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(Article from Securities Law Alert, April 2016) 

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On March 30, 2016, the Southern District of New York dismissed in its entirety a securities fraud action against Regional Management (“RM”), a consumer finance company specializing in subprime lending.[1] Waterford Twp. Police & Fire Ret. Sys. v. Reg’l Mgmt. Corp., 2016 WL 1261135 (S.D.N.Y. 2016) (Swain, J.). The court found that plaintiffs failed to identify any “misstatements or omissions of material facts” and “rest[ed] solely on non-actionable opinion statements” and allegations of fraud by hindsight.

Background

RM’s loan offerings include the mailing to prescreened customers of “live checks,” which, when cashed, become loans. In the complaint, plaintiffs alleged misrepresentations about the loan loss reserves for and credit performance of RM’s live check program.  Plaintiffs also alleged that RM’s underwriting practices were unsound and that RM should have predicted and disclosed in advance increased delinquencies in live checks. Defendants moved to dismiss plaintiffs’ complaint for “fail[ure] to allege any actionable misstatement or omission of material fact.”

Court Holds Plaintiffs Failed to Allege Any Material Misrepresentations or Omissions

The court granted defendants’ motion to dismiss in its entirety, finding that plaintiffs failed as a matter of law to allege any material misrepresentation. As to plaintiffs’ principal claims, which related to RM’s loan loss reserves and credit performance statistics, the court found that plaintiffs failed to allege that any of those statistics were misstated in any way. 

The court held that plaintiffs “failed to plead facts demonstrating that RM’s earlier loss reserve provisions were not the product of sincere opinions regarding appropriate loss reserves, notwithstanding the subsequent substantial increase in those provisions following the change of management.”

The court similarly held that plaintiffs’ claims that RM should have anticipated and disclosed in advance that (i) live check loan delinquencies might increase and (ii) its staffing levels were inadequate were inactionable claims of “fraud by hindsight.”  The court explained that under Second Circuit precedent, “[p]laintiffs may not sustain causes of action” that “rely[ ] on ‘allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did’” (quoting Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000)).

In addition, the court held that “RM’s characterizations of its underwriting practices as ‘sound’ or ‘targeted,’” were “statements in the nature of belief or opinion.” The court dismissed such claims because there were no allegations “demonstrating that RM or [its executives] did not believe the statements were true at the time they were made,” as required under the Second Circuit’s decision in Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011).[2] Plaintiffs alleged “no facts demonstrating that RM’s management believed that the [c]ompany’s underwriting practices were unsound or inappropriate for a program of that type, which involved offering loans to large numbers of subprime borrowers at high interest rates.” The court further found that there were no allegations “demonstrating that RM knowingly failed to follow the underwriting practices that it actually disclosed, or that those practices were objectively unsound in the context of the live check program.”

[2]               Please click here to read our prior discussion of the Fait decision.