Stichting Depositary Apg Developed Mkts. Equity Pool v. Synchrony Fin. (In re Synchrony Fin. Sec. Litig.)

988 F.3d 157

IN RE: SYNCHRONY FINANCIAL SECURITIES LITIGATION

Stichting Depositary Apg Developed Markets Equity Pool, Stichting Depositary Apg Fixed Income Credits Pool, Plaintiffs-Appellants,

v.Synchrony Financial, Margaret M. Keane, Brian D. Doubles, Thomas M. Quindlen, David Melito, Paget Alves, Arthur Coviello, Jr., William Graylin, Roy Guthrie, Richard Hartnack, Jeffrey Naylor, Laurel Richie, Olympia Snowe, Barclays Capital Inc., Mizuho Securities USA LLC, MORGAN STANLEY & CO. LLC, TD SECURITIES (USA) LLC, Blaylock Van, LLC, CastleOak Securities, L.P., Mischler Financial Group, Inc., R. Seelaus & Co., Inc., the Williams Capital Group, L.P., Defendants-Appellees.

Docket No. 20-1352

August Term, 2020

United States Court of Appeals, Second Circuit.

Argued: November 12, 2020

Decided: February 16, 2021

SALVATORE J. GRAZIANO, Bernstein Litowitz Berger & Grossmann LLP (Adam H. Wierzbowski, Kate W. Aufses, Matthew W. Traylor, on the brief), New York, NY, for Plaintiffs-Appellants.

William H. Narwold, Gregg S. Levin, Motley Rice LLC, Hartford, CT and Mount Pleasant, SC (on the brief), for Plaintiffs-Appellants.

VICTOR L. HOU, Cleary Gottlieb Steen & Hamilton LLP (Jared Gerber, on the brief), New York, NY, for Defendants-Appellees Synchrony Financial, Margaret M. Keane, Brian D. Doubles, Thomas M. Quindlen, David Melito, Paget Alves, Arthur Coviello, Jr., William Graylin, Roy Guthrie, Richard Hartnack, Jeffrey Naylor, Laurel Richie, and Olympia Snowe.

James T. Shearin, Pullman & Comley LLC, Bridgeport, CT (on the brief), for Defendants-Appellees Synchrony Financial, Margaret M. Keane, Brian D. Doubles, Thomas M. Quindlen, David Melito, Paget Alves, Arthur Coviello, Jr., William Graylin, Roy Guthrie, Richard Hartnack, Jeffrey Naylor, Laurel Richie, and Olympia Snowe.

Adam S. Hakki, Daniel C. Lewis, Shearman & Sterling LLP (on the brief), New York, NY, for Defendants-Appellees Barclays Capital Inc., Mizuho Securities USA LLC, Morgan Stanley & Co. LLC, TD Securities (USA) LLC, Blaylock Van, LLC, CastleOak Securities, L.P., Mischler Financial Group, Inc., R. Seelaus & Co., Inc., and The Williams Capital Group, L.P.

Before: JACOBS, POOLER, and BIANCO, Circuit Judges.

POOLER, Circuit Judge:

Securities fraud cases are often complex and costly, so the pleading standards for such cases are demanding. However, even securities plaintiffs need not prove their entire case within the confines of the complaint. Equally as important as concerns about facilitating overly burdensome and expensive discovery and litigation are concerns about prematurely dismissing cases where plaintiffs have plausibly alleged with particularity the existence of securities fraud. In applying Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act ("PSLRA"), we must be careful not to mistake heightened pleading standards for impossible ones. Although the district court conducted a sound analysis as to many of the instant allegations before dismissing plaintiffs’ case, one set of allegations was materially distinct and should have survived.

The district court properly dismissed several optimistic generalities about Synchrony Financial's ("Synchrony") business operations as inactionable corporate puffery. But some of the plaintiffs’ allegations paint a more specific narrative. In relevant part, plaintiffs allege that, in early 2018, Synchrony representatives stated the company had received no "pushback" from its retail partners in the face of certain changes to the company's underwriting standards and credit portfolio. However, multiple former employees and the Wall Street Journal allegedly reported that Synchrony's relationship with its then-largest retail partner, Walmart, was swiftly deteriorating in 2017 because of those changes. Plaintiffs thus plausibly alleged that Synchrony misrepresented facts pertaining to events that had already transpired, in violation of the Exchange Act, and those allegations sufficed to survive a motion to dismiss.

As for the remaining allegations, we affirm their dismissal. Accordingly, we affirm in part and reverse in part, and remand for further proceedings consistent with this opinion.

BACKGROUND

These facts are taken from plaintiffs’ amended complaint and are assumed true at this early stage of the litigation. See Ganino v. Citizens Utils. Co. , 228 F.3d 154, 161 (2d Cir. 2000).

I. The Parties

Plaintiffs-Appellants Stichting Depositary APG Developed Markets Equity Pool and Stichting Depositary APG Fixed Income Credits Pool (collectively, "Stichting") were appointed lead plaintiffs in this putative class action against, inter alia, Synchrony. Stichting is allegedly "one of the largest institutional investors in the world," App'x at 34, and purchased shares of publicly traded Synchrony stock between October 21, 2016 and November 1, 2018 (the "Class Period"). Stichting also purchased Synchrony 3.95 percent bonds due 2027 (the "Notes") traceable to Synchrony's December 1, 2017 note offering (the "Offering").

Defendant-Appellee Synchrony is a Delaware corporation that operates in the consumer financial services industry. For the relevant period, Margaret M. Keane was Synchrony's Chief Executive Officer ("CEO") and President, Brian D. Doubles was Synchrony's Chief Financial Officer ("CFO") and Executive Vice President ("EVP"), and Thomas M. Quindlen was another EVP and Synchrony's CEO of Retail Cards. All three, along with Synchrony, are defendants to Stichting's Exchange Act claims (collectively, the "Exchange Act Defendants").

Stichting brought its Securities Act claim against Keane, Doubles, and the following additional individuals: David Melito, Synchrony's Senior Vice President ("SVP"), Chief Accounting Officer, ("CAO"), and Controller, and Paget Alves, Arthur Coviello, Jr., William Graylin, Roy Guthrie, Richard Hartnack, Jeffrey Naylor, Laurel Richie, and Olympia Snowe, all members of Synchrony's Board of Directors ("BOD"). Stichting also named several financial institutions as defendants to the Securities Act claim. They were all allegedly involved with the Offering: Barclays Capital Inc.; Mizuho Securities USA LLC; Morgan Stanley & Co. LLC; TD Securities (USA) LLC; Blaylock Van, LLC; CastleOak Securities, L.P.; Mischler Financial Group, Inc.; R. Seelaus & Co., Inc.; and The Williams Capital Group, L.P. (collectively, the "Securities Act Defendants").

II. Synchrony's Operations and Alleged Misrepresentations

Synchrony is the largest provider of private label credit cards ("PLCC") in the United States. A PLCC bears the name of a specific retailer (e.g., Sam's Club, Amazon, Lowe's) and can be used only for purchases with that retailer. Synchrony also provides general purpose co-brand credit cards ("Dual Cards"), which bear the brand of a retail partner but can be used as an ordinary credit card at other stores. Consumers that hold PLCCs tend to be a higher credit risk and have lower Fair Isaac Corporation ("FICO") credit scores than consumers who receive Dual Cards.¹ For some time prior to 2016, Synchrony frequently upgraded consumers from PLCCs to Dual Cards, a strategy called "low and grow." App'x at 36 (internal quotation marks omitted). The strategy refers to Synchrony's practice of gradually upgrading consumers with PLCCs, typically those with lower credit scores, to higher credit lines and then to Dual Cards.

Within the triangle of retailer, Synchrony, and consumers, each actor experiences different incentives and rewards. Synchrony controls the credit criteria, the issuance of credit cards, and owns the underlying accounts. Retailers receive a share of the customers’ fees, interest payments, and other charges on the credit accounts, along with increased sales, customer loyalty, and stronger branding and marketing. Consumers who sign up for PLCCs or Dual Cards get instant access to credit, discounts, and loyalty programs.

One of Synchrony's most important retail partners was Walmart. Indeed, Stichting alleges that Walmart was so significant to Synchrony's business that Synchrony maintained an office in Arkansas, near Walmart's headquarters. Walmart draws a significant amount of business from a low-income, subprime-borrower customer base. Subprime borrowers, who have FICO scores of 660 or less, comprised about 25 percent of Synchrony's credit card loans within the Class Period. Walmart encouraged Synchrony to approve more subprime borrowers, which would boost sales to its customer base. Synchrony often generated revenue from this customer base in the form of interest payments and late fees. Between 2011 and 2016, Synchrony allegedly converted a number of Walmart PLCC-holders to Dual Cardholders, pursuant to its "low and grow" strategy.

By 2016, the "low and grow" strategy began to backfire. With converted Dual Cards, riskier borrowers had more freedom to use their cards at stores other than Walmart, resulting in lower-than-expected revenue for Walmart and higher credit portfolio losses for Synchrony. To remedy this, Synchrony subsequently allegedly "drastically tightened its underwriting standards" without disclosing this to its investors. App'x at 43.

Nevertheless, Synchrony representatives continued to publicly maintain that any changes to its underwriting standards were minimal. For example, on December 7, 2016, Doubles said at a financial services conference that Synchrony was "not seeing anything right now" suggesting a need to "change [its] underwriting." App'x at 50. On January 20, 2017, Doubles stated during an earnings call that Synchrony has "maintain[ed] very consistent credit guidelines." App'x at 50. In its Form 10-K filing, published on February 23, 2017, Synchrony maintained that it did "not anticipate making significant changes to [its] underwriting standards." App'x at 50, 77. Doubles reiterated the same at a financial services conference on February 27, 2017. During this time, Synchrony's stock price increased, and Synchrony officers, including Keane and Doubles, allegedly sold large...