In re Capital One Derivative S'holder Litig.

• Decision Date: 21 June 2013
• Docket Number: Case No. 1:12cv1100.
• Citation: 952 F.Supp.2d 770
• Parties: In re CAPITAL ONE DERIVATIVE SHAREHOLDER LITIGATION.
• Court: U.S. District Court — Eastern District of Virginia

952 F.Supp.2d 770

In re CAPITAL ONE DERIVATIVE SHAREHOLDER LITIGATION.

Case No. 1:12cv1100.

United States District Court,

E.D. Virginia,

Alexandria Division.

June 21, 2013.

Daniel M. Cohen, Washington, DC, for Plaintiff.

John Alexander Trocki, III, Morrison & Foerster LLP, McLean, VA, for Defendants.

MEMORANDUM OPINION

T.S. ELLIS, III, District Judge.

In this removed shareholder derivative action, two shareholders of Capital One Financial Corporation (“Capital One”) have brought suit against Capital One's directors and officers, alleging that the directors and officers (i) breached their fiduciary duty of loyalty, (ii) committed corporate waste, and (iii) were unjustly enriched when they failed to prevent allegedly deceptive sales practices at Capital One's third-party call centers. In their motions to dismiss, defendants argue that plaintiffs' claims fail because (1) plaintiffs have failed to meet the heightened pleading requirements of Rule 9(b), Fed.R.Civ.P.; (2) plaintiffs have failed to meet even the more basic requirements of Rule 8, Fed.R.Civ.P.; (3) plaintiffs have failed to state a claim upon which relief can be granted in accordance with Rule 12(b)(6), Fed.R.Civ.P.; (4) plaintiffs have failed to plead with particularity, as required by Rule 23.1, Fed.R.Civ.P., that making demand of the board of directors would be futile; (5) plaintiffs have failed to allege continuous ownership of Capital One stock; and (6) plaintiffs have failed to verify the complaint. For the reasons that follow, defendants' motions must be granted in part and denied in part.

I.¹

Plaintiffs Iron Workers Mid–South Pension Fund and Kim Barovic filed separate complaints in the Circuit Court of Fairfax County, Virginia. These complaints are essentially identical, naming the same defendants, and alleging essentially the same facts and precisely the same causes of action. Both cases were removed based on federal question jurisdiction to this district where they have been consolidated. In re Capital One Derivative Shareholder Litig., 1:12cvl 100 (E.D.Va. Nov. 30, 2012) (Order). Both plaintiffs held shares of Capital One stock at the time of the alleged wrongdoing, and both continue to hold Capital One shares.²

The nominal defendant, Capital One Financial Corporation (“Capital One”), is a publicly-traded Delaware corporation headquartered in McLean, Virginia. Capital One is the parent company of Capital One Bank (USA) (the “Bank”), which is one of the country's largest consumer credit and debit card issuers. It should be noted that the complaints identify Capital One and the Bank as separate entities, but then do not distinguish between Capital One and the Bank in discussing the Consent Orders or the liability of the officers and directors. The suit is brought against the directors and officers of Capital One, but the Bank is the entity named in the Consent Orders and the entity alleged to have been harmed. Where, as here, stockholders sue the parent company of the allegedly harmed subsidiary, Delaware law recognizes and defines such a claim as a double derivative suit. See Sternberg v. O'Neil, 550 A.2d 1105, 1107 n. 1 (Del.1988) (defining a double derivative action as “a derivative action maintained by the shareholders of a parent corporation or holding company on behalf of a subsidiary company”). The Bank also markets and sells credit card “add-on” products, such as Payment Protection and Credit Monitoring.

Plaintiffs named thirteen individual defendants, all of whom are either directors, officers, or both, of Capital One. Only defendant Richard D. Fairbank is both a director and an officer. He has been a director of Capital One since 1994 and is also Capital One's Chief Executive Officer and President. In addition to Fairbank, the complaints name as defendants seven other current Capital One directors: W. Roland Dietz, Patrick W. Gross, Ann Fritz Hackett, Lewis Hay, III, Pierre E. Leroy, Mayo A. Shattuck, III, and Bradford H. Warner. The complaints also name as a defendant a former director, Edward R. Campbell, a director of Capital One from 2005 until May of 2012. These named directors also serve on various board committees.

In addition to naming the directors listed above as defendants, the complaints also name as defendants the following Capital One officers: Peter A. Schnall, the Chief Risk Officer since 2006, and prior to that the Chief Credit Officer; Ryan M. Schneider, the President of Capital One's Card division since 2007, and an Executive Vice President prior to that time; Sanjiv Yajnik, the President of Financial Services since 2009, and an employee of Capital One's European and Canadian credit card businesses from 1998 until 2009; and Gary L. Perlin, the Chief Financial Officer since 2003.

Plaintiffs allege that these directors and officers breached their fiduciary duty of loyalty to Capital One, engaged in corporate waste, and were unjustly enriched because they allowed the Bank to engage in various deceptive and illegal practices related to two of its “add-on” products, thereby violating federal consumer protection laws. The fiduciary duty, corporate waste, and unjust enrichment claims are all Delaware state law claims. The implicated “add-on” products are known as “Payment Protection” and “Credit Monitoring”. Payment Protection allows a customer to cancel up to twelve months of minimum payments on the customer's credit card if the customer becomes unemployed or temporarily disabled. Credit Monitoring provides a package of consumer services including identity theft protection, daily credit monitoring, and notification of suspicious credit transactions.

The complaints allege that the Bank entered into two Consent Orders that are at the heart of plaintiffs' claims. First, the Bank entered into a Consent Order with the Office of the Comptroller of the Currency (the OCC Consent Order), in which the OCC found that by reason of certain marketing, sales, and retention practices, the Bank engaged in “unfair and deceptive practices” under Sections 5 and 6 of the Federal Trade Commission Act ³ and that “by failing to maintain effective risk management and control processes,” the Bank violated 12 C.F.R. § 37.8. Compl., at ¶ 38 (quoting OCC Consent Order, at 6–7). Second, the Bank entered into a Consent Order with the Consumer Financial Protection Bureau (the CFPB Consent Order), which found that the Bank violated Sections 1031 and 1036 of the Consumer Financial Protection Act ⁴ in connection with the marketing, sales, and operations of the Bank's Payment Protection and Credit Monitoring products.

As part of the OCC and CFPB Consent Orders, the Bank was required (i) to pay approximately $210 million in damages and fines, and (ii) to implement better control procedures designed to prevent such problems in the future. Specifically, the Bank had to refund approximately $143 million to nearly two million customers impacted by the Payment Protection and Credit Monitoring sales and retention practices, as well as $7 million to customers impacted by the Bank's billing practices for the Credit Monitoring products. The Bank was also required to pay $25 million in civil penalties to the CFPB and $35 million in civil penalties to the OCC.

Plaintiffs allege, based on the OCC and CFPB Consent Orders, that between 2010 and early 2012, when customers with low credit scores or low credit limits called to activate newly-issued or reissued credit cards, those customers were routed to third party vendors' call centers.⁵ Customers were also routed to these third-party vendors' call centers when they called to cancel their enrollment in the Payment Protection and Credit Monitoring programs. Third party vendors' employees at the call centers marketed and sold the Payment Protection and Credit Monitoring products during the card activation telephone calls and endeavored to retain the customers in these add-on programs during the cancellation phone calls. Plaintiffs allege, based on the Agencies' findings, that the vendors used “high-pressure sales [and retention] tactics and made materially false, deceptive, or otherwise misleading oral statements relating to the costs, coverage terms, benefits, and other features of the Payment Protection and Intersections Credit Monitoring products” during these telephone calls. Compl. at ¶ 36 (quoting the OCCs' Consent Order, at 4–5).

Citing the CFPB Consent Order, plaintiffs allege that the Bank's customers were misled by the call centers about the benefits of enrolling in these add-on products, including being told by call center personnel that purchasing the products would improve their credit scores and help them increase their limits on their Capital One credit cards. Plaintiffs allege that customers were not always told that purchasing the products was optional and that some customers were told they had to purchase the products in order to receive full information on the products. It is alleged that the vendors' agents marketed and sold the Payment Protection benefits to customers who were already unemployed or disabled and therefore would not be eligible to receive benefits under the Payment Protection Plan. Plaintiffs also allege that some customers were led to believe they were enrolling in a free product, rather than purchasing a product that carried a fee. Additionally, plaintiffs allege that some vendors enrolled customers in these add-on products without the consumers' consent. Customers were billed for the products and then had difficulty cancelling the products when they learned of the fee. Finally, plaintiffs allege that between 2002 and 2011 customers were sometimes enrolled in the Credit Monitoring products before they had provided all of the verification and authorizations needed to complete the enrollment and make them eligible for the full benefits of these products. Until the customers provided this information, they were billed for, but did not receive, the full benefit of...