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In re Toronto-Dominion Bank Securities Litigation

United States District Court, D. New Jersey

December 6, 2018



          SUSAN M. LEMING WILLIAM M. TAMBUSSI BROWN & CONNERY, LLP RICHARD C. PEPPERMAN, II MATTHEW A. PELLER SULLIVAN & CROMWELL LLP Attorneys for Defendants The Toronto-Dominion Bank, Bharat Masrani, Colleen Johnston, Riaz Ahmed, Teri Currie, Leo Salom, Mike Pedersen, Mark Chauvin.


          NOEL L. HILLMAN, U.S.D.J.

         This case is a putative securities class action concerning alleged material misrepresentations or omissions made by Defendants. Presently before the Court are two motions. First is Defendants' Motion to Dismiss Plaintiffs' First Amended Complaint. Second, is Plaintiffs' Motion to File a Sur-Reply. For the reasons expressed herein, Defendants' motion will be granted, in part, and denied, in part. Plaintiffs' motion will be granted.


         We take our brief recitation of the facts from Plaintiffs' First Amended Class Action Complaint (“FAC”). This is a putative securities class action asserted against Defendant Toronto-Dominion Bank (“TD Bank”) and several TD Bank executives (collectively, “Individual Defendants”). The executives include Bharat Masrani, CEO, Riaz Ahmed, CFO, Teri Currie, Group Head, Canadian Personal Banking, Leo Salom, Group Head, Wealth Management and TD Insurance, TD Bank Group (formerly, Executive Vice President, Wealth Management), Mike Pedersen, President and CEO until October 27, 2016 (formerly, Group Head, U.S. Banking), and Mark Chauvin, Group Head and Chief Risk Officer. The putative class consists of those who held United States-traded, TD Bank stock between December 3, 2015 and March 9, 2017, inclusive.

         The securities claims are centered around TD's public statements about (1) strong risk management, (2) solid organic growth, and (3) growth in the Canadian Retail segment. Those statements, Plaintiffs allege, were false. Instead, Plaintiffs allege that a “highly pressurized work environment” and “forced sales targets” - among other things - led to violations of TD Bank's Code of Conduct, behavior that “exceeded TD's articulated risk appetite, ” and possibly illegal activity. Plaintiffs suggest that these allegations are supported by hundreds of confidential witnesses (“CWs”).[1]

         The FAC presents statements from nineteen CWs, who are non-parties. Those individuals and their statements are discussed as relevant, infra. The CWs statements generally allege that TD Bank implemented a strict sales quota on tellers, loan advisors, financial advisors, and customer service representatives. These sales quotas were consistently used by management to both reward and punish TD Bank employees. This so-called high-pressure environment led tellers to allegedly sign up customers - without authorization - for TD Bank products, services, and accounts. This also led loan advisors to bend rules and guidelines - governing TD Bank's risk tolerance - in order to authorize a higher percentage of loans. Managers (at various levels) and the human resources department were unable to stop these unauthorized sales because it was the employees' word versus the customers' word, and serious discipline would only occur if the manager had personal knowledge of an unauthorized sale.

         Plaintiffs complain of statements made in press releases, SEC filings, TD Bank's Code of Conduct, and investor teleconferences by TD Bank and Individual Defendants, which they say contradict the alleged experience of the CWs. These statements will be discussed as relevant, infra. Generally, Plaintiffs have separated these statements into three fraud categories: (1) risk management and internal controls fraud, (2) business operations fraud, and (3) reported results fraud.

         Plaintiffs filed their first complaint on March 12, 2017. This Court consolidated this case with a similar action filed by Janet Tucci (No. 1:17-cv-1735 (NLH/JS)) and appointed Plaintiff Ethan Silverman as the lead plaintiff on December 13, 2017. Plaintiffs filed the operative FAC on March 5, 2018, alleging two counts. First, Plaintiffs allege violations of Section 10(b) of Securities Exchange Act of 1934 (the “Exchange Act”) and Securities and Exchange Commission (“SEC”) Rule 10b-5 (codified at 17 C.F.R. 240.10b-5) against all Defendants. Second, Plaintiffs allege violations of Section 20(a) of the Exchange Act against Individual Defendants.

         Defendants filed their Motion to Dismiss on April 16, 2018. The Motion to Dismiss has been fully briefed. Additionally, Plaintiffs filed their Motion for Leave to File a Sur-Reply or, in the Alternative, to Strike Exhibit 1 on July 24, 2018. This motion has also been fully briefed. Therefore, these motions are ripe for adjudication.

         A. Subject Matter Jurisdiction

         This Court has subject matter jurisdiction over this case because it presents a federal question under the Exchange Act. See 28 U.S.C. § 1331; 15 U.S.C. § 78aa.

         B. Motion to File a Sur-Reply

         On July 24, 2018, Plaintiffs filed a Motion to File a Sur-Reply and attached, as an exhibit, a proposed sur-reply brief. In the alternative, Plaintiffs request this Court to strike Exhibit 1 of Susan Leming's Supplemental Declaration, which was attached to Defendants' reply brief. Plaintiffs' only complaint concerns one footnote in Defendants' reply brief, which mentions a Financial Consumer Agency of Canada (“FCAC”) report (the “FCAC Report”). Plaintiffs believe the FCAC Report was improperly first set forth in a reply brief instead of being presented in Defendants' moving brief. Defendants disagree, arguing the FCAC Report was properly presented in the reply brief in reply to one of Plaintiffs' arguments.

         Local Rule of Civil Procedure 7.1(d) controls the filing of a sur-reply brief in this specific situation. It states: “No sur-replies are permitted without permission of the Judge or Magistrate Judge to whom the case is assigned.” Loc. R. Civ. P. 7.1(d)(6). Since the proposed sur-reply was accompanied by a brief in support, Plaintiffs have complied with the Local Rules.

         In the interests of justice, this Court will grant Plaintiffs' Motion to File a Sur-Reply and consider both Plaintiffs' and Defendants' arguments concerning the FCAC Report on the merits, to the extent relevant, infra. While this Court does not find either side's arguments particularly helpful (or persuasive), it considers it wise - in its discretion - to consider all argument on the merits. Considering Defendants have responded to Plaintiffs substantive arguments on the merits, this will not prejudice any of the parties. This Court will deny the Plaintiffs' alternative argument to strike the offending exhibit attached to Defendants' reply brief. In light of this Court's ruling to consider the sur-reply, that argument is moot.

         C. Motion to Dismiss Standard

         When considering a motion to dismiss a complaint for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), a court must accept all well-pleaded allegations in the complaint as true and view them in the light most favorable to the plaintiff. Evancho v. Fisher, 423 F.3d 347, 351 (3d Cir. 2005). It is well settled that a pleading is sufficient if it contains “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2).

         “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do . . . .” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (alteration in original) (citations omitted) (first citing Conley v. Gibson, 355 U.S. 41, 47 (1957); Sanjuan v. Am. Bd. of Psychiatry & Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1994); and then citing Papasan v. Allain, 478 U.S. 265, 286 (1986)).

To determine the sufficiency of a complaint, a court must take three steps. First, the court must “tak[e] note of the elements a plaintiff must plead to state a claim.” Second, the court should identify allegations that, “because they are no more than conclusions, are not entitled to the assumption of truth.” Third, “whe[n] there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.”

Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011) (alterations in original) (citations omitted) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 664, 675, 679 (2009)). A court may “generally consider only the allegations contained in the complaint, exhibits attached to the complaint and matters of public record.” Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014) (citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993)).

         A district court, in weighing a motion to dismiss, asks “not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claim.” Twombly, 550 U.S. at 563 n.8 (quoting Scheuer v. Rhoades, 416 U.S. 232, 236 (1974)); see also Iqbal, 556 U.S. at 684 (“Our decision in Twombly expounded the pleading standard for ‘all civil actions' . . . .”); Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009) (“Iqbal . . . provides the final nail in the coffin for the ‘no set of facts' standard that applied to federal complaints before Twombly.”). “A motion to dismiss should be granted if the plaintiff is unable to plead ‘enough facts to state a claim to relief that is plausible on its face.'” Malleus, 641 F.3d at 563 (quoting Twombly, 550 U.S. at 570).

         Since this is a claim covered by the Private Securities Litigation Reform Act (“PSLRA”), heightened pleading standards apply beyond those encapsulated by Rule 12(b)(6). Federal Rule of Civil Procedure 9(b) requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Moreover, to allege a material misrepresentation, a plaintiff must “specify[] each allegedly misleading statement, why the statement was misleading, and, if an allegation is made on information or belief, all facts supporting that belief with particularity.” Institutional Inv'rs Grp. v. Avaya, Inc., 564 F.3d 242, 252-53 (3d Cir. 2009). Finally, to allege scienter, a plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id.

         D. Motion to Dismiss

         To allege a Section 10(b) claim, a plaintiff must plead “(1) a material misrepresentation or omission, (2) scienter, (3) a connection between the misrepresentation or omission and the purchase or sale of a security, (4) reliance upon the misrepresentation or omission, (5) economic loss, and (6) loss causation.” City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014). “Every person who, directly or indirectly, controls any person liable under any provision of” the Exchange Act will be held jointly and severally liable under Section 20(a). As is apparent from the statutory text, Section 20(a) liability may only be found if there is an underlying violation of the Exchange Act - here Section 10(b).

         Defendants present four main arguments concerning dismissal of Plaintiffs' claims, focusing on the materiality and falsity of the statements and whether scienter has been appropriately pleaded. First, Defendants argue that the statements complained of were neither material nor false or misleading. Second, Defendants argue that Plaintiffs have not presented the strong showing of scienter required for either the Individual Defendants or Defendant TD Bank. Third, Defendants argue as a result of dismissal under either of the above two grounds, the Section 20(a) claims must also be dismissed. Fourth and finally, Defendants argue that - at the very least - claims against two Individual Defendants, Pedersen and Chauvin, should be dismissed because of a lack of the necessary factual predicates for a claim. This Court will address each argument in turn.

         a. Materially False and Misleading Statements

         Defendants present three basic arguments in favor of dismissal of the Section 10(b) claim. Essentially, Defendants argue the statements complained of were either not material or not false or misleading. First, Defendants argue Plaintiffs have failed to plead the falsity of the statements with particularity, as required by the Federal Rules of Civil Procedure and applicable statutory law. Second, Defendants argue Plaintiffs cannot base their claim on TD Bank's earnings statements or certifications. Third, Defendants argue Plaintiffs only cite general statements about risk management, internal controls, and business operations. This is - in Defendants' understanding - not enough to support a Section 10(b) claim as the statements are so general as to be immaterial.

         i. Whether Plaintiffs Fail to Plead the Alleged Underlying Scheme with Particularity

         Defendants assert Plaintiffs fail to plead facts with particularity concerning the underlying illegal scheme that resulted in improper, illegal, or unauthorized sales of TD Bank products, services, and accounts. Defendants' argument here contains two main facets: (1) Plaintiffs' CW allegations do not meet the standards required under controlling Third Circuit law and (2) even if they meet that standard, the allegations do not state an illegal scheme with the requisite particularity. Plaintiffs counter by stating the CW allegations are proper and an illegal scheme was pleaded with the requisite particularity. The details of those arguments will be addressed infra.

         1. Analysis of CWs' Statements under the Third Circuit Test

         In assessing the particularity of CWs' allegations, a court should examine “the sources' base of knowledge, the reliability of the sources, the corroborative nature of other facts alleged, including from other sources, the coherence and plausibility of the allegations, and similar indicia.” Cal. Pub. Emples.' Ret. Sys. v. Chubb Corp., 394 F.3d 126, 147 (3d Cir. 2004). When a plaintiff relies solely on CWs to meet the particularity requirement, those claims “assume[] a heightened importance.” Id. at 148. This Court will not engage in a wholesale examination of each CW under this test. Instead, it will address the alleged deficiencies presented by Defendants.

         Under this test, Defendants assert some CWs lack personal knowledge as they were not employed during the class period, some CWs' statements are conclusory, and some CWs' statements are based merely on rumor or conjecture. Defendants appear to be correct in that CW2, CW3, CW7, CW8, and CW9 were not employed at TD Bank during the class period. Although this seems to foreclose the possibility of personal knowledge of facts during the class period, that does not mean those CWs' statements must be - or can be - ignored. As Plaintiffs point out, the misstatements at issue made during the class period were based on TD Bank's conduct before the class period. The CWs statements are certainly relevant to those allegedly false statements - at least. Additionally, they may also serve as corroboration of CWs' statements regarding conduct within the class period.

         Defendants are correct that CWs' statements which appear to be based on rumor or conjecture do not meet the particularity requirement. See Chubb Corp., 394 F.3d at 155 (“Generic and conclusory allegations based upon rumor or conjecture are undisputedly insufficient to satisfy the heightened pleading standard of 15 U.S.C. § 78u-4(b)(1).”). This Court will not consider these statements in evaluating Plaintiffs Section 10(b) claim.

         But, CWs' statements are not conclusory merely because they state something happened “regularly, ” “often, ” or “usually.” Even though these statements are not exceedingly precise, Defendants place too much emphasis on the particularity requirement. These CW statements provide where the misconduct occurred - to a specific branch location or department, the time period when it occurred, how and why it occurred, and what products may have been involved.[2] It seems Defendants would only find these statements “particular” if all the alleged bad actors stepped forward and provided statements concerning the specific date, location, and product that was improperly sold to a specific customer. That is not required. Avaya, Inc., 564 F.3d at 253 (stating that particularity only requires a plaintiff to “plead the who, what, when, where, and how: the first paragraph of any newspaper story.” (internal quotations and citations omitted)).[3]

         Defendants also challenge CW7's statements on grounds of particularity. The crux of Defendants argument is that CW7 does not provide a basis for how he determined a certain percentage of his subordinates' sales of certain services were without customer authorization. Defendants point to CW7's statements, which states he lacked “direct evidence” and never “saw” unauthorized sales occur. Plaintiffs counter that CW7's estimates are sufficiently supported by the detailed allegations in the FAC.

         Defendants citations to Chubb Corp. and Intelligroup on this point are unhelpful. Both of those cases left the court without any idea of how the CWs came by their purported knowledge. As described in more detail infra, this case is distinguishable. The Court has enough information here to determine these estimates are based on personal knowledge of CW7 acquired during his time supervising his seventeen employees. The Court does not doubt - at this stage - his knowledge or reliability, and his allegations appear to be corroborated by other accounts and are plausible based on the allegations of a high-pressure sales environment. Thus, this Court will not ignore CW7's statements.

         Finally, Defendants challenge the CW statements that appear to be drawn from CBC reports released in March 2017. Defendants assert these allegations do not contain the necessary specificity or indicia of reliability. Defendants specifically complain that Plaintiffs fail to allege when these CBC CWs worked at TD Bank, the dates when they acquired the information that serves as the basis of their allegations, and the facts showing how they obtained the information. Plaintiffs counter with the assertion that many courts allow CW statements to be taken from other complaints. Moreover, some courts find news reports - because of their independence - a more reliable source than CW statements provided in other actions.

         This Court will consider the allegations stemming from the CBC CWs. Defendants' own case, In re Optionable Sec. Litig., supports this holding. 577 F.Supp.2d 681 (S.D.N.Y. 2008). In it, the Court assumes the veracity of allegations in a news report for purposes of a motion to dismiss. Id. at 690. Considering Plaintiffs' CW allegations are consistent with those made by the CBC CWs, there is no reason to seriously doubt their reliability at this stage in the proceedings.[4]

         Additionally, Plaintiffs are correct that some courts have considered “the probative value of an independent news article or government report is much greater than that of confidential witness statements recounted in another complaint.” In re Lehman Bros. SEC. & ERISA Litig., No. 09 MD 2017 (LAK), 2013 U.S. Dist. LEXIS 107559, at *13 (S.D.N.Y. July 31, 2013). This Court will follow in the footsteps of the Southern District of New York and consider these statements. To the extent a time period cannot be discerned from the CBC CWs' statements, this Court will only consider those statements for purposes of corroboration.

         These appear to be the only objections to the CWs statements under the Third Circuit test. Thus, with the above caveats in mind, this Court finds it may rely on the CWs' statements in determining whether an underlying wrong has been sufficiently pled.

         2. Whether the CWs' Statements Allege an Underlying Illegal Scheme

         Since this Court has found it may rely on certain CWs statements, it must next determine whether those statements have adequately pleaded an underlying illegal scheme. Defendants provide several reasons why these statements do not show, with particularity, an underlying illegal scheme. First, the allegations mainly focus on “standard sales practices” that are not unlawful. (Defs.' Br. 10.) Second, the allegations pertain to only “isolated, ” “localized, ” or “episodic” unlawful activities at most, not widespread illegal conduct across the Canadian retail market. (Defs.' Br. 12-13.)

         Defendants first argument on this point is a red herring. Plaintiffs do not complain that TD Bank's sales practices were per se illegal.[5] Even if Plaintiffs did complain of the legality of TD Bank's sales practices, it does not affect the sufficiency of Plaintiffs' other allegations concerning unauthorized sales. Moreover, Plaintiffs describe TD Bank's sales practices to explain why they believe TD Bank employees were engaging in improper or illegal conduct, like unauthorized sales or nondisclosure of fees. This provides helpful context for the Court in considering Plaintiffs' allegations. Accordingly, the Court finds Defendants' argument here does not bear on dismissal.

         Defendants second argument, whether Plaintiffs have alleged an underlying, nationwide illegal scheme, is substantive. The Court is certainly cognizant that Plaintiffs have not provided a CW - or even a statement - from someone occupying a high position at TD Bank to show conclusively that untoward conduct may have been occurring across the entire Canadian retail sector. The Court is also aware that the CWs' statements in the FAC provide snapshots of different locations at different times. But this does not make the FAC deficient.

         This case is not Chubb Corp., which Defendants heavily rely on in favor of dismissal. In Chubb Corp., the shareholders generally asserted a rate initiative in its commercial insurance business meant to improve Chubb's bottom-line was failing and that executives engaged in misleading accounting practices to cover up this failure. 394 F.3d at 140-41. In considering the CWs used in that case, the Third Circuit noted:

Plaintiffs fail to aver . . . when any of [the CWs] were employed by Chubb. Nor do Plaintiffs allege the dates that these sources acquired the information they purportedly possess, or how any of these former employees had access to such information . . . Plaintiff heavily rely on former employees who worked in Chubb's local branch offices for information concerning Chubb's business on a national scale. Moreover, many of these sources were branch employees who worked in departments other than standard commercial . . . we are left to speculate whether the anonymous sources obtained the information they purport to possess by firsthand knowledge or rumor.

Id. at 148.

         In contrast, the Plaintiffs have properly alleged where and when the CWs worked for TD Bank, how the CWs had access to the information they allege, and that they possess firsthand knowledge. Moreover, the CWs were employed in the very branches and departments that are alleged to have engaged in improprieties. These allegations are much different than those presented to the Third Circuit in Chubb Corp.

         As noted supra, Defendants are correct that Plaintiffs have not brought forth one source with nationwide knowledge. But, that is not dispositive of this matter. As even Chubb Corp. states, “[c]iting to a large number of varied sources may in some instances help provide particularity, as when the accounts supplied by the sources corroborate and reinforce one another.” Id. at 155. This is what Plaintiffs have accomplished here, relaying markedly consistent allegations from across TD Bank's Canadian retail segment.

         In fact, it appears Plaintiffs' case is most analogous to the case cited by Plaintiffs out of the Central District of California. In re Countrywide Fin. Corp. Derivative Litig., 554 F.Supp.2d 1044 (C.D. Cal. 2008). There, fourteen low-level CWs (underwriters, senior underwrites, senior loan officers, vice presidents, auditors, and external consultants) in four locations over the period of four years were found to have sufficiently shown - at the motion to dismiss stage - improper nationwide practices. Id. at 1058-59. Particularly persuasive to the court there was the consistency of the statements between different levels of employees at different locations across time. Id. Plaintiffs' allegations are sufficiently similar to those in Countrywide to allow them to survive a motion to dismiss.

         Defendants attempt to distinguish this case is unavailing. Possibly, Defendants arguments about whether the claims were elevated to higher levels of the company could have a bearing on scienter, but it does not bear on whether an underlying scheme has been pleaded with particularity. Moreover, Plaintiffs have presented CW statements from multiple levels - tellers, advisors, customer service representatives, a branch manager, a district vice president, a human resources employee, and a senior credit analyst - not just the lowest levels as Defendants attempt to argue. Accordingly, this Court will not dismiss Plaintiffs Section 10(b) claim on these grounds.

         ii. Whether Plaintiffs Fail to Plead the Falsity of Defendants' Statements with Particularity

         Defendants argue, even if this Court finds an underlying illegal scheme was sufficiently pleaded, Plaintiffs have not explained why each statement is misleading. Defendants assert Plaintiffs' allegations concerning the falsity of these statements are merely conclusory and boilerplate. Plaintiffs counter that their allegations may be repetitive, but they are far from conclusory or boilerplate.

         This Court first notes that it appears Plaintiffs have not merely used identical language to explain why each statement was allegedly misleading. Defendants seem to admit as much, saying the paragraphs are only “nearly identical.” Plaintiffs actually offer a number of different versions of this paragraph that are specifically tailored to the alleged misstatement at issue. As Plaintiffs point out, this does not make their allegations conclusory, nor is it a ground for dismissal. In re Honeywell Int'l Sec. Litig., 182 F.Supp. 414, 426-27 (D.N.J. 2002).

         Defendants are incorrect in that Plaintiffs do not refer to a public statement and then allege “in a general and conclusory manner, that those disclosures were false or misleading.” In re Party City Sec. Litig., 147 F.Supp.2d 282, 300 (D.N.J. 2001). Instead, Plaintiffs explain why the statement was misleading based on the CWs' ...

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