Genesee Cnty. Employees' Ret. Sys. v. FirstCash Holdings Inc.

• Decision Date: 31 March 2023
• Docket Number: 4:22-CV-0033-P
• Parties: Genesee County Employees' Retirement System, Plaintiff, v. FirstCash Holdings Inc., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

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Genesee County Employees' Retirement System, Plaintiff,
v.
FirstCash Holdings Inc., et al., Defendants.

No. 4:22-CV-0033-P

United States District Court, N.D. Texas, Fort Worth Division

March 31, 2023

OPINION & ORDER

Mark T. Pittman, United States District Judge

Before the Court is Defendants' Motion to Dismiss the Amended Class Action Complaint. ECF No. 45. For the reasons stated below, the Court GRANTS the Motion.

FACTUAL & PROCEDURAL BACKGROUND

FirstCash Inc. is an international pawn broker and financial lender with over 1,100 locations in the United States. Rick Wessel is the CEO and Douglas Orr is the CFO of FirstCash. ECF No. 42 at 7. FirstCash's revenue is heavily driven by short-term pawn loans, where small cash loans are made to individuals in exchange for personal property-such as jewelry or tools-where the property is posted as collateral. Id.

These pawn loans often have short maturity dates and command high interest rates. Id. As a result, they are subject to local, state, and federal regulation. Id. at 8-9. In 2015, Congress amended the Military Lending Act (“MLA”) to also include pawn-loan transactions. 10 U.S.C. § 987. Id. at 9. The amended MLA prevents pawn lenders from charging annual percentage rates of more than 36% to active-duty members of the military or their dependents. Id. at 8-9.

In 2016, FirstCash completed a merger with Cash America-another company that dealt in financial lending and pawn loans. Id. At the time of the merger, Cash America was subject to a 2013 consent order with

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the Consumer Financial Protection Bureau (“CFPB”) over issues with its consumer loan practices. Id. at 8. The consent order required future compliance with the MLA and-by the nature of the agreement's text- applied to FirstCash after the merger. Id.

After the successful merger, FirstCash issued many Form 8-K, 10-K, and 10-Q SEC reports that touted the company's operations and controls, including its proprietary point-of-sale system, audit teams, and training programs. Id. at 9-14. In addition, the reports spoke of the stable and state-centric regulatory environment for pawn and plugged FirstCash's record quarterly and annual financial results. Id. In its 10-K reports, FirstCash also discussed risks associated with the MLA, the 2013 consent order, and a host of other regulations. Id. at 13.

In November 2021, the CFPB filed suit in this Court alleging that FirstCash violated the 2013 consent order and the revised MLA, and that between June 2017 to May 2021, FirstCash made 3,600 pawn loans to active-duty members of the military. ECF No. 42-1 at 1-21. In the few days that followed the news of the suit, FirstCash's stock price took a hit and tumbled more than 14%. ECF No. 42 at 80. In its answer, FirstCash denied the allegations and filed a motion for judgment on the pleadings. See CFPB vs. FirstCash, Inc., 4:22-cv-1251 at ECF Nos. 53, 64. Around this time, FirstCash also filed an 8-K with the SEC denying all wrongdoing. ECF No. 42 at 79.

But just as the CFPB case was progressing, something odd happened. In an October 2022 opinion, the Fifth Circuit held that the Consumer Financial Protection Bureau's self-funding structure violated the Appropriations Clause and underlying separation of powers in the Constitution.^[1] This put the CFPB into a state of administrative limbo pending an appeal to the Supreme Court. As a result, the CFPB's case against FirstCash was administratively stayed at the pleadings stage and remains so today. CFPB, 4:22-cv-1251 at ECF No. 67.

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In January 2022, Plaintiff-Genesee County Employees' Retirement System-sued FirstCash, Wessel, and Orr under §§ 10(b) and 20(A) of the Securities Exchange Act both individually and on behalf of all others similarly situated. See ECF No. 1. The Court then appointed Wayne County Employees' Retirement System-a public pension fund headquartered in Wayne County, Michigan-as Lead Plaintiff. ECF No. 26. Lead Plaintiff alleges that the previous statements made in form 8-K, 10-K, and 10-Q reports were materially misleading or omitted information that inflated the price of the stock, causing its drop when the CFPB filed suit. See ECF No. 45. Lead Plaintiff later amended the complaint, and Defendants' moved to dismiss.

LEGAL STANDARD

A. Motion to Dismiss

Ordinarily, defeating a motion to dismiss under Rule 12(b)(6) is not difficult. A plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The Court, in turn, must accept all well-pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff. Sonnier v. State Farm Mut. Auto. Ins. Co., 509 F.3d 673, 675 (5th Cir. 2007). If there are well-pleaded factual allegations, the Court assumes their veracity and then determines whether they plausibly give rise to an entitlement to relief. Id.

B. Pleading Standards: Rule 9(b) and the PSLRA

When a plaintiff pleads fraud, Federal Rule of Civil Procedure 9(b) imposes a higher standard on the complainant, requiring that he plead with “particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b). To do so, a plaintiff must identify “the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what that person obtained thereby.” Owens v. Jastrow, 789 F.3d 529, 535 (5th Cir. 2015) (quoting Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994)). Because fraud-in the form of scienter-is a required element of Plaintiff's claims, Rule 9(b)'s heightened pleading standard applies.

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The PSLRA raises the standard for pleading fraud even higher for securities claims. See 15 U.S.C. § 78u-4. Under the Act, private securities complaints that allege false or misleading statements must: (1) specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading; and (2) state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 322 (2007) (cleaned up) (emphasis added). Because Plaintiff brings claims under §§ 10(b) and 20(A) of the Securities Exchange Act, the PSLRA's heightened pleading standard applies.

ANALYSIS

A. Section 10b-5

To state a claim under § 10(b) of the Securities Exchange Act and SEC Rule 10b-5, a plaintiff must allege: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. See Mun. Emps.' Ret. Sys. of Mich. v. Pier 1 Imps., Inc., 935 F.3d 424, 429 (5th Cir. 2019).

Defendant contends that Plaintiff has failed to meet these elements: (1) misrepresentation or omission; (2) scienter; and (6) loss causation. The Court addresses each of these arguments in turn.

1. “Discounting” Confidential Witnesses

Because the testimony of five confidential witnesses back Plaintiff's claims, the Court must first determine the appropriate “discount” to apply to each witness and their individual allegations.

Under the PSLRA's heightened pleading standard, the process for weighing inferences is “obstructed when the witness is anonymous.” Okla. Firefighters Pension & Ret. Sys. v. Six Flags Ent. Corp., 58 F.4th 195, 208 (5th Cir. 2023). Thus, the Fifth Circuit has long held that “courts must discount allegations from confidential sources.” Ind. Elec. Workers' Pension Tr. Fund IBEW v. Shaw Grp., Inc.,

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537 F.3d 527, 535 (5th Cir. 2008) (emphasis added). The “degree” of discounting depends on the circumstances involved. Id. Courts may rely on confidential sources if the person is “described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.” Six Flags, 58 F.4th at 208.

While this makes sense in theory, both the definition of “discount” and the process for “applying a discount” are unclear. On the one hand, courts “must” apply a discount of some sort to confidential witnesses. Shaw Grp., 537 F.3d at 535. On the other, courts may rely on discounted statements if they are not discounted enough. Six Flags, 58 F.4th at 208. This puts courts into the position of a landlocked shrimp consumer-it's always good to get a discount, but at a certain point, heavily discounted shrimp at the local market in Rising Star, Texas becomes too suspicious to warrant a purchase.

To simplify this matter, as best this Court can tell, courts functionally apply three levels of discount: slight, moderate, and heavy. Slightly discounted allegations are given substantial weight by courts.^[2]Moderately discounted allegations are considered with caution and reduced weight.^[3] And heavily discounted allegations are minimally considered and given little to no weight.^[4]

The Court will thus analyze the “particular job descriptions” and “individual responsibilities” of the confidential witnesses in comparison

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with the allegations they make. Id. The Court will then follow the lead of the Fifth Circuit and assign an indefinite adjective-in this case, slight, moderate, or heavy-to show how much of a discount is present.

i. Confidential Witness #1 (CW-1)

CW-1 is a former FirstCash District Manager in the Midwest whose job description involved the management of ten locations and between forty and fifty employees. ECF No. 42 at 17. CW-1's responsibilities are detailed in Plaintiff's complaint as (1) hiring and training employees, (2) conducting profit and loss analysis, (3) conducting and responding to audits, (4) enforcing company policies, and (5) generally supervising stores. Id.

CW-1 alleges the following:

CW-1...