18 F. Supp. 3d 482
S.D.N.Y.2014Background
- Plaintiffs (Arkansas Teacher Retirement System and Fresno County Employees’ Retirement Association) filed a putative securities class action against Bankrate, Inc., CEO Thomas R. Evans, and CFO Edward J. DiMaria for statements about the quality of Bankrate’s insurance “leads” during June 16, 2011–October 15, 2012.
- Bankrate operated consumer-finance sites and sold “cost per lead” information to insurers; plaintiffs allege many leads were worthless and large portions were written off.
- Plaintiffs point to specific positive statements by management (e.g., Aug. 10, 2011 and July 31, 2012 earnings calls) assuring investors that lead quality and conversion were improving.
- Contrary to those statements, plaintiffs allege Bankrate later disclosed it had eliminated over 40% of its insurance leads for poor quality and had earlier written off roughly $12 million in leads; stock price rose after the July 2012 statements and then dropped 22% after the Oct. 15, 2012 disclosure.
- Defendants moved to dismiss under the PSLRA for failure to plead a material misstatement or omission and failure to plead scienter; Apax defendants additionally challenged control-person liability under Section 20(a).
- The Court denied dismissal of the primary Section 10(b)/Rule 10b-5 claims (material misstatement and scienter adequately pleaded) but granted dismissal as to Section 20(a) control-person claims against Apax for lack of particularized facts showing control over the misrepresentations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs pleaded a materially false statement or omission under the PSLRA | Management’s statements about high/improving lead quality were false because large portions of leads were worthless and written off | Statements were puffery/generalized and inactionable; not specific misrepresentations | Denied dismissal — statements actionable where asserted assets were effectively worthless |
| Whether plaintiffs pleaded scienter (fraudulent intent or conscious recklessness) | Management knew of industry-wide and Bankrate-specific lead-quality problems; hands-on efforts and internal write-offs show knowledge/recklessness | Defendants claimed they lacked awareness of the company’s severe problems; no strong inference of scienter | Denied dismissal — pleaded facts give rise to a strong, cogent inference of scienter |
| Whether generalized statements about improvement can be securities fraud | Positive statements about improvements are misleading when contradicted by internal write-offs and later disclosures | Such optimistic statements are non-actionable puffery | Court: Context matters; here statements were materially misleading given later disclosures and alleged facts |
| Whether Apax defendants can be liable as control persons under Section 20(a) | Apax controlled >50% of stock and had board representation, implying control over Bankrate’s wrongdoing | Apax argued absence of particularized allegations showing control over the specific misstatements/transactions | Granted dismissal as to Apax — plaintiffs failed to plead particularized facts showing Apax’s control over the alleged misrepresentations |
Key Cases Cited
- ECA Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (discussing materiality and puffery in securities fraud claims)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (PSLRA scienter standard: inference must be cogent and at least as compelling as any opposing inference)
- South Cherry Street, LLC v. Hennessee Group LLC, 573 F.3d 98 (2d Cir. 2009) (defines conscious recklessness standard for scienter)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (elements of control-person liability)
- In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433 (S.D.N.Y. 2005) (Section 20(a) requires actual control over the transaction at issue)