(Article from Securities Law Alert, February 2018)
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On January 26, 2018, the Second Circuit affirmed denial of leave to amend a securities fraud complaint alleging misrepresentations concerning a consumer finance company’s underwriting practices. Waterford Twp. Police & Fire Ret. Sys. v. Reg’l Mgmt. Corp., 2018 WL 565780 (2d Cir. 2018) (Waterford III).[1] The Second Circuit found the proposed amended complaint alleged no material misrepresentations, and pled only “fraud by hindsight.”
Plaintiffs’ original complaint challenged the company’s “characterizations of its underwriting practices as ‘sound’ or ‘targeted,’” among other claims. Waterford Twp. Police & Fire Ret. Sys. v. Reg’l Mgmt. Corp., 2016 WL 1261135 (S.D.N.Y. 2016) (Waterford I).[2] Plaintiffs “alleged that lower-level branch staff were skeptical of [the company]’s live check underwriting.” However, the district court found plaintiffs pled no facts demonstrating that the company did not believe its statements of opinion concerning its underwriting practices at the time it made those statements, as required under the Supreme Court’s decision in Omnicare v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015).[3] The court dismissed plaintiffs’ complaint in its entirety.
The proposed amended complaint included new allegations from a supervisor who oversaw underwriting practices at a number of the company’s branches. Because these new allegations did not address underwriting practices at the company’s headquarters, which handled the live check loans at issue, the district court found plaintiffs’ proposed allegations would be insufficient to survive a motion to dismiss. Waterford Twp. Police & Fire Ret. Sys. v. Reg’l Mgmt. Corp., 2017 WL 395206 (S.D.N.Y. 2017) (Waterford II). The Second Circuit agreed, and found the facts pled were “just as consistent with the possibility that [the company] believed what it was saying about its underwriting practices (and that its beliefs were correct) as the opposite.” Waterford III, 2018 WL 565780.
The proposed amended complaint also included allegations post-dating the class period that concerned the company’s representations as to the adequacy of staffing in its loan servicing departments. The district court found these allegations were “a classic example of attempting to sustain a cause of action based on ‘fraud by hindsight,’ that is, alleging ‘that defendants should have anticipated future events and made certain disclosures earlier than they actually did.’” Waterford II, 2017 WL 395206 (quoting Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000)).
The Second Circuit agreed that these proposed allegations were insufficient to suggest that the company did not believe its staffing was adequate at the time it made the statements at issue. The court further determined that plaintiffs did not point to “‘any contemporaneous facts that would have rendered such a belief unfounded.’” Waterford III, 2018 WL 565780 (quoting Waterford I, 2016 WL 1261135). The Second Circuit observed that “[i]nvestors frequently clamor for cutting labor costs to pay out more in profits.” The court emphasized that it “need[s] something more than hypotheticals to conclude that such a ho-hum feature of a capitalist enterprise was in fact a guise to defraud those it often benefits.”
[1] Simpson Thacher represents Regional Management Corp. and certain of its current and former directors, officers and shareholders in this matter.
[2] Please click here to read our prior discussion of the district court’s decision.
[3] The Omnicare Court made it clear that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless [of] whether an investor can ultimately prove the belief wrong.” 135 S. Ct. 1318. Please click here to read our prior discussion of the Omnicare decision.