Are the Subprime Securities Lawsuits Faring Poorly?
At what point can we declare that the subprime securities lawsuits are not doing particularly well in the courts? It may not yet be time, but there unquestionably are growing numbers of subprime lawsuits that have failed to survive motions to dismiss, at least as a preliminary matter.
The latest evidence of this phenomenon involves the securities lawsuit filed against Fremont General and certain of its directors and officers. As detailed here, Fremont plaintiffs first initiated the securities suit in June 2007. The 175-page Amended Consolidated Complaint in the case can be found here.
The plaintiffs allege that Fremont, a subprime mortgage lender, misrepresented the "quality of Fremont’s underwriting, loan quality and loan performance," and also that misrepresentations in Fremont’s financial statements "resulted in a material deception of the investing public." It was, the plaintiffs alleged, "only a matter of time before the Company’s extremely loose lending practices – driven by aggressive volume targets and financial incentives – would result in substantially increased mortgage delinquencies and material losses for Fremont investors."
Fremont filed for bankruptcy on July 9, 2008. The securities lawsuit was stayed as to the company but proceeded against the individual defendants. The defendants moved to dismiss the plaintiffs’ complaint.
In an October 28, 2008 order (here), Central District of California Judge Florence-Marie Cooper granted the defendants’ motion to dismiss, but allowed the plaintiffs 45 days in which to file a further amended complaint.
In their motions, the defendants had contended that the plaintiffs had failed to allege sufficient facts to satisfy the material misrepresentation and scienter pleading requirements for a 10b-5 claim.
Judge Cooper began her analysis of the motions with a commentary on the "disjointed nature of the allegations" in the Amended Complaint, noting that "nearly 100 pages" of the pleading "are dedicated to recounting of the history of the company, allegations of flaws in the company’s underwriting practices, and allegations of misstatements in various financial statements." She noted that she had "scoured" the Amended complaint "in an effort to link Lead Plaintiff’s allegations of specific statements with the alleged reason(s) those statements are misleading." She observed that "the internal cross references…fail to substantiate Lead Plaintiffs’ conclusory allegations that the statements were false and, in nearly all cases, they fail to illuminate why or how the falsity was material."
The Court also noted that while the complaint has "numerous references to representations by or knowledge of ‘Defendants’" these references "collectively do not facilitate a reasoned assessment of the statements and knowledge attributable to the Individual Defendants."
Finally, Judge Cooper also noted that "more often than not, the cross-referenced allegations intended to evidence the falsity of the alleged misrepresentations fail to adequately plead scienter in connection with those statements."
Because she concluded that the plaintiffs’ allegations "do not clearly articulate the basis of Lead Plaintiff’s Section 10-b and Rule 10b-5 claims against the Individual Defendants," Judge Cooper granted the motion to dismiss, with leave to amend.
It of course remains to be seen whether the plaintiffs will be able to address the court’s concerns in their amended complaint; to the extent they can, their case may go forward. But though Judge Cooper’s dismissal ruling is merely provisional, it is the latest in a series of similar rulings where courts have proven unreceptive to similar allegations raised against companies caught up in the subprime meltdown.
As I noted in prior posts concerning dismissals in the IMPAC Mortgage case (refer here), NovaStar Financial case (here), the Standard Pacific case (here) and First Florida Home Builders of Florida case (here), courts have proven demanding in their expectations regarding the specificity of the allegations required in the claims against these participants in the subprime marketplace. The courts clearly want to see more than that the companies engaged in aggressive business practices before their residential lending portfolio collapsed.
To be sure, there have been cases in which the plaintiffs’ allegations have proven sufficient to survive a motion to dismiss, as for example in the Toll Brothers case (refer here). But several courts now have made it clear they expect to see more than the existence of a mess left from the subprime meltdown. Generalized allegations that the lending institutions were aggressive or even that they failed to follow their own loan underwriting guidelines apparently may not be enough.
The subprime litigation wave is still in its earliest stages, and for that reason it may be premature to start making any generalizations. Nevertheless, it is at least interesting to note that a growing (and arguably significant) number of the earliest filed subprime securities cases are finding it difficult to survive the preliminary motions. Some of the cases may yet go forward following the amended pleading stage. But at least based on the most recent preliminary rulings, the question does arise whether the general economic turmoil has made courts skeptical of generalized allegations of fraud.
There will of course be further developments in the weeks and months to come. I will be tracking the results on my table of subprime and credit crisis-related case dispositions, which can be accessed here.
Namesake: Fremont General’s name doubtlessly derives from that of John C. Frémont, the 19th century American explorer, military commander and politician. Frèmont is known as "The Great Pathfinder" for his surveys of the Oregon Trail, the Oregon Territory, the Great Basin, and the Sierra Mountains in California.
Frèmont was one of the two first Senators from California in 1850. Frèmont was also the Republican party’s first candidate for President in 1856 and he was the first major party Presidential candidate to run in opposition to slavery. He had the dubious distinction of losing to James Buchanan. He did at least draw more votes than Millard Fillmore.
Frèmont’s name lives on as the moniker for numerous counties, cities and civic buildings, in California and elsewhere. And, until it went bankrupt earlier this year, there was also a subprime mortgage lender named after him as well.
Observations on the Blogosphere: Congratulations to the Drug & Device Law Blog (here), which is celebrating the second anniversary of its blogging existence. In a post today, the blog’s authors pose this question, with following commentary:
We have a question for someone with access to the data: What percentage of legal bloggers stop publishing within 12 months of launching a new blog?
We don't know the answer to that, but we bet it's like small businesses -- most fail within a year.
Why?
First, as we’ve said before, blogging is hard, hard work. It's not easy to maintain an active legal practice by day and find time at night for massive "recreational" writing. Try writing five or six shorts articles a week (which is what we've averaged) for just one week. Think about what that would feel like for three months. And now imagine what we're celebrating today -- two years cranking out posts at that pace.
The authors are absolutely correct about how difficult it is for a fully occupied professional to maintain a blog over time. The authors supply their own reasons why they continue to blog despite the enormous burdens and effort required. I concur with their views, particularly as respects interaction with the audience and the ability to influence the dialog.
Andrew Sullivan, the author of The Daily Dish blog (here) has a more detailed answer in a November 2008 Atlantic Monthly article entitled "Why I Blog" (here). Sullivan eloquently captures what makes blogging so exhilarating -- and excruciating. He notes that "for bloggers, the deadline is always now. Blogging is therefore to writing what extreme sports are to athletics: more free-form, more accident prone, less formal, more alive. It is, in many ways, writing out loud."
One particularly distinctive aspect of the blogging experience is the immediacy of the connection between author and reader. Readers can (and do) easily post comments or send emails with corrections and criticisms. As a result, Sullivan notes, "the blogger can get away less and afford fewer pretensions of authority." Some of those who send comments, Sullivan adds,
unsurprisingly, know more about a subject than the blogger does. They will send links, stories, and facts, challenging the blogger’s view of the world, sometimes outright refuting it, but more frequently adding context and nuance and complexity to an idea. The role of a blogger is not to defend against this but to embrace it. He is similar in this way to the host of a dinner party. He can provoke discussion or take a position, even passionately, but he also must create an atmosphere in which others want to participate.
As Sullivan notes, this interaction is "an integral part of the blog itself." He is absolutely correct when he observes that "you’d be surprised by what comes unsolicited into the inbox, and how helpful it often is."
But while I agree with Sullivan’s essay on many points, I also think his concept of the blogosphere is peculiarly narrow and as a result his analysis is impoverished. Sullivan apparently presumes that all blogs and blogging lives resemble his own. However, Sullivan inhabits a rarified and privileged corner of the blogosphere, one that only an infinitesimally small number of bloggers enjoy. He is, for example, able to blog full–time. In addition, he has "an assistant and interns to scour the Web for links to stories and photographs." These are assets and advantages about which most bloggers can only fantasize.
Because he is blind to the varieties of blogging experience, Sullivan overlooks the diversity of blogging philosophy and goals that coexist with his own. To use but one very concrete example, his essay completely fails to take account of the numerous excellent law blogs in the blawging community (of which the Drug and Device Law blog is a superb example.)
Were Sullivan to encompass these kinds of blogs in his descriptions, he could not assert that "the blog has remained a superficial medium" or that blog readers are unwilling to read more detailed essays. His blog may be superficial, and his readers may have short little spans of attention, but those characteristics are not universal, either as to blogs or as to blog readers.
Sullivan also seemingly overlooks the challenge and pain (duly noted on the Drug and Device Law blog) that many bloggers experience trying to juggle our blogging addiction with the demands of our day jobs. Though Sullivan’s essay nowhere recognizes these challenges, I am confident that for many working bloggers these elements define the essence of their blogging experience. Bloggers with the luxury of blogging fulltime are spared these challenges.
Some day I will unburden myself of the longer essay on blogging that burns within me. Whenever that day comes, I will attempt to fill some of the critical voids in Sullivan’s essay. The most important point is the role that that blogs can play in a specific professional community -- for the exchange of ideas, for the development of connections, and for the passing events to be noted. Over time, a blog can also become a reference source for an entire industry (a point that the authors of the Drug and Device Law blog also note in their second anniversary post).
Until the day comes when I finally write my own essay on blogging, I will have to let it suffice to quote with approval one remark in Sullivan’s essay, in which he says "there are times, in fact, when a blogger feels less like a writer than an online disk jockey, mixing samples of tunes and generating new melodies through mashups, while making his own music."
Ultimately, as Sullivan writes in explanation of how he got hooked on blogging, "the simple experience of being able to directly broadcast my own words to readers was an exhilarating literary liberation."
Hat tip to the FCPA Blog (here) for the link to Sullivan’s essay.
Observers outside the D&O insurance industry frequently comment to me that with all the subprime-related litigation, D&O pricing must be skyrocketing. These observers are often puzzled when I respond that the D&O marketplace remains generally competitive and pricing advantageous to buyers. This same conversation recurs with sufficient frequency that if may be worth exploring in greater depth. It may also be worth considering whether or not current marketplace conditions may be vulnerable to abrupt change.
