Smallen Revocable Living Trust v. Western Union Company
950 F.3d 1297
10th Cir.2020Background
- Western Union, a global money-transfer company, faced long-running AML and fraud problems and entered a January 19, 2017 joint settlement (including a DOJ DPA) resolving investigations and agreeing to pay approximately $586 million; the DPA admitted willful failure to maintain an effective AML program 2004–Dec. 2012.
- After the settlement and a drop in stock price, Smallen Trust filed a securities-fraud class action alleging false or misleading public statements (Feb. 24, 2012–May 2, 2017) that Western Union’s AML and anti-fraud compliance was sufficient.
- Individual defendants named included CEO Hikmet Ersek and CFOs Scott Scheirman (through 2013) and Rajesh Agrawal (from 2014); claims asserted violations of §10(b)/Rule 10b–5 and control-person liability under §20(a).
- Plaintiff’s complaint relied on five categories of allegations to plead scienter: widespread “red flags” (consumer complaints, agent arrests), board/committee meeting materials, government investigations and materials provided to regulators, admissions in the DPA/FTC documents, and insider stock sales.
- The district court dismissed the §10(b)/Rule 10b–5 claims for failure to plead scienter with the particularity and strength required by the PSLRA; it likewise dismissed §20(a) claims because no primary violation was adequately pled.
- The Tenth Circuit affirmed, holding the complaint lacked particularized facts giving rise to a strong inference of scienter for any Individual Defendant or for Western Union as a corporate actor.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether complaint pleads scienter for Individual Defendants re: AML/compliance statements | Alleged red flags, internal reports, gov't investigations, DPA/FTC findings, and insider sales show knowledge or reckless disregard | Allegations are generalized, lack particularized linkage to individual knowledge, and are consistent with optimism or negligence, not recklessness/intent | Complaint fails to plead particularized facts giving rise to strong inference of scienter; dismissal affirmed |
| Whether corporate scienter (imputing agents’ knowledge or collective scienter) can be alleged | State of mind of compliance officers or other executives can be imputed to Western Union or corporate scienter doctrine applies | Scienter must be tied to those who made/approved the statements; imputing low-level agents would undermine PSLRA’s heightened pleading standard | Even assuming imputation or collective scienter theories, plaintiff’s allegations do not raise a strong inference of scienter for any relevant officer; corporate liability fails |
| Whether post hoc DPA/FTC admissions sustain an inference of prior scienter (fraud-by-hindsight) | DPA admission and FTC conclusions show the company knew of longstanding compliance failures and thus earlier statements were false | PSLRA prohibits reliance on after-the-fact revelations; need contemporaneous particularized allegations tying defendants to knowledge | DPA/FTC materials amount to hindsight and, without particularized contemporaneous facts, do not establish scienter |
| Whether §20(a) control-person claims survive if primary §10(b) claim fails | Control-person claims asserted against Individual Defendants based on alleged primary violation | Control-person liability requires a properly pled primary violation under §10(b) | Because §10(b) claims fail for lack of scienter, §20(a) claims necessarily fail; dismissal affirmed |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (holistic test for whether allegations give rise to a "strong inference" of scienter under the PSLRA)
- Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (elements of securities-fraud claims and reliance context)
- In re Zagg, Inc. Sec. Litig., 797 F.3d 1194 (10th Cir. 2015) (recklessness standard and PSLRA pleading requirements)
- In re Level 3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331 (10th Cir. 2012) (PSLRA particularity and scienter analysis)
- Adams v. Kinder–Morgan, Inc., 340 F.3d 1083 (10th Cir. 2003) (imputing scienter of senior officials to corporation where those officers made/approved statements)
- Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229 (10th Cir. 2016) (attendance at meetings and monitoring reports alone do not establish scienter)