Perez v. Higher One Holdings, Inc.: Plaintiff’s Second Amended Complaint Sufficiently Pleads Claims of Securities Fraud
In Perez v. Higher One Holdings, Inc., No. 3:14-cv-755 (D. Conn. Sept. 25, 2017), the United States District Court for the District of Connecticut granted in part and denied in part Higher One Holdings, Inc. (“Higher One”) and its current or former officers, Mark Volcheck, Christopher Wolf, Jeffrey Wallace, Miles Lasater, Dean Hatton, and Patrick McFadden’s (collectively “Defendants”) motion to dismiss the Second Amended Class Action Complaint of Brian Perez and Robert E. Lee, individually and on behalf of other similarly situated investors (collectively “Plaintiffs”), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder.
Plaintiffs purchased Higher One stock between August 7, 2012 and August 6, 2014. Higher One provides financial management and banking products and services to higher education institutions and their students. According to the complaint, on August 7, 2012, Higher One agreed to a consent order (“2012 Order”) issued by the Federal Deposit Insurance Corporation (“FDIC”) alleging violations of the Federal Trade Commission Act (“FTC Act”). Under the 2012 Order, Higher One was required to revise its compliance management system. According to the allegations, Defendants did not make the necessary changes to their policies, but claimed they had undertaken the requisite changes in various public statements. Higher One was again found in violation of the same provisions of the FTC Act under a FDIC Consent Order issued in 2015, and a Federal Reserve Cease and Desist Order. Plaintiffs further allege Cole Taylor Bank (“CTB”), one of Higher One’s banking partners, terminated its relationship with Higher One,in 2013,out of fear it would be subject to regulatory penalties related to Higher One’s conduct. According to the allegations, Defendants, in their public statements, stated the decision to end the relationship was mutual,and did not disclose the true reason for the termination when discussing Higher One’s relationships with other banks. Plaintiffs’ complaint alleged Defendants made statements that were materially false and misleading regarding: (1) Higher One’s compliance with the 2012 Order, (2) the dissolution of Higher One’s relationship with CTB, (3) the transparency of Higher One’s products, (4) required changes to practices due to a class action settlement, and (5) Higher One’s financial and operating results.
Section 10(b) and Rule 10b-5 of the Exchange Act prohibit any misstatements or omissions of material fact in connection with the sale or purchase of a security. Securities fraud claims are subject to the heightened pleading standards of the Private Securities Litigation Reform Act (“PSLRA”) which requires plaintiffs to plead with particularity facts establishing fraud and an inference of scienter. Plaintiffs must specify each statement alleged to be false and the reason the statement is misleading. Scienter can be established by alleging strong circumstantial evidence of conscious misbehavior or recklessness. Additionally, a plaintiff must establish he suffered a loss as a result of defendant’s actions. Finally, Section 20(a) holds control persons liable for the fraud of the entities they control.
The court determined Plaintiffs sufficiently met the heightened pleading standard under the PSLRA for the majority of their allegations. The court held the complaint properly identified the false statements and identified the reasons they were misleading with regard to statements made about: (1) the termination of Higher One’s relationship with CTB, (2) the transparency of Higher One’s products, (3) the changes required due to a class action lawsuit, and (4) Higher One’s financial and operating results. Furthermore, the court found the complaint established a sufficient nexus between the conduct cited in the 2012 Order and ongoing violations to establish Defendants could not have reasonably believed their own statements regarding legal compliance. However, the court determined statements about Higher One’s relationships with other banks, which made no mention of the reason for the termination of its relationship with CTB, were not actionable because Defendants had no general duty to disclose managerial misconduct or uncharged criminal conduct. The court held Plaintiffs allegations sufficiently established the knowledge or recklessness required for scienter, and found Plaintiffs established loss causation. Finally, because Plaintiffs established a primary violation of Section 10(b), the court declined to dismiss the Section 20(a) claim.
Accordingly, the court denied in part and granted in part Defendants’ motion to dismiss.
The primary materials for this case may be found on the DU Corporate Governance website.