Court: District Court, S.D. Florida; June 30, 2015; Federal District Court
Defendant H. Marc Helm’s Motion to Dismiss the Second Amended Class Action Complaint is granted, while the motions from Defendants Walter Investment Management Corporation and several individual officers are granted in part and denied in part. The case involves a federal securities fraud class action against Walter Investment Management and its officers, with Plaintiffs Richard Thorpe and Darrel Weisheit asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The allegations include that the Defendants made false or misleading statements and failed to disclose several critical issues: inadequate legal and regulatory compliance controls, violations of consumer protection laws jeopardizing revenues, ignored loan servicing errors, ineffective financial reporting controls, materially overstated financial statements, and an overstatement of the value of the RMS acquisition. The claims cover a class of individuals who purchased Walter Investment securities between May 9, 2012, and August 11, 2014. The individual defendants, who were senior officers during this period, include Mark J. O’Brien, Denmar J. Dixon, Charles E. Cauthen, Keith A. Anderson, Brian Corey, and H. Marc Helm. Alleged misrepresentations fall into two categories: those related to financial statements and compliance with laws, and those concerning the RMS acquisition and its financial state.
Plaintiffs allege that Defendants misrepresented and failed to disclose critical issues regarding the Company's financial statements, compliance, and internal controls. Specifically, they claim that: (i) the Company had inadequate legal and regulatory compliance controls; (ii) it was not compliant with legal and regulatory requirements; (iii) its business practices violated consumer protection laws, risking revenues and profits; (iv) it ignored servicing errors that contravened regulations; and (v) it had insufficient internal controls over financial reporting and loan servicing, resulting in materially false financial statements.
Defendants allegedly made several misrepresentations in their filings and communications. On May 9, 2012, August 9, 2012, and May 10, 2013, the Company filed Form 10-Q with the SEC, detailing its financial position and including certifications by Defendants O’Brien and Cauthen under the Sarbanes-Oxley Act, asserting the accuracy of the financial information and any material changes in internal controls.
Additionally, on May 9, 2012, the Company presented its First Quarter 2012 Earnings, highlighting its compliance culture and independent controls. During the June 5, 2012 conference, the Company emphasized its portfolio management and compliance efforts. In its Second Quarter 2012 Earnings Presentation on August 9, 2012, the Company claimed its servicing model exceeded client expectations and maintained a strong culture of compliance. In an earnings call on the same day, Defendants expressed confidence in their business practices and compliance with industry standards, asserting strong portfolio performance and operational improvements.
On September 11, 2012, Defendants O’Brien, Dixon, Corey, and Anderson presented at the 2012 Investor and Financial Analyst Day. Defendant Anderson emphasized the company's commitment to compliance, stating the importance of adhering to regulations and avoiding risks associated with fees and customer complaints. He noted that the company would forgo unclear fee opportunities to maintain compliance. Defendant Corey highlighted the regular review of legal changes and the implementation of compliance policies, including employee training and post-implementation audits.
The presentation outlined the company's robust compliance culture, featuring independent controls to manage regulatory, litigation, reputational, and financial risks. This included quarterly audits, rigorous due diligence for third-party agents, and performance monitoring using scorecards. The company adopted a customer-centric approach focusing on values such as respect and integrity.
Subsequent communications included the November 8, 2012 earnings presentation, which promoted the company’s compliance-driven servicing model as a competitive advantage. In a March 19, 2013 earnings call, O’Brien noted the growth in product capabilities while maintaining high compliance standards. Earlier, in a March 26, 2012 presentation, the company reported improvements in servicing performance and a reduction in Cohort Default Rates (CDR). By May and June 2013, the focus on compliance continued to be highlighted as a key factor in achieving preferred partner status.
On August 8, 2013, the Company released its second quarter financial results, featuring a statement from Defendant O’Brien emphasizing strong profit growth and operational performance in the Servicing segment. The earnings presentation highlighted several points: high compliance rates led to preferred partner status, Fitch Ratings upgraded the servicer rating, the servicing segment onboarded 552,000 accounts with significant reductions in GSE first-lien delinquencies, and improvements in delinquency were linked to profitability enhancements. On September 24, 2013, at the Barclays Global Financial Services Conference, Defendants reiterated these accomplishments.
Plaintiffs allege that Defendants misrepresented the financial condition of RMS following its acquisition. Key claims include: inflated financial statements for RMS, undisclosed material weaknesses in internal controls, an overstated valuation of the RMS acquisition, and understated servicing liabilities. The allegations reference a Form 8-K filed on August 6, 2012, detailing the RMS acquisition terms, and a September 4, 2012, investor presentation asserting the deal would enhance earnings. The acquisition was characterized as attractively priced at 2.6 times 2012 expected EBITDA, with projections of significant accretion to earnings and cash flow. The transaction, valued at $120 million, was reported to potentially increase core earnings per share by 25% if completed at the year’s start. Subsequent filings included the incorporation of RMS's financial statements and the announcement of the acquisition's completion on November 7, 2012, followed by an amended Form 8-K on January 17, 2013, providing pro forma financial data relating to RMS.
On March 18, 2013, the Company admitted to a material weakness in internal control over financial reporting due to improper capitalization of costs associated with the RMS acquisition, leading to a stock price drop of $8.61 (over 20%) to $32.98. On June 6, 2013, the Company disclosed it had failed to record estimated liabilities for servicing errors related to RMS, stating that the financial statements could no longer be relied upon; however, no stock price drop was alleged following this announcement. On September 24, 2013, the Company restated RMS’s financial statements, revealing a $41 million increase in liabilities as of June 30, 2012, and similar increases for earlier periods, but again, no stock price drop was alleged. Following the resignation of Executive VP and CFO Charles Cauthen on October 3, 2013, there were no subsequent stock price declines. On November 6, 2013, the Company filed Form 10-Q, revealing investigations by various federal agencies and a subpoena regarding interest payments and vendor contracts, resulting in a stock decline of $2.51 to $33.41 the following day. On February 27, 2014, the Company announced potential enforcement action from the FTC and CFPB, with stock falling from $28.28 to $25.70; statements from executives emphasized their commitment to compliance and service standards.
Defendant Anderson resigned on August 8, 2014, without any allegations of a subsequent stock price drop. On August 11, 2014, the Company filed a Form 10-Q, revealing ongoing settlement discussions with government agencies regarding Green Tree Servicing, including potential injunctive relief and civil penalties sought by the FTC and CFPB. Following this disclosure, the stock price fell from $28 to $24.75, a decline of over 11%. Analyst firms, including Compass Point Research and FBR Capital, noted that the stock's decline was influenced by regulatory developments and downgraded the Company's performance rating. On November 6, 2014, the Company reported further investigations by various state attorneys general and regulators regarding its business practices, but no stock price drop was alleged in connection with this disclosure.
In procedural history, on December 23, 2014, the Court granted the Defendants' motions to dismiss the First Amended Class Action Complaint and allowed Plaintiffs to file a Second Amended Complaint by January 6, 2015. The Plaintiffs complied, and the Court considered the Defendants' motions to dismiss this new complaint. On March 20, 2015, Plaintiffs requested judicial notice of several documents, including a February 26, 2015 press release about a proposed settlement with the FTC and CFPB, a Form 10-K report detailing settlement terms, and a recently unsealed qui tam Complaint alleging non-compliance with FHA regulations related to reverse mortgages. The Court granted this request for judicial notice, but limited it regarding the qui tam Complaint to recognizing the fact of its existence, not the truth of its allegations.
Defendants responded to judicially noticed documents on April 1, 2015. Subsequently, on April 24, 2015, Plaintiffs requested judicial notice of several key documents related to Green Tree Servicing, including two press releases and a complaint and consent order from the Federal Trade Commission, all dated in April 2015. The Court granted this request and allowed the Defendants to respond.
Under the Federal Rule of Civil Procedure 8(a)(2), a claim must include a short and plain statement showing entitlement to relief to provide the defendant with fair notice. In a Rule 12(b)(6) motion to dismiss, the court accepts factual allegations as true and views them in the light most favorable to the plaintiff, considering the complaint as a whole. Conclusory allegations are insufficient; the complaint must contain enough factual content to suggest a plausible claim for relief. Legal conclusions are not subject to this presumption of truth, and mere recitals of elements without factual support will not suffice. Dismissal is warranted if the allegations do not raise a right to relief above the speculative level.
Securities fraud claims are governed by Rule 9(b), which requires particularity in fraud allegations while allowing general averments regarding malice, intent, and knowledge. The Eleventh Circuit outlines that the fraud requirement is satisfied if the complaint details the documents or statements made, the time and place of those statements, the responsible person, the misleading content, and the benefit obtained by the defendants.
The Private Securities Litigation Reform Act (PSLRA) amended pleading requirements for securities fraud, necessitating that complaints specify misleading statements and the reasons they are misleading. Additionally, if allegations are based on information and belief, all supporting facts must be included. The PSLRA also raised the pleading standard for scienter, requiring plaintiffs to present specific facts that strongly infer the defendant's required state of mind for each alleged misrepresentation or omission.
The complaint must establish a strong inference of scienter for each defendant regarding each violation, allowing courts to consider referenced materials without changing a motion to dismiss to a summary judgment if the documents are central and undisputed. The Eleventh Circuit permits judicial notice of documents filed with the Securities and Exchange Commission, enabling consideration of allegedly fraudulent statements in context for 12(b)(6) motions. Plaintiffs allege violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which prohibit manipulative practices in securities transactions. To successfully claim under Section 10(b) and Rule 10b-5, plaintiffs must demonstrate: 1) a material misrepresentation or omission; 2) scienter; 3) a connection between the misrepresentation and the security transaction; 4) reliance on the misrepresentation; 5) economic loss; and 6) loss causation. Defendants Walter Investment, O'Brien, Dixon, Anderson, Corey, and Cauthen argue for dismissal of the Second Amended Complaint, asserting plaintiffs did not address earlier identified deficiencies. Defendant Helm contends for dismissal due to insufficient allegations of fraud against him, as he is minimally referenced in the complaint. The Court will evaluate whether the plaintiffs have sufficiently alleged claims under Section 10(b) and Rule 10b-5 in the Second Amended Complaint, with defendants raising several points regarding the adequacy of material misrepresentation allegations, including arguments about liability based on timing, the nature of financial statements, reliance on immaterial statements, and the protection of forward-looking statements under the PSLRA’s safe-harbor provision.
Plaintiffs assert that Defendants may be liable for misstatements in RMS financial statements, with a specific focus on Defendants Anderson and Corey, even for statements made before they assumed officer roles. However, Plaintiffs did not counter the Defendants' other arguments. Notably, Plaintiffs acknowledge that certain allegations in their complaint are inactionable, as confirmed by the Court's December 23, 2014 Order. Consequently, the Court will only consider 20 alleged material misrepresentations identified in specific paragraphs of the Second Amended Complaint.
Regarding the potential liability of Defendants Anderson and Corey under a group pleading theory for statements made prior to August 2013, the Defendants argue they cannot be held liable because they were not officers before that date. The group pleading doctrine allows for a presumption of collective responsibility for statements in fraud claims, but the Court has noted that this doctrine's applicability is uncertain post-PSLRA. However, some courts, including this one, have permitted group pleading if it is shown that defendants held high-ranking positions and were involved in the company's operations.
The Court concludes that the group pleading doctrine is inapplicable to Anderson and Corey for misrepresentations made before they became officers, as Plaintiffs have not alleged that they held high-ranking positions prior to August 2013.
On the question of whether the Individual Defendants can be considered makers of alleged misrepresentations in RMS’s financial statements, the Supreme Court in Janus Capital Group, Inc. v. First Derivative Traders defined the "maker" of a statement as the individual or entity with ultimate authority over the statement's content and communication. This definition implies that only those with such authority can be held liable for misrepresentations.
Helm is identified as the maker of RMS's financial statements, as he held key positions including Chief Executive, President, and Chief Operating Officer, and was directly involved in making materially false and misleading statements and deciding on disclosures. The Court has accepted allegations in the Second Amended Complaint as true, establishing Helm's legal responsibility for the inaccuracies in RMS’s financial statements.
Conversely, the Walter Individual Defendants (O’Brien, Dixon, Anderson, Corey, and Cauthen) argue they cannot be held liable for misrepresentations in RMS's financial statements. The Court previously agreed, noting a lack of allegations showing their control over these statements or that they vouched for their accuracy. Although Plaintiffs claim to have remedied this by referencing statements from an October 2012 8-K regarding the acquisition of RMS, the Court finds these allegations insufficient. The 8-K explicitly states that the pro forma financial information is for informational purposes only and does not guarantee the accuracy of RMS's financial statements. Thus, the Walter Individual Defendants cannot be held liable.
Future results for Walter Investment may differ significantly from the unaudited pro forma condensed combined financial information due to a lack of a detailed valuation of RMS’s assets and liabilities. The financial information is based on preliminary estimates and assumptions subject to material changes, as Walter Investment has not completed comprehensive due diligence to identify additional factors that could affect the purchase price allocation.
Plaintiffs acknowledge that the Walter Individual Defendants were not responsible for RMS’s standalone financial statements but argue they can be liable for misrepresentations in combined statements that were later found to be inaccurate. However, under the precedent set by Janus, simply compiling and disseminating information does not establish a defendant as the maker of a misrepresentation. Consequently, the court dismisses the Plaintiffs' Section 10(b) and Rule 10b-5 claims against Walter Investment and the Individual Defendants concerning RMS's financial statements, as they have not been shown to be the makers of those statements.
Additionally, during a conference call, Defendant Helm claimed that an aggressive reserve is taken for loans to account for potential losses but contends this statement is immaterial. The court does not need to evaluate the materiality of this statement since the Plaintiffs did not demonstrate it was misleading or related to the alleged misrepresentations in RMS’s financial statements, rendering it inactionable. The court also previously ruled that other statements cited by the Plaintiffs were immaterial.
The court defines materiality in securities fraud as whether a reasonable investor would find the misrepresented or omitted fact significant in making investment decisions. This determination is objective and requires careful consideration of the implications of the facts presented, typically leaving such assessments to the trier of fact.
Vague, generalized, non-verifiable statements, often characterized as corporate puffery, are deemed immaterial as a reasonable investor would not base decisions on them. Legal precedents, such as Mogensen v. Body Cent. Corp. and In re Royal Caribbean Cruises Ltd. Sec. Litig., affirm that such statements cannot sustain a Section 10(b) or Rule 10b-5 claim. Specific examples of inactionable statements include Walter Investment's earnings presentations and statements made by Defendant O’Brien regarding the company’s compliance, servicing model, and growth opportunities, all of which lack specific and verifiable facts. Furthermore, the PSLRA defines "forward-looking statements" as those projecting financial metrics or outlining management's future plans and performance, which may invoke certain legal protections.
Defendant Helm claims that certain statements regarding the benefits of the RMS acquisition are forward-looking and thus protected by the Private Securities Litigation Reform Act (PSLRA) safe-harbor provision. Plaintiffs acknowledge that the alleged misstatements about these benefits are inactionable, negating the need for the Court to evaluate their protection under the PSLRA. Helm also asserts that misstatements in Walter Investment's SEC filings are covered by the PSLRA. However, the Court previously determined that specific paragraphs (79, 82, 107) do not contain forward-looking statements, as they pertain to actual financial figures. Statements in paragraphs 91 and 101 reference documents that may contain forward-looking statements but are not forward-looking themselves. Consequently, the Court concludes that the statements in paragraphs 79, 82, 91, 101, and 107 are not protected by the PSLRA safe-harbor provision.
Regarding scienter, the Supreme Court defines the necessary mental state for a securities fraud claim as the intent to deceive or defraud. To adequately plead scienter in the Eleventh Circuit, a plaintiff must present facts that create a "strong inference" of purposeful action or severe recklessness by the defendant. A "strong inference" must be compelling compared to any opposing non-fraudulent intents. Severe recklessness involves significant misrepresentations or omissions that are an extreme departure from ordinary care, indicating a clear risk of misleading investors. To properly allege scienter, a plaintiff must provide facts suggesting it is as likely as not that high-ranking defendants orchestrated or were severely reckless about the alleged fraud when making the misleading statements.
A complaint will survive a motion to dismiss only if a reasonable person finds the inference of scienter (intent or knowledge of wrongdoing) compelling compared to any opposing inferences from the alleged facts. While reasonable inferences must be drawn in the investors’ favor, plausible non-culpable explanations for the defendant’s actions must also be considered. The Court emphasizes that it will not evaluate each allegation in isolation, but rather assess all allegations collectively. Each defendant must be individually identified in relation to scienter; the group pleading doctrine does not meet the heightened requirements of the Private Securities Litigation Reform Act (PSLRA). The Second Amended Complaint improperly groups defendants under terms like "Individual Defendants," failing to specify how each acted with intent or recklessness, which is insufficient under Rule 9(b) and the PSLRA. Scienter allegations not attributed to a specific defendant will be disregarded. Additionally, conclusory allegations without supporting facts are insufficient for a finding of scienter.
Defendant Helm is specifically accused of overstating RMS's financial performance and failing to disclose material weaknesses in internal controls during the relevant period. The plaintiffs assert that several facts support a strong inference of Helm's scienter: his position as an officer of RMS, receipt of shares from the RMS acquisition, RMS being a core business of Walter Investment, Helm's responsibility for conducting due diligence on RMS’s financials, his resignation, and the significant restatement of RMS’s financial statements.
The allegations against Defendant Helm center on misrepresentations regarding the value of the RMS acquisition and his financial motivations to maintain inflated stock prices for Walter Investment. Despite Helm's disagreement, the court clarifies that a defendant's corporate position alone does not imply knowledge of fraud. However, the Second Amended Complaint presents substantial evidence of Helm's scienter, including:
1. **Knowledge of Fraud**: Helm received information that revealed the true financial status of RMS and was aware of significant regulatory compliance, accounting issues, and material weaknesses affecting RMS’s financial reporting.
2. **Direct Conversations**: The complaint indicates that Helm had discussions with RMS’s interim CFO about the decision not to self-curtail, which involves failing to disclose unmet processing deadlines for insurance claims as required by federal regulations.
3. **Access to Information**: As CEO and Co-Founder, Helm had comprehensive knowledge of RMS’s operations and finances, receiving daily reports and being involved in disclosures, thereby being privy to material adverse facts regarding servicing violations.
4. **Core Operations**: Helm's leadership role in RMS, which is a core operation of Walter Investment, suggests he should have been aware of the improprieties occurring within RMS.
5. **Due Diligence Failures**: The complaint asserts that Helm failed to exercise due diligence in ensuring the reliability of RMS’s financial statements. A Stock Purchase Agreement referenced disclosures about servicing errors, which Helm was responsible for overseeing.
6. **Financial Restatement Implications**: The significant restatement of RMS’s financials, which transformed net income into a multimillion-dollar loss, indicates that Helm either knew or recklessly disregarded the material inaccuracies in the financial statements, with expenses for 2012 significantly increasing and net income plummeting.
These allegations collectively establish a strong inference of Helm's scienter in connection to the purported fraudulent activities at RMS.
RMS’s restated servicing liabilities increased by $41 million for the period ending June 30, 2012, representing approximately 30% of its purchase price. Following this restatement, Defendant Helm resigned on December 3, 2013, citing industry challenges related to regulatory pressures and product changes. Helm was responsible for developing RMS’s compliance protocols and supervised the in-house development of its faulty servicing platform. In a September 11, 2012 conference call, he discussed RMS’s aggressive reserves for potential losses, asserting that these reserves were modeled and updated monthly. Helm was also responsible for the materially inaccurate financial statements included in the Company’s October 15, 2012 Form 8-K, which led to the restatement. Additionally, Helm received 156,071 shares of Walter Investment as part of the RMS acquisition, valued at approximately $4.37 million at the time, indicating a strong incentive to minimize RMS’s servicing liabilities to facilitate the acquisition.
Despite these allegations of scienter, the Court found they did not provide a strong inference that Helm acted with intent or knowledge of wrongdoing. The Court noted that the size of the financial restatement presented by the Plaintiffs as a percentage of net income was not indicative of scienter, as net income can vary significantly, making it an unreliable metric. The Court referenced a precedent that emphasized the importance of using total revenue for such comparisons, concluding that the Plaintiffs' choice of metric undermined their claims and did not suggest that Helm acted with severe recklessness regarding the inaccuracies in RMS’s financial statements.
The Court determined that the plaintiffs failed to demonstrate that the size of the financial restatement was significant enough to support an inference of scienter regarding Defendant Helm's actions. The inability to assess the restatement's significance also precludes the conclusion that Helm's lack of due diligence indicates scienter. Furthermore, the Court found that Helm's resignation does not, by itself or in conjunction with other allegations, imply scienter. While the resignation occurred shortly after the restatement, the Court previously ruled that it was not definitive evidence of fraudulent intent due to alternative non-fraudulent interpretations of his departure. Plaintiffs claimed Helm resigned due to regulatory pressures, but evidence from a cited article suggested he left to pursue other interests and maintained a positive view of the industry despite challenges. Thus, the article undermines the plaintiffs' assertion regarding the reasons for Helm's resignation. Additionally, the Court rejected the allegations in the qui tam complaint as valid evidence of scienter and determined that the plaintiffs' argument that Helm's knowledge of RMS's financial statements could be imputed to him was insufficient without specific factual support about RMS's revenue contribution to Walter Investment.
Plaintiffs have not demonstrated that RMS was a significant income source for Walter Investment or that its acquisition impacted the company's earnings. The court referenced prior cases indicating that knowledge of a subsidiary's financial issues can be inferred from the acquisition's significance, particularly in high-value transactions. The allegation regarding Defendant Helm's receipt of shares valued at $4,368,427 lacks sufficient basis for establishing scienter, as standard incentive compensation has limited relevance in proving intent to commit fraud. Previous rulings emphasized that personal financial incentives alone do not imply fraud, and common factors such as high compensation do not uniquely indicate wrongdoing. Furthermore, Plaintiffs have not shown that Helm's shares were part of an extraordinary incentive, nor have they specified the information he possessed that contradicted public statements or demonstrated severe recklessness regarding RMS's financial reporting. Consequently, the court concluded that the allegations against Helm do not sufficiently support a strong inference of scienter, leading to his dismissal from the case.
The Walter Individual Defendants—O’Brien, Dixon, Anderson, Corey, and Cauthen—assert that the misstatements from May 9, 2012, and August 9, 2012, are not actionable because the Plaintiffs failed to allege that these statements were made with scienter, especially since they were corrected by a March 19, 2013 disclosure. They argue that the Plaintiffs’ Second Amended Complaint should be dismissed as it merely rehashes previously rejected scienter claims, and that their sales of Walter Investment securities do not support a strong inference of scienter.
The Court will evaluate the scienter allegations against the Walter Individual Defendants, focusing on whether the Plaintiffs have sufficiently alleged a strong inference of scienter in their complaint.
The Plaintiffs claim that several "red flags" should have alerted the Walter Individual Defendants to the alleged fraud, including: (i) multiple regulatory investigations into Green Tree's business practices, culminating in a $48 million settlement; (ii) online complaints from current and former employees about coercive collection practices; (iii) lawsuits regarding abusive collection practices; (iv) consumer complaints about failure to apply payments, harassment, and improper loan modifications; and (v) a petition against Green Tree's billing and accounting tactics.
Additionally, the Plaintiffs argue that knowledge of the fraud can be attributed to the Walter Individual Defendants because RMS and Green Tree were core businesses of Walter Investment. They also allege that due diligence failures should have raised concerns about the reliability of RMS's financial statements and the extent of their restatement. A confidential witness purportedly corroborates claims of deceptive practices by Green Tree. Lastly, Plaintiffs suggest that the Walter Individual Defendants were motivated to maintain inflated stock prices to meet debt obligations, facilitate new stock options, and support acquisitions, especially of RMS.
The Plaintiffs contend that the Walter Individual Defendants are accountable for all misrepresentations due to their roles and positions at Walter Investment or Green Tree and their access to contradicting facts.
Defendant Anderson is implicated in actions demonstrating scienter, based on several key factors. As the President and CEO of Green Tree and later COO of Walter, Anderson had comprehensive knowledge of the companies' operations, including regulatory compliance. He received daily reports on various aspects of the business and was involved in disclosure decisions. Despite being aware of ongoing government investigations into the companies' practices, he continued to publicly assert their compliance, indicating a willful ignorance of "red flags."
Anderson's resignation on August 8, 2014, closely preceded the announcement of government actions against Green Tree, raising suspicion about his timing. His stock trading activity further suggests misconduct; during the Class Period, he sold over 50% of his holdings for more than $1 million, a stark contrast to zero sales during the Comparison Period. This disproportionate selling indicates a motive to maintain inflated stock prices, potentially at the expense of accurate disclosures regarding internal controls.
Additionally, Anderson's insider trading profits significantly exceeded his base salary of $430,000 for 2013, highlighting a motive to misrepresent compliance in pursuit of financial gains. His annual bonuses, exceeding $800,000, were tied to purported regulatory compliance, suggesting further incentive to mislead regarding the state of Green Tree's operations. Lastly, the allegations include that Anderson received emails detailing compliance deficiencies, reinforcing the assertion of his awareness and disregard for the issues at hand.
On February 6, 2012, a consumer expressed concerns to Defendant Anderson regarding Green Tree's deceptive foreclosure practices. Another complaint on April 19, 2012, involved a consumer’s frustration with Green Tree's noncompliance with home loan modification procedures, which was submitted to the FTC and also directed to Defendant Anderson for resolution. A third complaint on October 25, 2013, highlighted various servicing errors on a mortgage account, with the consumer noting a response from Defendant Anderson.
Plaintiffs argue that Defendant Corey acted with scienter, citing his roles as Senior Vice President and Chief Compliance Officer for Walter Investment and as Green Tree’s Senior Vice President, General Counsel, and Secretary. During his tenure, he oversaw the legal and compliance departments amid numerous consumer complaints and lawsuits regarding Green Tree’s practices. As a proactive manager, he was responsible for regulatory compliance and legal affairs, receiving daily reports and having access to critical data concerning servicing requirements and internal controls.
Corey's involvement included making decisions about disclosures and participating in an investor call on September 11, 2012, where he was recognized as a leader in compliance, indicating familiarity with regulatory issues. He held regular meetings with senior management to review law changes, ensuring compliance with regulations. Additionally, he acted as the spokesperson for Green Tree regarding consumer complaints and lawsuits, demonstrating his direct involvement and knowledge of the complaints' underlying facts. Corey also certified in legal documents that he had personal knowledge of Green Tree’s foreclosure processing policies. Having joined Green Tree in 1995, he was aware of ongoing regulatory investigations from their inception and the business practices under scrutiny.
Corey, due to his long tenure and active role in Green Tree's legal affairs and compliance, is inferred to have been aware of significant consumer complaints, over 30% failure in compliance metrics reported by the Office of Mortgage Oversight, ongoing government investigations, and abusive practices targeted by the FTC and CFPB. Despite this knowledge of serious servicing violations, he continued to publicly affirm the company's regulatory compliance. Additionally, Corey’s stock trading during this period raises concerns; he sold over 30% of his Walter Investment shares while possessing adverse information, profiting over $500,000, with these sales being unusually high compared to his prior trading history.
Defendant O’Brien, as CEO and Chairman, held ultimate responsibility for Walter Investment’s regulatory compliance and had comprehensive access to operational information, including daily reports on servicing and internal controls. His direct involvement in company disclosures and SEC filings during the Class Period, which included certifications of financial accuracy, suggests he was well-informed about compliance issues. Similar to Corey, O’Brien’s position and hands-on management indicate he likely knew of the widespread consumer complaints, compliance failures, and ongoing investigations, reinforcing the inference of his awareness of the company's regulatory challenges.
Defendant O’Brien was aware of significant servicing and legal violations affecting the Company yet continued to publicly assert its regulatory compliance. Motivated to maintain Walter Investment’s stock price, he sold over $1.7 million in stock during the Class Period at inflated prices, profiting from shares granted at no cost. His stock sales generated proceeds exceeding three times his annual salary of $575,000 for 2013. O’Brien's bonus compensation, which was linked to the Company’s earnings and stock value, included $1 million in 2013 and $1.03 million in 2014, based on various performance metrics including business integration and regulatory compliance.
Defendant Dixon, as Vice Chairman and Executive VP, had access to critical information about the Company’s operations and compliance. He received daily reports and was involved in decision-making regarding disclosures. Dixon displayed knowledge of regulatory issues and was aware of significant adverse facts related to servicing violations affecting RMS and Green Tree, both vital revenue sources for the Company. His active role and oversight of operations suggest he was cognizant of widespread consumer complaints, compliance failures, and ongoing government investigations during the Class Period.
Defendant Dixon, aware of significant servicing and legal violations affecting the Company, continued to assert its regulatory compliance, which raises concerns about his credibility. He was motivated to inflate Walter Investment's stock price to profit from insider sales; his transactions during the Class Period were notably disproportionate compared to prior periods, generating approximately $2 million in profit. Notably, he sold $2.3 million in stock just before the Company disclosed internal control failures in March 2013, suggesting he improperly benefited from insider information. Dixon's stock sales during this period significantly exceeded his annual base salary of $428,000, further implying a motive to misrepresent the Company’s regulatory standing. Additionally, his bonuses in 2013, totaling $967,500, were tied to the Company’s performance, reinforcing his incentive to misrepresent compliance issues.
Defendant Cauthen, as the Chief Operating Officer and Chief Financial Officer, had extensive oversight of regulatory and compliance matters, receiving daily reports and accessing critical financial information. His active role included signing filings with the SEC and certifying their accuracy under SOX, indicating knowledge of the Company’s operations. During a November 2012 conference call, he discussed costs related to acquiring new loans and servicing non-performing loans, reflecting his awareness of the regulatory and compliance challenges faced by Walter Investment.
Defendant Cauthen acknowledged the importance of reducing delinquencies to manage costs and highlighted the positive performance of Walter Investment’s servicing business during a conference call on May 9, 2013. His position and active involvement in the company imply he was aware of significant consumer complaints, lawsuits, and compliance failures, as noted by the Office of Mortgage Oversight and various government investigations. Despite this knowledge, he continued to make optimistic statements about the company’s regulatory compliance.
Cauthen had a financial incentive to maintain the stock price, selling over $2.8 million in stock during the Class Period, which was significantly more than his annual salary of $430,000 for that year. His trading profits exceeded $2.4 million. Additionally, he was motivated to misrepresent compliance issues to secure substantial bonuses, receiving $468,700 in 2013 and $492,987 in 2012, which were tied to the company's perceived regulatory success and business integration achievements.
The timing of Cauthen’s resignation on October 3, 2013, shortly after the company had to issue revised financial statements and before potential CFPB actions against Green Tree, raises further questions regarding his knowledge of the company's issues.
The court notes that the allegations against the Walter Individual Defendants lack direct evidence of scienter but emphasizes that circumstantial evidence may suffice to infer that they were aware of or recklessly disregarded the alleged fraud. The court will consider if a reasonable person could conclude that there was at least a 50% chance that each defendant knew about the fraud or was grossly negligent in not knowing.
Plaintiffs allege that the Walter Individual Defendants acted with scienter due to their knowledge and access to facts contradicting the Company’s public statements regarding legal compliance and internal control deficiencies. However, the Court finds insufficient evidence of scienter for Defendants O’Brien, Dixon, and Cauthen, as the allegations lack specificity regarding the information they received or ignored. The Court emphasizes that general assertions of access to information are inadequate; specific details about the materials (e.g., documents, emails) and their connection to alleged fraudulent actions are necessary. In contrast, there are sufficient particularized allegations to support an inference of scienter for Defendants Corey and Anderson. Specifically, Defendant Corey, as head of the legal compliance department, was in a unique position to be aware of compliance issues, held himself out as knowledgeable on regulatory matters, conducted monthly reviews with senior management, and certified familiarity with the Company’s operations prior to the Class Period.
Defendant Corey was aware of consumer complaints and litigation regarding Green Tree’s servicing practices in 2009 and 2011, indicating potential issues with compliance and internal controls. As General Counsel, he likely had responsibilities related to the FTC's inquiries in 2010 and 2011. The Court accepts the allegations in the Second Amended Complaint as true, suggesting that Corey's knowledge of contradictory materials supports a finding of scienter. Although the 2009 and 2011 allegations alone do not demonstrate that statements made during the Class Period were false, they are relevant in showing a pattern of misconduct that plausibly extends into the Class Period, as evidenced by similar complaints from June 2014.
Defendant Anderson similarly faces scrutiny due to allegations that he received complaints about Green Tree’s deceptive practices and servicing issues, with some complaints occurring just three months before the Class Period began. These pre-Class Period complaints, along with those made during the Class Period, suggest a continuous misconduct pattern. Although Anderson argues that the consumer complaints cannot infer scienter due to their timing, the Court finds them pertinent for assessing his knowledge and intent. Additionally, a third complaint made during the Class Period elicited a response, though the specifics of this interaction remain unclear. Overall, both defendants face allegations that indicate a potential awareness of misconduct relevant to their actions during the Class Period.
Defendant Anderson's awareness of Green Tree's compliance issues is supported by the allegations in the Second Amended Complaint, which the Court accepts as true at this stage. The Plaintiffs claim that the Walter Individual Defendants either knew of or recklessly ignored various "red flags," including: (i) online posts by current and former employees indicating coercive and illegal collection practices; (ii) lawsuits alleging abusive collection tactics; (iii) consumer complaints regarding improper loan modifications and foreclosures; (iv) a petition against inaccurate billing and aggressive accounting practices; (v) government investigations into consumer financial law violations; (vi) an OMSO report revealing Green Tree's failure to meet 8 out of 28 compliance metrics; and (vii) Fitch Ratings placing Green Tree on negative watch.
Significantly, a government investigation led to a Consent Order on April 21, 2015, resolving enforcement actions by the FTC and CFPB against Green Tree for various violations, including those under the FTC Act and the Fair Debt Collection Practices Act. Although Green Tree did not admit to nor deny the allegations, the order prohibited practices identified in the complaints. While government investigations can suggest scienter, they must explicitly reveal a defendant's state of mind to be impactful. Here, the enforcement action and the Consent Order do not implicate the Walter Individual Defendants directly, serving instead as part of a broader context indicating potential scienter, though insufficient on their own to establish it.
Defendants O’Brien, Dixon, and Cauthen lacked knowledge of any internet postings, consumer complaints, lawsuits, or petitions related to the allegations against them, as established by the precedent in Mizzaro, which emphasizes the need for specific allegations of scienter to infer knowledge. The presence of governmental investigations and negative reports did not suffice to create a strong inference of scienter against these defendants. Conversely, Defendants Anderson and Corey, former CEO and General Counsel of Green Tree respectively, were aware of ongoing investigations and consumer complaints regarding aggressive and illegal collection practices, which supports an inference of scienter for them.
The plaintiffs assert that Green Tree was a core operation of Walter Investment, serving as a substantial revenue source, which could impute knowledge of compliance issues to Defendants Anderson and Corey. However, merely categorizing Green Tree as a core operation does not demonstrate scienter for Defendants O’Brien, Dixon, and Cauthen, as the Private Securities Litigation Reform Act (PSLRA) requires more substantial evidence.
Furthermore, allegations that the Walter Individual Defendants were incentivized to maintain high stock prices due to bonus compensation plans and financial agreements are deemed insufficient to establish scienter, as these claims are overly broad and lack the necessary specificity to support a strong inference of wrongdoing.
Higher compensation packages, debt covenants, and upcoming stock offerings can significantly impact companies. In the case of Edward J. Goodman Life Income Trust, the court found that allegations of bonuses do not imply scienter since the plaintiff did not provide sufficient evidence that any defendant received or could receive an extraordinary bonus. Resignations can strengthen the inference of scienter if they coincide with investigations. The plaintiffs argued that resignations of Defendants Cauthen and Anderson supported such an inference, occurring shortly after the company's new financial statements were issued and before government actions were disclosed. However, the court disagreed, noting that Cauthen's resignation on October 3, 2013, and Anderson's on August 8, 2014, did not align closely with the investigations, undermining the inference of scienter. Additionally, Cauthen was not responsible for the statements in the financial documents, making his resignation irrelevant to the case.
The timing of insider stock trades may also indicate scienter if the trades were made under suspicious circumstances. Courts assess suspicious trading based on the volume and percentage of shares sold, the timing of sales, and the consistency with the insider’s prior trading patterns. The plaintiffs alleged that the Walter Individual Defendants sold stock at inflated prices for significant profits, while the defendants contended that their sales were executed under a Rule 10b5-1 plan for tax purposes. The court noted that a Rule 10b5-1 plan is an affirmative defense that must be both pled and proven.
Trading under a Rule 10b5-1 plan does not automatically protect individuals from allegations of insider trading, especially if such plans are implemented during a class period. In this case, the Walter Individual Defendants initiated their trading plans during the class period, and they did not contest this assertion, which means their use of a 10b5-1 plan does not negate the possibility of scienter. Conversely, for Defendants O’Brien and Cauthen, the court found no evidence of scienter linked to their stock sales due to a lack of specifics regarding the timing of these sales and their trading history, which the plaintiffs did not provide.
Defendant Dixon's situation is more complex. Although he sold a significant amount of stock shortly before a critical disclosure regarding internal control failures, he also acquired shares during the same period. The court noted that while his sales could suggest scienter, his subsequent purchases and the timing of his transactions complicate this inference. Ultimately, the evidence alone does not substantiate a finding of scienter. Regarding Defendants Anderson and Corey, while their selling activity during the class period raises questions, the absence of suspicious timing in their trades means there is insufficient basis to infer scienter.
Plaintiffs contend that Defendants Anderson and Corey lack a full comparison period for insider trading, as they only became insiders at Walter Investment after the acquisition of Green Tree on July 1, 2011. Consequently, the relevant comparison period is limited to 313 days, from the acquisition until May 8, 2012, making it difficult for the Court to evaluate whether their stock trades during the Class Period were consistent with past practices. Thus, the Court finds their trades do not support an inference of scienter.
Regarding a confidential witness (CW1), Plaintiffs assert that CW1 worked in loss mitigation at EverBank and later at Green Tree after its acquisition. However, the Court deems the allegations insufficient due to a lack of detail about CW1's role at Green Tree and the timing of the alleged abusive tactics. There are no allegations indicating that CW1 communicated any complaints to the Walter Individual Defendants, further weakening the claims.
Finally, Plaintiffs reference Sarbanes-Oxley certifications signed by Defendants O’Brien and Cauthen to imply scienter. The Court finds this insufficient, noting that such certifications only indicate scienter if the signers were severely reckless concerning glaring accounting irregularities or red flags. Since no such issues are present, and Plaintiffs do not prove that O’Brien and Cauthen had knowledge of any fraud or red flags, the certifications do not support an inference of scienter.
Plaintiffs' allegations do not sufficiently indicate that Defendants O’Brien, Cauthen, and Dixon acted with scienter, while a strong inference of scienter is present for Defendants Anderson and Corey. Consequently, corporate scienter can be attributed to Walter Investment based on the actions of its officers. For a securities fraud claim under Section 10(b) and Rule 10b-5, a causal link between misrepresentation and the decline in investment value must be established. In a fraud-on-the-market case, this requires proof that the fraudulent misrepresentation inflated the security's value and that this inflation was later removed, leading to losses for the plaintiffs. Loss causation does not necessitate that the misrepresentation was the sole cause of the decline, but it must be a substantial factor. Plaintiffs can demonstrate loss causation by identifying a corrective disclosure, showing a subsequent stock price drop, and eliminating other potential causes for the decline. The Court previously determined that a March 2013 disclosure constituted the only effective corrective disclosure linked to a stock price drop, rendering other alleged disclosures insufficient for establishing loss causation. Additionally, Plaintiffs have noted that Defendant Anderson's resignation on August 8, 2014, further supports their claim.
On August 11, 2014, the Company reported in its Form 10-Q that it was engaged in settlement discussions with government agencies regarding Green Tree. The filing indicated that the FTC and CFPB planned to seek injunctive relief and financial penalties related to Green Tree's business practices, and the CFPB had authority to initiate legal action, while the FTC required further approval to proceed. Additionally, the Department of Justice was investigating potential violations of the False Claims Act concerning RMS. Following this disclosure, the stock price of Walter securities fell from $28 to $24.75, a decline of over 11%. On August 12, 2014, Compass Point Research attributed the stock price drop to the Company's disclosures, while FBR Capital downgraded Walter from "Outperform" to "Market Perform" due to increasing legal costs. A subsequent Form 10-Q filed on November 6, 2014, revealed ongoing investigations by various state attorneys general and regulators regarding Green Tree's loan servicing practices.
The plaintiffs did not claim that Defendant Anderson's resignation provided new market-relevant information or caused a stock price drop, which undermines loss causation claims related to his resignation. The Court noted that the August 11 disclosure does not qualify as a corrective disclosure since the details were previously indicated, and ongoing investigations alone do not constitute corrective disclosures without evidence of fraud. However, the Court found that prior disclosures did not explicitly state that the FTC and CFPB were actively seeking injunctive relief and financial penalties, only that such outcomes were possible.
The FTC and CFPB initiated an enforcement action against Green Tree following the Second Amended Complaint, resulting in a Consent Order that imposed injunctive relief, civil penalties, and monetary relief. Green Tree neither admitted nor denied the allegations, which were related to the claims in the current action. The August 11, 2014 disclosure regarding the FTC and CFPB investigation, alongside analysts' reports from August 12, 2014, constituted a corrective disclosure and supported a finding of loss causation, as noted in relevant case law.
Under Section 20(a) of the Exchange Act, the Plaintiffs allege claims against Individual Defendants for joint liability due to their control over the entity. However, the Court determined that since the Plaintiffs did not adequately plead violations under Section 10(b) and Rule 10b-5 against Defendants Helm, O’Brien, Cauthen, and Dixon, the Section 20(a) claims against them failed. Conversely, claims against Defendants Anderson and Corey were found to be adequately alleged.
The Court ordered that Defendant Helm’s Motion to Dismiss is granted, while the motion from the remaining Defendants is granted in part and denied in part, resulting in the dismissal of Helm, O’Brien, Dixon, Cauthen, and others from the action. Plaintiffs are required to submit a Third Amended Complaint by July 10, 2015, incorporating specific documents without adding further allegations, along with a redline comparison of the amended complaints.
Defendants Walter Investment Management Corporation, Keith A. Anderson, and Brian Corey are ordered to file their answer by July 24, 2015, with no further motions to dismiss permitted. References to the "Compl." pertain to the Second Amended Class Action Complaint filed on January 6, 2015, documented as D.E. 73, while "D.E." refers to docket entry numbers of relevant documents. Green Tree services home loans, particularly sub-prime mortgages, and RMS originates and services reverse mortgages. The term EBITDA is defined as earnings before interest, taxes, depreciation, and amortization, with a source cited for this definition.
Defendants Walter Investment, Anderson, Corey, O’Brien, Dixon, and Cauthen do not dispute their role as makers of misrepresentations unrelated to RMS’s financial statements. Defendant Helm claims he is not accountable for RMS’s financial statements, asserting he lacked a position at Walter Investment and that the statements were disclosed by Walter Investment. However, the Court maintains that the Second Amended Complaint sufficiently alleges Helm's responsibility as the maker of those statements, emphasizing that publishing a statement on behalf of another does not absolve one from being its maker.
Plaintiffs reference statements regarding the RMS acquisition and alleged misrepresentations related to Walter Investment’s internal controls and regulatory compliance, which may indicate Helm's scienter. The Court has previously found the RMS acquisition statements inactionable and need not consider the Defendants’ arguments regarding scienter inference from these statements. Additionally, it reiterates that Helm is not a maker of statements about Walter Investment or Green Tree, thus negating the need to discuss related misrepresentations or their implications for Helm’s intent.
The Court also notes ambiguity in the allegations of a qui tam complaint mentioning Helm, particularly regarding his conversations about fraudulent schemes involving RMS and Celink, which could imply either active involvement or mere awareness of those schemes.
Plaintiffs have alleged that RMS is a core operation, claiming the Court cannot attribute knowledge of financial statement inaccuracies to the Walter Individual Defendants. However, the Court has determined it cannot assess the significance of RMS's financial restatement as the plaintiffs presented the size in terms of net income rather than total revenue. Consequently, the Court will not evaluate whether the restatement indicates fraud or if the Walter Individual Defendants should have identified the accounting errors through due diligence. The Joint Planning and Scheduling Report confirms that Defendant Anderson resigned on August 8, 2014. The Court acknowledges Defendant Dixon's Form 4 from August 14, 2013, emphasizing that courts often take judicial notice of such forms when a defendant's trading history is relevant in dismissal motions. Disclosures post-Class Period, including one on November 6, 2014, will not be examined as they do not pertain to the class period in question. Even if the November disclosure were considered, it would not demonstrate loss causation, as the plaintiffs did not assert a stock price drop following that disclosure.
