City of Roseville Employees' Retirement System v. Sterling Financial Corp.
963 F. Supp. 2d 1092
E.D. Wash.2013Background
- This is an order granting defendants Sterling Financial Corp., Gilkey, and Byrne’s motion to dismiss the consolidated complaint under Rule 12(b)(6).
- Lead plaintiff City of Roseville Employees’ Retirement System alleges securities fraud under §10(b) and Rule 10b-5 and, derivatively, §20(a) against the company and individual defendants for class-period conduct in 2008–2009.
- Sterling pursued aggressive growth in construction lending, increasing construction loans markedly from 2004–2007 and expanding assets to over $12 billion by 2007.
- During 2007–2008, Sterling’s loan portfolio deteriorated amid the Great Recession, with nonperforming and construction-related assets rising sharply.
- Sterling announced increased loan-loss provisioning in 4Q08 and FY08, and by October 2009 executives departed and the FDIC/DFI issued a Cease & Desist Order.
- The class period saw volatile stock movement, peaking around $14.72 and falling to about $1.20 after executive departures and regulatory action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Consolidated Complaint states a actionable §10(b)/Rule 10b-5 claim | Roseville contends falsity in financial disclosures and risk controls. | Defendants contend absence of contemporaneous false statements and adequate disclosures/forward-looking safe harbors. | Dismissed for lack of contemporaneous falsity and insufficient scienter. |
| Whether the complaint pleads a strong inference of Scienter | Plaintiff asserts eight scienter theories, including red flags, reserve manipulation, and CW testimony. | Defendants assert lack of particularized facts showing intent or reckless disregard. | Holistic review fails: no inference of scienter strong enough to meet PSLRA; dismissal affirmed. |
| Whether §20(a) claims survive | §20(a) control-person liability based on §10(b) violation. | Without a viable §10(b) claim, §20(a) claim fails. | Rejected as derivative of defective §10(b) claim. |
| Whether amendment should be granted | Plaintiff seeks leave to amend to cure deficiencies. | If pleading flaws persist, amendment would be futile. | Leave to amend granted; amended complaint due within 60 days. |
Key Cases Cited
- In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (9th Cir. 2012) (elements of Rule 10b-5 falsity require PSLRA pleading specifics)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (strong inference of scienter; holistic approach)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Supreme Court 2007) (holistic pleading standard for scienter; balance inferences)
- Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (U.S. 2011) (forward-looking statements and materiality under PSLRA)
- GlenFed, Inc. v. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994) (contemporaneous falsity requirements; admonition against hindsight)