Frаnk NOLTE; Helen Nolte; Local 144 Nursing Home Pension Fund, Plaintiffs-Appellants, and Bill Brooks; Charles Bruener; Charles Bryant; James B. Howard; Amir Nasrabadi; Robert Norman; David Onerheim; Jack B. Pierce; Kunming Qian; Bernard Stern; Raymond Tyler; Lisa Yankofsky, Plaintiffs, v. CAPITAL ONE FINANCIAL CORPORATION; Richard D. Fairbank; Nigel W. Morris; David M. Willey; Peter A. Schnall, Defendants-Appellees. Emile Wanich; Rhoda Wanich; the Charles H. Walsh, Sr. Trust, Mоvants.
No. 03-1612
United States Court of Appeals, Fourth Circuit
Dec. 2, 2004
339 F.3d 311
ARGUED: Melvyn I. Weiss, Milberg, Weiss, Bershad, Hynes & Lerach, New York, New York, for Appellants. Jordan D. Eth, Morrison & Foerster, San Francisco, California, for Appellees. ON BRIEF: Lee A. Weiss, Milberg, Weiss, Bershad, Hynes & Lerach, New York, New York; Steven J. Toll, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, D.C.; Daniel W. Krasner, Gregory M. Nespole, Stacy T. Kelly, Wolf, Haldenstein, Adler, Freeman & Herz, New York, New York, for Appellants. Melvin R. Goldman, Erik J. Olson, Mia Mazza, Morrison & Foerster, San Francisco, California; Laurie A. Hand, Morrison & Foerster, McLean, Virginia; James A. Murphy, Leclair Ryan, P.C., Richmond, Virginia, for Appellees.
Before WIDENER and DUNCAN, Circuit Judges, and William D. QUARLES, Jr., United States District Judge for the District of Maryland, sitting by designation.
QUARLES, District Judge:
Shareholders appealed the district court‘s dismissal of their securities fraud action for failure to plead fraud with particularity. Finding no error, we will affirm.
I.
On July 19, 2002, in the Eastern District of Virginia, Robert Norman filed a Class Action Complaint in which he alleged violations of the
On October 17, 2002, the Appellants filed a Consolidated and Amended Complaint in which they аlleged violations of
Appellants alleged that in various Securities and Exchange Commission (“SEC“) filings, Capital One made materially false and misleading statements about the adequacy of its loan loss reserves and IBS system. The appellants further alleged that the failure to disclose material facts artificially inflated the price of Capital One securities; when Capital One released a statement changing its financial forecast and reporting that it was entering into a Memorandum of Understanding with regulators, the Appellant shareholders suffered a financial loss.
On Decеmber 4, 2002, the district court granted the Appellees’ motion to dismiss and gave the Appellants 14 days in which to file an amended complaint. On December 23, 2002, the Appellants filed a Second Consolidated and Amended Class Action Complaint. While the Appellees’ motion to dismiss was under consideration by the district court, Appellants moved for leave to amend and supplement the second consolidated and amended complaint.
In their amended pleading, the Appellants alleged that Capital One had maintained insufficient loan loss reserves and capital in violation of banking guidelines, while it represented to the public that it was holding an appropriate amount of capital. Appellants cited the testimony of several confidential witnesses who worked for Capital One and asserted that concerns about Capital One‘s capitalization had arisen within management while the company was still reporting that it believed it was adequаtely capitalized. The Appellants also alleged that employees were told not to cooperate with federal bank regulatory investigations during the class period. Appellants alleged that Capital One‘s undercapitalization was shown by a July 16, 2002 SEC announcement that the Appellees had entered into a Memorandum of Understanding with Federal Banking Regulators to address, among other things, Capital One‘s capitalization, loan loss allowances, and deficiencies in Capital One‘s infrastructure.
The Appellants also alleged that Capital One consistently portrayed its IBS system as providing a competitive advantage, even though there were serious deficiencies in the system. In support of this allegation, Appellants cited information from confidential witnesses about instances when the system was demonstrably ineffective. Appellants also relied upon the July 16, 2002 SEC filing in which Appellees acknowledged serious deficiencies in Capital One‘s infrastructure and technology.
Appellants also bolstered their assertions by noting that the individual defendants had sold their Capital One stock during the class period.
Appellants alleged that materially false and misleading statements in various SEC filings and the failure to disclose material facts artificially inflated the pricе of Capital One securities; when Capital One released a statement changing its financial forecast and reporting that it was entering into a Memorandum of Understanding with regulators, the Appellant shareholders suffered a financial loss.
On April 10, 2003, the district court granted the Appellees’ motion to dismiss the Second Consolidаted and Amended Class Action Complaint on the basis that
II.
The court reviews the dismissal of claims pursuant to
III.
To establish liability under
To allege a false statement or omission of material fact, “plaintiffs must point to a factual statement or omission—that is, onе that is demonstrable as being true or false.” Longman v. Food Lion, Inc., 197 F.3d 675, 682 (4th Cir.1999). To form the basis of a cause of action, the statement must be false, or the omission must render public statements misleading. Id. (citing
The false statement or omission must be material. The question of materiality is an objective one, which examines the significance of an omitted or misreprеsented fact to a reasonable investor. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 445 (1976). A fact is material if there is a substantial likelihood that it would have assumed actual significance in the deliberations of a reasonable investor; that is, the disclosure of the omitted statement or revelation of the true circumstances would have been viewed by the reаsonable investor as having significantly altered the “total mix” of available information. Id. at 449.
The shareholders allege that Capital One‘s management lied to investors when it opined that Capital One maintained sufficient capital and loan loss reserves, and that the company‘s success was due in part to its unique comрuter infrastructure.
In Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), the Supreme Court held that in a securities fraud case, a statement of opinion may be a false factual statement if the statement is false, disbelieved by its maker, and related to matters of fact which can be verified by objective evidence. Longman, 197 F.3d at 683 (citing Virginia Bankshares, 501 U.S. at 1093).
In order to plead that an opinion is a false fаctual statement under Virginia Bankshares, the complaint must allege that the opinion expressed was different from the opinion actually held by the speaker. Virginia Bankshares, 501 U.S. at 1093.
The shareholders claim that Peter Schnall, a member of Capital One‘s management team, fearing that Federal Regu-
Moreover, Schnall was not allеged to have made any public statements about Capital One. Therefore, as the district court explained, for the shareholders to assert that Schnall‘s behavior indicated that management disbelieved its positive public remarks about Capital One‘s capitalization, the shareholders would have needed tо have alleged that: (1) Schnall believed Capital One was undercapitalized; (2) Schnall informed other managers of his opinion; and (3) those managers adopted his opinion but then publicly declared that Capital One was maintaining sufficient capital. The complaint is devoid of such allegations.
The complaint also fails to allege that Capital One‘s management disbelieved its public statements about the strength of the company‘s computer system. The shareholders claim that unnamed former Capital One employees believed that the system was incapable of meeting the demands of the company‘s rapid growth and that Federal Regulators were concerned about its performance. The shareholders do not allege, however, that management was ever informed of these concerns or that they had any other reason to doubt the system‘s reliability.
Even if the complaint had alleged that Capital One‘s management disbeliеved its public remarks about the state of the company, the complaint must be dismissed because it fails to plead falsity with requisite particularity. The shareholders assert that Federal Regulators would not have required Capital One to enter into a Memorandum of Understanding calling for increased capital and computer system enhancement unless Capital One had been undercapitalized and using a substandard computer infrastructure during the class period. But the Memorandum of Understanding between Federal Regulators and Capital One required Capital One to make prospective changes to its business. Had Federal Regulators determined that Capital One‘s past practices were deficient, they could have applied corrective measures retroactively and forced the company to restate its earnings to reflect retroactive adjustments. See
Relying on the same factual allegations, the shareholders claim that Capital One omitted from its financial statements disclosures required by Generally Accepted Accounting Principles (“GAAP“) about its potential liabilities, including the size of its subprime portfolio, that it was under investigation by Federal Regulators, and that its computer system could not keep pace with its rapid grоwth.
Although GAAP require disclosure of significant risks and uncertainties, “[t]he disclosure requirements do not encompass risks and uncertainties that might be associated with management or key personnel, proposed changes in government regulations, proposed changes in accounting principles, or deficiencies in the intеrnal control structure.” American Institute of Certified Public Accountants, Statement of Position No. 94-6 § .04 (1994). The al-
Moreover, subprime lenders are discouraged from publicly reporting the size of their subprime portfolios because “there is no standard industry-wide approach to the definitions of either ‘subprime’ or ‘program,’ which means that the meanings of these terms are institution-specific. Thus, the reported information will not be entirely comparable from one institution to the next, leading to potential misinterpretation of thе data by the public.” Proposed Agency Information Collection Activities; Comment Request, 67 Fed. Reg. 46,250, 46,253 (July 12, 2002).
Because we find that the shareholders failed to plead falsity with particularity as required by the PSLRA, it is unnecessary to determine whether they adequately alleged scienter.
IV.
While its motion to dismiss was pending, Capital One announced that a Defendant in this case, David M. Willey, its Chief Financial Officer and Executive Vice President, was resigning from the company because he had received notice that the SEC was likely to file a civil action against him for insider trading.* The SEC had been investigating stock trades that Willey had made in 2002 to determine whether they were based on material non-public information regarding Capital One‘s negotiations with Federal Regulators. The shareholders moved for leave to amend the complaint to allege that Willey sold his stock in Capital One before the Memorandum of Understanding was announced because he believed that the stocks’ value would рlummet after the announcement. The district court denied the motion for leave to amend.
We review the district court‘s denial of leave to amend the complaint for an abuse of discretion. HCMF Corp. v. Allen, 238 F.3d 273, 276-77 (4th Cir.2001).
The fact that Willey allegedly believed Capital One‘s stock value would drop when the Memorandum of Understanding was announced does not lead to the conclusion that Willey thought Capital One was undercapitalized. Nor does it show that Willey, or anyone else in Capital One‘s management for that matter, believed that Capital One held insufficient loan loss reserves or lacked adequate technology. Because the proposed amendment would not have cured the deficiencies of the complaint, it would have been futile for the shareholders to have amended it. Accordingly, the district court did not abuse its discretion in denying leave to amend.8
For the reasons discussed above, the district court‘s dismissal of the shareholders’ case and denial of their motion for lеave to amend the complaint is AFFIRMED.