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Hefler v. Wells Fargo & Co.

United States District Court, N.D. California

February 27, 2018

GARY HEFLER, et al., Plaintiffs,
WELLS FARGO & COMPANY, et al., Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS RE: ECF NOS. 135, 138, 139, 142, 143, 145, 147, 153, 156, 158


         Pending before the Court Are the Motions to Dismiss the Consolidated Class Action Complaint (“Complaint”) for Violations of the Federal Securities Laws filed by defendants Wells Fargo & Company (“Wells Fargo Motion”), ECF 135; Carrie L. Tolstedt, ECF No. 138; Michael J. Loughlin, ECF No. 139; David M. Carroll, ECF No. 142; James M. Strother, ECF No. 143; David Julian and Avid Modjtabai, ECF No. 145; John D. Baker III, John S. Chen, Lloyd H. Dean, Elizabeth A. Duke, Susan E. Engel, Enrique Hernandez, Jr., Donald M. James, Cynthia H. Milligan, Federico F. Pena, James H. Quigley, Judith M. Runstad, Stephen W. Sanger, Susan G. Swenson, Suzanne M. Vautrino (collectively, “Independent Directors”)[1], ECF 147; John G. Stumpf, ECF No. 153; and Hope Hardison, ECF No. 158. The Court will grant the motions in part and deny them in part.


         On October 4, 2017, this Court filed an Order Granting in Part and Denying In Part Motions to Dismiss in a related case. In re Wells Fargo & Company Shareholder Derivative Litigation, No. 16-cv-05541 JST, ECF No. 174 (N.D. Cal. Oct. 4, 2017) (“Derivative Litigation Order”). The complaint in the derivative action contains many claims that are substantially similar, and in some cases identical, to those in the Complaint here. Accordingly, the Court refers to the Derivative Litigation Order when that order sets forth the Court's reasoning as to a particular claim or argument.


         This is a securities fraud class action brought on behalf of all persons who purchased Wells Fargo stock between February 26, 2014 and September 20, 2016, against certain current and former Wells Fargo officers and directors. ECF No. 72, Consolidated Class Action Complaint for Violations of the Federal Securities Laws (“Compl.”) ¶ 2.

         In addition to Wells Fargo itself, the Complaint names two groups of defendants: “Officer Defendants” and “Director Defendants.” The Officer Defendants include John Stumpf (Chairman of the Board and Chief Executive Officer during the entirety of the Class Period); John Shrewsberry (Chief Financial Officer during part of the Class Period); Carrie Tolstedt (Senior Executive Vice President of Community Banking during the Class Period until her resignation on July 31, 2016); Timothy Sloan (Chief Financial Officer, Chief Operating Officer, and head of Wholesale Banking during different points of the Class Period); David Carroll (Senior Executive Vice President in charge of the Wealth, Brokerage and Retirement Group during the Class Period); David Julian (Company's Chief Auditor during the Class Period); Hope Hardison (Senior Executive Vice President and Human Resources Director during the Class Period); Michael Loughlin (Senior Executive Vice President and Chief Risk Officer during the Class Period); Avid Modjtabai (Head of Consumer Lending during the Class Period), and James Strother (Company's General Counsel during the Class Period). Compl. ¶¶ 51-61. The Director Defendants were members of the Wells Fargo Board of Directors and various committees during the Class Period. They include John Baker, John Chen, Lloyd Dean, Elizabeth Duke, Susan Engel, Enrique Hernandez, Donald James, Cynthia Milligan, Federico Peña, James Quigley, Judith Runstad, Stephen Sanger, Susan Swenson, and Suzanna Vautrinot.[2] Id. ¶¶ 62-76. Wells Fargo is also a defendant. Id. ¶ 5.

         The gist of the Complaint is that Wells Fargo made repeated “misrepresentations and omissions about a core element of Wells Fargo's business: its acclaimed ‘cross-selling' business model” in which Wells Fargo emphasized the sale of multiple Wells Fargo products to existing customers. Id. ¶ 3.[3] Throughout the class period, Wells Fargo allegedly touted its cross-selling model as the reason for its financial success, when in fact Wells Fargo and the individual defendants knew that many of the purported “sales” to existing customers never took place ‒ because Wells Fargo had instead secretly opened new deposit and credit card accounts for those customers without their knowledge or permission. Id. ¶¶ 3-5. Plaintiffs note that the government found ‒ and Wells Fargo executives have admitted ‒ that Wells Fargo opened unauthorized accounts for existing customers and transferred funds to those accounts without the customers' knowledge or consent; submitted applications for credit cards in customers' names without their consent; enrolled customers in online banking services they did not request; and ordered and activated debit cards using customer information without customers' consent. Id. Plaintiffs allege that Wells Fargo employees resorted to committing fraud because of a “toxic, high-pressure sales culture and ill-conceived compensation plan” and “[r]uthless pressure” exerted from the top down. Id. ¶¶ 7-8. Plaintiffs further allege that Wells Fargo has been aware of these practices since at least 2011, and the Company's highest executives and Board of Directors have been aware of them since 2013. Id. ¶ 8. As summarized by the Plaintiffs:

[A]s the problem persisted and as investigations mounted, Defendants continued their aggressive sales and incentive programs, and consistently touted the successes of cross-sell to investors. The price of Wells Fargo stock increased in lockstep and, although faced with investigations and with knowledge that the problem was of a significant magnitude, certain of the Defendants sold or disposed of massive amounts of personal holdings of Company stock.

Id. ¶ 10.

         Plaintiffs allege that when the truth about this conduct was revealed over a period of days in September 2016, Wells Fargo's stock price fell from $49.90 to $45.83 per share. E.g., id. ¶ 187, 190, 223 (“When the truth began to be disclosed in September 2016, Wells Fargo's stock price suffered significant declines, as the artificial inflation was removed from the stock price.”). “On September 16, 2016, a Reuters article discussed the 7.5% stock price decline caused by the surprise revelations that the Company had created millions of bank accounts and applied for credit cards without account holders' permission.” Id. ¶ 193. And “after the Class Period, on September 26, 2016, CNNMoney published a report titled ‘Wells Fargo stock sinks to 2-1/2 year low' attributing the recent price declines to the fake account scandal and settlement disclosed in September 2016.” Id. ¶ 239.

         Based on the misconduct described above, several related lawsuits were filed against Wells Fargo. ECF Nos. 8, 12, 14, 18, 47, 55. On January 5, 2017, this Court granted Plaintiff Union Asset Management Holding's motion to consolidate Hefler v. Wells Fargo & Co., Case No. 16-cv-5479 with Klein v. Wells Fargo & Co., Case No. 16-cv-5513 and to appoint Union as Lead Plaintiff. ECF No. 58 at 1. Plaintiffs filed their Consolidated Class Action Complaint for violations of the Federal Securities Laws on March 6, 2017. ECF No. 72. In the Complaint, Plaintiffs assert three causes of action: (1) Violations of Section 10(b) of the Securities Exchange Act of 1943 (“ 1934 Act”) and SEC Rule 10b-5; (2) Violations of Section 20A of the 1934 Act; and (3) Violations of Section 20(a) of the 1934 Act. Defendants filed Motions to Dismiss on June 19, 2017. See ECF Nos. 135, 138, 139, 142, 143, 145, 147, 153, 156, 158.


         Before addressing Plaintiffs' claims, the Court considers the four requests for judicial notice filed by Defendants, ECF Nos. 135-4, 144, 154, 188 and the request filed by Plaintiffs, ECF No. 177.

         While the scope of review on a motion to dismiss is generally limited to the contents of the complaint, under Federal Rule of Evidence 201(b), courts may take judicial notice of facts that are “not subject to reasonable dispute.” Courts also take notice of documents whose authenticity is not contested and on which the complaint necessarily relies, Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001), publicly available financial documents such as SEC filings, Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1064 n. 7 (9th Cir.2008), and publicly available articles or other news releases of which the market was aware, Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n. 18 (9th Cir.1999).

         Defendants request judicial notice of numerous reports, press releases, news articles, investor presentations, and other filings with the SEC, many of which Plaintiffs reference in the Complaint. See ECF Nos. 144, 154, 188. Plaintiffs do not object. The Court grants this request.

         Plaintiffs request judicial notice of numerous reports, press releases, news articles, investor presentations, conference call transcripts and other filings with the SEC, many of which were incorporated by reference in the Complaint. See ECF No. 177. Defendants do not object. The Court grants this request also.

         Defendants also request judicial notice of Wells Fargo's historical stock prices and trading volume during the class period. ECF Nos. 135-4 at 2; 144 at 4; 154 at 5. Plaintiffs do not object. “The court may judicially notice a fact that is not subject to reasonable dispute because it . . . can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b). The Court grants this request as well.

         The Court takes judicial notice of all the requested exhibits in ECF Nos. 135-4, 144, 154, 177 and 188. The Court does not take notice of any disputed facts contained within those documents. Lee, 250 F.3d at 689-90.


         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 (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 (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 (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 (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 (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 (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).

         D. Loss Causation

         Loss causation, “i.e. a causal connection between the material misrepresentation and the loss” experienced by the plaintiff, is a necessary element of pleading a securities fraud claim under section 10(b) of the Exchange Act. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005). “A complaint fails to allege loss causation if it does not ‘provide[ ] [a defendant] with notice of what the relevant economic loss might be or of what the causal connection might be between that loss and the misrepresentation[.]' Stated in the affirmative, the complaint must allege that the defendant's share price fell significantly after the truth became known.'” Meltzer Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1062 (9th Cir. 2008) (quoting Dura Pharm., 544 U.S. at 347). “The burden of pleading loss causation is typically satisfied by allegations that the defendant revealed the truth through ‘corrective disclosures' which ‘caused the company's stock price to drop and investors to lose money.'” Lloyd v. CVB Fin. Corp., No. 13-56838, 2016 WL 384773, at *8 (9th Cir. Feb. 1, 2016) (citing Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398, 2406 (2014)).

         “Typically, ‘to satisfy the loss causation requirement, the plaintiff must show that the revelation of that misrepresentation or omission was a substantial factor in causing a decline in the security's price, thus creating an actual economic loss for the plaintiff.'” Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1119 (9th Cir. 2013) (quoting McCage v. Ernst & Young, LLP, 494 F.3d 418, 425-26 (3d. Cir. 2007)). However, “[t]he fundamental inquiry before the Court remains whether there is ‘a causal connection between the material misrepresentation and the loss.'” Thomas v. Magnachip Semiconductor Corp., 167 F.Supp.3d 1029, 1046 (N.D. Cal. 2016) (quoting Dura Pharm., 544 U.S. at 342).

         V. DISCUSSION

         Defendants move to dismiss Plaintiffs' claims under Federal Rule of Civil Procedure 12(b)(6). Defendants Wells Fargo, Carrie Tolstedt, Michael Loughlin, David Carroll, Avid Modjtabai, John Stumpf, John Shrewsberry, and Timothy Sloan move to dismiss Plaintiffs' claims against them under Section 10(b) and Rule 10b5, Section 20A, and Section 20(a). Defendants James Strother, David ...

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