In re First Union Corp. Securities Litigation
| Decision Date | 10 January 2001 |
| Docket Number | No. 3:99CV237-MCK.,3:99CV237-MCK. |
| Citation | 128 F.Supp.2d 871 |
| Court | U.S. District Court — Western District of North Carolina |
| Parties | In re The FIRST UNION CORP. SECURITIES LITIGATION. |
Steven G. Schulman, Samuel H. Rudman, Russell J. Gunyan, New York City, NY, for R. Allen.
Edward T. Hinson, Ann L. Hester, James, McElroy & Diehl, Charlotte, NC, Richard J. Morvillo, Jeffrey B. Maletta, Jeffrey F. Robertson, Nicholas G. Terris, Kirkpatrick & Lockhart, LLP, Washington, DC, for Edward E. Crutchfield, John R. Georgius, James H. Hatch, First Union Corp.
This matter is before the Court with the consent of the parties for ruling on Defendants' Motion to Dismiss. [Doc. 41.] Oral argument was held on the motion and the matter is now ripe for resolution.
Twelve class action suits were filed against Defendant First Union and its directors. These suits were consolidated in this Court with Allen v. Crutchfield as the lead case. The complaint and amended complaint allege securities fraud under Section 10(b) of the Exchange Act consisting of: (1) misrepresentation by officers in statements and omissions regarding the effects on earnings of First Union's acquisitions; and (2) violations of GAAP (Generally Acceptable Accounting Procedures) as to certain losses.
More specifically, regarding misrepresentations in statements and omissions, Plaintiffs allege that during the class period of August 14, 1998, to May 25, 1999, First Union's stock was artificially inflated because First Union misrepresented the effects of integrating recent acquisitions into First Union's corporate structure. Primarily the allegations concern the acquisition of CoreStates, a rival bank which comprised one-third of First Union's total value post-acquisition, in August of 1998. It is uncontested that problems during the integration of CoreStates into First Union's structure caused customer and financial loss resulting in the revised lowered expectations for earnings announcement in May. This announcement caused stock prices to hit a seven-year low, resulting in allegedly "heavy" losses for Plaintiffs. Plaintiffs allege the officers knew about the problems but made statements or omissions representing to the public that the integration was going smoothly. Pointing to Defendants' selling of their own shares of First Union stock during the class period, Plaintiffs base their fraud claim on Defendants' motive and opportunity to defraud investors for personal gain.
Defendants respond that the directors' sales of stock were relatively small compared to their net holdings and that each director actually owned more First Union stock at the close of the class period than at the beginning, belying any motive argument. As to the statements identified as misleading, Defendants respond that none are actionable because they were either (1) made by analysts or other non-First Union people; (2) not shown to be false when made; (3) statements that, under caselaw, would be deemed "puffery" that no reasonable investor would rely on; or (4) they were protected statements under the safe-harbor provisions of the Private Securities Litigation Reform Act (protecting "forward-looking" statements if identified as such with cautionary language). As to omissions, or failure to warn the public of problems, First Union responds that either it released that information as it became available or that the problems were reported in the press. Regarding the GAAP allegations, First Union responds that the procedures used do not constitute violations of GAAP. For the reasons discussed below, this Court finds that Plaintiffs cannot meet their burden under the applicable pleading standards, and as such, the motion to dismiss should be granted.
The following facts are either taken from the Amended Complaint and the documents referenced therein or are facts of which this Court takes judicial notice.1
First Union is a Charlotte, North Carolina-based bank holding company that provides financial services and products. Doc. 1, Compl. ¶ 15. During the relevant time periods, the three individual Defendants were all officers of the Company. Edward Crutchfield served as First Union's Chairman and Chief Executive Officer. Compl. ¶ 16. John Georgius was First Union's President from January 1998 until August 1999. Id. ¶ 17; see also Appendix Tab I (Annual Report on Form 10-K for the year ended December 31, 1998 ("1998 Form 10-K") at 8).2 James Hatch was First Union's Senior Vice President and Corporate Control Accounting Officer. Id. ¶ 18.
First Union is the nation's sixth largest bank with assets of over $237 billion. It has achieved that growth in large part due to acquisitions. See Appendix Tab 1 (1998 Form 10-K Annual Report at i). Since 1985, First Union has completed nearly eighty acquisitions, as the Company grew from 5,000 to more than 75,000 employees. Appendix Tab 1 (1998 Form 10-K) at 1.
The $20 billion CoreStates acquisition, completed April 28, 1998, was First Union's largest. It stands at the heart of this cause of action. While the relevant class period starts in August 1998, First Union's disclosures concerning the CoreStates acquisition began nine months earlier. On November 18, 1997, First Union issued a press release ("November 18, 1997 press release") and filed a Report with the SEC on Form 8-K ("November 18, 1997 8-K") announcing its intent to acquire CoreStates, subject to several conditions, including regulatory approvals. Appendix Tab 2 (November 18, 1997 8-K and press release). The November 18, 1997 press release expressed the Company's hope that the CoreStates merger would be "cumulatively accretive within 18 months" — that it would improve the combined earnings of the institutions by mid-1999. Id. at 2. At the same time, First Union cautioned investors about risks in the acquisition. For example, the November 18, 1997 8-K stated that the merger announcement contained forward-looking statements, specifically identifying "statements related to cost savings, enhanced revenues and accretion to reported earnings that may be realized from the [CoreStates] Merger." Appendix Tab 2 at 3. More specifically, the November 18, 1997 8-K warned that the Company's expectations might not be met:
Such forward-looking statements involve certain risks and uncertainties, including a variety of factors that may cause the Corporation's actual results to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) expected cost savings from the Merger and the Corporation's other pending acquisitions may not be fully realized or realized within the expected time frame; (2) revenues following the Merger and the other pending acquisitions may be lower than expected, or deposit attrition, operating costs or customer loss and business disruption following the Merger and the other pending acquisitions may be greater than expected; (3) competitive pressures among depository and other financial institutions may increase significantly; (4) costs or difficulties related to the integration of the business of the Corporation, CoreStates, and the other pending acquisitions may be greater than expected; ... and (8) changes may occur in the securities markets.3
Appendix Tab 2 (November 18, 1997 8-K) at 3.
On February 27, 1998, First Union announced that it expected to consummate4 the CoreStates acquisition by April 30, 1998. Appendix Tab 3 (February 27, 1998 press release).5 On April 13, 1998, the Federal Reserve Board approved the CoreStates acquisition, Appendix Tab 5 (April 13, 1998 press release), and First Union reported on steps it was taking to integrate the operations of the two institutions. Appendix Tab 6 (April 27, 1998 press release). The merger was consummated on April 28, 1998. Appendix Tab 7 (April 28, 1996 8-K).
In the months that followed, the Company continued to advise the public that expectations for the CoreStates acquisition might not be met. For example, on page one of its Annual Report on Form 10-K for the year ending December 31, 1997 ("1997 Form 10-K"), filed on March 23, 1998, First Union stated that anticipated expense savings and revenue enhancements from the CoreStates acquisition, among other factors, could cause the Company's results to differ materially from the Company's forward-looking statements. Appendix Tab 8 at 1. The 1997 Form 10-K, like the Company's pronouncements before and during the "Class Period", also incorporated the risk factors that had been included in the November 18, 1997 8-K.6
On August 14, 1998, First Union filed its Report on Form 10-Q for the second quarter ended on June 30, 1998 ("1998 Second Quarter 10-Q"), which made the following statements about integration of First Union's 1998 acquisitions:
We are very pleased with our progress in integrating recent acquisitions and with the growth prospects stemming from these transactions. We believe 1998 will continue to be a very active year as we work to develop new markets and business strategies into revenue growth. In addition to revenue growth we expect further improvements in efficiency as we begin to benefit from the consolidation of our recent acquisitions.
With our previously pending acquisitions now completed, our primary attention is focused on developing our existing business base as we continue to invest in new technology and fee income-generating lines of business.
The acquisition of CoreStates of Philadelphia will create new opportunities to leverage our growing Capital Management and Capital Markets businesses in states that generate 36 percent of the nation's gross state product and in...
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