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In re Triangle Capital Corp. Securities Litigation

United States District Court, E.D. North Carolina, Western Division

March 7, 2019

IN RE TRIANGLE CAPITAL CORP. SECURITIES LITIGATION This Document Relates to ALL ACTIONS

          ORDER

          LOUISE W. FLANAGAN, UNITED STATES DISTRICT JUDGE

         These consolidated cases involving violations of federal securities laws come now before the court on defendants' motion to dismiss plaintiffs' amended consolidated complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) (DE 76). Lead plaintiff LifeWise Family Financial Security, Inc. (“LifeWise”) filed its response in opposition to the motion, and defendants replied. In this posture, the issues presented are ripe for ruling. For the reasons that follow, defendants' motion is granted.

         STATEMENT OF THE CASE

         Plaintiffs commenced the instant actions on November 21, 2017 and November 28, 2017,, respectively, alleging defendants violated of Securities Exchange Act of 1934 (“Exchange Act”), §§ 10(b) and 20(a), and applicable regulations by making fraudulent misrepresentations and omissions to investors in defendant Triangle Capital Corporation (“Triangle”). Plaintiffs seek to certify a class action on behalf of all purchasers of defendant Triangle's common stock, and seek damages, costs, attorney's fees, and other relief.

         On January 12, 2018, the United States District Court for the Southern District of New York transferred Holden v. Triangle Capital Corporation and Koeppel v. Triangle Capital Corporation[1]to this district. On March 5, 2018, this court granted plaintiff LifeWise's motion to consolidate Holden and Koeppel. On March 12, 2018, the court ordered that plaintiff LifeWise be appointed lead plaintiff in the consolidated cases, appointed counsel for lead plaintiff, designated the consolidated cases as In re Triangle Capital Corp. Securities Litigation, Master File No. 5:18-CV-10, and directed lead counsel to file and serve a consolidated amended complaint.

         On April 10, 2018, plaintiff Lifewise served a consolidated amended complaint against defendants Triangle Capital, Garland S. Tucker, III (“Tucker”), Steven C. Lilly (“Lilly”), and E. Ashton Poole (“Poole”), together with an exhibit listing alleged false or misleading statements (DE 69-1). On May 25, 2018, defendants filed the instant motion to dismiss for failure to state a claim. Defendants argue that plaintiffs fail to plead an actionable misstatement or omission, plaintiffs fail to plead falsity with particularity, and plaintiffs have failed to allege facts which raise a strong inference of scienter. In support of the motion, defendants rely upon a supporting declaration and several exhibits, including transcripts of investor calls and investor presentations, press releases, and Forms 10-K and 10-Q. Reference is made to defendants' index of exhibits submitted for the court's consideration, lodged on the docket at (DE 78-1), [2] for a complete listing of exhibits.

         Lead plaintiff LifeWise responded in opposition to the motion. Lead plaintiff LifeWise argues that the complaint alleges several different types of false material misstatements and omissions by defendants that are actionable, and that the complaint adequately alleges scienter. Defendants replied by arguing plaintiffs mischaracterized their own allegations, and reasserted prior arguments regarding the absence of a material act or omission, falsity, or scienter on the face of plaintiffs' complaint.

         STATEMENT OF THE FACTS

         The facts alleged in the complaint[3] may be summarized as follows. Defendant Triangle is a publicly traded business development company (“BDC”) which provides mezzanine finance to private businesses with annual revenues between $10 million and $250 million. (Compl. ¶¶ 2, 16). Defendant Poole is defendant Triangle's president, Chief Executive Officer (“CEO”), and Chairman of the Board of Directors (“Board”), and previously served as president and Chief Operating Officer (“COO”). (Id. ¶ 17). Defendant Lilly is defendant Triangle's Chief Financial Officer (“CFO”) and a member of the Board. (Id. ¶ 18). Defendant Tucker is a member of the Board, and served as defendant Triangle's CEO until February 2016 and Chairman of the Board until May 2017. (Id. ¶ 19). Lead plaintiff LifeWise is a financing and investment company which purchased defendant Triangle's common stock during the proposed class period. (Id. ¶ 15). Plaintiff Lifewise seeks to certify a class action for all persons or entities who purchased or otherwise acquired defendant Triangle securities between May 7, 2014, and November 1, 2017. (Id. ¶ 1).[4]

         A. Background

         Mezzanine financing is a hybrid of debt and equity financing that provides the lender with the ability to convert their financing to an ownership or equity interest in the borrowing company in the case of default. (Id. ¶ 22). In its 2014 Form 10-K filed with the SEC on March 2, 2015, defendant Triangle represented that it invests primarily in subordinated debt securities secured by second lien security interests in portfolio company assets, coupled with equity interests. (Id. ¶ 25; 2014 Form 10-K (DE 78-11) at 4).[5] Defendant Triangle further represented that such investments “would be rated below investment grade if they were rated. Such below investment grade securities are often referred to as ‘high yield' or ‘junk.'” (2014 Form 10-K (DE 78-11) at 4). Defendant Triangle's 10-K identifies numerous risk factors related to the business, such as “[f]inancial results might be affected adversely if one or more of our portfolio investments defaults on its loans or fails to perform as we expect, ” “we are dependent upon our executives for our future success, ” and “investing in our securities may involve an above average degree of risk.” (2014 Form 10-K (DE 78-11) at 16, 28, 31).[6]

         By approximately 2014, the mezzanine finance market began to experience some erosion due to the emergence of “unitranche” lending. (Compl. ¶ 26). Unitranche lending provided a hybrid security combining senior and subordinated debt in to one package with a blended rate and less risk. (See id.). This hybrid investment put pressure on the mezzanine finance market because it allowed borrowers to obtain financing at a single, blended rate between senior loans and junior mezzanine debt. (Id.). In addition, private equity firms began to compete to provide equity financing to firms that would traditionally utilize mezzanine financing. (Id. ¶ 27). Plaintiffs allege, based on comments made by defendant Poole in November 2017, that at some point between early 2013 and the beginning of 2016, defendant Triangle's “investment professionals were aware of these changes and recommended to our former CEO to begin moving away from mezzanine structures and into lower-yielding but more secure second lien unitranche and senior structures.” (See id. ¶¶ 28, 37). Defendant Poole stated the investment professionals reasoned that “[c]ompanies in our target market were gaining access to additional forms of capital on terms more favorable than what they could have achieved in the past. And as a result, the traditional risk-reward equation from mezzanine debt did not appear as attractive as it previously had.” (Id.).

         Plaintiffs allege that defendants misled the market with respect to the quality of the underwriting and investment controls and the quality of its 2014 and 2015 investments in order to continue to chase high end yields with lesser quality opportunities. (Id. ¶ 29). Several of defendant Triangle's 2014 and 2015 investments were placed on “non-accrual” at the close of the class period, effectively acknowledging that those assets were unlikely to generate future returns. (See id. ¶¶ 30-31). These investments constituted approximately 20% of defendant Triangle's investment portfolio from 2014 and 2015, 13.4% of defendant Triangle's total investment portfolio at cost, and 4.7% of defendant Triangle's total investment portfolio at fair value. (Id. ¶ 8).

         B. Defendant Triangle Pursues Mezzanine Financing Under its Established Structure

         On May 7, 2014, defendant Triangle issued a press release and Form 10-Q announcing financial results for the first quarter of 2014, and defendant Tucker stated in the press release “we believe the lower middle market is poised to provide attractive investment opportunities during the balance of 2014.” (Id. ¶¶ 32, 33; 2014 Q1 Press Release (DE 78-4) at 7; 2014 Q1 Form 10-Q (DE 78-3)). On May 8, 2014, in an earnings call with analysts and investors, defendant Poole stated that defendant Triangle was “focusing on quality over quantity in terms of its investment pace per quarter, ” and that defendant Triangle was being “discriminate in how it is reviewing opportunities and choosing to invest.” (Compl. ¶ 34; 2014 Q1 Earnings Call (DE 78-5) at 4, 9). Defendant Poole elaborated that defendant Triangle was passing on “B deals” so it could focus on “A deals, ” and that defendant Triangle's investment strategy was “a great way to continue to prudently invest the liquidity that we have - had over the last year and the firepower that we've reserved for more fruitful investing environment, which we believe is clearly unfolding.” (Compl. ¶ 34; 2014 Q1 Earnings Call (DE 78-5) at 9, 11). Defendant Lilly also spoke on the call, stating “[t]he primary keys to a successful long-term track record in the BDC industry are to maintain one's credit focus, remain conservative and consistently apply an underwriting formula that produces solid results.” (Compl. ¶ 35; 2014 Q1 Earnings Call (DE 78-5) at 4).

         On August 6, 2014, defendant Triangle issued a press release and filed its Form 10-Q to announce its financial results for the second quarter of 2014, and defendant Tucker stated in the press release that “the second quarter of 2014 was robust on all fronts . . . [a]gain it is an exciting time for Triangle and it gives me great pleasure to be able to share such good news with our investors.” (Compl. ¶ 38; 2014 Q2 Form 10-Q (DE 78-6)). On August 7, 2014, defendant Triangle held an earnings call with analysts and investors, where defendant Lilly stated that “we have taken advantage of what we perceived to be high-quality investment opportunities at attractive price points.” (Compl. ¶ 39; 2014 Q2 Earnings Call (DE 78-7) at 4).

         On November 5, 2014, defendant Triangle issued a press release and filed its Form 10-Q announcing the company's financial results for the third quarter of 2014. (Compl. ¶ 41; 2014 Q3 Press Release (DE 78-9) at 7; 2014 Q3 Form 10-Q (DE 78-8)). On November 6, 2014, defendant Triangle held its quarterly earnings call. (Compl. ¶ 42; 2014 Q3 Earnings Call (DE 78-10)). In that call, defendant Tucker stated “[w]e are pleased that the origination portion of our business is operating so well. Our investment pipeline has been robust all year . . . .” (Compl. ¶ 42; 2014 Q3 Earnings Call (DE 78-10) at 3). Defendant Poole also stated that, with respect to the amount of opportunities coming in the door and the opportunities that defendant Triangle chose to pursue, “I can safely say that our pipeline is healthy.” (Compl. ¶ 42; 2014 Q3 Earnings Call (DE 78-10) at 8).

         On March 2, 2015, defendant Triangle issued a press release and filed its Form 10-K, announcing financial results for the fourth quarter and full year of 2014. (Compl. ¶¶ 44, 46; 2014 Q4 Press Release (DE 78-12); 2014 Form 10-K (DE 78-11)). In the press release, defendant Tucker stated that the fourth quarter represented a “strong end of the year” and stated that defendant Triangle was “pleased with the quality of our investment portfolio, the strength of our balance sheet, and the opportunities we see across the lower middle market.” (Compl. ¶ 45; 2014 Q4 Press Release (DE 78-12) at 7). Defendant Triangle's Form 10-K represented that “the financing market for lower middle market companies” was “underserved, providing [the Company] with greater investment opportunities.” (Compl. ¶ 46; 2014 Form 10-K (DE 78-11)). That same day, defendant Triangle hosted an earnings call with analysts and investors, reviewing financial results for the fourth quarter and end of year 2014. (Compl. ¶ 48; 2014 Q4 Earnings Call (DE 78-13)). Defendants emphasized the quality of their investments and review process. (Compl. ¶ 48; 2014 Q4 Earnings Call (DE 78-13)). At one point, defendant Poole specifically stated “we will continue to remain focused on quality versus quantity in terms of new investment activity.” (Compl. ¶ 49; 2014 Q4 Earnings Call (DE 78-13) at 5).

         The 2014 Form 10-K also detailed defendant Triangle's investment process, explaining that for underwriting and approval, the defendant Triangle's investment committee would obtain due diligence from the underwriting team, request additional due diligence if necessary, and “approve the proposed investment by affirmative vote from a majority of the investment committee members” before proceeding with any investment. (See Compl. ¶¶ 46, 47; 2014 Form 10-K (DE 78-11) at 7-10).

         On May 6, 2015, defendant Triangle issued a press release and filed its Form 10-Q, announcing its financial results for the first quarter of 2015. (Compl. ¶ 51; 2015 Q1 Press Release (DE 78-15); 2015 Q1 Form 10-Q (DE 78-14)). In the press release, defendant Tucker stated “[w]e remain confident in both the overall quality of our investment portfolio and the investment opportunities in the lower middle market for the remainder of 2015.” (Compl. ¶ 51; 2015 Q1 Press Release (DE 78-15) at 8). On May 7, 2015, defendant Triangle held its quarterly earnings call. (Compl. ¶ 52; 2015 Q1 Earnings Call (DE 78-16)). Defendant Poole stated that he and management felt “very good” about defendant Triangle's new investments, and defendant Lilly stated “quality over quantity . . . . that's what we try to focus on and always have and I think that would be most - biggest guide post as we move forward.” (Compl. ¶ 52; 2015 Q1 Earnings Call (DE 78-16) at 11).

         On August 5, 2015, defendant Triangle issued a press release and filed its Form 10-Q for the second quarter of 2015. (Compl. ¶ 54; 2015 Q2 Press Release (DE 78-18); 2015 Q2 Form 10-Q (DE 78-17)). On August 6, 2017, defendant Triangle held its quarterly earnings call. (Compl. ¶ 55; 2015 Q2 Earnings Call (DE 78-19)). Defendant Tucker stated “we believe a steady unwavering focus on appropriate risk adjusted returns is the best method of producing above average, long term results.” (Compl. ¶ 55; 2015 Q2 Earnings Call (DE 78-19) at 3). Defendant Lilly also said “we're trying to find the best risk adjusted returns we can.” (Compl. ¶ 55; Q2 Earnings Call (DE 78-19) at 10).

         On November 4, 2015, defendant Triangle issued a press release and filed its Form 10-Q for the third quarter of 2015. (Compl. ¶¶ 57, 58; 2015 Q3 Press Release (DE 78-21); 2015 Q1 Form 10-Q (DE 78-20)). In the press release, defendant Tucker stated “we were able to originate a record level of new investments in high quality companies during the quarter” and that defendant Triangle was able to “take advantage of what we perceive to be an opportune time in the investing market.” (Compl. ¶ 58; 2015 Q3 Press Release (DE 78-21) at 6). On November 5, 2015, defendant Triangle hosted its quarterly earnings call. (Compl. ¶ 59; 2015 Q3 Earnings Call (DE 78-22)). Defendants emphasized the robustness of defendant Triangle's underwriting procedures, with defendant Tucker stating “I believe Triangle has successfully navigated this rough [p]atch with the same measure of discipline and focus . . . .” (See Compl. ¶ 59; 2015 Q3 Earnings Call (DE 78-22) at 5). Defendant Lilly also stated “we feel very good about [the current originations]” and “there is a lot of filter and it goes on.” (Compl. ¶ 59; 2015 Q3 Earnings Call (DE 78-22) at 11). Defendant Poole also stated on the call that, based on “our credit discipline and maintaining our focus, ” defendant Triangle would be “in a position to achieve in what we believe is a very opportunistic time in the market.” (Compl. ¶ 59; 2015 Q3 Earnings Call (DE 78-22) at 3).

         D. Defendant Triangle Changes Leadership and Reorganizes

         On February 3, 2016, defendant Triangle announced that defendant Poole would take over as CEO, while defendant Tucker would continue to serve as Chairman of the Board. (Compl. ¶ 62). Following defendant Poole becoming CEO, defendant Triangle implemental a new operational plan, called TCAP 2.0, which it claimed would promote open communication, cross-functional alignment, and increased accountability. (Id. ¶ 63). Plaintiffs allege that this regime changed the investment committee to require approval for deals from the COO, Chief Accounting Officer (“CAO”), and Chief Compliance Officer (“CCO”), while sole approval and rejection power previously resided with the CEO. (Id. ¶ 64). TCAP 2.0 also required beginning to shift focus away from riskier, higher-yield investments and place further emphasis on unitranche investing. (Id. ¶ 65).

         On February 24, 2016, defendant Triangle issued a press release and filed its Form 10-K, announcing financial results for the fourth quarter and full year of 2015. (Id. ¶¶ 66, 68; 2015 Q4 Press Release (DE 79-1); 2015 Form 10-K (DE 78-23)). In the press release, defendant Poole stated “[w]e are pleased to report a strong finish to 2015 . . . . As we move into 2016, we believe our investing platform is well positioned to continue capitalizing on the attractive opportunities the lower middle market provide[]s.” (Compl. ¶ 67; 2015 Q4 Press Release (DE 79-1) at 7). The 2015 Form 10-K also detailed defendant Triangle's investment process, portfolio management and investment monitoring processes. (See Compl. ¶ 68; 2015 Form 10-K (DE 78-23) at 7-10). Defendant Triangle's 2015 Form 10-K also described the company's internal process for rating investments. (Compl. ¶ 69; 2015 Form 10-K (DE 78-23) at 10-11). On February 25, 2016, defendant Triangle held its quarterly earnings call to discuss financial results for the fourth quarter of 2015, as well as give a year end review of 2015. (See Compl. ¶ 70; 2015 Q4 Earnings Call (DE 79-2)). On the call, defendant Poole stated “we excelled in originating high-quality new investments in the lower-middle market.” (Compl. ¶ 70; 2015 Q4 Earnings Call (DE 79-2) at 3).

         On May 4, 2016, defendant Triangle issued a press release and filed its Form 10-Q, announcing financial results for the first quarter of 2016. (Compl. ¶ 72; 2016 Q1 Form 10-Q (DE 79-3). On May 5, 2016, defendant Triangle hosted its quarterly earnings call. (Compl. ¶ 73). On the call, defendant Poole stated that yield compressions impacted defendant Triangle's “market pricing and the weighted average yield of our investment portfolio.” (Id.). Defendant Poole stated that the market was bifurcated, stating “the higher spreads . . . aren't happening with the A deals, the A companies. They are happening with the B and C companies.” (Id.). Defendant Poole then stated “[B and C deals] may have a whole host of risk profiles that are different than what you see in the A deals.” Id.

         On July 29, 2016, defendant Triangle issued a press release announcing that it closed an underwritten public officer of common stock, which netted approximately $119.6 million in proceeds. (Id. ¶ 76). According to the press release, defendant Triangle intended to use the net proceeds of the public offering to make additional investments. (Id.).

         On August 3, 2016, defendant Triangle issued a press release and filed its Form 10-Q, announcing its financial results for the second quarter of 2016. (Id. ¶ 77; 2016 Q2 Form 10-Q (DE 79-5)). On August 4, 2016, defendant Triangle held its quarterly earnings call. (Compl. ¶ 78; 2016 Q2 Earnings Call (DE 79-6)). During the call, defendant Poole stated “the pipeline that we have is healthy. It represents a good mix of mezzanine and unitranche opportunities.” (Compl. ¶ 79; 2016 Q2 Earnings Call (DE 79-6) at 6).

         On October 18, 2016, defendant Triangle announced that Brent P.W. Burgess (“Burgess”) was resigning from his positions as Chief Investment Officer (“CIO”) and director. (Compl. ¶ 80). On November 2, 2016, defendant Triangle issued a press release and filed its Form 10-Q, announcing financial results for the third quarter of 2016. (Id. ¶ 81; 2016 Q3 Form 10-Q (DE 79-7)). On November 3, 2016, defendant Triangle held its quarterly earnings call. (Compl. ¶ 82; 2016 Q3 Earnings Call (DE 79-8)). Defendant Lilly stated “we had a very healthy investment pipeline in the second half of the year, which result in our desire to raise growth equity capital to fund in to that pipeline.” (Compl. ¶ 82; 2016 Q3 Earnings Call (DE 79-8) at 8). When asked by an analyst whether the company's current structure could have avoided issues under the prior organization, defendant Poole stated the structure prior to TCAP 2.0 “might have had elements” that “in some cases might have influenced decisions that ultimately came back to bite us.” (Compl. ¶ 83; 2016 Q3 Earnings Call (DE 79-8) at 12). Defendant Poole elaborated, saying “maybe there were fewer checks ...


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