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Yellowdog Partners, LP v. Curo Group Holdings Corp.

United States District Court, D. Kansas

December 3, 2019

YELLOWDOG PARTNERS, LP and CARPENTERS PENSION FUND OF ILLINOIS, individually and on behalf of all others similarly situated, Plaintiffs,
v.
CURO GROUP HOLDINGS CORP., et al., Defendants.

          MEMORANDUM AND ORDER

          JOHN W. LUNGSTRUM UNITED STATES DISTRICT JUDGE

         Plaintiffs[1] initiated this putative class action under the federal Securities Exchange Act of 1934 (“the Exchange Act”) against defendant CURO Group Holdings Corp. (“Curo”) and various executives and owners of Curo. This matter presently comes before the Court on defendants' motion to dismiss the consolidated complaint (Doc. # 47). For the reasons set forth below, the Court denies the motion to dismiss.

         I. Background

         The following facts are based on the allegations in the complaint, which the Court accepts as true under the applicable standard. During the relevant time period, Curo provided lending products to nonprime, underbanked consumers in need of cash in the United States, Canada, and the United Kingdom. Essentially, Curo operated as a payday lender, and its most profitable single line of business was its Canadian “single-pay” loans. In 2016 and 2017, various new laws and regulations in Canada imposed restrictions on such loans, which served to decrease Curo's yield on the single-pay loans in Canada. As a result, Curo developed a strategy to transition Curo's Canadian business from single-pay loans to installment and “open-end” loan products. Pursuant to that strategy, Curo began to convert single-pay customers to installment and open-end loans in Alberta, and it then opened test stores in one market in Ontario, before effecting the transition in the broader Ontario market.

         Open-end loans were expected to be less profitable for Curo initially because revenue on such loans takes longer to build and because Curo was required to account for increased loan losses “upfront” (at the time of origination). Defendants assured investors that the transition away from Curo's most profitable line of business would not be immediate; that single-pay loans would remain viable; and that the negative impact would be minimal, would be confined to the second quarter of 2018, and had been factored into Curo's publicly-reported 2018 financial guidance. Curo reaffirmed that guidance in late April 2018 and at the end of July 2018. In fact, defendants had already decided to accelerate the transition in Ontario, and the transition was significantly ramped up beginning in May 2018. The majority of the losses from the transition had already occurred by July 2018. In October 2018, Curo announced dismal third quarter financial results, and it significantly reduced its 2018 guidance for income and earnings.

         Plaintiffs bring this action on behalf of a putative class of those who acquired shares of Curo between April 27, 2018, and October 24, 2018. Plaintiffs assert claims against Curo and three officer defendants for violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5. Plaintiffs also assert claims against the non-Curo defendants as control persons pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The gist of plaintiffs' complaint is that defendants failed to disclose to the public that the transition to open-end loans in Canada would be accelerated and that Curo's short-term performance would therefore be negatively impacted; and that defendants therefore made false and misleading statements concerning the transition and Curo's expected 2018 financial performance. Defendants have moved to dismiss the claims.

         II. Governing Standard

         The Court will dismiss a cause of action for failure to state a claim under Fed.R.Civ.P. 12(b)(6) only when the factual allegations fail to “state a claim to relief that is plausible on its face, ” see Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007), or when an issue of law is dispositive, see Neitzke v. Williams, 490 U.S. 319, 326 (1989). The complaint need not contain detailed factual allegations, but a plaintiff's obligation to provide the grounds of entitlement to relief requires more than labels and conclusions; a formulaic recitation of the elements of a cause of action will not do. See Bell Atlantic, 550 U.S. at 555. The Court must accept the facts alleged in the complaint as true, even if doubtful in fact, see id., and view all reasonable inferences from those facts in favor of the plaintiff, see Tal v. Hogan, 453 F.3d 1244, 1252 (10th Cir. 2006).

         The Private Securities Litigation Reform Act (PSLRA) also imposes heightened pleading standards for securities fraud actions. In such an action, “the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” See 15 U.S.C. § 78u-4(b)(1). In addition, if the action requires proof of a specific state of mind, “the complaint shall, with respect to each act or omission alleged to [be a violation], state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” See Id. § 78u-4(b)(2)(A).

         III. Actionable Statements

         Section 10(b) forbids the use, in connection with the sale of securities, of any “manipulative or deceptive device or contrivance” in contravention of the SEC's rules. See 15 U.S.C. § 78j(b). SEC Rule 10b-5 implements Section 10(b) by making it unlawful in connection with the purchase or sale of any security “[t]o employ any device, scheme, or artifice to defraud;” “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made . . . not misleading;” or “[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” See 17 C.F.R. § 240.10b-5. An omitted fact is material “if there is a substantial likelihood that a reasonable [investor] would consider it important in deciding” how to act. See Basic, Inc. v. Levinson, 485 U.S. 224, 231 (1988) (internal quotation and citation omitted). “To fulfill the materiality requirement there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” See Id. at 231-32 (internal quotations and citation omitted). “In the context of a Rule 12(b)(6) motion, the court is reminded that materiality is a mixed question of law and fact and ordinarily should be reserved for the trier of fact.” See In re Sprint Corp. Sec. Litig., 232 F.Supp.2d 1193, 1215 (D. Kan. 2002) (citing cases).

         Defendants seek dismissal of plaintiffs' claims on the basis that the statements by defendants that plaintiffs have challenged in the complaint are not actionable as a matter of law, for various reasons. Specifically, defendants assert that particular statements are not actionable or are not material because they are opinions and thus not statements of fact; they are forward-looking statements protected by the statutory safe harbor or the “bespeaks caution” doctrine; they are merely statements of corporate optimism or puffery; or they are accurate descriptions of historical performance.

         The Court rejects these arguments for dismissal at this stage. Considering the totality of the allegations in the complaint, these claims, as alleged by plaintiffs, are not merely based on predictions or projections of financial performance that proved inaccurate. Rather, at their heart, these claims are based on allegations that defendants failed to disclose specific facts, particularly concerning the strategy and timing of the transition in Canada, which transition was bound to have a substantial undisclosed impact on financial performance. Under plaintiffs' theory of the case, those omissions made the challenged statements materially false or misleading, and thus actionable.

         For instance, defendants attack certain statements as protected forward-looking statements. Under the Exchange Act's “safe harbor”, a defendant is not liable with respect to a forward-looking statement if the statement is identified as such and is “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” See 15 U.S.C. § 78u-5(c). Under the “bespeaks caution” doctrine, forward-looking representations are “considered immaterial when the defendant has provided the investing public with sufficiently specific risk disclosures or other cautionary statements concerning the subject matter of the statements at issue to nullify any potentially misleading effect.” See Grossman v. Novell, Inc., 120 F.3d 1112, 1120 (10th Cir. 1997). Defendants cite various cautionary statements they made concerning the potential impact of government regulations and Curo's expected financial performance. The Court cannot conclude as a matter of law, however, that defendants' cautionary statements were sufficient to nullify any misleading effects of the challenged statements. This doctrine would not protect statements of then-present factual conditions, see Id. at 1123, and plaintiffs' have challenged statements concerning the timing and strategy decisions for the transition. Nor does the doctrine protect statements that imply background factual assumptions that a reasonable investor would regard the speaker as believing to be true. See Id. Plaintiffs have alleged that in making any forward-looking statements, defendants failed to disclose that those projections were contradicted by known facts concerning the transition and its inevitable impact. Ultimately it is for the trier of fact in this case to decide whether defendants' cautionary statements were sufficient in this case.

         Similarly, defendants argue that some of the challenged statements represent mere opinions. First, statements of opinion or belief may be actionable if the speaker did not in fact hold that belief. See Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S.Ct. 1318, 1326 (2015). In addition, an omission of a material fact may make a statement of opinion misleading and thus actionable. See Id. at 1327-32. As the Supreme Court recognized in Omnicare:

[A] reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion - or, otherwise put, about the speaker's basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience.

See Id. at 1328. Thus, an investor may state a claim based on a statement of opinion by identifying “particular (and material) facts going to the basis for the issuer's opinion - facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have - whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” See Id. at 1332. “[A] statement as to beliefs or opinions . . . may be actionable if the opinion is known by the speaker at the time it is expressed to be untrue or to have no reasonable basis in fact.” See Grossman, 120 F.3d at 1119 n.6 (citing Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1093-94 (1991)). Plaintiffs have alleged that omissions made defendants' statements, including any statements of opinion, materially misleading. Plaintiffs have not merely made such an allegation conclusorily; rather, plaintiffs have identified particular facts concerning the timing and strategy of the transition to open-end loans in Ontario, and the financial impact of that decision, that made the challenged statements misleading, and which suggest that the statements were made without a reasonable basis. Accordingly, the Court cannot conclude that any particular ...


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