In re H & R Block Securities Litigation
| Decision Date | 04 October 2007 |
| Docket Number | No. 06-0236-CV-W-ODS.,06-0236-CV-W-ODS. |
| Parties | In re H & R BLOCK SECURITIES LITIGATION. |
| Court | U.S. District Court — Western District of Missouri |
Pending is Defendants' Motion to Dismiss Consolidated Class Action Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure (Doc. # 88). For the following reasons, the motion is GRANTED.
The above-captioned action was brought in the form of a class action against Defendant H & R Block, Inc. ("Block" or the "Company") and Defendants Mark A. Ernst, Jeffery W. Yabuki, and William L. Trubeck by purchasers of H & R Block publicly traded securities seeking damages for violations of the Securities and Exchange Act of 1934. Block, a Kansas City, Missouri-based corporation, delivers tax, investment, mortgage and business services and products. Its Tax Services segment provides income tax return preparation and other services and products related to tax return preparation for the general U.S. public and offers investment services and securities products through H & R Block Financial Advisors, Inc. Compl. ¶ 4.1
In the Consolidated Complaint ("Complaint"), Lead Plaintiff Horizon Asset Management Inc. ("Plaintiff") alleges that between February 24, 2004, and March 14, 2006 (the "Class Period"), Defendants violated sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities Exchange Commission. The Complaint also alleges the Individual Defendants, officers and directors of the Company, were "controlling persons" under section 20(a) of the 1934 Act, and are therefore derivatively liable for the Company's fraudulent acts. Compl. ¶ 1.
The Complaint alleges that Defendants misled the Company's public investors by disseminating a series of materially false and misleading statements concerning the Company's revenues, earnings, profitability, and financial condition. More specifically, the Company failed to disclose: (1) the Company falsely attributed its success to legitimate business practices when, in fact, it engaged in deceptive consumer practices by offering such programs as the (i) Express IRA plan ("X-IRA") and (ii) the Refund Anticipation Loans ("RAL") program; (2) the Company derived substantial revenue from these improper practices, thereby artificially inflating its reported earnings; (3) the Company improperly accounted for its effective income tax rate requiring a restatement of reported financial results (the "Restatement"); and (4) the Company lacked a system of safeguards and procedural controls such that investors could rely upon its reported and announced financial statements and results of operations; and (5) as a consequence of the foregoing, the Company's financial results were materially overstated at all relevant times. Compl. ¶ 2.
Plaintiff contends the truth was revealed in early 2006 upon the happening of three events: (1) on February 15, 2006, the Attorney General of California announced a lawsuit against the Company, alleging the Company marketed its RAL product in violation of California law; (2) on March 15, 2006, the Attorney General of New York announced a lawsuit against the Company targeting the X-IRA product; and (3) on February 23, 2006, the Company announced it would be restating more than two, years' worth of financial statements due to errors in determining the Company's state effective income tax rate. Plaintiff alleges that these disclosures resulted in a significant reduction in the value of the Company's shares, causing a loss to investors. Compl. ¶¶ 119-126. On June 8, 2007, Defendants filed a Motion to Dismiss the Consolidated Complaint, contending Plaintiff has failed to state a claim upon which relief may be granted.
A motion to dismiss for failure to state a claim should be granted when it appears that "the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Davis v. Hall, 992 F.2d 151, 152 (8th Cir.1993) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). In ruling on a motion to dismiss, the Court is required to view the facts alleged in the complaint in the light most favorable to the plaintiff.
The Court is limited to a review of the complaint; the only items outside the complaint that may be considered without converting the motion to one seeking relief pursuant to Rule 56 of the Federal Rules of Civil Procedure are (1) exhibits attached to the complaint, and (2) materials necessarily embraced by the complaint. Mattes v. ABC Plastics, Inc., 323 F.3d 695, 698 (8th Cir.2003).
The Private Securities Litigation Reform Act of 1995 ("PSLRA") "dictates a modified analysis due to its special heightened pleading rules." Kushner v. Beverly Enter., Inc., 317 F.3d 820, 824 (8th Cir. 2003). The purpose of the heightened pleading standard was set forth to eliminate abusive securities litigation and put an end to the practice of pleading "fraud by hindsight." In re Vantive Corp. Secs. Litig., 283 F.3d 1079, 1084-85 (9th Cir. 2002). The PSLRA requires plaintiffs "to specify each misleading statement or omission and specify why the statement or omission was misleading." Id. at 326 (citing 15 U.S.C. § 78u-4(b)(1)). The complaint must also "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2); see also Kushner, 317 F.3d at 826 (citation omitted). Finally, the court must "disregard `catch-all' or `blanket' assertions that do not live up to the particularity requirements." Id. at 824 (quoting Florida State Bd. of Admin. v. Green Tree Fin, Corp., 270 F.3d 645, 660 (8th Cir.2001)).
(1) Section 10(b) of the Securities Exchange Act
To allege a cause of action involving publicly traded securities and purchases under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities Exchange Commission the following elements must be established: (1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005); 15 U.S.C. §§ 78j(b) and 78t; 17 C.F.R. § 240.101)-5. Defendants contend that Plaintiff has failed to state a claim upon which relief can be granted by not meeting the heightened pleading requirements of falsity and scienter and by failing to adequately plead causation.
"A fact is deemed material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as substantially altering the mix of information available to the investor." Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824, 829 (8th Cir. 2003) (citing Parries v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir.1997)), The question of whether a fact is material depends on the company's particular circumstances. Id. The court must look at the information from a reasonable investor's perspective at the time of the alleged misrepresentation, not from the reasonable investor's perspective looking back at how the events unfolded. Id. at 831. Furthermore, in order to take the question of materiality away from a jury, "the circumstances must make it obvious why a reasonable investor would not be concerned about the facts misrepresented." Id. at 830 (emphasis added).
Additionally, "[b]efore liability for non-disclosure can attach, the defendant must have violated an affirmative duty of disclosure." In re Sofamor Danek Group, Inc., 123 F.3d 394, 400 (6th Cir.1997). A company is not required to predict and publish the possibility that a product may lose profitability in the future. Id. at 402. There is only a duty to disclose "a belief as to the legality of the company's own actions" if the company has "actual knowledge of wrongdoing." Kushner, 317 F.3d at 831. "[E]ven absent a duty to speak, a party who voluntarily discloses material facts in connection with securities transactions assumes a duty to speak fully and truthfully on those subjects." Helwig v. Vencor, Inc., 251 F.3d 540, 561 (6th Cir. 2001).
Plaintiff alleges the Company made a material omission when it failed to tell the market that its RAL program was unlawful and that the current revenue derived from the program may cease. Compl. ¶ 61. Plaintiff contends the Company had a duty to disclose the illegality of its RAL program because it expressly stated in public filings that Compl. ¶ 101. Plaintiff argues the Company's "omission" of the actual illegality of the program is material because Block's representation allowed investors to believe that "(a) the program was legal; (b) Block `regularly' re-evaluated its legality; and (c) it did not anticipate any existing challenges to its legality (i.e., lawsuits) would be sustained." Opp'n at 21-22.2 However, the mix of information available to investors includes the Company's multiple disclosures regarding pending RAL litigation. For example, the Company's July 2, 2004 10-K stated
Plaintiffs in the RAL cases have alleged, among other things, that disclosures in the RAL applications were inadequate, misleading and untimely; that RAL interest rates were usurious and unconscionable; that we did not disclose that we would receive part of the finance charges paid by the customer for such loans; breach of state laws on credit service organizations; breach of contract; unjust...
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