Local 295/Local 851 Ibt Emp'r Group Pension Trust v. Fifth Third Bancorp.

• Decision Date: 10 August 2010
• Docket Number: Case No. 1:08-cv-421
• Citation: 731 F.Supp.2d 689
• Parties: LOCAL 295/LOCAL 851 IBT EMPLOYER GROUP PENSION TRUST AND WELFARE FUND, et al., Plaintiffs, v. FIFTH THIRD BANCORP. et al., Defendants
• Court: U.S. District Court — Southern District of Ohio

731 F.Supp.2d 689

LOCAL 295/LOCAL 851 IBT EMPLOYER GROUP PENSION TRUST AND WELFARE FUND, et al., Plaintiffs,

v.FIFTH THIRD BANCORP. et al., Defendants

Case No. 1:08-cv-421.

United States District Court,

S.D. Ohio,

Western Division.

Aug. 10, 2010.

Barbara A. Podell, Eric Lechtzin, Sherrie R. Savett, Berger & Montague, P.C., Philadelphia, PA, Donald John Rafferty, Michael Richard Schmidt, Cohen Todd Kite & Stanford, William Kendall Flynn, Strauss & Troy, Phyllis Elaine Brown, Law Offices of Phyllis Brown,Lynn D. Pundzak, Cincinnati, OH, Robert B. Weintraub, Wolf Haldenstein Adler Freeman & Herz, New York, NY, Douglas S. Wilens, Jack Reise, Paul J. Geller, Stephen R. Astley, Robbins Geller Rudman & Dowd LLP, Boca Raton, FL, Harry David Rankin, Sutton, Hicks, Lucas, Grayson & Braden, PLC, Edgewood, KY, for Plaintiffs.

David Thomas Bules, James Eugene Burke, Joseph M. Callow, Jr., Anthony Michael Verticchio, Danielle Marie D'Addesa, Jennifer J. Morales, Keating Muething & Klekamp PLL, Robert Alexander Pitcairn, Jr., Katz, Teller, Brant & Hild, Glenn Virgil Whitaker, Mary C. Henkel, Dorothea K. Langsam, Vorys Sater Seymour & Pease, Cincinnati, OH, Adam Hakki, Daniel Craig Lewis, Shearman & Sterling LLP, Herbert S. Washer, Clifford Chance U.S. LLP, New York, NY, for Defendants.

ORDER

SANDRA S. BECKWITH, Senior District Judge.

This matter comes before the Court on the following motions: Defendants' motion to dismiss (Doc. No. 78), Defendants' supplemental motion to dismiss (Doc. No. 79); Plaintiffs' motion to file an amended consolidated class action complaint (Doc. No. 83), Plaintiffs' motion to strike extraneous documents and references filed in support of Defendants' motion to dismiss (Doc. No. 90), and Plaintiffs' motion to file a sur-reply brief in opposition to Defendants' motion (Doc. No. 99). For the reasons that follow Defendants' motion to dismiss and supplemental motion to dismiss are GRANTED IN PART AND DENIED IN PART; Plaintiffs' motion to file an amended consolidated class action complaint is MOOT; Plaintiffs' motion to strike is MOOT; Plaintiffs' motion to file a sur-reply brief is well-taken and is GRANTED.

I. General Background

Generally speaking, this is a securities fraud class action against Fifth Third Bancorp. and other individual and institutional defendants arising out of alleged material misrepresentations and omissions by the Defendants during the period from October 19, 2007 to June 17, 2008. The consolidated complaint is comprised of or has under its umbrella essentially four different lawsuits involving four different sub-classes of owners or purchasers of securities-First Charter Bank Stock, Fifth Third common stock, Fifth Third Preferred B stock, and Fifth Third Preferred C stock. The Court will address the specifics of the alleged misrepresentations and omissions in the course of its analysis of Defendants' motion to dismiss. The basic theme of the complaint, however, is that during the class period, Fifth Third represented that it followed conservative lending policies and had adequate capital reserves. The complaint alleges that in reality, however, during the class period Fifth Third abandoned its conservative lending policies and embarked on an aggressive campaign to originate what amounted to sub-prime loans. Moreover, the complaint alleges that despite being a de facto sub-prime lender, Fifth Third failed to set aside adequate loan loss reserves and misleadingly blamed the deteriorating credit quality of its loan portfolio on the downturn in the macro credit market instead of its own poor lending practices. Thus, the complaint alleges, the price of Fifth Third securities was artificially inflated during the class period and abruptly collapsed on June 17, 2008 when Fifth Third announced that it would to have raise capital through new securities offerings, cutting its dividends, and selling off non-core business assets.

II. First Charter Subclass

On August 15, 2007, Fifth Third's Board of Directors approved the acquisition ofFirst Charter Bank of Charlotte, North Carolina at a price of $31 per share. The total price of the acquisition was $1.1 billion, 70% of which was to be paid by tendering Fifth Third common stock and 30% of which was to be paid with cash. Consolidated Class Action Complaint ¶¶ 90-91 (hereinafter "Complaint" or "complaint"). On November 7, 2007, Fifth Third filed with the SEC a registration/proxy statement and prospectus for the issuance of 35,000,000 shares of common stock to be issued upon completion of the First Charter acquisition. Fifth Third's registration statement incorporated by reference its Form 10-Q for the quarter ended September 30, 2007, its Forms 8-K filed on October 29, 2007, October 31, 2007, and November 9, 2007 and "any documents filed with the SEC in the future under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended ... until we exchange all of the securities offered in this Prospectus." Id. ¶ 93.

The complaint alleges that the registration/proxy statement filed with the SEC contained the following material misrepresentations and omissions:

1. the consideration payable for the First Charter shares was not actually worth $31 per share;

2. Fifth Third used "a system of rigid sales quotas and lavish bonuses" to encourage its employees to originate risky and illiquid commercial and consumer loans;

3. the above risky loans included Alt-A loans that had risks comparable to subprime loans; ¹

4. Fifth Third was originating Alt-A loans with "layered risk factors" such as high loan-to-value ratios, borrowers with credit scores below 660, unverified employment, unverified income, unverified assets, and borrowers with high debt-to-income ratios;

5. Defendants ² aggressively marketed high loan-to-value commercial and land loans;

6. Defendants aggressively marketed Fifth Third real estate loans in Florida to European borrowers whose creditworthiness they were unable to verify;

7. as a result of its deficient underwriting and risk management practices, Fifth Third was increasingly unable to sell its loans in the secondary market and thus was forced to retain these loans in its held-for-investment portfolio;

8. the credit quality of Fifth Third's loan portfolio rapidly deteriorated from mid-2006 through 2008.

9. Fifth Third failed to timely identify and report non-performing loans;

10. Fifth Third's income was overstated throughout the class period as a result of its failure to make timely reserves for loan losses;

11. the credit quality of Fifth Third's Tier 1 capital had severely deteriorated, leaving it undercapitalized and vulnerable to future losses;

12. that as a result of the above policies or business practices, Fifth Third would be required to raise "massive amounts of capital" by cutting its annual dividend, selling billions of dollars of preferredstock, selling assets, and seeking federal bailout money.

Complaint ¶ 106. Fifth Third failed to correct any of these alleged misstatements and omissions prior to the final closing of the First Charter acquisition on June 6, 2008. Id. ¶ 108-110.

On June 18, 2008, Fifth Third issued a press release stating that it needed to strengthen its capital position in light of deteriorating credit trends. Therefore, Fifth Third stated that it was going to raise $1 billion in Tier 1 capital by issuing convertible preferred shares. Fifth Third also announced that it was going to reduce its quarterly dividend from $.44 per share to $.15 per share and that it was going to raise another $1 billion in capital by selling non-core businesses. After Fifth Third made this announcement, the price of its shares dropped from $12.73 to $9.26 on heavy volume. Id. ¶¶ 111-12.

III. The Preferred B Sub-class

The claims of the Preferred B sub-class plow much of the same ground as the First Charter sub-class. The claims of this sub-class, however, specifically relate to filings Fifth Third submitted to the SEC in October 2007 in conjunction with its public offering of 34,500,000 shares of 7.25% Fifth Third Preferred B stock. The Preferred B prospectus incorporated by reference its Form S-3 automatic shelf registration statement of March 26, 2007, which in turn was signed by the Director Defendants. The offering itself was underwritten by the Underwriter Defendants. Id. ¶ 158.

The Preferred B prospectus included certain financial data for the six months ended June 30, 2007 and June 30, 2006, including Fifth Third's provision for loan and lease losses of $205 million and $149 million respectively. The prospectus also reported non-performing assets of $706 million as of September 30, 2007 and a loan loss provision of $139 million for the third quarter of 2007. Id. ¶¶ 159-60. The complaint alleges, however, that despite reporting these numbers, the prospectus was materially misleading because it failed to disclose that Fifth Third's non-performing assets were rapidly increasing as a result of its deficient lending practices. The complaint also alleges that the prospectus was materially misleading because Fifth Third failed to increase its loan loss provision to cover the losses. Therefore, the complaint alleges, Fifth Third overstated its income. Id. ¶ 161. Additionally, the Preferred B sub-class alleges that the prospectus was misleading because it contained substantially the same materially misleading misrepresentations and omissions listed, supra at 696, for the First Charter sub-class. Id. ¶ 162. The Preferred B sub-class alleges that when Fifth Third made its June 18, 2008 announcement concerning the need to raise additional capital, the price of Preferred B shares dropped from $18.00 per share to $ 16.64 per share. Id. ¶ 163.

IV. The Preferred C Sub-class

On April 28, 2008, Fifth Third filed with the SEC a prospectus for its offering of Preferred C shares, each share of which represented an undivided interest in an underlying trust consisting of $400,000,000 in junior subordinated notes. Complaint ¶¶ 188-89. The...