GlenFed, Inc. Securities Litigation, In re
| Decision Date | 09 December 1994 |
| Docket Number | No. 92-55419,92-55419 |
| Citation | 42 F.3d 1541 |
| Parties | , Fed. Sec. L. Rep. P 98,475, 30 Fed.R.Serv.3d 1416 In re GLENFED, INC. SECURITIES LITIGATION. John Paul DECKER, Arnold Cohen, Gary Haskins, Larry Schwartz, Gary F. Young, Elbridge Ruhl Graef, Trustee u/w of Charlotte R. Graef on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. GLENFED, INC., Norman M. Coulson, Raymond D. Edwards, Dann V. Angeloff, Dean R. Bailey, Charles T. Blair, Douglas A. Clarke, Morris K. Daley, Richard O. Kearns, Walter A. Ketcham, Jean C. Roeschlaub, Jack D. Steele, Gilbert R. Vasquez, E. Gex Williams, Jr., Keith P. Russell, Jr., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Arthur R. Miller, Cambridge, MA, for plaintiffs-appellants.
Martin Carl Washton, Gibson, Dunn & Crutcher, Los Angeles, CA, for defendants-appellees.
Edward M. Gergosian, Barrack, Rodos & Bacine, San Diego, CA, for amicus.
Thomas J. Greco, American Bankers Ass'n, Washington, DC, for amicus.
Appeal from the United States District Court for the Central District of California.
Before: WALLACE, Chief Judge, SCHROEDER, FLETCHER, PREGERSON, CANBY, NORRIS, BEEZER, HALL, WIGGINS, RYMER and G. NELSON, Circuit Judges.
Opinion by Judge FLETCHER; Concurring only in result of Part IA of opinion, Judges NORRIS, BEEZER, HALL and RYMER; Separate Concurring opinion by Judge NORRIS, joined by Judges BEEZER, HALL and RYMER as to Parts I and III.
A three-judge panel affirmed the district court's dismissal of plaintiffs' securities fraud class action against GlenFed, Inc. and various of its officers and directors. In re GlenFed, Inc. Sec. Litig., 11 F.3d 843 (9th Cir.1993). The panel dismissed plaintiffs' claim under Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), as not meeting the requirements of Fed.R.Civ.P. 9(b). 1 The panel reasoned that "[a]lthough Rule 9(b) allows scienter to be pleaded generally, courts have required that the facts pled provide a basis for a strong inference of fraudulent intent." 11 F.3d at 848. As authority for this proposition, the panel cited two Second Circuit cases, O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir.1991), and Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). We granted plaintiffs' petition for rehearing en banc in order to determine whether the panel's requirement of a "strong inference of fraudulent intent" is consistent with Fed.R.Civ.P. 9(b), whether the panel's decision is consistent with circuit precedent, and whether we should embrace the Second Circuit's or any other circuit's approach. We vacate and remand to the panel.
We adopt and quote verbatim the statement of the case set forth by the panel at 11 F.3d at 845-47:
GlenFed, Inc. is a real estate and financial services holding company that declared a $140.8 million loss for the second quarter of fiscal year ("FY") 1991, after several years of reporting profitable operations. John Decker and other investors (the proposed class, or the "Plaintiffs") appeal the district court's dismissal of their second amended complaint against GlenFed, Inc. and its officers and directors under Secs. 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. Secs. 78j(b) and 78t(a), Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, promulgated by the Securities and Exchange Commission (SEC), and Secs. 11, 12 and 15 of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. Secs. 77k, 77l and 77o, and various California state law theories including fraud, deceit and negligent misrepresentation.
Plaintiffs allege that GlenFed's officers and directors made misrepresentations and omissions designed to conceal GlenFed's deteriorating financial condition, lack of adequate internal controls and declining market. Plaintiffs contend that the district court erred in dismissing their complaint for failing to plead fraud with particularity, Fed.R.Civ.P. 9(b)....
Plaintiffs claim that GlenFed concealed deficiencies concerning its asset monitoring and loan underwriting policies that affected the quality of assets. They also claim that GlenFed understated loan loss reserves and failed to disclose the true facts regarding the disposition of subsidiaries, instead attempting to gain more favorable accounting treatment than the true facts would have warranted.
GlenFed's annual reports referred to its "superior" or "excellent" asset quality and "stringent," "strict" and "rigorous" underwriting and credit procedures. Plaintiffs refer to a $20 million reduction in non-performing assets in the fourth quarter of 1990, supposedly attributable to rigorous loan approval and asset review procedures. According to Plaintiffs, it was apparent to the Defendants at least until June 1990 that loan underwriting and monitoring policies were inadequate and were not being followed. They contend that non-public information was available to the Defendants (reports from the internal audit department, an accounting firm providing management advisory services, government regulators and an investment banking firm) revealing that GlenFed's procedures were inadequate to detect
non-performing assets and set loan loss reserves. Plaintiffs allege the following facts: inaccurate (delayed) reporting of in-substance foreclosures (where collateral's fair value is less than the carrying value of the loan); inadequate monitoring of a loan to one borrower; failure to timely refer loans to foreclosure; concentration on loans 91+ days delinquent, rather than also attending to loans 31-60 and 60-90 days delinquent; and failing to update appraisals.
GlenFed embarked on a restructuring program with the stated purpose of improving core earnings and increasing capital as would be required by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Form 10-Q filed with the SEC for the second quarter of FY 1990 characterized a $35 million increase in loan loss reserves as primarily due to a $30 million special charge to increase loan loss reserves to a more conservative level. In December 1990 (the second quarter of FY 1991), however, GlenFed announced that loan loss reserves were inadequate and had to be increased by $150 million, resulting in a $141 million loss and elimination of dividend payments. According to Plaintiffs, the cause of the huge increase in loan loss reserves was the result of finally disclosing what the Defendants knew all along, despite prior statements to the contrary: (1) loan loss reserves were inadequate, and (2) despite assurances of stability, many of the problem assets were in the California and Florida real estate markets. Plaintiffs ... [allege that] (1) financial analysts expected GlenFed to have operating income, rather than the loss attributable to the increased loan loss reserves, (2) the Florida economy had been in decline for many years and this was known to Defendants, (3) other thrifts reported increases in non-performing assets as of June 30, 1990, whereas GlenFed did not, and (4) other thrifts took losses on real estate loans and operations at least a year earlier than GlenFed. See Complaint p 97A at 68.
GlenFed operated three subsidiaries 2 which in March 1990 it decided to divest. According to Plaintiffs, GlenFed announced that it had adopted a plan to discontinue operations with no aggregate net loss. Complaint p 37 at 35. In order to obtain discontinued operations accounting treatment (and defer reporting losses on the subsidiaries), GlenFed was required to represent to its outside auditors that it intended to sell the three subsidiaries. According to Plaintiffs, Defendants knew that this was completely infeasible given the declining real estate economy and the non-performing assets held by the subsidiaries. A strategic plan presented at a September 25, 1990 GlenFed board meeting indicated that the discontinued operations might have to be liquidated rather than sold, resulting in an after-tax loss of $17 million. The plan indicated that the sale of GDC was not a viable alternative in the current market and that no buyers were capable of purchasing the other two subsidiaries except at fire sale prices. Almost contemporaneously, however, minutes of board meetings discuss an expected total of "three to five" bids for GDC as of August 31, 1990, and the receipt of "about eight to ten bids" for the finance subsidiaries and three offers for GDC (all unsatisfactory) by September 25, 1990. Complaint p 48 at 40-41.
Plaintiffs point to the September 30, 1990 Form 10-Q which indicated that no net loss was expected on disposition by sale. Relying on an internal position paper, Plaintiffs also allege that the senior management Defendants deliberately delayed the losses from these subsidiaries until December 31, 1990, when the plan to sell them was publicly acknowledged to be infeasible and "discontinued operations" accounting treatment was terminated.
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