Late last year, the United States District Court for the Central District of California dismissed a securities class action claim against IndyMac Financial, Inc. and several of its officers and directors because the plaintiffs failed to plead scienter. Tripp v. IndyMac Financial Inc., No. 2:07 CV-01635-GW-VBK (November 29, 2007). A copy of that decision is available here.
The class action was brought on behalf of all IndyMac shareholders for the period of January 26, 2006 to January 25, 2007. Shareholders accused IndyMac of violating various securities laws by allegedly making public statements that projected a positive outlook for the Company in the national housing and mortgage markets despite the economic downturn in those markets in order to inflate the Company’s stock prices. Among other things, shareholders alleged IndyMac failed to fully disclose problems with the Company’s internal controls and underwriting policies , including that it “inappropriately loosened its underwriting guidelines such that it had extended far riskier loans that were going into default at an increasing rate; inadequately hedged against its risks; and had inadequate internal controls.”
Judge George H. Wu of the Central District of California held that dismissal was proper because the plaintiffs failed to allege facts sufficient facts to demonstrate that defendants had knowledge that IndyMac was "deeply troubled" in 2006. Judge Wu was not persuaded by the plaintiffs' use of confidential witnesses or their reliance on the Company’s press releases and earnings calls. He was also unconvinced by the plaintiffs’ use of IndyMac's financial statements as evidence that IndyMac knew a large percentage of its secondary market loans were troubled and would need to be repurchased. Judge Wu inferred that the statements at most illustrated the Company’s inability to fully protect itself at the level the Company expected in the midst of the turmoil in the housing and mortgage markets. Once the problem was evident, the financial statements were changed accordingly. Further, Judge Wu held that plaintiffs’ generalized allegations that IndyMac’s company-wide knowledge of its underwriting problems, by implementing a policy of “pushing through” unqualified loans, were also insufficient to show scienter.
Additionally, Judge Wu rejected the plaintiffs’ argument that the defendants issued false and misleading statements to “capitalize on the inflated stock price,” opining that most individual defendants kept most of their stock, and that scienter could not be attributed to two particular defendants -- Michael Perry (IndyMac's CEO and Chairman) and Scott Keys (IndyMac's CFO) -- since they did not sell any stock.