Arkansas Teacher Retirement System v. Bankrate, Inc.
Docket: No. 13 Civ. 7183(JSR)
Court: District Court, S.D. New York; April 30, 2014; Federal District Court
Arkansas Teacher Retirement System and Fresno County Employees’ Retirement Association filed a class action lawsuit against Bankrate, Inc. and its senior officers, alleging violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 due to misrepresentations regarding the quality of Bankrate’s insurance leads during the Class Period from June 16, 2011, to October 15, 2012. Defendants moved to dismiss, arguing that plaintiffs did not sufficiently plead material misstatements or omissions, failed to establish a strong inference of scienter, and did not adequately claim control-person liability against the Apax defendants. The court granted the motion only concerning the control-person liability claim. Bankrate generates revenue by providing access to potential customers for financial products through its websites and by purchasing leads for resale. The plaintiffs alleged that misrepresentations about lead quality occurred, notably during an August 10, 2011 earnings call where CEO Evans claimed confidence in lead quality despite undisclosed issues, including $12 million in worthless leads and a loss of significant customers. Following a disappointing revenue report on May 1, 2012, Bankrate's leadership attempted to reassure investors about rectifying lead quality issues, claiming improvements in lead conversion rates and pricing negotiations in subsequent communications.
Bankrate's stock price rose by 10% following certain statements about the quality of its insurance leads, yet the actual quality was significantly low. On October 15, 2012, Bankrate announced the elimination of over 40% of its insurance leads due to this poor quality, which led to a 22% decline in stock price the next trading day. Under the Private Securities Litigation Reform Act (PSLRA), class action plaintiffs must show that a materially false statement or omission was made. Defendants argue that terms like "high quality" are merely puffery and not actionable. However, the court found that calling worthless leads "high quality" constituted a material misrepresentation, particularly given the context of the leads’ actual value. Despite claims of improving conversion rates, Bankrate had to write off a significant portion of its leads.
Regarding scienter, the court noted that Bankrate management's awareness of the industry's lead quality issues, along with their direct involvement in efforts to improve lead quality, suggests that the knowledge of these problems was both known and obvious. As a result, a strong inference of fraudulent intent was established. Conversely, the court found that plaintiffs failed to adequately plead control-person liability against the Apax defendants. Although Apax controlled over 50% of Bankrate’s stock and had board representation, the plaintiffs did not provide specific facts showing that Apax controlled the misrepresentations in question. Therefore, while the court partially granted and partially denied the defendants' motion to dismiss, the plaintiffs successfully pled a material misstatement or omission.
