AnchorBank, FSB v. Hofer: The Barriers of Loss Causation

In AnchorBank, FSB v. Hofer, No. 09-CV-610-SLC, 2010 WL 842172 (W.D. Wis. Mar. 5, 2010), the court granted defendant Hofer’s motion to dismiss.  The court held plaintiffs failed to adequately plead loss causation and reliance under the Private Securities Litigation Reform Act's heightened pleading standards.  We have previously discussed the loss causation issue here, here, and here. 

Plaintiff AnchorBank, FSB (“AnchorBank”), is a federal stock savings association under the Anchor BanCorp of Wisconsin holding company.  Plaintiff AnchorBank Unitized Fund (“Fund”) is a stock fund offered to AnchorBank employees as part of its 401(k) plan.  The Fund was comprised of cash and Anchor BanCorp’s common stock. 

The Fund manager was required to maintain a cash to stock ratio of 5-11%.  If the ratio fell outside the range, the Fund manager had to buy or sell Anchor BanCorp stock on the open market to correct the ratio. 

Plaintiffs alleged Hofer conspired with two other AnchorBank employees identified as “A” and “B.”  Allegedly, the three engaged in a “collusive strategy of buying and selling [AnchorBank Unitized Fund] shares . . . [,] which directly affected [Anchor BanCorp of Wisconsin’s] stock price.”  Hofer and either A, B, or both traded together on 36 occasions, beginning September 2008 through June 2009.  Additionally, Hofer indicated to A and B when he planned to trade and encouraged them to do the same.  The trading activity "eventually resulted in large gains to those coconspirators and losses to the Fund and the other Fund participants." 

AnchorBank claimed Hofer violated Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934.  First, Section 9(a)(2) prohibits manipulating securities prices through a series of transactions “creating actual or apparent active trading . . . or raising or depressing the price of such security.”  Second, Section 10(b) prohibits “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

The strict pleading requirements for federal securities claims required the plaintiffs to prove: (1) specific facts allowing a “strong inference” that the defendant acted with an intent to deceive, or scienter; (2) that defendant’s deception caused the plaintiffs economic loss, or loss causation; and (3) that the plaintiffs relied upon the deception to their detriment. 

The court agreed that plaintiffs pleaded sufficient facts supporting a reasonable inference that Hofer intended to defraud the Fund to meet the requirements of Rule 9(b).  Similarly, the facts were sufficient to establish scienter.  AnchorBank, however, failed to sufficiently plead loss causation.  

To meet this requirement, AnchorBank had to show that Hofer’s deception caused economic loss.  Plaintiffs alleged that the increased trading volume in the Fund shares resulting from Hofer’s scheme forced the Fund to trade on the open market and thus caused excessive trading of Anchor BanCorp shares. The court concluded that AnchorBank had failed to show the number of shares the Fund manager was required to trade on the open market resulting from Hofer’s increased trading.  The court stated, “nothing explains how the amounts traded relate to the Fund’s required cash balance requirements or how much of the increased trading volume was caused by the fund manager.” AnchorBank, therefore, failed to adequately relate Hofer’s alleged fraudulent trading scheme to the increased trading and the resulting loss of the Fund’s value.

Finally, AnchorBank failed to show reliance.  The plaintiffs were required to demonstrate that they relied upon the alleged deceit to their detriment.  AnchorBank did not allege that it was injured.  Rather, the Fund claims it was injured, but does not claim the injury resulted from reliance on the alleged fraud.  The court stated the “complaint does not suggest a reasonable basis for inferring that plaintiffs ever relied on the fraud to their detriment.”  The Fund operated in the open market as a result of internal controls, not market forces.  Moreover, the court stated that had the increased trading volume been for a legitimate purpose the Fund would have traded as it did in the open market.  Therefore, the alleged facts failed to support an inference that AnchorBank or the Fund relied upon Hofer’s deceit to their detriment.

Plaintiff’s claims were dismissed without prejudice and AnchorBank is allowed to file a second amended complaint to correct factual deficiencies.  

The primary materials for this case may be found on the DU Corporate Governance website.