United States District Court, D. South Carolina, Greenville Division
IN RE WORLD ACCEPTANCE CORPORATION DERIVATIVE LITIGATION This Document Relates To: ALL ACTIONS.
MEMORANDUM OPINION AND ORDER GRANTING DEFENDANTS'
MOTIONS TO DISMISS THE VERIFIED AMENDED CONSOLIDATED
GEIGER LEWIS UNITED STATES DISTRICT JUDGE.
filed this case as a shareholder derivative action. The Court
has jurisdiction over the matter under 28 U.S.C. §§
1331 and 1367(a), as well as Section 26 of the Exchange Act,
15 U.S.C. § 78aa.
before the Court is Defendants James R. Gilreath, Charles D.
Way, Ken R. Bramlett, Jr., Scott J. Vassalluzzo, and Darrell
E. Whitaker's (Outside Director Defendants) Motion to
Dismiss Plaintiffs' Verified Amended Consolidated
Derivative Complaint (Amended Complaint) for failure to
satisfy the heightened pleading requirements of Rule 23.1 of
the Federal Rules of Civil Procedure. ECF No. 60. Defendants
A. Alexander McLean III, John L. Calmes, Jr., Kelly M.
Malson, Mark C. Roland (Individually Named Defendants,
collectively, Defendants), and Nominal Defendant World
Acceptance (World Acceptance or the Company) have filed a
motion to dismiss in which they join Outside Director
Defendants' Motion to Dismiss. ECF No. 61. Having
carefully considered the motions, the response, the replies,
the record, and the relevant law, it is the judgment of the
Court Defendants' Motions to Dismiss will be granted.
FACTUAL AND PROCEDRUAL HISTORY
following facts are taken from Plaintiffs' Amended
Complaint, the documents incorporated by reference therein,
and public filings of which the Court may take judicial
notice. World Acceptance is a small-loan consumer finance
business that specializes in sub-subprime lending, offering
short-term installment loans to “consumers who have no
other place to turn for financial help.” ECF No. 55 at
8. The Company's customers “by and large are
low-income consumers with bad credit, little educational
background, and very limited financial resources.”
Id. at 25. The typical installment loan World
Acceptance offers is between $300 and $4, 000 in value, and
is payable in fully amortizing monthly installments with
terms ranging from four to forty-two months. Id. at
124. World Acceptance has rapidly expanded over the past
decade, and by the end of the 2014 fiscal year, the Company
had a loan portfolio in excess of 956, 000 loans valued at
more than $1.1 billion. Id.
World Acceptance provides financing that is otherwise
unavailable to these borrowers, Plaintiffs assert the
financing “amounts to little more than a form of
perpetual debt” as a result of exorbitant interest
rates, unnecessary credit insurance products frequently
forced on the consumer, and the Company's practice of
encouraging customers to refinance, or “renew, ”
existing loans. Id. at 8-9. Plaintiffs allege World
Acceptance aggressively pushed customers to refinance their
loans only two or three months into an existing loan, which
created the perception the Company was experiencing rapid
growth in loans and loan revenue and helped avoid
delinquencies. Id. at 32. These “small-dollar
loan renewals” occurred whenever a customer took out a
“new” loan by refinancing a preexisting loan, at
which point the Company marked the old loan as paid in full.
Id. at 11. Plaintiffs avow Defendants made this
calculated perception their “number one
priority”; small-dollar loan renewals comprised as much
as 75% of the Company's loan portfolio from January 30,
2013-July 15, 2015 (Relevant Period). Id. July 15,
2015, is the date Plaintiffs brought this lawsuit. ECF No. 1.
Company later admitted it had improperly accounted for such
loan renewals in direct violation of Generally Accepted
Accounting Principles (GAAP). ECF No. 55 at 11. GAAP allows
an existing loan to be recapitalized into a “new”
loan only if the borrower has repaid at least 10% of the
principal. In those instances, the old loan may be recorded
as extinguished and a new loan may be recorded in the
lender's books. Id. In contrast, if a borrower
has repaid less than 10% of the principal, the
“new” loan must be accounted for as a
“modification” of an existing loan-not as a
“new” loan. Id. The crux of
Plaintiffs' allegations are Defendants “failed to
disclose, or recklessly disregarded, ” these faulty
accounting practices, which “artificially inflated loan
volume and growth during the Relevant Period.”
Id. at 45.
January 30, 2013, Defendants announced the Company's 2013
third quarter financial results by filing a Form 8-K and a
Form 10-Q with the SEC. Id. at 45, 48. The press
release attached to the filing emphasized the Company's
forty-eighth consecutive year-over-year quarterly increase in
diluted earnings per share, which the Company attributed
primarily to “the increase in average net loans and the
associated growth in interest and fees.” Id.
Total revenue increased by 10.1%: from $136 million during
the third quarter of the prior year to $149.6 million in the
third quarter of 2013, due to loan growth. Id. at
46. In a follow-up conference call, Defendant McLean, in
responding to a question by a securities analyst, concluded,
“I certainly don't believe the outlook for this
Company is anything but positive.” Id. at 47.
to Plaintiffs' Amended Complaint, certain Defendants
assured “the Company's accounting and reporting
policies are in accordance with U.S. GAAP and conform to
general practices within the finance company industry.”
Id. at 49. Further, the Summary of Quarterly Results
An evaluation was carried out under the supervision and with
the participation of the Company's management, including
its CEO and CFO, of the effectiveness of the Company's
disclosure controls and procedures as of December 31, 2012.
Based on that evaluation, the Company's management,
including the CEO and CFO, has concluded that the
Company's disclosure controls and procedures are
effective as of December 31, 2012.
Id. (internal quotation marks omitted). Defendants
McLean and Malson signed certifications required by the
Sarbanes-Oxley Act of 2002 (SOX) stating they had reviewed
the Form 10-Q and it did “not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by that
report.” Id. (internal quotation marks
omitted). The market reacted favorably to this report, and
the stock price for World Acceptance rose from $75.31 to
$77.55 the next day, and eventually up to $78.20 per share on
February 8, 2013. Id. at 50.
the release of the Form 8-K on January 30, 2013, certain
Defendants began selling some of their World Acceptance stock
over the course of the next two months. Id.
Defendant Roland sold 7, 500 shares at $77.76 per share for
total proceeds of $583, 193; Defendant Whitaker sold 1, 000
shares at $77.76 per share for total proceeds of $77, 370;
Defendant Vassalluzzo sold or caused to be sold 34, 477
shares at $78.77 per share for total proceeds of $2, 715,
792; and Defendant and CEO McLean sold 25, 000 shares at
prices ranging from $79.01 to $79.55 per share for total
proceeds of $1, 978, 499. Id.
April 25, 2013, World Acceptance announced its fourth quarter
and fiscal year 2013 financial results, which closely
resembled the prior announcement, including continued growth
in total revenue, average net loans, and loan volume.
Id. at 52. During a conference call that same day,
several analysts asked questions regarding the effects of
state and federal regulation on the Company's
refinancings. Id. When asked what percentage of new
loans written were refinancings of prior outstanding loans,
Defendant McLean responded, “If you base it on loan
volume, 77% of our loan volume represents renewals of
existing loans.” Id. at 54.
the announcement on April 25, 2013, Defendants Roland and
Vassalluzzo sold more stock. Id. at 55. On May 6 and
May 8, 2013, Defendant Vassalluzzo sold 214, 218 shares of
Company stock at prices ranging from $91.08 to $92.93 per
share for total proceeds of $19, 863, 245; on May 22, 2013,
Defendant Roland sold 1, 758 shares at $88.76 per share for
total proceeds of $156, 044. Id.
Company released its fourth quarter and fiscal year 2013
financial results in its 2013 Form 10-K, initially filed with
SEC on June 14, 2013, and amended July 19, 2013. Id.
In its Form 10-K, World Acceptance claimed to adhere to
stringent underwriting practices for its installment loans,
and the Company admitted to “actively” marketing
the opportunity for qualifying customers to refinance
existing loans prior to maturity. Id. The Form 10-K
reiterated the Company's adherence to GAAP and contained
similar SOX certifications. Id. at 58. Both the
fiscal 2013 Form 10-K and the 2013 amended Form 10-K were
signed by, among others, Defendants McLean, Whitaker,
Vassalluzzo, Way, Bramlett, and Gilreath. Id. at 59.
advance the truth about the Company's allegedly illicit
lending practices began to emerge when World Acceptance filed
Form NT 10-K/A with the SEC on July 3, 2013, disclosing
“the Company was unable to file a completed Form 10-K
for the fiscal year ended March 31, 2013, ‘because of
unexpected delays' relating to the need for an
‘additional review and analysis' of the
Company's allowance for loan losses.” Id.
at 12. The Company disclosed it was “possible that the
Company's amended Form 10-K [would] report a material
weakness in its internal control over financial reporting
relating to its process for determining its allowance for
loan losses.” Id. (emphasis omitted). After
these announcements, the Company's stock price fell more
than 12% the next trading day. Id.
25, 2013, Defendant McLean, on behalf of World Acceptance,
explained the Public Company Accounting Oversight Board
(PCAOB), during an audit of the Company's independent
auditor KPMG, discovered a “material weakness” in
World Acceptance's accounting treatment of small-dollar
loan renewals as a result of loans improperly being recorded
as “renewals” instead of
“modifications.” Id. at 64.
Specifically, “it was determined that the Company did
not have a control to assess less than 10% renewals and had
difficulty proving that they did not materially affect the
allowance.” Id. at 61. As Defendant McLean
later admitted during an April 29, 2014, conference call, the
Company “was not properly accounting for those loans
with proceeds of less than 10%.” Id. at 35.
the amended 10-K and admitted material weakness, Defendant
McLean, during his conference call with analysts, said,
“I do not believe that it will represent a material
impact on our operations or results.” Id. at
62. Defendant McLean confirmed to analysts the Company
already possessed the data necessary for proper accounting,
and provided further assurances “this situation is well
under control.” Id. at 64.
the Company's share price fell 4.3%, Plaintiffs claim the
drop would have been much greater had Defendants not (a)
downplayed numerous analysts' inquiries, (b) falsely
reassured shareholders the “material weakness”
would not have a significant impact on the overall operations
of the Company moving forward, and (c) not simultaneously
disclosed generally positive news regarding the Company's
“record financial results” for the first quarter
of fiscal year 2014. Id. at 70.
August 14, 2013, after the stock price had begun to recover
from the Company's announcement regarding its internal
accounting controls, Defendant Way sold 6, 000 shares of
World Acceptance stock at $86.54 per share for total proceeds
of $519, 240; on August 20, 2013, Defendant Bramlett sold 3,
000 shares at $88.41 per share for total proceeds of $265,
230. Id. at 68. On September 10, 2013, the Company
announced its Chief Financial Officer and Senior Vice
President, Defendant Malson, would retire. Id. at
19. On November 4, 2013, the Company announced its Chief
Operating Officer and President, Defendant Roland, was
resigning for “personal reasons.” Id.
According to Plaintiffs, this pattern of reporting loan and
revenue growth, continuing inflation of the Company's
stock price, and subsequent selling of stock by Defendants
continued through the second and third quarters of fiscal
year 2014. Id. at 68-75.
March 12, 2014, the Consumer Financial Protection Bureau
(CFPB) served World Acceptance with a Civil Investigative
Demand (CID) related to the Company's lending practices.
Id. at 43. The Company publicly disclosed this event
by filing a Form 8-K with the SEC. Id. According to
the Form 8-K, the CID stated the CFPB was investigating:
(i) to determine whether finance companies or other unnamed
persons have been or are engaging in unlawful acts or
practices in connection with marketing, offering, or
extension of credit in violation of Sections 1031 and 1036 of
the Consumer Financial Protection Act, 12 U.S.C. §§
5531, 5536, the Truth in Lending Act, 15 U.S.C. §§
1601. et seq., Regulation Z, 12 C.F.R. pt. 1026, or any other
Federal consumer financial law and (ii) to determine whether
Bureau action to obtain legal or equitable relief would be in
the public interest.
Id. Following this disclosure, the Company's
stock fell almost 20%. Id.
April 29, 2014, Plaintiffs aver Defendants caused the Company
to issue World Acceptance's fourth quarter 2014 financial
results, which were filed with the SEC in Form 8-K.
Id. at 76, 79. World Acceptance announced in the
Form 8-K it had made some “system changes that ensured
customers were not encouraged to refinance existing loans
where the proceeds from the transaction were less than 10% of
the loan being refinanced.” Id. at 77. The
Company acknowledged “this resulted in a decrease in
our loan volume and had an impact on our balances outstanding
and our overall yields.” Id. Following the
announcement of the “system changes, ” the
Company experienced its lowest quarterly growth in nine
years. Id. at 78.
incorporated the Company's fourth quarter and full year
financial results into its fiscal 2014 Form 10-K, which was
filed with the SEC on June 12, 2014. Id. at 79. The
2014 Form 10-K contained “substantially similar
statements as those in the Company's fiscal 2013 Form
10-K, ” including similar SOX certifications and an
emphasis on adhering to GAAP. Id. The “system
changes” had a significant, negative impact on the
Company's shareholders. When an analyst inquired as to
the percent of originations that came from sub-10% renewals
before and after the changes were implemented, Defendant
McLean responded, “It's dropped down to the 7% or
8% range from the 20% range that we announced last year. So
it's dropped down dramatically.” Id.
Regarding the ongoing CFPB investigation, the Company stated
in the Form 10-K,
While the Company believes its marketing and lending
practices are lawful, there can be no assurance that
CFPB's ongoing investigation or future exercise of its
enforcement, regulatory, discretionary, or other powers will
not result in findings or alleged violations of federal
consumer financial protection laws that could lead to
enforcement actions, proceedings, or litigation and the
imposition of damages, fines, penalties, restitution, other
monetary liabilities, sanctions, settlements, or changes to
the Company's business practices or operations that could
have a material adverse effect on the Company's business,
financial condition or results of ...