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Epstein v. World Acceptance Corporation

United States District Court, D. South Carolina, Greenville Division

May 18, 2015

Edna Selan Epstein, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
World Acceptance Corporation, A. Alexander McLean, Ill. John L. Calmes, Jr., Kelly M. Malson, and Mark Roland, Defendants.


MARY G. LEWIS, District Judge.

Before this Court is Defendants World Acceptance Corporation, A. Alexander McLean, III, John L. Calmes, Jr., Kelly M. Mason, and Mark Roland's ("Defendants") Motion to Dismiss Plaintiff's Amended Complaint brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (ECF No. 58 & 59.) Having considered the motion and the responses filed (ECF No. 64 & 69), the record, and the applicable law, the Court denies Defendants' Motion to Dismiss for the reasons set forth below.


Plaintiff Edna Selan Epstein ("Plaintiff") originally filed this securities class action on April 22, 2014, pursuant to §§ 10(b), and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 on behalf of all investors who purchased or acquired the common stock of World Acceptance Corporation ("World") between April 25, 2013 and March 12, 2014 (the "Class Period"). (ECF No. 1.) Plaintiff filed an amended class action complaint on August 12, 2014, alleging that during the Class Period, Defendants participated in a fraudulent scheme to artificially inflate World's stock price by misrepresenting and concealing information about World's business practices. (ECF No. 50 at 4.) Defendants filed a motion to dismiss the amended complaint on September 16, 2014. (ECF No. 58 & 59.) Plaintiff filed a response in opposition to Defendants' motion to dismiss on October 21, 2014 (ECF No. 64) and Defendants filed a reply in support of their motion on November 17, 2014. (ECF No. 69.) The Court has considered the motions, memoranda, and arguments of the parties, and this matter is now ripe for disposition.[1]


Defendants move to dismiss this putative securities fraud class action under Rule 12(b)(6) of the Federal Rules of Civil Procedure on the grounds that the Amended Complaint fails to satisfy the applicable heightened pleading standards of the Private Securities Litigation Reform Act of 1995 and Federal Rule of Civil Procedure 9(b). (ECF No. 58.) "The purpose of a Rule 12(b)(6) motion is to test the sufficiency of a complaint." Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir.1999). In considering a motion to dismiss, a plaintiff's well-pled allegations are accepted as true, and the complaint and all reasonable inferences are liberally construed in the plaintiff's favor. MyIan Laboratories, Inc. v. Matkari, 7 F.3d 1130 (4th Cir. 1993); E.I. du Pont de Nemours & Co. v. Kolon Industries, Inc., 637 F.3d 435, 440 (4th Cir. 2011). The court may consider only the facts alleged in the complaint, which may include any documents reference, and matters of which the court may take judicial notice.[2] Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 448 (4th Cir. 2011) ("In deciding whether a complaint will survive a motion to dismiss, a court evaluates the complaint in its entirety as well as any documents attached to or incorporated into the complaint."). If, on a motion under Rule 12(b)(6), matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56. Fed.R.Civ.P. 12(d). Further, all parties must be given a reasonable opportunity to present material that is pertinent to the motion. Id.

To survive a motion to dismiss in a securities fraud case, a plaintiff must satisfy procedural and substantive pleading requirements. Pearce v. UBS PaineWebber, Inc., No. 3:XX-XXXX-XX, 2003 WL 25518056, at *3 (D.S.0 Nov. 4, 2003). Pleading requirements are usually governed by Rules 8 and 9 of the Federal Rules of Civil Procedure, however, the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), imposes additional requirements applicable here. Id.; Latham v. Matthews, 662 F.Supp.2d 441, 456 (D.S.C. 2009). First, Rule 9(b) requires that in all actions alleging fraud, the circumstances alleging fraud must be "state[d] with particularity." Additionally, the PSLRA requires that a securities fraud Plaintiff "state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention to deceive, manipulate, or defraud." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (internal citations and quotations omitted). The Fourth Circuit has noted that the PSLRA modifies the traditional Rule 12(b)(6) analysis: "(1) by requiring a plaintiff to plead facts to state a claim and (2) by authorizing the court to assume that the plaintiff has indeed stated all of the facts upon which he bases his allegation of a misrepresentation or omission." Teachers' Retirement System of Louisiana v. Hunter, 477 F.3d 162, 172 (4th Cir.2007) (emphasis in original). The PSLRA also requires a plaintiff to plead sufficient facts to raise a strong inference of scienter. Id. (emphasis in original).

In sum, to properly plead a claim for relief pursuant to § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, a plaintiff must allege "(1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance... (5) economic loss; and (6) loss causation, ' i.e., a causal connection between the material misrepresentation and the loss." Teachers' Retirement System of Louisiana v. Hunter, 477 F.3d at 172 n. 2 (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)).[3] Facing a 12(b)(6) motion to dismiss, the Court's inquiry "becomes whether, if those facts alleged in the complaint are true, relief could be granted on the plaintiffs' claim." Id. at 173. The PSLRA requires the district court to dismiss the complaint, on motion of any defendant, if the pleading requirements for alleging misrepresentations and scienter are not met. 15 U.S.C. § 78u-4(b)(3)(A).


Plaintiff filed a lengthy Amended Complaint against World as well as Defendants McLean, Calmes, Malson, and Roland ("Individual Defendants") who were senior executive officers of World during and prior to the Class Period. (ECF No. 50 at 9.) The Court has analyzed the Amended Complaint in great detail in light of the arguments made in the Motion to Dismiss.

According to the allegations of the Amended Complaint, World is a small-loan consumer finance business offering short-term and medium-term installment loans. Plaintiff alleges that she purchased World common stock at "artificially inflated prices during the Class Period and suffered an economic loss when true facts about the Company's illicit lending practices and inflated growth were disclosed, and the stock price resultantly declined." (ECF No. 50 at 8.) Plaintiff's allegations concerning Defendants' allegedly materially false and misleading statements and Defendants' scienter are based on certain "confidential witnesses" to include former employees of World and other industry participants who are described but not named in the Amended Complaint. (ECF No. 50 at 12.) For specific counts, Plaintiff alleges:1) all Defendants committed violations of Section 10(b) of the Exchange Act and Rule 10b-5 (promulgated under that Act) by deceiving the investing public and artificially inflating and maintaining the market price of World's securities by making untrue statements and omissions about World's value and growth, and engaging in and concealing deceitful business and lending practices (ECF No. 50 at 104-105); and 2) the individual defendants violated Section 20(a) of the Exchange Act through their acts and omissions as controlling persons of World who participated in or were aware of World's operations, practices, and business prospects. (ECF No. 50 at 108-109.)

Defendants argue that the Amended Complaint must be dismissed for failing to comply with the mandates of the PSLRA and Rule 9(b)'s heightened pleading standard. (ECF No. 58.) Specifically, Defendants maintain that Plaintiff failed to plead with the required particularity how or why World's loan practices were illegal, which laws World allegedly violated, and how any of World's disclosures or statements regarding legal and regulatory matters were false or misleading. (ECF No. 58-1 at 1-2.) Defendants also argue that many of the public statements challenged by Plaintiff are "forward-looking" and are accompanied by meaningful cautionary language such that they fall under the PSLRA's "safe harbor" provision. (ECF No. 58-1 at 2.) Further, Defendants state that the Amended Complaint fails to establish the "strong inference" of scienter required and also fails to connect any individual defendant to knowledge of or participation in the alleged fraud. (ECF No. 58-1 at 2.) Finally, Defendants argue that Plaintiff fails to allege that her investment losses were caused by the alleged fraudulent activity of which Plaintiff complains to establish loss causation. (ECF No. 58-1 at 2-3.)

1. Section 10 (b) and Rule 10b-5 Claim

First, the Court will address Plaintiff's 10(b) claim asserted ...

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