In Re Franklin Bank Corp. Securities Litigation
782 F. Supp. 2d 364
S.D. Tex.2011Background
- Consolidated securities class action against Franklin Bank insiders Ranieri, Nocella, and McCann; FDIC-assisted failure of Franklin Bank in 2008; FDIC OIG Report implicated high-risk strategy and weak risk controls; plaintiffs allege violations of 10(b)/Rule 10b-5 and 20(a) and, for preferred stock, Sections 11 and 15; defendants move to dismiss alleging failure to plead material misstatements and lack of scienter; court grants motions to dismiss all claims with prejudice; case development includes public disclosures and restatements relating to 2007-2008 period; PSLRA and Rule 9(b) pleading standards govern the securities claims; governing limitations analysis references Merck and Dynegy decisions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scienter sufficiency for 10(b) claims | Ranieri/McCann/Nocella allegedly знowingly or recklessly misstated facts | No strong inference of scienter from pleaded facts | No strong inference; claims dismissed |
| Control person liability under Section 20(a) | Plaintiffs allege control person liability | No primary violation; moot if 10(b) fails | Moot; dismissed due to failure on primary liability |
| Section 11 claims against RBC and Directors | Omissions/false statements in May 2006 registration; materiality shown by later restatements | Materiality not shown for 2006 time frame; limitations and scienter issues | Dismissed with prejudice for RBC and for Directors |
| Section 11 limitations vs. Dynegy framework | Storm warnings before May 1, 2008 should toll limitations | Storm warnings pertain to 2007 events; August 2008 restatement did not trigger timely filing | Not barred by limitations; claims dismissed on other grounds |
| Section 11/15 against Nocella | Nocella signed 2006 10-K; alleged misstatements/omissions | Lack of particularized pleading and lack of scienter | Dismissed with prejudice |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (requires a strong inference of scienter to survive PSLRA)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality requires a substantial likelihood a shareholder would find the fact important)
- Shaw Group, Inc. v. TRC, 537 F.3d 533 (5th Cir. 2008) (rejection of group pleading; focus on individual state of mind)
- ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336 (5th Cir. 2002) (confirms need to view totality of facts; confers weight to confidential sources)
- Krim v. BancTexas Group, Inc., 989 F.2d 1435 (5th Cir. 1993) (materiality and safe harbor principles; guidance on omissions)
- Dynegy, Inc. Securities Litig. v. Dynegy, 339 F.Supp.2d 804 (S.D. Tex. 2004) (constructs storm warnings/inquiry notice for limitations analysis)
- Lormand v. U.S. Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) (heightened pleading standards under PSLRA; group pleading not allowed)
- Merck & Co., Inc. v. Reynolds, 130 S. Ct. 1749 (U.S. 2010) (discovery rule for statute of limitations in 10(b) actions; scienter discovery included)
- P.R. Diamonds, Inc. v. Chandler, 364 F.3d 671 (6th Cir. 2004) (recklessness standard for auditor liability)
- In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804 (S.D. Tex. 2004) (pleading and limitations analysis for Section 11/10b claims)