On March 9, 2009, in a short but strongly worded opinion, Judge Andrew Guilford of the Central District of California dismissed with prejudice the third amended complaint in the subprime-related securities class action lawsuit filed against Impac Mortgage Holdings. A copy of the opinion can be found here.



As discussed here, on October 6, 2008, Judge Guilford had dismissed plaintiffs’ second amended complaint with leave to amend. Plaintiffs filed their third amended complaint on October 27, 2008, and the defendants renewed their motion to dismiss.


The third amended complaint essentially alleged that contrary to the company’s public statements and to the company’s own underwriting guidelines, the company’s Alt-A loans were 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. Further background regarding the lawsuit can be found here.


The March 9 Opinion

In his March 9 opinion, Judge Guilford noted that the in opposing dismissal the plaintiffs had quoted from the court’s opinion in the New Century case denying the motion to dismiss (about which refer here), contending that this case, like the New Century case, is about a "staggering race-to-the-bottom of loan quality and underwriting standards as part of an effort to originate more loans for sale through secondary markets."


Judge Guildford said that he "disagrees" with this characterization, noting that in his view, "this case is about a company involved in a volatile industry at the onset of a long, destructive economic downturn."


The specific basis on which Judge Guilford granted the motion to dismiss is his finding that the third amended complaint "fails to plead a strong inference of scienter." He found that the former employees’ statements on which the plaintiffs relied were just "vague accusations and conjecture." The third amended complaint’s reference to follow due diligence or loan guidelines were just generalizations lacking connection to specific actions or events.


The plaintiff had also relied on the "core operations inference" to try to satisfy the scienter requirement. While noting that there may be rare instance in which an event is so prominent that it would be "absurd" to suggest that key officers lacked knowledge of it, this, Judge Guilford found, was "not one of those exceedingly rare cases."



Judge Guilford’s opinion joins a growing list of subprime and credit crisis-related securities lawsuits in which dismissal motions have been granted. (To access my running scorecard of subprime and credit crisis-related securities lawsuit settlements, and dismissal motion denials, refer here.) To be sure, there have also been a number of cases, including some higher profile cases – particularly the Countrywide case (about which refer here) and the New Century case (refer here) – where dismissal motions have been denied.


However, Judge Guilford’s express rejection of the Impac plaintiffs’ attempt to compare their case to the New Century case, and to use that as a way to avert dismissal, may suggest the constraints that plaintiffs in other cases may face in trying to rely on the Countrywide and New Century dismissal motion denials.


It should be noted that relatively few of the dismissal motion denials thus far have been with prejudice. Indeed, of the dismissals granted, only the Impac dismissal and the dismissal in the NovaStar Financial case (about which refer here) have been with prejudice. However, in both of those cases, the courts seemed particularly concerned with the fact that defendant companies had been caught in an industry-wide or even economy wide downturn, and as a result were openly skeptical of plaintiffs’ claims of fraud.


It is still too early to generalize about how these cases are faring or will fare overall, as most of them are only in their earliest stages. But at a minimum it appears that some courts, fully aware of the global financial turmoil, are viewing at least certain of these cases with skepticism. By the same token, there have been courts that have found the plaintiffs’ initial pleadings to be sufficient to survive a motion to dismiss.


Judge Guilford’s refusal to consider the core business operations inference stands in contrast to the opinion denying the motion to dismiss in the RAIT Financial subprime-related securities case, where the court held that the allegations regarding the defendant company’s core business operations were adequate to satisfy the scienter requirement. As I noted in my discussion of that ruling (here), earlier courts had rejected this theory as inconsistent with the PSLRA’s pleading requirements, but more recently courts, for example, in the Ninth Circuit (refer here) and the Seventh Circuit (refer here), have taken it up. As noted in a recent commentary by the Katten Muchin law firm entitled "Reform Act Under Attack?" (here), the core operations theory "has made a comeback in 2008," which the authors contend is inconsistent with the PSLRA’s meaning and intent.


In any event, I have added the Impac dismissal to my list of subprime and credit crisis securities lawsuit resolutions, which can be accessed here.


The "Ultimate Solution" to Corporate Financial Misconduct?: In a March 10, 2009 press release (here), Fuwei Films, a China-based plastic films manufacturer whose shares trade on Nasdaq, reported that it had "become aware" of an "initial verdict" by the Jinan Intermediate People’s Court, in the city of Jinan, in the Shandong province. The verdict related to an action brought against three major shareholders of the company, for misappropriation of state-owned assets worth tens of millions of renminbi, during the reorganization of Shandong Neoluck Plastics. The three shareholders were identified as Mr. Jun Yin, Mr. Tongju Zhou, and Mr. Duo Wang.


According to the press release, the verdict found the three individuals guilty of the charges. The court "sentenced Mr. Yin to death, with a stay of execution of two years." The other two defendants received life imprisonment. The court will transfer to the Chinese government all of the personal property of the three defendants, including their holdings in two entities that owned approximately 65% of Fuwei’s common shares.


The press release stated that "none of these individuals is currently involved in Fuwei’s day-to-day operations."


Prospective investors will be happy to know that with this bit of unpleasantry put to rest, the company will now "be able to focus exclusively on executing Fuwei’s strategy to emerge from the current economic crisis." In light of the court-ordered ownership change, it is probably good that the company added that "we believe the Chinese government will support our long-term growth."


Special thanks to a loyal reader for the link to the Fuwei press release.


Options Backdating Update: The Securities Litigation Watch has updated (here) its helpful scorecard of the options backdating-related securities lawsuits. As reflected in the scorecard itself (here), of the 39 options backdating related securities lawsuits, 26 have now been resolved – nine have been dismissed and 17 have settled.


According to the Securities Litigation Watch, the average settlement for these cases is $83.1 million. However, if the largest settlement (United Health) is removed, the average is $32.37 million, which is roughly line with the overall average class action settlement level noted by Cornerstone in its recently released study of securities lawsuit settlements.


My own detailed running tally of the options backdating lawsuits settlements and dismissal motion grants and denials can be accessed here.