In re Advanta Corp. Securities Litigation
| Decision Date | 17 June 1999 |
| Docket Number | No. 98-1846.,98-1846. |
| Citation | 180 F.3d 525 |
| Parties | IN RE: ADVANTA CORP. SECURITIES LITIGATION Steven B. Shaiman; Richard Molison; James Law; Saul A. Schwartz; Diane Sklar; Theresa Wai; Stephen Wai; Claude Wells; Benjamin Axler; Marilyn Axler; Jerry Weinberg, Appellants. |
| Court | U.S. Court of Appeals — Third Circuit |
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Arthur R. Miller (Argued), Cambridge, Massachusetts,
Deborah R. Gross, Law Offices of Bernard M. Gross, Philadelphia, Pennsylvania,
Joshua H. Vinik, Milberg, Weiss, Bershad, Hynes & Lerach, New York, New York, Attorneys for Appellants.
Jerome J. Shestack (Argued), Jay A. Dubow, Matthew A. White, Laura E. Krabill, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pennsylvania, Attorneys for Appellees, Advanta Corp., Dennis J. Alter, Alex Hart, William Rosoff, Gene S. Schneyer and John J. Calamari.
Arthur E. Newbold (Argued), Hope M. Freiwald, Michael E. Baughman, Dechert, Price & Rhoads, Philadelphia, Pennsylvania, Attorneys for Appellees, Robert A. Marshall and Richard A. Greenawalt.
Before: MANSMANN, SCIRICA and NYGAARD, Circuit Judges.
This is a securities class action lawsuit brought by shareholders of Advanta Corporation against the corporation and several of its officers. Plaintiffs allege the defendants made false and misleading statements and material omissions regarding the company's earnings potential and value of its stock, in violation of the Securities and Exchange Act of 1934. The District Court granted Advanta's motion to dismiss for failure to meet the pleading requirements of Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq. (West Supp.1999) (the "Reform Act"). We will affirm.
Plaintiffs are former shareholders of Advanta Corporation ("Advanta"), a leading issuer of MasterCard and VISA credit cards. Advanta forged its reputation in the credit card industry by innovating the practice of attracting new customers with unusually low introductory interest rates, known as "teaser rates," which remain in effect for a limited period of time, often six months. At the end of this period, the interest rate returns to a higher, permanent level. During the early and mid-1990s, Advanta used this practice to achieve rapid growth and earn large profits.
The focus of this litigation concerns a $20 million first quarter loss that Advanta announced on March 17, 1997. According to plaintiffs' complaint, the loss was caused by Advanta's decision to implement aggressive techniques to attract new credit card customers. Specifically, plaintiffs allege Advanta began issuing cards with lower teaser rates and longer introductory periods than standard industry practice, resulting in riskier customers and, ultimately, a decrease in revenues as many of the new customers defaulted on their repayment obligations. The increased delinquency rates produced greater "charge-offs," which are the costs incurred by the credit card company when a card holder's balance becomes uncollectible.
Plaintiffs claim Advanta officers failed to disclose these practices despite knowledge of the risks involved, even after it became clear that losses were inevitable, and simultaneously made various statements that allegedly were false or materially misleading. Much of plaintiffs' complaint focuses on a statement made by Janet Point, Advanta's Vice President for Investor Relations, in a September 12, 1996 Dow Jones article. The article reads in part, "Over the next six months Advanta will experience a large increase in revenues as it converts more than $5 billion in accounts that are now at teaser rates of about 7% to its normal interest rate of about 17%, said Advanta spokeswoman Janet Point." This statement ("the Point statement") allegedly contradicts a subsequent statement by Dennis Alter, Advanta's chairman and former CEO ("the Alter statement"). In a June 1997 article entitled "House of Cards" that appeared in Philadelphia Magazine, Alter was quoted as saying: Plaintiffs allege the Alter statement proves the Point statement was false and misleading, because the Point statement appears to indicate that Advanta was planning to reprice its teaser rates to 17 percent, yet the Alter statement apparently reveals that Advanta repriced to only 13 or 14 percent.
In addition, plaintiffs identify various statements portraying Advanta in what plaintiffs believe was an unduly positive light. These "positive portrayals" include the following statements, among others:
According to plaintiffs, these statements were made with knowledge that they were false and misleading, and plaintiffs relied on them in deciding to buy (or not to sell) Advanta stock. Consequently, the complaint alleges that the positive portrayals constitute a violation of section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5.
In addition, one of the plaintiffs, Jerry Weinberg, alleges that two of the individual defendants, Richard Greenawalt and Robert Marshall, traded large blocks of Advanta stock contemporaneously with Weinberg while in possession of material, nonpublic information, violating section 20(A) of the Exchange Act. According to the complaint, Greenawalt sold Class A and B stock on December 6, 1996; Marshall sold Class A and B stock on December 9, 1996; and Weinberg purchased Class A stock on December 9, 1996. The complaint does not allege that either defendant traded stock directly with Weinberg, only that the trading was sufficiently contemporaneous to warrant relief under section 20(A).
On December 17, 1997, plaintiffs filed a complaint naming Advanta and seven of its present and former officers and directors as defendants. Count I of the complaint alleges the defendants are liable under Section 10(b) of the Exchange Act, 15 U.S.C.A. § 78j(b) (West Supp.1999), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1998), for the Point statement and the positive portrayals. Count II, based on the same factual allegations, asserts the liability of the individual defendants under section 20(a) of the Exchange Act. Count III asserts Weinberg's section 20(A) claim of contemporaneous trading against individual defendants Greenawalt and Marshall.
The District Court granted defendants' motions to dismiss all three counts. See In re Advanta Corp. Sec. Litig., No. 97-CV-4343, mem. op. at 23-24 (E.D.Pa. July 9, 1998). Specifically, the District Court held that Count I's claims based on the Point statement and the positive portrayals failed to meet the pleading requirements imposed by Fed.R.Civ.P. 9(b) and the Reform Act. The court dismissed these claims without prejudice and granted 30 days' leave for plaintiffs to amend their complaint. The court also dismissed without prejudice Counts II and III, holding that they were derivative of Count I.1 Rather than amend their complaint, plaintiffs elected to file a Notice of Intention to Stand on the Complaint, which the District Court construed as a request to dismiss the remaining claims with prejudice. See Shapiro v. UJB Fin. Corp., 964 F.2d 272, 278 (3d Cir.1992) (). By an order entered September 18, 1998, the District Court denied plaintiffs' request and this appeal followed.
At the outset, we must determine the effect of the Reform Act on the pleading requirements governing securities fraud lawsuits, particularly with respect to pleading scienter. Plaintiffs argue the Reform Act codified the standard developed by the Court of Appeals for the Second Circuit in Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir.1987) and subsequent cases, and adopted by this Court in In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1418 (3d Cir. 1997). Under the Second Circuit standard, a plaintiff must plead facts supporting a "strong inference" that the defendant acted with the requisite scienter, by alleging either "facts establishing a motive to commit fraud and an opportunity to do so" or "facts constituting circumstantial evidence of either reckless or conscious behavior." In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 269 (2d Cir.1993). Defendants argue the Reform Act establishes a pleading standard that is more stringent than all previously existing standards, including the Second Circuit's.
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