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Financial Services Law Insights and Observations

District Court dismisses shareholder sales-compensation suit

Courts CFPB SEC Securities Enforcement Incentive Compensation


On April 27, the U.S. District Court for the District of Illinois granted an Ohio-based bank’s motion to dismiss a consolidated shareholder suit, ruling that investors “failed to allege facts that give rise to a strong inference of scienter” concerning whether bank executives intended to deceive them by not immediately disclosing a federal investigation into unauthorized account openings. The investors claimed, among other things, that bank executives made misleading statements and material omissions in the bank’s securities filings for 2016, 2017, and 2018 by failing to disclose a 2016 CFPB investigation into the bank’s sales practices. After the bank disclosed the investigation in its 2019 filings, the investors alleged the stock price dropped. The Bureau later filed a complaint in 2020 (covered by InfoBytes here) charging that the bank knew that sales employees “engag[ed] in misconduct in order to meet goals or earn additional compensation,” but purportedly “took insufficient steps to properly implement and monitor its program, detect and stop misconduct, and identify and remediate harmed consumers.” The investors claimed that bank executives’ assurances about the bank’s robust risk management and compliance practices “served to conceal [its] faulty reporting structure and their knowledge of its problems,” and that the CFPB’s ongoing litigation against the bank supported an inference of scienter because, among other things, bank executives were allegedly motivated to hide the Bureau’s investigation and underlying account issues because of a pending acquisition.

The court disagreed, ruling that the investors failed to allege any specific facts showing that bank executives knew of reporting structure deficiencies or that they “had personal knowledge of any problematic practices at the time when they made the statements at issue.” The court pointedly stated that it “does not find it appropriate to infer scienter from conclusory statements made in another litigation.” Moreover, with regards to whether bank executives concealed the Bureau’s investigation to make the company appear profitable, the court stated that “the general desire to keep stock prices high to make the company appear profitable or to close a deal” is not enough on its own to “allow a strong inference of scienter.”