In the latest of the decisions in which subprime and credit crisis-related securities lawsuits have failed to withstand preliminary judicial scrutiny, on October 6, 2008, Central District of California Judge Andrew Guilford granted (here) defendants’ motion to dismiss the plaintiffs’ second amended complaint in the IMPAC Mortgage Holdings case, with leave to amend.


As reflected here, the plaintiffs initially filed their purported class action complaint on August 17, 2007. The initial complaint was subsequently amended twice, and the October 6, 2008 ruling related to the plaintiffs’ second amended complaint. The second amended complaint essentially alleged that contrary to the company’s public statements, the company’s Alt-A loans were actually being sold to less creditworthy borrowers, so that the Alt-A loan portfolio was as risky as a portfolio of subprime mortgages. The plaintiffs further alleged that at the same time, the company misrepresented its true financial condition by its failure to write down the value of its loan portfolio.


In his October 6 opinion, Judge Guilford states that "plaintiff packs the Complaint with 30 pages of supposed misstatements or culpable acts, but none of them shows fraudulent intent or deliberate or conscious recklessness." The statements of the former employees on whom the plaintiffs sought to rely are, Judge Guilford found, "completely benign," or "so vague as to be meaningless."


Judge Guilford concluded that the plaintiffs’ allegations "do not provide any specifics, and they do not show fraudulent intent or conscious recklessness." The PLSRA, the court noted, "was intended to guard against exactly these sorts of vague, conclusory allegations." Judge Guilford therefore granted the defendants’ motion to dismiss, allowing the plaintiffs’ 21 days to file an amended complaint.


The plaintiffs in the IMPAC Mortgage case not only face a tight timeframe but also face an uphill battle to satisfy the shortcomings Judge Guilford identified. The complaint Judge Guilford rejected had already been amended twice, so it unlikely the plaintiffs held anything back or have a reservoir or additional powerful allegations to draw upon. The short work Judge Guildford made of their multifarious allegations could hardly be encouraging. In addition, Judge Guilford did not even reach the issues of whether the complaint adequately pled misrepresentation or appropriately relied on the group pleading doctrine, holding that his ruling on the scienter issue relieved him of the necessity to reach those other issues.


Judge Guilford’s approach in the IMPAC Mortgage case has appeared in a number of the preliminary rulings in the current wave of subprime and credit crisis-related cases. Even though we are still only in the very earliest stages of most of these cases, there have already been a number of cases where courts have been similarly skeptical of plaintiffs’ allegations. Some recent examples include the First Home Builders of Florida ruling (discussed here) or the NovaStar Financial ruling (here).


While there have of course been decisions going the other way, these skeptical courts have made it clear that they expect to see more than mere allegations that a mortgage loan portfolio underperformed prior expectations or that the lender’s financial condition has deteriorated. If the early returns are any indication, plaintiffs in many of the subprime and credit crisis-related cases may face similar skepticism in order on their preliminary motions.


In any event, I have added the IMPAC Mortgage decision to my table of subprime and credit crisis case dispositions, which can be accessed here.