Securities Regulation Daily Lone Exchange Act claim in Synchrony case survives appellate review
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Tuesday, February 16, 2021

Lone Exchange Act claim in Synchrony case survives appellate review

By Mark S. Nelson, J.D.

The surviving claim was stated with sufficient particularity whereas other Exchange Act and Securities Act claims were too vague to plead fraud.

The Second Circuit will allow one Exchange Act claim against Synchrony Financial to proceed because, contrary to the district court’s holding, it was alleged with enough specificity, but the appeals court upheld the dismissal of other Exchange Act and Securities Act claims because they were too vague to plead securities fraud. As a result, the case was remanded to the district court for further proceedings on the remaining fraud claim and potentially additional consideration by the district court of its rulings on the plaintiffs’ arguments about the PSLRA discovery stay and the district court's denial of leave to amend, issues the appeals court declined to address (In re: Synchrony Financial Securities Litigation, February 16, 2021, Pooler, R.).

Subprime retail credit market. Synchrony is in the business of partnering with major retail outlets to provide higher risk private label credit cards (PLCCs) that can be used only at a particular retail store while also providing dual cards that can be used anywhere and whose holders typically would pose less credit risk. But Synchrony also had a business model that sought to migrate retail store card holders from PLCCs to dual cards.

At some point, Synchrony had moved enough PLCC holders (many of whom were subprime card holders) to the more flexible dual cards that the increased credit risk began to affect its credit portfolio causing the company to impose stricter credit screens in the form of tightened underwriting standards. The plaintiffs alleged, in part, that Synchrony misled investors about the degree to which retailers opposed the tightened underwriting standards. For example, Synchrony’s underwriting changes purportedly caused Walmart, one its largest customers, to begin to lose revenues and, as a result, to seek out other credit card issuers.

Exchange Act claims. The appellate court affirmed dismissal of multiple Exchange Act claims that were either too vague, forward-looking, or that amounted to puffery (e.g., claims that Synchrony was "pretty confident" or "pretty positive" about its credit portfolio outlook), or which had been "properly contextualized" in the total mix of information available to investors (e.g., Synchrony’s "consistency" in underwriting). However, the court held that one Exchange Act claim regarding a major customer should not have been dismissed.

Specifically, the plaintiffs had alleged that a Synchrony executive stated that the company had not received "pushback" from its major retail store customers about stricter credit screens and that any changes to its underwriting policies were minimal in scope. The appellate court reasoned that the "pushback" statement was not merely an opinion but was a factual description. In this context, Synchrony could have known the statement was false when it was made. For example, the appellate court noted a The Wall Street Journal article cited by the plaintiffs in which it was revealed that Walmart was seeking new credit card issuers. The court further noted that several former Synchrony employees backed up that revelation.

According to the court, the district court had failed to address the specificity of the "pushback" statement in its opinion. The court, however, declined to address other issues regarding the surviving Exchange Act claim such as scienter and loss causation.

Securities Act claims. The district court concluded that the Securities Act claims sounded in fraud and, thus applied the requisite heightened pleading standard, a result the plaintiff did not contest on appeal. Thus, the appeals court applied the same heightened pleading standard.

The plaintiffs had alleged that Synchrony made materially false statements or omissions regarding the nature of its relationships with large retailers. Specifically, the plaintiffs pointed to statements that Synchrony has "longstanding and collaborative relationships" with big retailers and that Synchrony’s business relationships and "partner-centric business model" help it retail partners to produce "increased sales" and "strength[ened] customer loyalty."

The appeals court, however, concluded that these statements were too vague and generic to plead material misrepresentations or omissions. The appeals court also noted that Synchrony acknowledged that it faced sharp competition and that credit markets were likely to tighten. As a result, in addition to affirming dismissal of the Securities Act fraud claim, the appeals court likewise upheld the dismissal of the related controlling persons claim. However, because the appeals court dismissed the Securities Claims on the merits, it did not address the question of whether those claims had been brought within the applicable limitations period, the district court’s alternative holding.

The case is No. 20-1352.

Attorneys: Salvatore Graziano (Bernstein Litowitz Berger & Grossmann LLP) and Gregg S. Levin (Motley Rice LLC) for Stichting Depository APG Developed Markets Equity Pool and Stichting Depository APG Fixed Income Credits Pool. Jared Gerber (Cleary Gottlieb Steen & Hamilton LLP) and James T. Shearin (Pullman & Comley, LLC) for Synchrony Financial. Evan I. Cohen (Finn Dixon & Herling LLP) and Adam Selim Hakki (Shearman & Sterling LLP) for Barclays Capital Inc., Mizuho Securities USA LLC, Morgan Stanley & Co. LLC, TD Securities [USA] LLC, Blaylock Van, LLC, CastleOak Securities, L.P., Mischler Financial Group, Inc., R. Seelaus & Co., Inc. and The Williams Capital Group, L.P.

Companies: Synchrony Financial; Stichting Depositary APG Developed Markets Equity Pool; Stichting Depositary APG Fixed Income Credits Pool

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