In re Countrywide Fin. Corp. Derivative Litigation

Page 1160

542 F.Supp.2d 1160

In re COUNTRYWIDE FINANCIAL CORP. DERIVATIVE LITIGATION In re Countrywide Financial Corp. Securities Litigation.

Lead Case No. CV-07-06923-MRP (MANx).

Lead Case No. CV-07-05295-MRP (MANx).

United States District Court, CD. California.

March 28, 2008.

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Blair A. Nicholas, David A. Thorpe, Matthew P. Siben, Niki L. Mendoza, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA, Diane Zilka, Jay W. Eisenhofer, Michael James Barry, Grant and Eisenhofer PA, Wilmington, DE, Gerald H. Silk, Mark Lebovitch, Bernstein Litowitz Berger & Grossmann, New York, NY, for Plaintiffs.

Brian E. Pastuszenski, Stuart M. Glass, Goodwin Procter LLP, Boston, MA, Eric M. Roth, Graham W. Meli, Stephen R. Diprima, Wachtell Lipton Rosen and Katz New York, NY, Lloyd Winawer, Goodwin Procter, Eric S. Waxman, Skadden Arps Slate Meagher and Flom LLP, Los Angeles, CA, for Defendants.

ORDER (1) GRANTING DEFENDANTS' CROSS MOTION STAY; (2) DENYING PLAINTIFFS' MOTION FOR CONSTRUCTIVE TRUST AND PRELIMINARY INJUNCTION; AND (3) DENYING PLAINTIFFS' MOTION FOR EXPEDITED DISCOVERY

MARIANA R. PFAELZER, District Judge.

Before the Court are three motions brought with respect to In re Countrywide Financial Corp. Derivative Litigation, No. CV-07-06923-MRP ("Arkansas Teachers"), and one brought with respect to In re Countrywide Financial Corp. Securities Litigation, No. CV-07-05295-MRP ("Pappas"). The motions generally relate to the series of cases before this and other courts involving Countrywide Financial Corporation ("Countrywide"), Bank of America Corporation ("Bank of America"), and several current and former Countrywide directors and officers.

Defendants¹ in Arkansas Teachers bring a Cross-Motion to Stay merger-related class action claims in Arkansas Teachers in favor of similar proceedings currently progressing in the Delaware Court of Chancery. Defendants also bring a Motion to Stay Discovery in In re Countrywide Fin. Corp. Shareholder Derivative Litigation, No. BC375275 (Cal.Super.Ct), asking this Court to enjoin discovery in an action pending in Superior Court of California, Country of Los Angeles ("Los Angeles Superior Court"), that involves the same defendants. The latter motion was filed under the Pappas case number.

Plaintiffs² in Arkansas Teachers have filed two motions as well. They seek expedited discovery notwithstanding the stay provision in the Private Securities Litigation Reform Act ("PSLRA"). They also request equitable relief in the form of a constructive trust and preliminary injunction to preserve their standing to proceed in derivative fashion should Countrywide merge into Bank of America.

I. BACKGROUND

Countrywide is a Delaware corporation headquartered in Calabasas, California. It operates in five business areas: Mortgage Banking, Banking, Capital Markets, Insurance, and Global Operations. The Mortgage Banking component originates and sells residential loans, and the Global Operations component provides ancillary services for those loans. The Banking component operates a federally chartered bank that invests in mortgages and home equity loans that originated in Mortgage Banking. The Capital Markets component underwrites and trades in mortgage-backed securities.

Countrywide's common stock, which is traded publicly, steadily climbed in value from about $20 in 2003 to $45 in February 2007. Arkansas Teachers Compl. ¶ 2. However, the stock has since declined in value, trading at about $20 at the time of the first lawsuit in this Court in mid August, 2007, and at about $6 currently. Several parties have now filed lawsuits against Countrywide and current and former officers and directors, asserting violations of federal and state securities laws and breaches of fiduciary duties.

A. Filings Prior to Merger Announcement

1. The Public Securities Class Actions

In one category of cases brought in this Court as early as August, 2007, and now consolidated under Pappas, No. CV-07-05295-MRP, plaintiffs bring class action claims against Countrywide and several present and former officers and directors of Countrywide on behalf of purchasers of the company's publicly traded securities. See generally Order Consolidating Cases and Appointing Lead Plaintiff and Lead Counsel, No. CV-07-05295-MRP, Nov. 28, 2007. Several of the Pappas cases allege that Countrywide issued false and misleading statements from 2004 to August 2007, in violation of § 10(b) and § 20(a) of the Securities and Exchange Act of 1934 ("1934 Act") and Securities and Exchange Commission ("SEC") Rule 10b-5.³ These "fraud on the market" allegations reference Countrywide press releases, conference calls with investors where executives answered questions, SEC filings such as quarterly and annual reports, and presentations to investors — dating back to 2004 — as examples of misleading statements and misrepresentations.⁴ Others of the cases consolidated under Pappas bring class action suits on behalf of purchasers of "preferred" securities traceable to a single offering — i.e. the November 1, 2006 offering of "7% Capital Securities of Countrywide Capital V."⁵ These complaints allege that Defendants failed to craft a registration statement and prospectus (collectively "Prospectus") for the securities offering that fully informed investors of "all material facts and industry trends." The cases are brought under and allege violations of §§ 11, 12, and 15 of the Securities Act of 1933 ("1933 Act").⁶ Pursuant to the 1933 Act, some of the cases name Citigroup Global Markets, J.P. Morgan Securities, Merrill Lynch, Morgan Stanley, UBS Securities LLC, Wachovia Capital Markets LLC (collectively the "underwriters") as defendants. On Nov. 28, 2007, this Court appointed "New York Funds"⁷ as Lead Plaintiff for the group of securities cases consolidated under Pappas. Order Consolidating Cases and Appointing Lead Plaintiff and Lead Counsel, No. CV-07-05295-MRP, Nov. 28, 2007.

2. Los Angeles Superior Court Derivative Cases

A second series of cases, including Garber I⁸ and New Jersey Carpenters' Pension Fund,⁹ were brought in derivative form in Los Angeles Superior Court. These cases, which have since been consolidated in the state court under the title In re Countrywide Financial Corporation Shareholder Derivative Litigation, No. BC375275 (Cal.Super.Ct), (hereafter "Garber"), name, as defendants several individuals and nominal defendant Countrywide Financial Corporation ("Countrywide"), and allege that the individual defendants breached their fiduciary duties to shareholders in the operation of the company. For example, the Garber I complaint alleges that defendants breached their fiduciary duties by (i) causing Countrywide to engage in unsound lending practices, leading to substantial earnings problems and dramatically insufficient loan loss reserves; (ii) causing Countrywide to disseminate materially false and misleading statements during the relevant period, in order to artificially inflate the value of Countrywide securities, which has exposed the company to liability in federal securities actions; and (hi) unlawfully engaged in massive insider-selling, so as to unlawfully enrich themselves while in possession of material, adverse non-public information. Def. Bank of America's Notice of Removal, Jan. 22, 2008, Exh. 1 ¶¶ 3-5. Defendants removed these cases to federal court on Aug. 31, 2007, but Judge Walter of this Court granted plaintiffs' motion to remand because the defendants had not established the presence of subject matter jurisdiction. See Nov. 15, 2007 Order Granting In Part and Denying In Part Plaintiffs Motion to Remand Action, Case No. CV-07-5728-JFW (SSx); Order Granting In Part and Denying In Part Plaintiffs Motion to Remand Action, Case No. CV-07-7118-JFW (SSx).

3. ERISA Cases

During the same time period, a third series of cases were brought in this Court against Countrywide and several individual defendants under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq.¹⁰ These "ERISA cases" are currently proceeding before Judge Klausner. The cases raise allegations that "Defendants breached various fiduciary duties owed to Plan participants under ERISA by imprudently allowing the investment of the Plan's assets in Countrywide stock ... [and] such investment was unduly risky given the company's involvement in marketing and extending subprime mortgage loans on a `low documentation' basis." Mar. 18, 2008 Minutes of Defendant Countrywide Financial Corp.'s Motion to Dismiss, Alvidres v. Countrywide Financial Corp., et al., No. CV-07-05810-RGK, at 1, 2008 WL 819330.

4. Federal Court Derivative Cases

Finally, in October 2007, a fourth series of cases, now consolidated under Arkansas Teachers, No. CV-07-06923, were brought in this federal court derivatively, alleging that Countrywide directors engaged in an extensive pattern of misconduct in disregard of their fiduciary duties to the corporation, including a lack of good faith, due care, and oversight of Countrywide's lending practices, financial reporting, and internal control.¹¹ The breach of fiduciary duty claims, brought under principles of corporate law, are supplemented with claims that allege violations of the 10(b), 14(A) and 20A of the 1934 Act and SEC Rule 10b-5 and 14A-9. The allegations arising under federal securities laws contend that Countrywide, as an entity, suffered harm because during the relevant period, Countrywide "repurchased" billions of dollars of its own securities from the open market.

B. The January 11, 2008 Merger Announcement

On January 11, 2008, Bank of America and Countrywide announced a proposed transaction whereby Countrywide would merge with Red Oak Merger Corporation, a subsidiary of Bank of America. Pursuant to the proposed merger agreement, Countrywide shareholders would receive 0.1822 shares of Bank of America stock for each Countrywide share, in an "all stock" t...