Fait v. Regions Financial Corp.
| Decision Date | 10 May 2010 |
| Docket Number | No. 09 Civ. 3161(LAK).,09 Civ. 3161(LAK). |
| Citation | 712 F.Supp.2d 117 |
| Parties | Alfred FAIT, Plaintiff,v.REGIONS FINANCIAL CORP., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Andrew J. Brown, Eric I. Niehaus, Lucas F. Olts, Samuel H. Rudman, David A. Rosenfeld, Coughlin Stoia Geller Rudman & Robbins LLP, for Plaintiff.
David B. Tulchin, William J. Snipes, Claire E. Hunter, Florence J. Goal, Sullivan & Cromwell LLP, for the Regions Defendants.
Stanley J. Parzen, John J. Tharp, Jr., James C. Schroeder, J. Bishop Grewell, Mauricio A. Espana, Mayer Brown LLP, for Defendant Ernst & Young LLP.
This is a purported class action for alleged violations of the Securities Act of 1933 (the “Securities Act”) by a bank holding company, its subsidiary, its directors, its auditor, and the investment banks that underwrote its April 2008 offering of Trust Preferred Securities (the “Offering”). The amended complaint alleges that the registration statement and prospectus supplement for the offering (the “Offering Documents”) were false and misleading because they incorporated by reference financial statements that overstated goodwill and underestimated loan loss reserves. The matter is before the Court on defendants' motions to dismiss for failure to state a claim upon which relief may be granted.
Plaintiff Alfred Fait acquired Trust Preferred Securities pursuant or traceable to the Offering Documents.1 On April 1, 2009, he filed the initial complaint through Coughlin, Stoia, Geller, Rudman & Robbins LLP (the “Coughlin Firm”).2 Pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”), this Court subsequently entered an order providing that a lead plaintiff could file an amended complaint within sixty days of his or her appointment.3 Howard M. Rensin, trustee, later filed a motion to be appointed lead plaintiff and for approval of the Coughlin Firm as lead counsel, which this Court granted on June 30, 2009.4 Rensin, however, took no further action. Instead, on August 28, 2009, the Coughlin Firm filed the amended complaint on behalf of Fait, incorrectly asserting that Fait had been appointed lead plaintiff.5
Defendants argue that Fait's amended complaint is a nullity because Fait has no authority to prosecute the action under the PSLRA.6 Plaintiff rejoins that defendants' argument was mooted by Rensin's November 2, 2009 filing of a “corrected” complaint,7 which “merely corrects ... scrivener's errors concerning the identit[y] of Lead Plaintiff.” 8 While the failure of counsel to keep track of whom they are representing is disquieting, the Court will proceed on the assumption that the Coughlin Firm filed the amended complaint on Rensin's behalf.
Defendant Regions Financial Corporation (“Regions”) is a Delaware corporation and a regional bank holding company with its principal executive offices in Birmingham, Alabama. Defendant Regions Financing Trust III (the “Trust”) is a Delaware statutory trust, a wholly owned subsidiary of Regions, and the issuer of the Trust Preferred Securities.
Each of the individual defendants was a member of the board of directors of Regions in 2008 and signed the Offering Documents and Regions' 2007 Form 10-K, which the Offering Documents incorporated by reference.9
Defendant Ernst & Young LLP (“E & Y”) is an accounting firm that served as Regions' auditor. E & Y certified a portion of the registration statement and the financial statements in Regions' 2007 10-K. The registration statement incorporated by reference E & Y's audit opinions of Regions.10
In May 2006, Regions announced an agreement to acquire AmSouth Corporation (“AmSouth”), another bank holding company. The deal closed in November 2006.11 The merger proxy statement disclosed that AmSouth's assets would be recorded at their fair value at the time of the acquisition. It disclosed also that “[a]ny excess of purchase price over the net fair value of AmSouth assets and liabilities is recorded as goodwill (excess purchase price).” 12 Regions' balance sheet thereafter reflected $6.2 billion of goodwill in connection with the acquisition.13
On April 28, 2008, the Trust issued 13.8 million shares of Trust Preferred Securities-“hybrid” securities that have characteristics of both equity and debt-at $25 per share in a registered public offering.14 The Offering Documents incorporated by reference Regions' 2007 Report on Form 10-K and other Securities and Exchange Commission (“SEC”) filings Regions had made before April 28, 2008.15
The amended complaint alleges that the Offering Documents were “negligently false and misleading” because they incorporated by reference Regions' 2007 10-K, which allegedly contained misstatements concerning Regions' goodwill and loan loss reserves.16 It alleges that over seventy-one percent of the reported fair value of AmSouth's assets at the time of the acquisition was attributable to AmSouth's loan portfolio, which was “grossly overstated due to its gross understatement of loan loss reserves.” 17 It further contends that Regions “did not write down any of the massive goodwill” it recorded in its 2007 10-K “despite growing evidence indicating that serious problems existed at the time of the acquisition with AmSouth's loan portfolio.” 18 The amended complaint alleges also that Regions “only marginally increased its loan loss reserves” despite “the high risk of loss inherent in its mortgage loan portfolio.” 19
The amended complaint further alleges that the Offering Documents misstated that Regions' goodwill valuation and provision for loan loss reserves complied with generally accepted accounting principles (“GAAP”) and the Sarbanes-Oxley Act (“SOX”). It claims as well that E & Y falsely certified that Regions' financial results complied with GAAP and that E & Y's audits complied with generally accepted accounting standards (“GAAS”).
The Regions defendants 20 and E & Y each move to dismiss the amended complaint, principally on the ground that plaintiff has failed to allege actionable misstatements or omissions.
In deciding a motion to dismiss, a court ordinarily accepts as true all well-pleaded factual allegations and draws all reasonable inferences in the plaintiff's favor.21 In order to survive such a motion, however, “the plaintiff must provide the grounds upon which [its] claim rests through factual allegations sufficient ‘to raise a right to relief above the speculative level.’ ” 22 Although such motions are addressed to the face of the pleadings, the court may consider also documents attached to or incorporated by reference in the amended complaint as well as legally required public disclosure documents and documents possessed by or known to the plaintiff upon which it relied in bringing the suit.23
Sections 11 and 12(a)(2) are “Securities Act siblings with roughly parallel elements.” 24 Section 11 applies to registration statements while Section 12 applies to prospectuses or oral communications connected with a sale.25 “Collectively, the language of sections 11 and 12(a)(2) creates three potential bases for liability based on registration statements and prospectuses filed with the SEC: (1) a misrepresentation; (2) an omission in contravention of an affirmative legal disclosure obligation; and (3) an omission of information that is necessary to prevent existing disclosures from being misleading.” 26 Section 15 creates liability for individuals or entities that “control[led] any person liable” under Section 11 or 12. 27
The amended complaint alleges that the Offering Documents contained false and misleading statements regarding Regions' (1) goodwill and loan loss reserves and (2) maintenance of “effective internal control over financial reporting” pursuant to SOX.28
Plaintiff asserts that Regions' 2007 Form 10-K, which the Offering Documents incorporated by reference, overstated goodwill in connection with Regions' 2006 acquisition of AmSouth and understated the expected losses in Region's loan portfolio. It alleges also that the 10-K was not “prepared in conformity with GAAP” 29 because the company's goodwill valuation allegedly was stale and its loan loss reserves were “inadequate” at the time of the Offering. 30 Defendants rejoin that Regions' goodwill and loan losses were opinions or judgments about future events, not statements of fact, and therefore cannot constitute actionable misrepresentations.
In order to state a claim under the Securities Act, the amended complaint must allege a misstatement or omission of fact. An opinion is actionable under Section 11 or 12 only if the complaint alleges that the speaker did not truly hold the opinion at the time it was issued.31
When one company acquires another, GAAP requires that it book any excess of the purchase price over the fair value of the assets acquired as goodwill, or “excess purchase price.” 32 According to Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 142 (“SFAS 142”), the value of goodwill thereafter should be tested for impairment at least annually and “more frequently if events or changes in circumstances indicate that the asset[s] might be impaired.” 33 Thus, goodwill should be tested if a significant adverse change in the company's business climate “more likely than not would reduce the fair value of a reporting unit [34] below its carrying amount.” 35
Regions booked $6.2 billion of goodwill, the difference between the purchase price and the net fair value of AmSouth's assets, in connection with the AmSouth acquisition. It concededly tested for goodwill impairment pursuant to SFAS 142 at the end of 2007, but recorded no impairment in its 200710-K. 36 Plaintiff nevertheless contends that Regions used “unreasonable” assumptions and was...
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