On April 9, 2009, the subprime securities lawsuit pending against Radian Group joined the growing list of subprime-related cases in which the dismissal motions have been granted. Eastern District of Pennsylvania Judge Mary McLaughlin entered the order dismissing the case, without leave to amend. A copy of the opinion can be found here.
As reflected in an earlier post about the lawsuit (here), Radian provides credit protection products (such as mortgage guarantee insurance). The lawsuit related to an affiliate company in which Radian was a minority owner, Credit Based Servicing & Asset Securitization (C-Bass), an investor in the credit risk of subprime residential mortgages. Radian was a joint venturer in the affiliate with MGIC, with which Radian also had an agreement to merge.
The plaintiffs alleged that the defendants (the company and several of its directors and officers) made false and misleading statements about C-Bass’s profitability and liquidity position and thus, the value of Radian’s investment in C-Bass. The statements allegedly inflated Radian’s share price, which led to losses to shareholders when Radian announced an impairment of its investment on July 30, 2007. The turbulence surrounding the C-Bass affiliate may also have undermined the pending merger with MGIC. Further background about the case can be found here.
Judge McLaughlin granted the motion to dismiss based on the plaintiffs failure to adequately plead scienter. She found that the plaintiffs’ allegations "do not establish either motive and opportunity or conscious misbehavior or recklessness on the part of the defendants" and that the plaintiffs therefore have not "raised a strong inference of scienter." She also found that the inference of scienter the plaintiffs sought to draw "is neither cogent not at least as compelling as the plausible opposing inferences suggested by the defendants."
The plaintiffs had alleged that the defendants had delayed announcing the material impairment to the C-Bass investment in order to allow the completion of the MGIC merger, and also to allow the defendants to sell shares in their personal holdings of Radian.
Judge McLaughlin found the motivation to complete the merger is not "distinctively unique" as it is like "the motives that have been found to be generally possessed by most corporate directors." She also found that the plaintiffs failed to allege any concrete and personal benefit the completion of the merger might provide the individual defendants.
Judge McLaughlin found further that the allegations of insider trading inadequate to establish motive and opportunity. One of the three individual defendants more than tripled his investment during the class period, which a second sold only 2.7% of his holdings, and the related Form 4s showed they were sales of restricted stock, and in part motivated to pay taxes. The third individual defendant sold a much larger percentage of his holdings but the public record showed that he was not planned to be a part of the merged company and was divesting his ownership.
In support of their allegation that the defendants had been reckless, the plaintiffs had argued that as a result of their positions with Radian, the defendants were aware of the risky nature of C-Bass’s business and the deteriorating conditions of the subprime industry. Judge McLaughlin found first that the plaintiffs’ allegations did not establish that C-Bass was in fact impaired before the company took the impairment charge. Judge McLaughlin also found that the plaintiffs’ allegations "did not establish with sufficient particularity that the defendants knew or should have known that their statements presented an obvious danger of misleading the investing public."
The plaintiffs had also argued that the defendants had to be aware of the problems at C-Bass because of their positions of responsibility within the company and the relation of the C-Bass investment to the "core operations" of the company. Judge McLaughlin said that while some courts have found that knowledge of core activities can be imputed to company officials under some circumstances, they had done so only when there were particularized allegations showing that the defendants had ample reason to know of the falsity of the allegedly misleading statements.
Judge McLaughlin said that the plaintiffs had failed to explain why C-Bass’s activities were part of Radian’s core activities. She also found that the plaintiffs had failed to show why defendants must have known that their statements presented a danger of misleading investors. In this connection, Judge McLaughlin reviewed the plaintiffs’ extensive allegations about the deteriorating conditions in the subprime marketplace, which the plaintiffs alleged the defendants must have known.
With respect to these allegations, Judge McLaughlin observed that "these facts were known to the plaintiffs and by the market at large, and the [amended complaint] itself establishes that Radian publicly disclosed its knowledge of these facts and their potential to effect on Radian’s investment in C-Bass."
Judge McLaughlin also found that the plaintiffs’ attempt to establish scienter in reliance on confidential witnesses, the defendants’ sox certifications and the company’s alleged violation of GAAP were equally unavailing,
Judge McLaughlin’s opinion joins the growing list of subprime and credit crisis-related securities class action lawsuits in which courts have granted preliminary motions to dismiss. It is also is yet another case that seems to reflect a general judicial unwillingness to conclude that merely because companies were caught in the downdraft accompanying the subprime meltdown that the company had engaged in fraud. (Refer here for similar observation regarding the recent dismissal motion grant in the subprime case involving Downey Financial.)
I have in any event added the Radian opinion to the table in which I have been tallying the subprime case resolutions. The list can be accessed here.
Special thanks to a loyal reader for forwarding me a copy of the Radian decision.
Dismissal Denied Again in Countrywide Case: Perhaps by contrast, and in one of the prominent cases in which a dismissal motion has been denied, on April 6, 2009, Judge Mariana Pfaelzer largely denied the defendants’ renewed motions to dismiss. A copy of Judge Pfaelzer’s opinion can be found here.
In a prior opinion (available here), Judge Pfaelzer had substantially denied the defendants motions to dismiss, although she did granted the motion in certain respect with leave for the plaintiffs to amend. The plaintiffs filed an amended complaint and the defendants renewed their motions to dismiss.
In her April 6 opinion Judge Pfaelzer largely incorporated her reasoning from her prior opinion. However there were a couple of respects in which the April 6 ruling is noteworthy. First, she found that the plaintiffs’ revised allegations against defendant KPMG, whose dismissal motion previously had been granted, would now "suffice" and therefore KPMG’s renewed dismissal motion was denied.
However she also found that insider allegations as to certain insider defendants, whose sales were made pursuant to written Rule 10b5-1 trading plans, were insufficient and accordingly the insider trading were dismissed. However she refused to dismiss most of the insider trading allegations against former Countrywide CEO Angelo Mozillo, even though he too purported to have traded pursuant to a Rule 10b5-1 plan, because of "unusual" modifications he had made to his plan.
Allison Frankel’s April 8, 2009 American Lawyer article about Judge Pfaelzer’s latest opinion can be found here. I urge everyone to read it, if for no other reason that along the way Frankel refers to The D&O Diary’s author (that would be me) as "our favorite subprime litigation savant." I am humbled by the accolade.
Special thanks to several loyal readers who supplied me with a copy of the April 6 opinion.