Last month, a federal judge in Austin dismissed a securities fraud class action brought against EZCorp, Inc. and its CFO alleging that the defendants made false and misleading statements that overstated EZCorp’s net income and misrepresented the nature of certain loan sales by improperly recording the sales as gains. The co-lead plaintiffs alleged the defendants violated Section 10(b) of the Securities Exchange Act of 1934, and to prevail under a Section 10(b) claim, the plaintiff must plead that the defendant made the misrepresentation or omission with scienter. To satisfy the scienter element, the co-lead plaintiffs alleged, in part, that EZCorp overstated its net income by 52.9% in FY 2013, 29.4% in FY 2014, and 31% in the first quarter of 2015; that confidential witnesses would testify that the CFO knew of the inaccuracies surrounding the accounting issues; and that the CFO received a $350,000 bonus for his role in the loan sales.

The Court determined that the 52.9%, 29.4%, and 31% overstatements, while high, were merely “some basis from which to infer scienter” because accounting violations are insufficient in and of themselves to establish scienter. As to the confidential witness statements, the Court explained that allegations from confidential witnesses must be viewed with some level of skepticism and that the statements at issue failed to establish that the confidential witnesses had personal knowledge of the events at issue, made vague allegations, and failed to provide certain specifics, such as when and where a key conversation occurred. Finally, as to the CFO’s bonus, the court determined that the alleged desire to increase compensation did not support a strong inference of scienter standing alone, especially because the $350,000 bonus was not a bonus of an extraordinary amount.

The Court dismissed the case without prejudice and provided the co-lead lead plaintiffs the opportunity to file an amended complaint. The case is styled, Huang & Rooney v. EzCorp, Inc. & Kuchenrither, No. A-15-CA-00608-SS.

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