Sheer Size of Class Action Complaint for Securities Fraud Violations did not Defeat Motions to Dismiss because Class Action Allegations were “Verbose” but “Disordered” and Required “More Definite Statement” Washington Federal Court Holds
Three class action complaints were filed against dozens of defendants alleging securities fraud in connection with Washington Mutual home lending business; specifically, the class actions alleged violations of §§ 10(b) and 20(a) of the 1934 Securities and Exchange Act and Rule 10b-5 promulgated under § 10(b), and under §§ 11, 12(a)(2) and 15 of the 1933 Securities Act. The class actions were consolidated by the Judicial Panel on Multidistrict Litigation, lead plaintiff appointed, and a consolidated class action complaint filed. Among the more than three dozen defendants named in the consolidated class action were officers and directors, including outside directors, underwriters and investment banks, and accounting firms. In re Washington Mutual, Inc. Securities, Derivative & ERISA Litig., ___ F.Supp.2d ___ (W.D. Wash. May 15, 2009) [Slip Opn., at 1-3, 5]. The consolidated class action complaint was enormous, containing almost 400 pages (without exhibits), more than 1000 paragraphs, and citations to 89 confidential witnesses, _id._, at 5. The first 300 pages of the complaint consist of factual allegations of improper activity that claimed “(1) deliberate and secret efforts to decrease the efficacy of WaMu’s risk management policies…; (2) corruption of WaMu’s appraisal process…; (3) abandonment of appropriate underwriting standards for WaMu loans…; and (4) misrepresentation of financial results….” _Id._ Defense attorneys for various defendants filed five motions to dismiss the class action claims, _id._, at 1-2. And if plaintiffs believed that size alone would be sufficient to defeat a motion to dismiss, then they were mistaken: in the end, the district largely granted the motion to dismiss concluding that Counts One, Two and Three required “a more definite statement of the grounds for their claims,” and that Counts Four, Five and Six should be dismissed with respect to “claims regarding WaMu’s August 2006, September 2006, and December 2007 securities offerings.” _Id._, at 2. (The federal court denied the motion to dismiss Counts Four, Five and Six to the extent they concerned WaMu’s October 2007 securities offering. _Id._)
We summarize only briefly the federal court’s 33-page opinion. It is worth noting that the district court characterized the massive class action complaint as a “verbose and disordered pleading,” and concluded that it “failed to organize and clearly identify allegations in support of each element of the 10(b) claims against each defendant” even though more than 280 page of the complaint were directed toward these claims. In re WaMu, at 8. Relying on the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA) which requires that “a plaintiff alleging securities fraud must ‘plead with particularity both falsity and scienter,’” id., at 15 (citation omitted), the district court found “Remarkably, Plaintiffs make no effort to connect a particular statement made by any defendant with allegations as to why that statement was false or misleading or with allegations of facts giving rise to a strong inference of scienter,” id., at 17. The federal court also observed at page 17, “The first 300 pages of the Complaint fail to organize and identify the allegations supporting securities fraud as to each defendant, contain no useful cross-references or paragraph citations to connect the relevant allegations, and appear to include numerous irrelevant allegations, thereby depriving Defendants of proper notice of the grounds for the 10(b) claims against them.”
The district court also criticized plaintiffs’ counsel for not complying with its directive, issued two days prior to oral argument, to “Address[] the Officer Defendants individually, identify each alleged misleading statement made by the defendant and connect each statement to specific allegations showing that the defendant knew the statement was false or was deliberately reckless as to its falsity at the time the statement was made.” In re WaMu, at 18. Rather than comply with this request, “when the Court suggested that Plaintiffs’ counsel address the inquiry with specific references to the Complaint, he indicated that the relevant allegations were too numerous to identify even in three hours of argument.” Id. (footnote omitted). The district court admitted at page 19 that it “remains mystified at counsel’s failure to allege cohesive claims, submit helpful briefing, or prepare a response to the Court’s inquiry in advance of oral argument,” and observed that “Plaintiffs’ counsel cannot expect the Court to engage in the necessary analysis when counsel is not prepared to do so.” The federal court went so far as to issue a warning, “If Plaintiffs’ counsel are unable to rectify the problems identified in this Order when they file an amended complaint, the Court may be obligated to review whether counsel can adequately represent the proposed class.” Id., at 19 (citation omitted).
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