In re Synchrony Fin. Sec. Litig., No. 3:18-cv-1818 (VAB)

• Decision Date: 31 March 2020
• Docket Number: No. 3:18-cv-1818 (VAB)
• Citation: 450 F.Supp.3d 127
• Parties: IN RE SYNCHRONY FINANCIAL SECURITIES LITIGATION
• Court: U.S. District Court — District of Connecticut

450 F.Supp.3d 127

IN RE SYNCHRONY FINANCIAL SECURITIES LITIGATION

No. 3:18-cv-1818 (VAB)

United States District Court, D. Connecticut.

Signed March 31, 2020

RULING AND ORDER ON MOTION TO DISMISS

Victor A. Bolden, United States District Judge

On April 5, 2019, Stichting Depositary APG Developed Markets Equity Pool ("APG" or "Lead Plaintiff") and Stichting Depositary APG Fixed Income Credits Pool ("APG Fixed") (collectively "Lead Plaintiffs") filed an Amended Complaint on behalf of themselves, all similarly situated purchasers of Synchrony Financial common stock ("Synchrony stock") between October 21, 2016 and November 1, 2018 (the "Class Period"), and all similarly situated purchasers of Synchrony Financial 3.95% bonds due 2027 (the "Synchrony Notes") either in or traceable to Synchrony Financial's December 1, 2017 note offering (the "Offering") during the Class Period. Am. Compl. at 5, ECF No. 78 (Apr. 5, 2019).

Lead Plaintiffs sued Synchrony Financial ("Synchrony"), Margaret M. Keane, Brian D. Doubles, Thomas M. Quindlen (collectively with Synchrony, "Exchange Act Defendants"), David Melito, Paget Alves, Arthur Coviello, Jr., William Graylin, Roy Guthrie, Richard Hartnack, Jeffrey Naylor, Laurel Richie, Olympia Snowe, Barclays Capital Inc., Mizuho Securities USA LLC, Morgan Stanley & Co. LLC, TD Securities (USA) LLC, Blaylock Van, LLC, CastleOak Securities, L.P., Mischler Financial Group, Inc., R. Seelaus & Co., Inc., and The Williams Capital Group, L.P. (collectively "Defendants").

Lead Plaintiffs allege numerous violations of Sections 10(b), 20A, and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78t-1, and 78t(a), against Synchrony, Ms. Keane, Mr. Doubles, and Mr. Quindlen; insider trading in violation of SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 promulgated thereunder, against Ms. Keane, Mr. Doubles, and Mr. Quindlen; and violations of Sections 11 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k and 77o against Defendants.

Defendants move to dismiss the Securities Class Action in its entirety and with prejudice.

For the reasons explained below, the Court GRANTS the motion to dismiss with prejudice .

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Allegations¹

According to Lead Plaintiffs:

This case is about a company that loosened its underwriting standards to boost growth, handing out credit cards to consumers who never should have had them. When it saw that this scheme generated a pool of bad loans, the company pulled back on underwriting so hard that it stalled its own growth and killed its most lucrative retail partnership with Walmart. Each step of the way, rather than disclose to investors that its lax underwriting standards had generated significant loan losses and historic charge-offs, and how its pull-back on underwriting was causing pushback from retail partners and jeopardizing the Walmart contract, Synchrony hid the truth and issued a series of materially false and misleading statements to investors that artificially inflated Synchrony's securities prices. When the truth was revealed, Synchrony's securities prices fell sharply in response, causing significant harm to the class of Synchrony investors that Lead Plaintiff APG represents in this action.

Am. Compl. ¶ 1. The relevant events in this lawsuit culminate in Walmart's termination of its twenty-year partnership with Synchrony and Walmart's breach of contract action filed against Synchrony shortly thereafter, and also focus on Synchrony's statements and underwriting efforts leading up to Walmart's announcement of its non-renewal. See Am. Compl. ¶¶ 1–37; Defs.’ Mem. of Law in Supp. of Their Mot. to Dismiss the Am. Compl. at 1–2, ECF No. 99 (June 26, 2019) ("Sec. Defs.’ Mem").

Synchrony, a Delaware corporation and consumer financial services company based in Connecticut, sells stock on the New York Stock Exchange. Am. Compl. ¶ 45. As of October 26, 2017, Synchrony allegedly had over 780 million shares of stock outstanding. Id. Synchrony allegedly is the largest provider of private label credit cards in the United States. Id. ¶ 51. Private label credit cards allegedly bear the name of a specific retailer and are intended primarily for use on purchases with that retailer. Id. Synchrony also offers general purpose co-brand credit cards ("Dual Cards"), which are "branded by one of Synchrony's retail partners," and "functions like a [private label credit card] when a consumer uses it to purchase goods or services from that retail partner, but ... like an ordinary credit card when the consumer uses it elsewhere." Id. ¶ 52. Synchrony allegedly "has a practice of converting [private label credit card] customers into Dual Card customers." Id. ¶ 53. Synchrony's credit cards are generally backed, however, by banks and credit card issuers, and not the retail partners themselves.² Id. ¶¶ 3, 52.

Within each of Synchrony's three sales platforms—Retail Card, Payment Solutions, and CareCredit—Synchrony allegedly has partner relationships with retailers and consumer brands. Id. ¶¶ 55–56. The retail partnerships allegedly are the "cornerstone of Synchrony's business," and include "retail giants" like Sam's Club,³ Amazon, BP, Lowe's, The Gap, J.C. Penney, Ashley Furniture Homestore, and until recently, Walmart. Id. ¶ 56. Retailers allegedly "enter into Retail Card arrangements with Synchrony to increase sales and marketing, and to encourage customer loyalty," while customers get "instant access to credit, discounts, attractive loyalty programs, and promotional offers." Id. ¶ 57.

Synchrony allegedly controls the credit criteria, issues the credit cards, and owns the underlying accounts and loan receivables generated under the programs. Id. Based on retailer share arrangements that are allegedly typically included in Synchrony's Retail Card partnership agreements, Synchrony and the retail partner allegedly "share in the gains from their partnership that flow from customers’ fees, interest payments and other charges on their credit accounts," provided that "the economic performance of the program exceeds a contractually-defined threshold." Id. ¶ 58. Synchrony allegedly claims that its retailer share arrangements "align its interests with its partners[.]’ " Id.

Walmart, allegedly the nation's largest retailer, was also Synchrony's "most important retail partner." Id. ¶ 59. Synchrony allegedly maintained an office in Bentonville, Arkansas, where Walmart also has its headquarters. Id. ¶ 60. At the end of 2017, "the Walmart partnership accounted for more than 10% of the total interest and fees on Synchrony loans." Id. ¶ 63. In early 2019, "Synchrony estimated the size of its Walmart portfolio to be approximately $9 billion." Id. Walmart allegedly focuses a "significant portion of [its] store credit card business ... on subprime borrowers," id. ¶ 69, and "historically [has] drawn a significant amount of its business from low-income consumers with subprime credit," id. ¶ 67. Consequently, "Walmart was incentivized to encourage Synchrony to grant subprime customers access to credit," which "increase[d] Walmart's sales as well as Walmart's fees on the credit card financing" under its retailer share agreement with Synchrony." Id. ¶ 69. Because Synchrony allegedly leveraged its balance sheets, "a modest increase in losses [due to subprime and near-prime borrowers⁴ ] can have a meaningful impact" on Synchrony's capital position and securities prices. Id. ¶ 66. Synchrony allegedly "generated a lot of revenue from [subprime borrowers] through interest payments and late fees," and "Walmart wanted approval for almost everyone." Id. ¶ 71.

Briefly, Defendants are alleged to have committed numerous misrepresentations related to Synchrony's credit underwriting practices; "the resulting decrease in near-prime and subprime customers;" and "pushback" from retail partners, namely Walmart. Id. ¶ 98. These misrepresentations allegedly began on October 21, 2016, and continued as late as June 2018. See id. ¶¶ 100—when Ms. Keane assured investors that Synchrony's relationship with Walmart, its largest retail partner, was strong. See id. ¶¶ 100–71.

The falsity of the statements detailed in the Amended Complaint allegedly came to light when: (1) on April 28, 2017 (the start of the Class Period), Synchrony announced "disappointing results for the first quarter of fiscal year 2017, including that net income had dropped 14% from a year earlier," and attributed these losses to the "poor credit profile of its loan portfolio" and a spike in charge-offs, id. ¶ 232; (2) on July 26, 2018, Synchrony confirmed—after media sources first reported—that Walmart ended its twenty-year partnership with Synchrony in favor of Capital One Bank, id. ¶¶ 174–75; and (3) on November 1, 2018 (the end of the Class Period), Walmart sued Synchrony in federal court, claiming "that Synchrony intentionally underwrote the Walmart/Synchrony credit card program in a way that exposed the program to significant credit risk and harmed Walmart," id. ¶ 177.

Lead Plaintiffs therefore generally allege that Exchange Act Defendants’ misrepresentations were materially false and misleading, artificially inflating Synchrony's stock price and ultimately, when the truth was revealed, leading to significant losses and harm to shareholders. According to the Lead Plaintiffs, Ms. Keane and Mr. Doubles "held themselves out as knowledgeable" about Synchrony's underwriting practices, its partnership relationships, and retail partners’ pushback on Synchrony's changes to its credit underwriting. Id. ¶¶ 262-63.

1. Parties to the Securities Class Action

i. Exchange Act Parties

APG "is one of the largest institutional investors in the world" with allegedly "over $500 billion under management." Am. Compl. ¶ 43. APG allegedly purchased shares of Synchrony stock during the Class Period. Id. APG Fixed is an investment pool that allegedly purchased Synchrony Notes during the Class Period. Id. ¶ 44. Lead Plaintiffs allegedly "suffered damages as a result of the federal...