Sterling Financial Corporation, Harold B Gilkey, Daniel G Byrne, Defendants: Barry M Kaplan, LEAD ATTORNEY, Wilson Sonsini Goodrich & Rosati, Seattle, WA; Brian Danitz, LEAD ATTORNEY, PRO HAC VICE, Wilson Sonsini Goodrich & Rosati, Palo Alto, CA; Gregory L Watts, Stephanie Lynn Jensen, LEAD ATTORNEYS, Wilson Sonsini Goodrich & Rosati PC, Seattle, WA.

OPINION

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ORDER GRANTING DEFENDANTS' MOTION TO DISMISS

EDWARD F. SHEA, Senior United States District Judge.

I. INTRODUCTION

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

II. BACKGROUND

A. Factual History[1]

This putative class-action lawsuit alleges securities fraud on behalf of all persons who acquired Sterling's publicly traded securities between July 23, 2008, and October 15, 2009 (the " Class Period" ). Consol.

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

1. The Parties

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

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

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

2. Sterling's Aggressive Growth Strategy

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

In the years preceding the Class Period, Sterling substantially increased the size of its portfolio of construction loans. [2] Id. ¶ 4. Sterling focused on construction loans because

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

Unlike individual mortgages, which usually consist of a single borrower acquiring one property, construction loans often involve multi-unit projects of much greater size and cost. Id. ¶ 5. These projects, which often require constructing a residential property from the ground up, are subject to additional layers of risk, including construction delays, cost overruns, and the borrower's inability to sell the property or units once developed. Id. Sterling consistently disclosed the riskier aspects of these loans in its SEC filings, cautioning that " a downturn in the local economies or real estate markets could negative impact Sterling's banking business," and that Sterling was " likely to experience higher levels of loan losses [on construction loans] than it would on ...


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