This is a shareholder class action brought on behalf of all persons who purchased common stock in Olympic Financial Limited ("Olympic") during the period of July 20, 1995 through March 3, 1997. Plaintiffs allege that Olympic and the individual defendants¹ engaged in a plan and scheme designed to fraudulently inflate and manipulate the value of Olympic common stock. By February 1997, Plaintiffs allege that Defendants were unable to conceal the financial problems plaguing Olympic and that the value of Olympic stock fell drastically.

Olympic, founded in 1990, is a company that buys loans from car dealers and issues debt securities collateralized by the loans. Olympic aggregates the loans and sells them to a trust, which in turn sells asset-backed securities to investors. Originally, Olympic lent only to "prime" credits through its Premier program. In October 1994, Olympic introduced its Classic program, which was targeted at higher risk borrowers. Since 1994, Olympic expanded the number of dealers in its network and increased its annual volume of auto loans purchased from $743.3 million in 1994 to $2.8 billion in 1996. As of December 31, 1996, approximately half of the Company's aggregate loan purchases were being made under the Classic program.

The Consolidated Amended Complaint ("Complaint"), filed August 11, 1997, alleges that Olympic and the individual defendants misled investors through the issuance of false and misleading statements concerning the company's operations and financial health. Specifically, plaintiffs claim that defendants (1) falsely characterized the Company's underwriting standards and the quality of its loan portfolio as "prime" with minimal or lower credit risk, (2) concealed from investors increasing numbers of defaults, delinquencies and repossessions by rewriting and/or extending otherwise delinquent loans, (3) delayed the recognition of losses by retailing repossessed autos, (4) intentionally excluded high risk loans from regularly conducted audits of the Company's loan portfolio, and (5) misled the adequacy of the Company's loss reserves.

Defendants claim that all of the risks and its operations were disclosed, and that the company consistently cautioned potential investors. Defendants argue that Olympic disclosed all the data on which it based its opinions, including the loans' annual percentage rates and the loans' historical performance, such as losses, delinquencies, costs, and repossessions. Defendants further contend that Olympic disclosed that it was increasingly making high-risk loans and that it detailed the associated risks at length.

Once market analysts learned of Olympic's pending financial downfall sometime after February 3, 1997, the price of Olympic's stock dropped significantly. Plaintiffs subsequently filed this action, alleging a claim against all Defendants for violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated by the Securities Exchange Commission ("SEC"). Plaintiffs also asserted a claim against the individual defendants for violation of Section 20(a) of the Securities Exchange Act.

This matter is currently before the Court on Defendants' motion to dismiss for failure to properly plead pursuant to Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLA"), 15 U.S.C. §§ 78u-4 and 78u-5. In addition, Defendants seek dismissed on grounds that Plaintiffs' claims are barred by the safe harbor and bespeaks caution doctrines. For the following reasons, the Court denies Defendants' motion in its entirety.

For the purposes of the Defendants' motion to dismiss, the Court takes all facts alleged in the Complaint as true. Westcott v. Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990). Furthermore, the Court construes the allegations in the Complaint and all reasonable inferences arising from the Complaint favorably to Plaintiffs. Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). A motion to dismiss will be granted only if "it appears beyond doubt that the Plaintiff can prove no set of facts which would entitle him to relief." Id.; see Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). The Court applies those standards in the following discussion.

A. Sufficiency of the pleadings

Defendants argue that dismissal of the claims against them is proper because Plaintiffs failed to sufficiently plead their claims pursuant to Fed. R. Civ. Pro. 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Rule 9(b) provides that when fraud is alleged, "the circumstances constituting fraud or mistake shall be stated with particularity." Therefore, Rule 9(b) requires identification of the "time, place, and circumstances of the alleged fraudulent activities. First Presbyterian Church v. John G. Kinnard & Co., 881 F. Supp. 441, 445 (D.Minn. 1995). Compliance with Rule 9(b) is reviewed as to each of the elements of a fraud claim and as to each of the named defendants.

In addition to the requirements imposed in Rule 9(b), the PSLRA requires that the complaint specify each statement alleged to be misleading and the reasons why the statement is claimed to be misleading. 15 U.S.C. § 78u-4(b)(1). The Act further requires that the complaint state with particularity facts giving rise to a strong inference that the defendants acted with the required state of mind. 15 U.S.C. § 78u-4(b)(2).

To establish a § 10(b) claim under the Securities and Exchange Act, Plaintiffs must show the following: (1) that Defendants made a false representation of material fact, (2) with scienter, (3) upon which Plaintiffs justifiably relied, (4) to Plaintiffs' detriment, (5) in connection with the purchase or sale of a security. Davidson v. Wilson, 973 F.2d 1391, 1400 (8th Cir. 1992).

Defendants argue that Plaintiffs fail to satisfy the pleadings requirements in regards to three elements of their § 10(b) claim. Specifically, Defendants claim that Plaintiffs failed to sufficiently plead (1) that Defendants made false representations, (2) that any misrepresentations made were material and (3) scienter.

1. Misrepresentation

A Misrepresentation may occur either through a statement that is untrue, or the omission of facts that are "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." Brogren v. Pohlad, 960 F. Supp. 1401, 1404 (D.Minn. 1997). Under the pleading requirements of the PSLRA, the complaint must specify each statement alleged to have been misleading and the reasons why such statements are misleading. If an allegation regarding a misrepresentation is based upon information and belief, the PSLRA requires that the complaint state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4(1).

Defendants argue that Plaintiffs complaint insufficiently pleads allegations of misrepresentation in that it fails to state facts to support the falsity of Defendants' representations. Defendants claim that Plaintiffs fail to provide any facts or documents at odds with the disclosures challenged. However, a review of the complaint shows that Plaintiffs assert specific facts that conflict with representations made by Defendants. Specifically, Plaintiffs assert internal actions taken by Olympic which suggest that Defendants' may have known they were overstating Olympic's financial health. For instance, Plaintiffs claim that Defendants purchased non-prime loans outside of underwriting guidelines, they concealed increases in delinquencies through the extensive use of extensions, rewrites, and improper credit examinations, and they refinanced repossessed vehicles to high risk borrowers yet claimed recovery rates that were impracticable, (Amended Compl. ¶ 50, 65). Furthermore, Plaintiffs assert that Olympic's internal audits reflect a continuing deterioration in underwriting and credit quality compared to company standards. To reduce the number of questionable loans and overstate the quality of its loan portfolio, Plaintiffs assert that Defendants instructed its credit examiners to exclude loans on repossessed vehicles from the sampling process. (Amended Compl. ¶ 54). Based on such numerous assertions, the Court concludes that Plaintiffs adequately pled claims of misrepresentations.²

2. Materiality of misrepresentations

To present a cognizable claim for securities fraud, Plaintiffs must allege that Defendants made misrepresentations that were material. Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir. 1996). A misrepresentation is material if it is substantially likely that the disclosure of the omitted fact would have been viewed by a reasonable investor as having significantly altered the "total mix" of information made available. Furthermore, in many circumstances, materiality is a factual question that is appropriate for the jury to decide. Id.

Defendants allege that Plaintiffs have failed in their burden to plead facts supporting a reasonable inference that any of the alleged misstatements or nondisclosures had a material effect on Olympic during the class period. Defendants argue that the public did not rely on Olympic's characterization of its loan portfolio for its Classic program as "prime" vs. "non-prime" and instead relied on credit data submitted by the company. Defendants claim the terms "prime" and "non-prime" are mere industry vernacular with no precise definition.

Although Defendants assert that Olympic had no duty to characterize their Classic program as "high risk" or "non-prime," that is not the focus of this Court's inquiry. Rather, the issue presented before the Court is whether Defendants' characterization of Classic loans as "prime" was a material misrepresentation. Pursuant to TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976), the issue of materiality is determined from the investor's point of view and is not dependent upon whether the information actually had a material effect on the Company. The Court thus concludes that Plaintiffs could present sufficient facts from which to conclude that such a characterization is indeed a material misrepresentation. Therefore, dismissal on these grounds is not warranted at this time.

3. Scienter

Finally, Defendants argue that Plaintiffs' pleadings fail to satisfy the "scienter" element of their § 10(b) claim. Pursuant to Fed. R. Civ. Pro. Rule 9(b), the complaint must set forth facts explaining why it is claimed that the representations were known by the Defendants to be untrue or misleading when they were made. In re Buffets, Inc. Securities Litigation, 906 F. Supp. 1293, 1300 (D.Minn. 1995). Furthermore, the PSLRA requires Plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).

A review of the complaint shows that contrary to Defendants' assertion, Plaintiffs did not merely plead conclusory allegations of fraudulent intent. Rather, as discussed above, Plaintiffs also pled facts that conflict with representations made by Defendants. Specifically, Plaintiffs make numerous assertions regarding internal actions taken by Olympic which suggest that Defendants may have known that they were overstating Olympic's financial health. The Court thus concludes that Plaintiffs' pleadings of scienter are sufficient to avoid dismissal at this time.

B. Application of the Safe Harbor and Bespeaks Caution Doctrines

Defendants claim that the alleged misrepresentations made are protected either by the PSLRA's safe harbor provision for forward-looking statements or the bespeaks caution doctrine.

1. Bespeaks Caution Doctrine

The bespeaks caution doctrine has been explained by the Eight Circuit as follows:

When an offering document's forecasts, opinions, or projections are accompanied by meaningful cautionary statements, the forward-looking statements will not form the basis for a securities fraud claim if those statements did not affect the "total mix" of information the document provided investors. In other words, cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law.

Parnes v. Gateway 2000, Inc., 122 F.3d 539, 548 (8th Cir. 1997) (quoting In Re Donald I. Trump Casino Securities Litigation, 7 F.3d 357, 371 (3rd Cir. 1993)). The Court further elaborated that the cautionary language must "relate directly to that which plaintiffs claim to have been misled." Id. (quoting Kline v. First Western Gov't Sec., Inc., 24 F.3d 480, 489 (3rd Cir. 1994). Dismissal is proper under the bespeaks caution doctrine only where "the documents containing defendants' challenged statements include enough cautionary language or risk disclosure that reasonable minds could not disagree that the challenged statements were not misleading." 122 F.3d at 548 (quoting Fecht v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995)).

Defendants argue that they sufficiently disclosed the risk involved in Olympic's stock portfolio such that the bespeaks caution doctrine bars Plaintiffs claims that Defendants misrepresented the risk involved. Although Defendants assert that Plaintiffs received documents containing some cautionary language, they do not specifically address the heart of Plaintiffs' claims. See Kline v. First Western Government Securities, Inc., 24 F.3d 480, 489 (3rd Cir. 1994) (application of the bespeaks caution doctrine requires more than the simple assertion by defendants that the alleged misrepresentation is based on represented facts). Plaintiffs make numerous other allegations for which there is no cautionary language that relates directly to Plaintiffs' claims of misrepresentation. Particularly, Defendants do not contend that they cautioned Plaintiffs in regards to their characterization of the Classic loans as "prime" loans. Therefore, the Court concludes that Plaintiffs claims are not barred by the bespeaks caution doctrine.

2. Safe Harbor Doctrine

Defendants argue that a bulk of the challenged statements were forward-looking in nature and that the PSLRA's safe harbor provision immunizes them because each of the statements are forward looking under 15 U.S.C. § 78u-5(l)(1). Specifically, Defendants contend that Plaintiffs claims involve a "projection of revenues, income . . . or other financial items" within § 78u-5(l)(1)(A); a "statement of future economic performance" within § 78u-5(l)(1)(C); or a "statement of the assumption underlying or relating to "the foregoing, within § 78u-5(l)(1)(D).

The Court concludes that Plaintiffs claims are not based on forward-looking statements as defined under the Securities and Exchange Act. Rather, the complaint sets forth numerous misrepresentations of past and current facts regarding the nature of loans, their riskiness, and their continuing decline throughout the class period, none of which constitute forward-looking statements.

Accordingly, based upon the foregoing and all the files, records, and proceedings herein, IT IS HEREBY ORDERED THAT:

Defendants' motion to dismiss is DENIED.

¹ The individual defendants are all officers and/or directors of Olympic. Defendant Jeffrey Mack is represented by separate counsel, but joins in the memorandum of law submitted by the remaining defendants.

² Given the Court's analysis on this issue, the Court similarly rejects Defendants' argument that Plaintiffs claims are inactionable as mismanagement complaints.