CHICAGO — A federal judge has ended, for now, a class action lawsuit from investors based on allegations Fifth Third Bank employees opened unauthorized accounts in customers’ names.
The consolidated complaint, under putative lead plaintiff Heavy & General Labors’ Local 472 & 172 Pension and Annuity Funds, was a securities class action covering anyone who bought Fifth Third common stock from Nov. 9, 2016, through March 6, 2020. The bank, along with executives Greg Carmichael and Tayfun Tuzun, moved for dismissal, which Judge Sara Ellis granted in an opinion filed April 26.
Like other litigation involving Fifth Third, this lawsuit referenced the Consumer Financial Protection Bureau, which on Nov. 3, 2016, notified the bank of an investigation into its sales practices, including opening accounts without consumers’ knowledge or consent, changing the types of services in which its clients are enrolled or completing unauthorized transactions. On March 9, 2020, the CFPB filed its own complaint against Fifth Third in federal court in Chicago.
Marcella Lape
| Skadden.com
Ellis said the CFPB’s investigation indicated Fifth Third was aware of “problematic sales practices as early as 2008.” She also noted the importance of Fifth Third’s March 2019 acquisition of Chicago-based MB Financial, and the role of common stock in that $4.7 billion transaction, as well as detailed salary and incentive-based compensation for the executives during the class period.
The dismissal argument maintained plaintiffs didn’t sufficiently show how each of the allegedly illegal statements were false or misleading “and instead merely pastes repetitive and lengthy quotes from Fifth Third’s regulatory filings and earnings followed by boilerplate allegations,” Ellis wrote. She said those arguments were unpersuasive, but did give weight to the defendants’ position on what they knew or should have known at the time they made the statements the plaintiffs challenged.
Because a corporation cannot have its own state of mind, Ellis explained, the matter hangs on Carmichael and Tuzun and whether they “knew the omitted facts undermining their alleged misstatements.” While the plaintiffs did note Carmichael was given direct notice of the CFPBs investigation before the class period — during which he signed statements filed with the Securities and Exchange Commission and spoke to investors — Ellis said the complaint falls short because it only alleges he “knew of the investigation, not necessarily of the problem itself.”
Tuzun attended shareholder meetings and also signed SEC statements, but the complaint doesn’t allege he “was told of the falsity of any of the representations or otherwise knew of the alleged problems.”
Furthermore, Ellis wrote, “while the consolidated complaint does allege that Fifth Third knew of pervasive employee misconduct, it fails to identify which corporate agents or officers knew of said misconduct. None of these allegations allow for the inference that Carmichael and Tuzun had such knowledge. At most, they allow an inference that Carmichael and Tuzun should have known about the fraud, but what they should have known does not suffice to show that they acted recklessly.”
The complaint specifically targeted statements from both executives concerning the bank’s compliance and risk management procedures, including an assertion those policies meant they would’ve known about improper sales practices. While the plaintiffs said those statements “served to conceal Fifth Third’s faulty reporting structure and their knowledge of its problems,” Ellis wrote, “the existence of inadequate compliance practices alone” doesn’t show how the executives’ statement were intended to deceive investors.
Although the bank’s disclosure of the problems in March 2020 negatively affected compensation for Carmichael and Tuzun, Ellis said allegations of motive linked to executive pay are too common to support SEC fraud allegations, whether related to share price alone or to stock value as an aspect of the MB Financial acquisition, because the same factors can inspire people to run successful corporations above board.
Eliis dismissed the complaint with prejudice, giving the plaintiffs until June 11 to file an amended complaint.
Fifith Third is represented in the action by attorneys Marcella L. Lape, Charles F. Smith, Elizabeth A. Simon, Daniel J. Scime and Scott D. Musoff, of the firm of Skadden Arps Slate Meagher & Flom LLP, of Chicago and New York.
The plaintiffs are represented by attorneys Tor Gronborg, Laurie L. Largent, Christopher R. Kinnon and Brian E. Cochran, of the firm of Robbins Geller Rudman & Dowd, of Chicago and San Diego.