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Securities – Investment choices were mistakes, not fraud

Where a company that provided mezzanine financing made poor investment choices in 2014 and 2015, plaintiffs failed to show its contemporaneous statements were made with the required scienter and their securities fraud class action was dismissed.


LifeWise Family Financial Security Inc. is the lead plaintiff in this securities fraud class action suit against Triangle Capital Corporation and three of its controlling shareholders: E. Ashton Poole, Steven C. Lilly and Garland S. Tucker.

Triangle is a business development company providing “customized financing to lower middle market companies located primarily in the United States.” Unlike traditional lenders, Triangle offered companies in this market “mezzanine financing,” that is “a hybrid of debt and equity financing that provide[d] the lender with the ability to convert to an ownership or equity interest in the borrowing company in the event of default, after senior lenders [were] paid.” Poole, Lilly, Tucker and Brent P.W. Burgess (who is not a defendant) were all “C-level” executives in Triangle between 2014 and 2017. Poole, Lilly and Tucker also held positions on Triangle’s board of directors.

In November 2017, several of Triangle’s investments made in 2014 and 2015 faltered, causing Triangle’s shares to decrease by 21%. LifeWise, a shareholder in Triangle, alleges that defendants knew or should have known of the risks of those investments but defrauded them by failing to disclose such alleged risks.

After the district court dismissed LifeWise’s amended complaint without prejudice, LifeWise moved for leave to file its proposed second amended complaint. The district court denied leave to do so as futile under Federal Rule of Civil Procedure 12(b)(6), finding that the proposed second amended complaint failed to adequately allege scienter.


LifeWise relies heavily on its allegation that Triangle’s C-level executives, who both served on and largely controlled the investment committee’s decisions, were advised that the mezzanine lending market was contracting, and that Triangle should focus on unitranche lending. But, two factors diminish the strength of any scienter inference that could be drawn.

First, “omissions and ambiguities count against inferring scienter, for plaintiffs must ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.’” Here, LifeWise never specifies when this advice was given, how firm in their conviction these investment advisors were in recommending that Triangle should avoid mezzanine deals moving forward or what a mix of mezzanine and unitranche investments should look like. Neither do any of the statements from Triangle’s C-level executives in 2017 shed any further light on those issues. Second, as LifeWise concedes, it has not alleged that defendants had some particular motive to defraud investors.

Next, LifeWise suggests that the court should infer from the advice that some of defendants’ investment advisors gave that they had contemporaneous knowledge that the mezzanine lending market was in fact devoid of quality deals. Pointing to Lilly’s May 2017 and Poole’s November 2017 statements to investors, LifeWise argues that those statements equate to admissions that defendants knew in 2014 and 2015 that they were investing in low-quality deals. But LifeWise cannot connect the backwards-looking statements of Lilly and Poole to actual contemporaneous knowledge that the 2014-2015 mezzanine market had no viable prospects. LifeWise’s argument is purely speculative.

Finally, LifeWise asserts that defendants’ motivations to raise capital in 2016 and 2017, and their generalized motive throughout the class period to keep share prices and dividends high in order to attract more investors, are further evidence of their fraudulent intent. Once again, the court “rejects these types of generalized motives–which are shared by all companies–as insufficient to plead scienter under the PSLRA.”

Considering these allegations holistically and in their proper context, LifeWise has failed to allege a “strong” inference of scienter. The much stronger inference is that defendants had an honest debate about the merits of a subjective business judgment, and in hindsight, simply made the wrong choice with some investments.

The breadth of defendants’ risk disclosures to investors further strengthens the competing inference of innocence. First, defendants told their investors that they invested in “junk” rated companies. Second, defendants warned about the “highly competitive” nature of the market they operated in.


In re: Triangle Capital Corporation Securities Litigation (Lawyers Weekly No. 001-039-21, 25 pp.) G. Steven Agee, J. Case No. 19-2162. Feb. 22, 2021. From E.D.N.C. (Louise W. Flanagan, J.) Patrick Donovan for Appellant. Ashley Charles Parrish for Appellees.

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