Two recent dismissal motion rulings in cases arising out of the subprime and credit crisis litigation wave involve two companies from outside the original core of the subprime lending sector – student lender First Marblehead and residential home builder Levitt Corporation. When these cases were filed early in 2008, I cited each of them as examples of how the subprime litigation wave was expanding to encompass a broader range of companies.


Both of the recent opinions in these two cases are quite detailed and allegation-specific, but in many respects they point in divergent directions. The First Marblehead decision is a sweeping defense victory, but the Levitt Corp. opinion, while a split decision, is generally more favorable to the plaintiff in that case.


First Marblehead: In an August 5, 2009 opinion (here), District of Massachusetts Judge Joseph L. Tauro granted defendants’ motion to dismiss. Judge Tauro’s opinion essentially rejects all of plaintiffs’ allegations. (Background regarding the case can be found here; my prior post about the lawsuit’s filing can be found here).


Judge Tauro found that the plaintiffs had not sufficiently pled misrepresentation, because, he concluded, "First Marblehead disclosed what the Complaint alleges it concealed" with respect to the company’s supposedly changed lending criteria and loan standards; default rates; relationship with its insurer affiliate; and changes in the various factors that could undermine its financial projections.


Because he found that the company had disclosed what the plaintiffs alleged was withheld, Judge Tauro also found that the plaintiffs had failed to plead sufficient facts to give rise to a strong inference of scienter. He also found that the complaint’s insider trading allegations were not sufficient to establish a strong inference of scienter, because the individual defendants who traded were not alleged to have particularized knowledge of the alleged fraudulent scheme, and because one individual’s trades were distant in time from the alleged corrective disclosure while the other individual’s trades were pursuant to trading plans whose existence had been publicly disclosed.


Finally Judge Tauro rejected plaintiffs’ loss causation allegations, finding that the company’s "drop in share price coincided with a significant downturn in the credit markets and its own preexisting patter of stock declines." He also quoted with approval from a Second Circuit opinion in a RICO case, which stated that "when the plaintiff’s loss coincides with marketwide phenomena causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by fraud decreases."


Judge Tauro’s opinion does not state whether or not the dismissal is with prejudice, but the opinion does not offer the plaintiffs’ leave to amend.


Levitt Corp.: Southern District of Florida Judge Donald L. Graham’s August 10, 2009 opinion in the Levitt Corp case (here) grants in part and denies in part the defendants’ motions to dismiss. (Background regarding the case can be found here. My prior post about the lawsuit’s filing can be found here.)


With respect to many of the factual allegations in the plaintiffs’ complaint, Judge Graham found that the plaintiff had sufficiently alleged misrepresentation, except as to a few with respect to which he found the allegations were insufficient, and several others he found came within the safe harbor for forward looking statements. Other than with respect to the statements he found to be within the safe harbor, he allowed plaintiff leave to amend his allegations to attempt to correct the pleading deficiencies noted.


Judge Graham also found that the plaintiff had adequately alleged scienter as to the company’s CEO Alan Levan, based on the plaintiffs’ allegations that Levan had knowledge of the need for updated pro forma financial analyses of the company’s home building subsidiary and was aware of circumstances that necessitated an impairment analysis.


However, Judge Graham concluded the plaintiff’s scienter allegations were insufficient as to the company’s CFO George Scanlon, finding that the plaintiff had "insufficiently alleged his knowledge of the failure to update pro formas and, as a result, to conduct the impairment analysis." He did allow plaintiff leave to amend the scienter allegations as to Scanlon.


Finally Judge Graham found based on the complaint’s allegations of the company’s share price declines following the alleged disclosure revelations that the plaintiff had adequately pled scienter.


Judge Tauro’s opinion in the First Marblehead case appears tough and skeptical by comparison to Judge Graham’s, particularly with respect to loss causation issues. In those respects the two cases may well appear at odds, although the difference may largely be due to Judge Tauro’s initial conclusion that the defendants had disclosed what the plaintiffs alleged had been withheld. With that as a starting point, he seemed clearly inclined against the plaintiffs’ allegations.


Whatever else may be said about the opinions, the two decisions do illustrate how the outcome of the dismissal motions in these cases have shown a broad range of approaches and outcomes. While a fair number of these cases are being dismissed, a number are surviving as well, notwithstanding such considerations as the overall market decline in which so many of these companies participated.


In any event, I have added these cases to my register of subprime and credit crisis-related securities lawsuit dismissal motion resolutions, which can be accessed here.


Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing me with copies of the opinions.