Pittleman v. Impac Mortgage Holdings, et al. CV 07-00970 (CD Cal., filed August 7, 2007)

On March 9, U.S. District Court Judge Andrew Guilford dismissed with prejudice a securities fraud complaint against Impac Mortgage Holdings, Inc., an Orange County lender that specialized in “low documentation loans.” Shareholders had filed the class action complaint in August 2007, alleging that Impac had improperly relaxed lending standards to the detriment of the plaintiff shareholders. The plaintiffs argued that this case was about a “staggering race-to-the-bottom” of loan quality and underwriting standards. The court disagreed, holding that the case was “about a company involved in a volatile industry at the outset of a long, destructive economic downturn.”

This result is particularly noteworthy at this time, as there have been few dismissals with prejudice of mortgagerelated shareholder cases in the federal courts. This decision reflects that federal tort reform has raised the bar for pleading standards for shareholder class actions The plaintiffs contended that Impac artificially inflated its stock prices through the fraudulent loan practiced, relying on statements made by five anonymous former employees and Internet bloggers. The plaintiffs pled a “core operations inference,” arguing the loan fraud was so obvious that the defendant company’s executives must have known about it. The court held that in order to state a claim under SEC Rule 10b-5, plaintiffs must plead a material misrepresentation or omission, reliance, and actual loss causation. Judge Guilford also noted the heightened pleading standard applicable to fraud allegations pursuant to Federal Rule of Civil Procedure 9(b), which requires a complaint to specify such facts as the time, date and other particulars of the fraudulent activities. Furthermore, the court cited the strict pleading requirements imposed by the Private Securities Litigation Reform Act of 1995 (PSLR), which was intended to eliminate abusive securities litigation “and particularly put an end to the practice of pleading ‘fraud by hindsight.’”  

The court characterized the former disgruntled employees’ allegations as vague conjecture.  

Judge Guilford concluded:  

Plaintiff argues that this case is about “a staggering race-to-the-bottom of loan quality and underwriting standards as part of an effort to originate more loans for sale through secondary market transactions.”. . . The Court disagrees. This case is about a company involved in a volatile industry at the onset of a long, destructive economic downturn.