On February 11, 2022, the United States District Court for the
District of Connecticut denied a motion to dismiss a putative
securities class action asserting claims under the Securities
Exchange Act of 1934 ("Exchange Act") against a consumer
financial services company that issues private-label credit cards
and certain of its executives. In re Synchrony Fin. Sec.
Litig., No. 3:18-CV-1818 (VAB), 2022 WL 427499 (D. Conn. Feb.
11, 2022). As discussed in our prior post the Court had previously
dismissed the action in its entirety, including with respect to
claims under the Securities Act of 1933 ("Securities
Act"). The Court of Appeals for the Second Circuit
upheld the dismissal of the Securities Act claims and certain of
the Exchange Act claims but remanded for further proceedings
regarding one challenged statement—that the company
misrepresented the alleged "pushback" it had received
from retail partners with respect to its underwriting
standards. Id. at *2. On remand, the district
court held that plaintiffs adequately alleged falsity, scienter,
and loss causation with respect to the remaining challenged
statement.
Plaintiffs alleged that the company's former CEO made a
material misstatement on an earnings call when asked if the company
was "getting any pushback" as it tightened its
underwriting standards for subprime borrowers. In response,
the CEO allegedly emphasized the company's close partnership
with retailers and stated, "we are not getting any pushback on
credit." Id. at *4. Plaintiffs alleged
that the company had, in fact, received significant pushback from a
major retail partner, and that at the time of the CEO's
statement she had been traveling to meetings with the partner with
"increased frequency" in order "to mitigate the
impact of alarming feedback ... that the relationship was
doomed," and the retail partner had been soliciting bids from
rival card issuers for the first time. Id. at
*6. The Second Circuit determined that the challenged
statement regarding "pushback" amounted to a
representation that the company had not received any negative
reaction or opposition to changes in its underwriting
standards. Id.
On remand, the district court rejected defendants' argument
that the challenged statement was not material because it was
"merely noted that [the company's] partners were generally
in agreement that they do not want to put credit in the hands of
people who cannot handle it and were not pushing back on credit in
that sense," and the CEO had stated on the same earnings call
that the company "would not be commenting on any renewal
negotiations with particular retailers." Id. at
*4-5. Recognizing that "reasonable minds could
differ" as to the importance of the statement, the
Court—applying the Second Circuit's interpretation of the
"pushback" statement as meaning that the company had not
received any negative reaction or opposition from retail partners
to changes in its underwriting practices—agreed with
plaintiffs that it was plausible that investors could view any
resistance from the company's retail partners to tightened
underwriting standards as significant to an investment decision,
and that knowledge of the major retail partner's
"resistance" would have "altered the 'total
mix' of information" available to investors.
Id. at *6. Further, the Court rejected
defendants' argument that the challenged statement was
protected by the "bespeaks caution" doctrine due to
disclosures warning of the risk of partner termination because, the
Court concluded, plaintiffs had alleged that the risk had already
materialized. Id.
With respect to scienter, the Court determined that plaintiffs
sufficiently alleged scienter regarding the company's CEO,
which was then imputed to the company. The Court pointed to
allegations the Second Circuit relied on in reversing the
Court's prior dismissal order, including in particular the
allegation that the CEO had traveled with "increased
frequency" in the period immediately prior to the challenged
statement due to "alarming feedback" that the
company's relationship with the retailer was
"doomed." Id. at *8. The Court
determined that these allegations were sufficient "to support
an inference of recklessness." Id. at
*10. Moreover, the Court rejected defendants' arguments
that risk disclosures could overcome allegations of scienter and
that the analyst's question and the CEO's response were
imprecise or ambiguous in a way that might undercut an inference of
scienter. Id. at *9-10.
The Court also determined that plaintiffs had sufficiently alleged
loss causation, which the Court noted was "not a heavy"
burden. Id. at *11. The Court explained that
one alleged corrective disclosure—a news report indicating
that the company's retail partner was considering moving its
credit card business and was "dissatisfied with the [c]ompany
because it wanted [the company] to approve a higher percentage of
applicants"—revealed information that was concealed by
the alleged false statement. Id. at *11-12.
The Court also observed that, at the motion-to-dismiss stage,
plaintiffs did not need to prove that a particular corrective
disclosure was the only possible cause for a decline in the
company's stock price, but were only required to "raise a
reasonable inference that the alleged concealment caused an
'ascertainable' portion of the alleged loss."
Id. at *13. Thus, the Court concluded that, based on
a "liberal reading" of plaintiffs' complaint, there
was an insufficient basis for defendants' argument that, as of
the time of the news report, investors were aware of the financial
decline of the company and chose to invest anyway.
Id.
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