## Facts

- Advanta Corporation, a major credit-card issuer, grew rapidly in the early–mid 1990s by offering low introductory “teaser” interest rates that later reset to higher permanent rates.
- On March 17, 1997, Advanta announced an approximately $20 million first-quarter loss.
- Shareholders alleged the loss resulted from a shift to more aggressive marketing: lower teaser rates and longer introductory periods than typical in the industry, attracting riskier customers and increasing defaults.
- Plaintiffs claimed Advanta had publicly projected strong earnings, including expectations of increased first-quarter 1997 earnings premised on permanent rates around 17–18%.
- Plaintiffs alleged Advanta changed course by lowering permanent rates to roughly 13–14% to expand its customer base, allegedly increasing credit risk and reducing revenues.
- Plaintiffs asserted defendants made material misstatements and omissions about earnings prospects and stock value, including failing to disclose the lowered permanent-rate strategy and its risks.
- Plaintiffs pointed to pre-disclosure stock sales by two officers as alleged insider trading supporting scienter.
- The action sought relief under Exchange Act § 10(b) and Rule 10b-5, plus § 20(a) control-person liability; the district court dismissed under Rule 9(b) and the PSLRA, and plaintiffs appealed.

## Issues

1. Whether the complaint pled with particularity facts giving rise to a strong inference of scienter as required by the PSLRA for § 10(b)/Rule 10b-5 claims.
2. Whether challenged statements about expected earnings and performance were protected as forward-looking statements under the PSLRA safe harbor and/or the bespeaks-caution doctrine.
3. Whether plaintiffs adequately alleged specific false or misleading statements or actionable omissions, including contemporaneous facts showing falsity when made.
4. Whether allegations of insider stock sales, without detailed context, supported a strong inference of scienter.
5. Whether § 20(a) control-person claims could proceed absent a well-pled primary § 10(b) violation.

## Decision

- The Third Circuit affirmed the dismissal de novo.
- The court held plaintiffs failed to plead scienter with the PSLRA-required strong inference supported by particularized facts.
- The court concluded many challenged projections were forward-looking and were nonactionable where accompanied by meaningful cautionary language describing relevant risks.
- The court found allegations of falsity and omission relied largely on hindsight from the later loss rather than contemporaneous facts showing defendants knew or were reckless as to falsity at the time.
- The court held the insider-trading allegations were insufficient because the complaint did not plead facts showing the trades were unusual or suspicious in timing or amount.
- Because the primary § 10(b) claim was inadequately pled, the derivative § 20(a) claims were also properly dismissed.

## Legal Principles

- Under the PSLRA, a securities-fraud complaint must specify each allegedly misleading statement, explain why it is misleading, and plead with particularity facts creating a strong inference of scienter.
- General allegations that executives “must have known” information based on position or access, and allegations inferred from later adverse results, do not satisfy the strong-inference scienter standard.
- Forward-looking statements are generally not actionable when protected by the PSLRA safe harbor or when accompanied by substantive, tailored cautionary language under the bespeaks-caution doctrine.
- Insider stock sales may support scienter only if pled with contextual facts (e.g., scope, timing, prior trading history, percentage of holdings) showing the sales were unusual or suspicious.
- § 20(a) control-person liability is derivative and requires an adequately pled underlying securities-law violation.

## Conclusion

The Third Circuit affirmed dismissal of the securities class action because the complaint did not plead particularized facts supporting a strong inference of scienter and largely relied on hindsight; forward-looking statements accompanied by meaningful caution were protected, insider-trading allegations lacked necessary context, and the failure to plead a primary violation required dismissal of the § 20(a) claims.


In re Advanta Corp. Securities Litigation, 180 F.3d 525 (3d Cir. 1999)