Se. Pa. Transp. Auth. v. Orrstown Fin. Servs.

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SOUTHEASTERN PENNSYLVANIA TRANSPORTATION AUTHORITY, on behalf of itself and all others similarly situated, Plaintiff v. ORRSTOWN FINANCIAL SERVICES, INC., et al., Defendants

No. 1:12-cv-00993

United States District Court, M.D. Pennsylvania

February 1, 2023

MEMORANDUM

Kane Judge

Before the Court is Plaintiff Southeastern Transportation Authority (“SEPTA” or “Plaintiff”)'s Unopposed Motion for Entry of an Order Preliminarily Approving Settlement, Establishing Notice Procedures, and Setting Settlement Hearing Date. (Doc. No. 295.) For the reasons that follow, the Court will grant the motion and schedule a fairness hearing.

I. BACKGROUND

On May 12, 2012, SEPTA filed this putative class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) against Orrstown Financial Services, Inc. (“Orrstown”) Orrstown Bank (the “Bank”),^[1]Anthony Ceddia Jeffrey W. Coy, Jeffrey W. Embly, Bradley S. Everly, Mark K Keller, Andrea Pugh, Thomas R. Quinn, Jr., Gregory Rosenberry, Kenneth R. Shoemaker, Glenn W. Snoke, John S. Ward, and Joel R. Zullinger (collectively, the “Orrstown Defendants”), alleging securities violations in connection with Orrstown's March 2010 public offering (the “Offering”) of approximately 1.4 million shares of common stock, which raised almost $40 million dollars. (Doc. Nos. 1, 199 ¶¶ 1, 26-27.) SEPTA's claims related to Orrstown's report of significant losses for the fourth quarter of 2011, and the filing of its 2011 Annual Report on March 15, 2012, which disclosed that Orrstown had a “material weakness” in its internal controls and “did not maintain effective internal control over the process to prepare and report information related to loan ratings and its impact on the allowance for loan losses” as of December 31, 2011. (Doc. No. 199 ¶ 2.) SEPTA's claims also related to Orrstown's March 23, 2012 revelation that it had entered into an agreement with the Philadelphia Federal Reserve Bank and a consent order with the Pennsylvania Department of Banking, requiring Orrstown to revise its underwriting and credit administration policies and strengthen its credit risk management practices. (Id. ¶¶ 6-7.) On August 20, 2012, the Court appointed SEPTA as Lead Plaintiff and approved Chimicles Schwartz Kriner & Donaldson-Smith LLP^[2] as Lead Counsel pursuant to the Private Securities Litigation Reform Act (“PSLRA”). (Doc. No. 33.)

On March 4, 2013, SEPTA filed a First Amended Complaint (the “FAC”), adding as defendants Orrstown's auditor Smith Elliott Kearns & Company LLC (“SEK”) and the underwriters involved in the Offering, Janney Montgomery Scott, LLC and Sandler O'Neill & Partners, L.P. (the “Underwriter Defendants”), and alleging that Defendants issued materially untrue and/or misleading statements and omissions in violation of both the Securities Act of 1933 and the Exchange Act of 1934. (Doc. No. 40.) SEPTA asserted claims on behalf of two classes: (1) the “Securities Act Class,” i.e., persons and/or entities who purchased Orrstown common stock pursuant to, or traceable to, Orrstown's February 8, 2010 Registration Statement and March 23, 2010 Prospectus Supplement (the “Offering Documents”) issued in connection with its secondary stock offering in March 2010 and were damaged thereby; and (2) the “Exchange Act Class,” i.e., persons and/or entities who purchased Orrstown common stock on the open market between March 15, 2010 and April 5, 2012 (the “class period”)^[3]and were damaged thereby. (Id. ¶¶ 17-18.) SEPTA acquired Orrstown stock pursuant to the Offering Documents for the March 2010 Offering and also purchased Orrstown common stock on the open market during the class period. (Id. ¶ 25.) Following extensive briefing, the Court dismissed SEPTA's claims for failure to state a claim upon which relief could be granted. (Doc. No. 92.)

Subsequently, SEPTA, with the Court's permission, filed a Second Amended Complaint (“SAC”) against the same Defendants. (Doc. No. 101.) The SAC asserted Securities and Exchange Act claims against the same Defendants, but this time focused on alleged materially false and/or misleading statements made by Defendants in the Offering Documents and through the class period pertaining to the “effectiveness of the [Orrstown Defendants'] internal controls over underwriting of loans, risk management, financial reporting and compliance with banking regulations.” (Id. ¶ 22.)

All Defendants moved to dismiss the SAC, and while their motions were pending, on September 27, 2016, the Orrstown Defendants filed a “Notice of Subsequent Event in Further Support of their Motion to Dismiss the Second Amended Complaint.” (Doc. No. 122.) That filing pertained to the Securities and Exchange Commission (“SEC”) investigation of Orrstown referenced in the SAC and informed the Court that the SEC had concluded its investigation and issued an “Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Orders” (“SEC Order”). Orrstown attached the SEC Order to its filing, noting that it memorialized a settlement between the SEC and Orrstown, between the SEC and Orrstown's current Chief Executive Officer (Defendant Quinn) and current Chief Accounting Officer, and between the SEC and Orrstown's former Chief Financial Officer (Defendant Everly) and former Chief Credit Officer (Defendant Embly). (Id. at 2.) Pursuant to the SEC Order, Orrstown was required to pay a civil monetary penalty of $1 million, and Quinn, Everly, and Embly were required to pay civil penalties of $100,000 each. (Id. at 21.)

On December 7, 2016, the Court granted the motions to dismiss as to SEK and the Underwriter Defendants and granted in part and denied in part the Orrstown Defendants' motion to dismiss. (Doc. Nos. 126-27.) In connection with its decision, the Court took judicial notice of the SEC Order and its findings. The Court dismissed the SAC's Securities Act claims after concluding that SEPTA's allegations did not support a reasonable inference that the representations and certifications in Orrstown's 2009 Annual Report on Form 10-K as to the effectiveness of its “internal controls over financial reporting” were materially false and misleading when made. (Doc. No. 126 at 23-33.) The Court dismissed the Exchange Act claims as to SEK and the Individual Defendants, excepting Quinn, Everly, and Embly, but denied the motion to dismiss as to Orrstown and the Bank. (Id. at 34-53.) Accordingly, after the issuance of the Court's December 7, 2016 Order regarding the parties' motions to dismiss the SAC, the claims remaining in this case consisted of Exchange Act claims under Section 10(b) and rule 10b-5 against Orrstown, the Bank, Quinn, Everly, and Embly, as well as a Section 20(a) claim for control person liability against Quinn, Everly, and Embly. (Id. at 49-51.)

The parties subsequently initiated discovery on the remaining Exchange Act claims. During this time Plaintiff received and reviewed over one million pages of documents from the Orrstown Defendants, SEK, and the Underwriter Defendants, as well as numerous third parties (including many of the Bank's commercial borrowers and numerous Bank consultants). (Doc. No. 297 at 3.) Due to the technical nature of many of the documents, Plaintiff retained several banking and accounting consultants to assist it in its analysis of the documents. (Id.) Plaintiff deposed a representative of SEK and one of the Bank's consultants. (Id.) In addition, in December 2017 and January 2018, certain parties exchanged opening and rebuttal expert reports addressing issues relevant to class certification. (Id. at 4.) The Court notes that discovery involved substantial delays and Court intervention to address claims of privilege by Orrstown and banking regulators. The details of the privilege claims and the extensive motion practice related to them are set forth in the Court's August 18, 2022 Memorandum and Order addressing SEPTA's renewed motion to compel (Doc. Nos. 277-78) and will not be repeated here.

In April 2019 SEPTA sought leave to file its operative pleading, the TAC (Doc. No. 182), incorporating facts obtained in discovery and reasserting Securities and Exchange Act claims previously dismissed against several Individual Defendants, SEK, and the Underwriter Defendants based upon information gathered during discovery in 2018. After extensive briefing, the Court granted SEPTA's motion for leave to file the TAC in a February 14, 2020 Order. (Doc. Nos. 197-98.) In so doing, the Court rejected Defendants' argument that the Securities and Exchange Act's respective statutes of repose barred SEPTA's reassertion of claims, rendering its effort to amend the operative complaint futile. On February 24, 2020, Defendants filed motions to certify the Court's February 14, 2020 Order for interlocutory appeal. (Doc. Nos. 201-02.) In accordance with the Court's Order adopting their proposed briefing schedule (Doc. No. 203), Defendants filed motions to dismiss the TAC (Doc. Nos. 213, 215, 217), and completed briefing on the motions to dismiss on August 26, 2020. The Court granted Defendants' motions to certify its Order for interlocutory appeal, finding that there existed substantial grounds for difference of opinion on the issue of whether claims reasserted against the Defendants were barred by the respective statutes of repose (Doc. Nos. 229-30), the Third Circuit Court of Appeals granted their petitions for permission to appeal the February 14, 2020 Order pursuant to 28 U.S.C. § 1292(b), and Defendants filed a notice of appeal (Doc. Nos. 236, 253).

After...