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City of Roseville Employees' Retirment System v. Sterling Finance Corp.

United States District Court, E.D. Washington

September 17, 2014

CITY OF ROSEVILLE EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All others Similarly Situated, Plaintiff,

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For City of Roseville Employees Retirement System, Individually and on Behalf of All Others Similarly Situated, Plaintiff: Christopher Paul Seefer, Matthew S Melamed, Sunny September Sarkis, LEAD ATTORNEYS, 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, John C Roberts, Jr, 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.

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Stanley A. Bastian, United States District Judge.

Before the Court is Defendants' Motion to Dismiss Consolidated Amended Complaint for Violation of the Federal Securities Laws, ECF No. 113; Defendants' Request for Judicial Notice and Notice of Incorporation, ECF No. 119; and Defendants' Supplemental Request for Judicial Notice and Notice of Incorporation by Reference, ECF No. 126. A hearing on the motions was held on August 13, 2014, in Spokane, Washington. Plaintiff was represented by Christopher P. Seefer and Laura J. Black. Defendants were represented by Barry M. Kaplan and Gregory L. Watts.

This is the second time around for the parties in arguing the Motion to Dismiss and the first time for this Judge. Previously, Judge Shea entered an Order granting Defendants' Motion to Dismiss Consolidated Complaint, but permitting Plaintiff to file an Amended Complaint. Plaintiff did so, and Defendants now move for dismissal on the Amended Consolidated Complaint. In ruling on Defendants' Motion to Dismiss, the Court does not intend to revisit prior rulings made by Judge Shea. Accordingly, this Order will only address new claims and theories that were not presented in Plaintiff's Consolidated Complaint.[1]

A. Legal Standard for Plaintiff's Claims

1. Section 10(b) Claim

Private federal securities fraud actions are based upon federal securities statutes and their implementing regulations. Section 10(b) of the Securities Exchange Act of 1934 forbids (1) the " use or employ[ment] . . .

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of any . . . deceptive device," (2) " in connection with the purchase or sale of any security," and (3) " in contravention of" Securities and Exchange Commission " rules and regulations." 15 U.S.C. § 78j(b). Pursuant to this section, the SEC promulgated Rule 10b-5, which makes it unlawful:

(1) to employ any device, scheme, or artifice to defraud;
(2) 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 the light of the circumstances under which they were made, not misleading, or
(3) 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 (2004).

Taken together, courts have generally recognized that in order to adequately plead a private securities fraud action, the plaintiff must allege: (1) material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. Police Retirement System of St. Louis v. Intuitive Surgical Inc., 759 F.3d 1051, 2014 WL 3451566 (2014) (citing Halliburton Co. v. Erica P. John Fund, Inc., __ U.S. __, 134 S.Ct. 2398, 189 L.Ed.2d 339 (2014).

2. Section 20(a) Claim

In order to prove a prima facie case under Section 20(a) of the Securities Exchange Act of 1934, a plaintiff must prove: (1) a primary violation of federal securities law; and (2) that the defendant exercised actual power or control over the primary violator. No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. West. Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003).

Section 20(a) claims may be dismissed summarily if a plaintiff fails to adequately plead a primary violation of section 10(b). Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).

B. Pleading Standards

The Ninth Circuit has cautioned that plaintiffs in private securities fraud class actions face " formidable pleading requirements to properly state a claim and avoid dismissal under Fed.R.Civ.P. 12(b)(6)." Metzler, Inc. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1055 (9th Cir. 2008).

1. Fed.R.Civ.P. 12(b)(6)

Rule 12(b)(6) of the Federal Rules of Civil Procedure permits a defendant to seek dismissal of a complaint that " fail[s] to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). The Court should not dismiss the complaint if the plaintiff has stated " enough facts to state a claim to relief that is plausible on its face." Bell A. Corp v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw reasonable inferences that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The Court accepts all factual allegations in the complaint as true and construes them in the light most favorable to the nonmoving party, except the Court is not required to accept legal conclusions cast in the form of factual allegations if those conclusions cannot be reasonably drawn from the facts alleged. Id.

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The court must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on a 12(b)(6) motion to dismiss, i.e. documents incorporated into the complaint by reference, and matters of which a court may take judicial notice. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).

2. Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act (" PSLRA" ) Pleading Requirements

Federal R. Civ. P 9(b) and the Private Securities Litigation Reform Act (PSLRA) set forth additional pleading requirements. Reese v. Malone, 747 F.3d 557, 568 (9th Cir. 2014). Under Rule 9(b), claims alleging fraud are subject to a heightened pleading requirement, which requires that a party " state with particularity the circumstances constituting fraud or mistake." Fed.R.Civ.P. 9. Additionally, the PSLRA requires that the complaint plead with particularity both falsity and scienter. 15 U.S.C. § 78u-4(b)(1),(2).

a. Pleading Requirements for Falsity and Materiality

Under Rule 10b-5, the complaint must allege " falsity" by specifying each allegedly misleading statement, why the statement was misleading, and if an allegation is made on information and belief, all facts supporting that belief with particularity. 18 U.S.C. § 78u-4(b)(1); Reese, 747 F.3d at 568. To meet the materiality requirement of Rule 10b-5, the complaint must allege facts sufficient to support the inference that there is " 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." Police Retirement Syst., 759 F.3d 1051, 2014 WL 3451566 *4.

b. Pleading Requirements for Scienter

Scienter is defined as " a mental state embracing intent to deceive, manipulate, or defraud." Reese, 747 F.3d at 568. To adequately plead 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); Reese, 747 F.3d at 568. The inference must be that " the defendant made false or misleading statements either intentionally or with deliberate recklessness." Id. 569. " Deliberate recklessness means that the reckless conduct 'reflects some degree of intentional or conscious misconduct.'" Id. Thus, mere recklessness or a motive to commit fraud and opportunity to do so is not sufficient to establish a strong inference of deliberate recklessness. Id. To meet the requirements of the PSLRA, the plaintiff must plead " a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Zucco Partners, LLC, 552 F.3d at 991.

A " strong inference" of scienter exists if, when the allegations are accepted as true, " a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, Inc., 551 U.S. at 324. It must be more than merely plausible or reasonable. Reese, 747 F.3d at 569.

Ultimately, the Court must ask: " When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing

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inference?" Tellabs, Inc., 551 U.S. at 323. In doing so, " the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs." Metzler, 540 F.3d at 1061 (emphasis in original). Recently, the Ninth Circuit instructed that courts should conduct a holistic review of the allegations to determine whether they combine to create a strong inference of intentional or deliberate recklessness, while also keeping in mind the individual allegations and the inferences drawn from them. In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 703 (9th Cir. 2012). Stated another way, courts are to examine individual allegations in order to benchmark whether they are actionable, but also consider the allegations collectively to examine the complaint as a whole. Police Retirement System, 759 F.3d 1051, 2014 WL 3451566 at *4.

C. Plaintiff's Consolidated Amended Complaint

Plaintiff is bringing a putative class-action lawsuit, alleging securities fraud on behalf of all persons who purchased or otherwise acquired publicly traded securities of Sterling Financial Corporation between July 23, 2008, and October 15, 2009 (the " Class Period" ). Plaintiff is suing Sterling Financial Corporation and its top officers for violations of the Securities Exchange Act of 1934 and the U.S. Securities and Exchange Commission Rule 10b-5.

Defendant Sterling Financial Corporation is a bank holding company operating through its two main banking subsidiaries--Sterling Savings Bank and Golf Savings Bank. During the Class Period, Sterling Savings Bank was the largest commercial bank headquartered in Washington with over $12 billion of ...

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