On October 4, 2018, Magistrate Judge Bruce Reinhart of the United States District Court for the Southern District of Florida granted in part and denied in part a motion to dismiss claims asserted under Rule 10b-5 of the Securities Exchange Act of 1934 by certain investment funds against Ocwen Financial Corporation. Owl Creek I, L.P. v. Ocwen Financial Corp., No. 18-80506-CIV (Oct. 4, 2018). Plaintiffs alleged that Ocwen and certain of its executives induced plaintiffs to invest by making inaccurate statements regarding Ocwen’s financial statements, its purported regulatory compliance, and the effectiveness of its internal controls and procedures. The Court dismissed claims based on statements in one conference call due to lack of scienter, but otherwise denied defendants’ motion.
The crux of plaintiffs’ allegations concerned 2011 and 2012 agreements between Ocwen and various regulators, in which Ocwen agreed to certain mortgage loan servicing standards, including that any denial of a homeowner’s request for an interest rate reduction be accompanied by a notice informing the borrower of an appeal period. Slip op. at 3. Ocwen acknowledged in a 2014 consent order that it had been backdating such letters to borrowers “for years,” and plaintiffs alleged that an employee had discovered the problem and reported it to Ocwen’s compliance department in November 2013 and April 2014. Id.
Plaintiffs alleged that on October 31, 2013, Ocwen’s CEO stated during a conference call that Ocwen had been “careful to assure . . . strong compliance” when it transferred nearly two million newly-acquired loans to its electronic servicing platform, and that the transfer had been costlier than expected because of an emphasis on compliance. Id. Then, in a May 1, 2014 press release, Ocwen’s founder and chairman stated that he considered Ocwen’s compliance with the 2012 regulatory agreement to be a “substantial competitive advantage.” Id. at 4.
With respect to claims based on the October 31, 2013 statements, the Court rejected defendants’ arguments that these were non-actionable “puffery” and had not caused any loss. Rather, the Court held that statements that Ocwen had been “careful to assure … strong compliance” and that the loan transfer had been costlier because of Ocwen’s emphasis on compliance were verifiable and specific factual statements that were allegedly false when made. Id. at 15-16. The Court further held that public disclosures that the company’s internal controls suffered from a material weakness and with regard to the backdating issue adequately alleged loss causation. Id. at 16. The Court nevertheless dismissed the claims based on the October 31 statements, holding that the allegation the CEO sat on Ocwen’s compliance committee was insufficient to show scienter, and that the fact that an Ocwen employee allegedly raised concerns in November 2013 could not support an inference of scienter for a statement made on October 31, 2013. Id. at 17-18.
In contrast, the Court found that allegations relating to the May 1, 2014 press release were adequately pleaded, including with respect to scienter. The Court found that the allegation that Ocwen admitted in the 2014 consent order that the backdating had been occurring “for years” was sufficient to infer that Ocwen’s founder and chairman was aware of this activity by May 1, 2014. Id. at 21. Moreover, while he was not alleged to have been personally informed, his status as a high level executive gave rise to a plausible inference that he was aware of the activity after an Ocwen employee raised the issue with Ocwen’s Vice President of Compliance in November 2013 and April 2014. The Court found that scienter could be inferred based on either of two alternative standards — that allegations regarding the executive’s role raised an inference that was “cogent and compelling” compared to other explanations, or alternatively were sufficient to suggest that he had “actual access” to the disputed information. Id. at 21-22.
This decision is a reminder that an inference of scienter with respect to individual executives will depend on the specifics of allegations regarding knowledge in relation to the claimed misstatement.