Smallen & Smallen Revocable Living Tr. v. Western Union Co.

LAWRENCE HENRY SMALLEN AND LAURA ANNE SMALLEN REVOCABLE LIVING TRUST,individually and on behalf of all others similarly situated, and UA LOCAL 13 PENSION FUND,individually and on behalf of all others similarly situated, Plaintiffs, v. THE WESTERN UNION COMPANY, HIKMET ERSEK,SCOTT T. SCHEIRMAN, RAJESH K. AGRAWAL, and BARRY KOCH, Defendants.

Civil Action No. 17-cv-00474-KLM

C/w Civil Action No. 17-cv-00648-KLM

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

March 27, 2019

ORDER

ENTERED BY MAGISTRATE JUDGE KRISTEN L. MIX

This matter is before the Court on the Motion to Dismiss the Consolidated Amended Complaint Pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) and the PSLRA [#53],¹ filed by Defendants Hikmet Ersek ("Ersek"), Scott T. Scheirman ("Scheirman"), Rajesh K. Agrawal ("Agrawal"), and The Western Union Company ("Western Union" or the "Company"), and on the Motion to Dismiss the Consolidated Amended Complaint Pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) and the PSLRA [#55], filed by Defendant Barry Koch ("Koch"). Plaintiffs filed a combinedResponse [#63] in opposition to the Motions [#53, #55], and Defendants filed separate Replies [#70, #71]. The Court has reviewed the briefs, the entire case file, and the applicable law, and is sufficiently advised in the premises. As explained in detail below, the Motions [#53, #55] are GRANTED.²

I. Summary of the Case³

Western Union is a "money transfer service" which "provides money movement and payment services worldwide." Am. Compl. [#40] ¶ 33. During the alleged Class Period (from February 24, 2012, to May 2, 2017), Defendant Hikmet Ersek ("Ersek") was the Chief Executive Officer ("CEO") of the Company. Id. ¶¶ 1, 26. Defendant Scott T. Scheirman ("Scheirman") was the Company's Chief Financial Officer ("CFO") and an Executive Vice President from sometime prior to the Class Period until December 31, 2013, and a Senior Advisor until February 28, 2014. Id. ¶ 27. Defendant Rajesh K. Agrawal ("Agrawal") was President of Western Union Business Solutions from sometime prior to the Class Period through December 2013, was Interim CFO from January 2014 to July 2014, and CFO from July 2014 to after the end of the Class Period. Id. ¶ 28. He also served as an Executive Vice President during the entire Class Period. Id. Defendant Barry Koch ("Koch") was the Chief Compliance Officer from May 2013 until about November 2015. Id. ¶ 29.

Plaintiffs are investors who acquired Western Union securities during the ClassPeriod allegedly "at artificially inflated prices" during the Class Period and who were "damaged upon the revelation of the alleged corrective disclosures." Id. ¶ 24. In short, Plaintiffs assert that, during the Class Period, Defendants deliberately misled investors regarding Western Union's regulatory compliance regarding anti-money laundering ("AML") and anti-fraud practices. Id. ¶¶ 15-19.

On January 19, 2017, Western Union "reached a settlement with several federal regulators [including the Federal Trade Commission ("FTC")] in which it agreed to pay" $586 million. Id. ¶ 2. As part of this settlement, which covered a period from 2004 through December 2012, Western Union admitted to criminal violations including willfully failing to maintain an effective AML program and aiding and abetting wire fraud,⁴ which resulted in a Deferred Prosecution Agreement ("DPA") between Western Union and the Department of Justice ("DOJ"). Id. ¶¶ 130-31, 139. In part, Western Union admitted to failing "to implement proper controls and discipline agents." Id. As stated by the DOJ, "[r]ather than ensuring their high volume agents were operating above-board, Western Union rewarded them without regard to the blatant lack of compliance and illegal practices taking place." Id. As part of the settlement agreement, Western Union agreed to implement a number of compliance steps, including "ensuring that the Company a) conducts adequate due diligence on its agents; b) adequately monitors agent activity for anti-fraud and AML violations; c) takes prompt disciplinary action against agents that pose an unacceptable risk of money laundering and fraudulent practices; d) reports suspicious or illegal activity by itsagents as required by the AML laws; and e) establishes executive review and bonus structures that account for compliance with U.S. law." Id. ¶ 16.

On January 31, 2017, Western Union also settled charges brought by the attorney generals of forty-nine states and the District of Columbia for an additional $5 million "to resolve their investigations into how fraudsters used Western Union's money transfer services to defraud customers." Id. ¶ 526. Between January 18, 2017, and February 1, 2017, the price of Western Union stock shares declined by 10.57%. Id. ¶ 527.

Plaintiffs state that as a result of Defendants' conduct, they "suffered damages in connection with their respective purchases, acquisitions and sales of the Company's securities during the Class Period, upon the disclosure that the Company had been disseminating misrepresented information concerning Western Union's compliance efforts to the investing public." Id. ¶ 574. Plaintiffs therefore assert two claims: (1) violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder against all Defendants ("Claim One"), and (2) violation of § 20(a) of the Securities Exchange Act against the four individual Defendants, i.e., Defendants Ersek, Scheirman, Agrawal, and Koch ("Claim Two"). Id. ¶¶ 564-580.

II. Standard of Review

A. Fed. R. Civ. P. 12(b)(6)

The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test "the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true." Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994); Fed R. Civ. P. 12(b)(6) (stating that a complaint may be dismissed for "failure to state a claim upon which relief can be granted."). To withstand a motion to dismiss pursuant to Rule 12(b)(6),"a complaint must contain enough allegations of fact 'to state a claim to relief that is plausible on its face.'" Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Shero v. City of Grove, Okla., 510 F.3d 1196, 1200 (10th Cir. 2007) ("The complaint must plead sufficient facts, taken as true, to provide 'plausible grounds' that discovery will reveal evidence to support the plaintiff's allegations." (quoting Twombly, 550 U.S. at 570)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertions devoid of further factual enhancement." Id. (internal quotation marks omitted). "The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted." Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999) (citation omitted).

B. Private Securities Litigation Reform Act of 1995 ("PSLRA")

Because the PSLRA governs this case, the Court notes and applies guidance from the Tenth Circuit Court of Appeals regarding interpretation of the Act's "stringent" pleading requirements. Pirraglia v. Novell, Inc., 339 F.3d 1182, 1186 (10th Cir. 2003).

Under the PSLRA, "Section 10(b) and Rule 10b-5 create an implied private cause of action arising from fraud in the purchase or sale of securities." Hampton v. root9B Techs., Inc., 897 F.3d 1291, 1298 (10th Cir. 2018). Section 10(b) makes it unlawful for anyperson to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Rule 10b-5 prohibits "any untrue statement of a material fact or [omission of] a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading[,] . . . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5.

To state a claim under § 10(b) and Rule 10b-5, a plaintiff must plausibly allege that "a defendant made statements that (1) contained false or misleading statements of material fact, (2) related to the purchase or sale of a security, (3) were made with intent to defraud investors or conscious disregard of a risk that shareholders would be misled (scienter), (4) led to reliance by the plaintiff, and (5) caused the plaintiff's loss (loss causation)." Nakkhumpun v. Taylor, 782 F.3d 1142, 1146-47 (10th Cir. 2015).

The PSLRA, 15 U.S.C. § 78u-4(b), "adjusts the general pleading standard applicable under Federal Rule of Civil Procedure 12(b)(6), which requires a plaintiff to plead sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Hampton, 897 F.3d at 1298 (internal quotation marks omitted). "Specifically, under the PSLRA, a plaintiff must meet a heightened pleading standard with regards to the first and third elements of a securities-fraud claim: that is, respectively, as to whether the statements at issue were false or misleading, and whether the defendant acted with the requisite scienter." Id.

Under the Reform Act, a private complaint that alleges a violation of section10(b) of the 1934 Act and Rule 10b-5 thereunder must first "specify each statement alleged to have been misleading, the reason or reasons why the statement is

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