Securities Fraud Class Action Allowed to Proceed Against Bank Accused of Not Disclosing an OTS Investigation

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Christina DeIasi | Bloomberg Law In re Meta Financial Group, Inc. Securities Litig., No. 10-CV-04108 (N.D. Iowa July 18, 2011) A securities fraud class action against Meta Financial Group, Inc. (Meta) and certain officers (collectively, Defendants) survived Defendants' motion to dismiss. Plaintiffs claim, in short, that Meta failed to disclose an Office of Thrift Supervision (OTS) investigation into iAdvance, a micro-lending product. The U.S. District Court for the Northern District of Iowa held that plaintiffs' securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 andRule 10b-5 thereunder satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995.

OTS Investigation of iAdvance

Meta is a holding company whose subsidiaries include MetaBank, a regional retail bank. According to plaintiffs, the Meta Payments Systems (MPS) division was a substantial source of revenue for Meta. The MPS division included the iAdvance product, which Meta designed to provide a line of credit on prepaid debit cards, such as those issued in connection with tax refund anticipation loans. Defendants allegedly painted a "rosy picture" of the iAdvance product in its 2008, 2009, and 2010, filings with the Securities and Exchange Commission. For instance, plaintiffs claim that Meta touted iAdvance, specifically, as experiencing "'increasing consumer acceptance and performance'" and MPS programs, generally, as being "'managed prudently, in accordance with governing rules and regulations, and without unnecessary exposure to the capital base.'" Plaintiffs claim that these statements were materially false and misleading because, by 2009, OTS had started to investigate iAdvance. According to confidential witnesses on whom plaintiffs relied in drafting their complaint, "OTS questioned the benefits and legality of the iAdvance program." The investigation ultimately came to light, plaintiffs assert, on October 12, 2010, when Defendants disclosed that OTS was requiring Meta to discontinue all origination activity for iAdvance lines of credit. Defendants also reported OTS's finding that Meta had engaged in unfair trade practices in connection with iAdvance that violated Section 5 of the Federal Trade Commission Act. Plaintiffs further allege that, within five days of Defendants' announcement, Meta's stock price had dropped by 60 percent.

Adequate Allegations of Fraud

After a lengthy recitation of the applicable heightened pleading standards, the Court briefly explained its application of those standards to the complaint before it. First, it concluded that plaintiffs adequately pled the basis of their confidential witnesses' knowledge. The Court was not specific as to the allegations it considered, but earlier in the opinion, it noted that the confidential witnesses allegedly included two MPS employees and one mortgage loan officer at MetaBank, all of whom worked at the company until sometime in 2010. "More importantly," the Court continued, "the actions of the OTS corroborate and support the reliability of the confidential witnesses' allegations." Next, the Court directed its attention to whether plaintiffs adequately alleged the elements of securities fraud. On the falsity element, the Court concluded that plaintiffs "have pleaded the alleged misstatements and why they were false when made." By way of example, the Court listed the paragraphs of the complaint where these allegations could be found. It then concluded, in summary fashion, that the alleged misstatements were not mere puffery as a matter of law and that "the 'group pleading doctrine' does adequately tie the alleged misrepresentations and non-disclosures to the various defendants." The Court further found that plaintiffs adequately alleged scienter, but it provided scant insight into the basis for its decision. Instead, it noted that
the combination of the allegations of the individual defendants' positions with Meta [], their alleged access to information and the disclosures in question, and the nature of the alleged mispresentations and omissions give rise, at the very least, to a "strong inference" that the individual defendants were severely reckless in allowing the disclosures to be released or to stand and that all of the defendants had the motive and opportunity to make the allegedly fraudulent disclosures or not to recall them after they were made.
(Citations omitted). And, in one sentence, the Court concluded that plaintiffs had pled the remaining securities fraud elements: "connection, reliance, economic loss, and causation." Lastly, the Court sustained plaintiffs' control person claims against the individual defendants. Plaintiffs alleged, the Court explained, that the individual defendants exercised control over Meta. Plaintiffs also identified with particularity "not only the positions of each individual defendant in Meta Financial, but specific SEC disclosures signed and certified by them." Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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