In prior posts (here and here), I noted two subprime securities lawsuit rulings in which defendants’ motions to dismiss were granted with leave to amend. But in a January 4, 2008 order (here) in the Accredited Home subprime-related securities lawsuit pending in the United States District Court for the Central District of California, the defendants’ motions to dismiss were largely denied, except with respect to certain of the outside director defendants’ dismissal motions.
The lead plaintiff in the case is the Arkansas Teacher Retirement System. The corrected consolidated class action complaint can be found here. Background regarding the case can be found here. The complaint names as defendants the company, a subprime-mortgage lender; its mortgage REIT subsidiary; five individuals who served as executives at the company or the REIT; and five individuals who had served as outside directors on the company’s board.
The complaint contains three basic sets of alleged misrepresentations: first, that the company maintained certain loan underwriting standards, when, it is alleged, the standards were in fact lax and were even undermined by the individual defendants; second, that the company maintained adequate reserves and allowances, when, it is alleged, that its reserves in fact did not adequately take into account the deterioration of the company’s mortgage loan portfolio and were even reduced as the portfolio deteriorated, resulting in an overstatement of the company’s earnings; and three, that the company misleadingly accounted for goodwill in connection with its May 2006 acquisition of Ames Investment Corp.
The plaintiffs asserted claims under Section 10 of the ’34 Act (and Rule 10b-5 thereunder); Section 14 of the ’34 Act (and Rule 14a-9 thereunder); and Sections 11, 12 and 15 of the ’33 Act.
In ruling on the motions to dismiss, Judge Marilyn Huff separately assessed the allegations against the various defendants. Judge Huff found that the complaint’s allegations as to the company and the five officer defendants adequately pled that the alleged misrepresentations were false and misleading. In making this finding, the court relied on the “group pleading doctrine,” which the court found properly applied to the officers since the individuals had “direct involvement with the company’s day-to-day affairs and financial statements.”
But Judge Huff declined to extend this finding to the outside directors or to the REIT. Judge Huff said that the complaint “fails to establish any basis for attributing statements” to these defendants. Accordingly, Judge Huff granted the motion to dismiss the Section 10 claims against the outside directors and the REIT.
Judge Huff also found that the complaint adequately pled scienter as to the five officer defendants and the company. She cited the complaint’s allegations that these individuals had “access to periodic reports that included detailed information regarding widespread deviations from company policy” and the allegations from several confidential witnesses that the defendants “actually directed these deviations.” Judge Huff also cited the allegations that the defendants “caused or permitted large decreases in several significant reserve accounts” in violation of GAAP while at the same time aware of the mortgage portfolio’s deterioration.
Judge Huff also found that the plaintiffs had adequately pled materiality, reliance and loss causation. Judge Huff denied the motions to dismiss the Section 14 claim, largely on the same grounds as with respect to the Section 10 claim, although once again she separated out the outside director defendants and granted their Section 14 dismissal motions. She denied the motion to dismiss the ’33 Act claims as well, although she again separated out the outside directors and granted their motion to dismiss the section 12 claims against them .
Special thanks to an alert reader, who felt that if I were going to write about the dismissals granted, I also had to write about the Accredited Home dismissal denial, to which he referred me.
Motion to Dismiss Denied in Comverse Options Backdating Securities Lawsuit: On February 19, 2008, Judge Nicholas Garaufis entered an order (here) denying the defendants’ motions to dismiss the Consolidated Amended Complaint (here) in the Comverse Technology options backdating securities lawsuit. Refer here for background regarding the case.
The motions actually came in the form of an appeal from the prior report and recommendation of Magistrate Judge Ramon Reyes, to whom the court had referred the case.
Significantly, Judge Garaufis reversed the Magistrate Judge’s recommendations in one significant respect. The Magistrate Judge had recommended dismissal of the Section 10(b) claims against the three outside director defendants who had served on the board’s audit and compensation committees. The court found that the three individuals’ “knowledge and experience” coupled with “red flags” evident in the board consent forms, made it “at least as plausible” that the three “were aware of, but ignored a strong likelihood of wrongdoing when the signed the unanimous consent forms.”
The court affirmed the Magistrate Judge’s recommendations in all other material respects.
The plaintiffs’ lawyers’ press release describing the dismissal order can be found here.
I have added the Comverse Technology order to my list of options backdating lawsuit dismissals, denials and settlements, which can be accessed here.