Nolte v. Capital One Financial Corp.
| Decision Date | 02 December 2004 |
| Docket Number | No. 03-1612.,03-1612. |
| Citation | 390 F.3d 311 |
| Parties | Frank NOLTE; Helen Nolte; Local 144 Nursing Home Pension Fund, Plaintiffs-Appellants, and Bill Brooks; Charles Bruener; Charles Bryant; James B. Howard; Amir Nasrabadi; Robert Norman; David Onerheim; Jack B. Pierce; Kunming Qian; Bernard Stern; Raymond Tyler; Lisa Yankofsky, Plaintiffs, v. CAPITAL ONE FINANCIAL CORPORATION; Richard D. Fairbank; Nigel W. Morris; David M. Willey; Peter A. Schnall, Defendants-Appellees. Emile Wanich; Rhoda Wanich; the Charles H. Walsh, Sr. Trust, Movants. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Melvyn I. Weiss, Milberg, Weiss, Bershad, Hynes & Lerach, New York, New York, for Appellants. Jordan D. Eth, Morrison & Foerster, San Francisco, California, for Appellees.
ON BRIEF:
Lee A. Weiss, Milberg, Weiss, Bershad, Hynes & Lerach, New York, New York; Steven J. Toll, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, D.C.; Daniel W. Krasner, Gregory M. Nespole, Stacy T. Kelly, Wolf, Haldenstein, Adler, Freeman & Herz, New York, New York, for Appellants. Melvin R. Goldman, Erik J. Olson, Mia Mazza, Morrison & Foerster, San Francisco, California; Laurie A. Hand, Morrison & Foerster, McLean, Virginia; James A. Murphy, Leclair Ryan, P.C., Richmond, Virginia, for Appellees.
Before WIDENER and DUNCAN, Circuit Judges, and William D. QUARLES, Jr., United States District Judge for the District of Maryland, sitting by designation.
Affirmed by published opinion. Judge QUARLES wrote the opinion, in which Judge WIDENER and Judge DUNCAN concurred.
Shareholders appealed the district court's dismissal of their securities fraud action for failure to plead fraud with particularity. Finding no error, we will affirm.
On July 19, 2002, in the Eastern District of Virginia, Robert Norman filed a Class Action Complaint in which he alleged violations of the Securities Exchange Act of 1934 (the "Exchange Act") against Appellee Capital One Financial Corporation ("Capital One") and certain of its officers and executives. On October 1, 2002, the district court consolidated the Norman case with 11 other pending cases in which similar claims had been brought.
On October 17, 2002, the Appellants filed a Consolidated and Amended Complaint in which they alleged violations of Section 10(b) and Rule 10b-5 of the Exchange Act against Capital One and its Chief Executive Officer, Chief Operating Officers and Chief Financial Officer as individual defendants in Count I and a violation of Section 20(a) of the Exchange Act against the individual defendants in Count II. In that pleading, the Appellants alleged that during the class period Capital One maintained insufficient loan loss reserves and capital in violation of banking guidelines, but represented to the public that it was holding an appropriate amount of capital. The complaint cited information from several former Capital One employees that it was internally known at Capital One that the loan loss reserves were deficient, and banking regulators had begun investigating these deficiencies during the class period. The Appellants also alleged that during the class period, Capital One consistently portrayed its proprietary information based strategy ("IBS") system as providing Capital One with a competitive advantage, even though serious deficiencies in the system were known to former employees.
Appellants alleged that in various Securities and Exchange Commission ("SEC") filings, Capital One made materially false and misleading statements about the adequacy of its loan loss reserves and IBS system. The appellants further alleged that the failure to disclose material facts artificially inflated the price of Capital One securities; when Capital One released a statement changing its financial forecast and reporting that it was entering into a Memorandum of Understanding with regulators, the Appellant shareholders suffered a financial loss.
On December 4, 2002, the district court granted the Appellees' motion to dismiss and gave the Appellants 14 days in which to file an amended complaint. On December 23, 2002, the Appellants filed a Second Consolidated and Amended Class Action Complaint. While the Appellees' motion to dismiss was under consideration by the district court, Appellants moved for leave to amend and supplement the second consolidated and amended complaint.
In their amended pleading, the Appellants alleged that Capital One had maintained insufficient loan loss reserves and capital in violation of banking guidelines, while it represented to the public that it was holding an appropriate amount of capital. Appellants cited the testimony of several confidential witnesses who worked for Capital One and asserted that concerns about Capital One's capitalization had arisen within management while the company was still reporting that it believed it was adequately capitalized. The Appellants also alleged that employees were told not to cooperate with federal bank regulatory investigations during the class period. Appellants alleged that Capital One's undercapitalization was shown by a July 16, 2002 SEC announcement that the Appellees had entered into a Memorandum of Understanding with Federal Banking Regulators to address, among other things, Capital One's capitalization, loan loss allowances, and deficiencies in Capital One's infrastructure.
The Appellants also alleged that Capital One consistently portrayed its IBS system as providing a competitive advantage, even though there were serious deficiencies in the system. In support of this allegation, Appellants cited information from confidential witnesses about instances when the system was demonstrably ineffective. Appellants also relied upon the July 16, 2002 SEC filing in which Appellees acknowledged serious deficiencies in Capital One's infrastructure and technology.
Appellants also bolstered their assertions by noting that the individual defendants had sold their Capital One stock during the class period.
Appellants alleged that materially false and misleading statements in various SEC filings and the failure to disclose material facts artificially inflated the price of Capital One securities; when Capital One released a statement changing its financial forecast and reporting that it was entering into the Memorandum of Understanding with regulators, the Appellant shareholders suffered a financial loss.
On April 10, 2003, the district court granted the Appellees' motion to dismiss the Second Consolidated and Amended Class Action Complaint on the basis that the Appellants had failed to adequately plead either falsity or scienter. This appeal followed.
The court reviews the dismissal of claims pursuant to Federal Rule of Civil Procedure 12(b)(6) de novo. Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993).
To establish liability under § 10(b) and Rule 10b-5, plaintiffs must demonstrate that: (1) the defendants made a false statement or omission of material fact; (2) with scienter; (3) upon which the plaintiffs justifiably relied; (4) that proximately caused the plaintiffs' damages. Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204, 208 (4th Cir.1994). Pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA"), the complaint must aver "each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1) (2004). The complaint must also allege facts giving rise to a strong inference that the defendant acted with scienter. § 78u-4(b)(2).
To allege a false statement or omission of material fact, "plaintiffs must point to a factual statement or omission — that is, one that is demonstrable as being true or false." Longman v. Food Lion, Inc., 197 F.3d 675, 682 (4th Cir.1999). To form the basis of a cause of action, the statement must be false, or the omission must render public statements misleading. Id. (citing 17 C.F.R. § 240.10b-5).
The false statement or omission must be material. The question of materiality is an objective one, which examines the significance of an omitted or misrepresented fact to a reasonable investor. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 445, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). A fact is material if there is a substantial likelihood that it would have assumed actual significance in the deliberations of a reasonable investor; that is, the disclosure of the omitted statement or revelation of the true circumstances would have been viewed by the reasonable investor as having significantly altered the "total mix" of available information. Id. at 449, 96 S.Ct. 2126.
The shareholders allege that Capital One's management lied to investors when it opined that Capital One maintained sufficient capital and loan loss reserves, and that the company's success was due in part to its unique computer infrastructure.
In Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1093, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991), the Supreme Court held that in a securities fraud case, a statement of opinion may be a false factual statement if the statement is false, disbelieved by its maker, and related to matters of fact which can be verified by objective evidence. Longman, 197 F.3d at 683 (citing Virginia Bankshares, 501 U.S. at 1093, 111 S.Ct. 2749).
In order to plead that an opinion is a false factual statement under Virginia Bankshares, the complaint must allege that the opinion expressed was different from the opinion actually held by the speaker. Virginia Bankshares, 501 U.S. at 1093, 111 S.Ct. 2749.
The shareholders claim that Peter Schnall, a member of Capital One's management team, fearing that Federal Regulators would...
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