In re Navient Corp. Sec. Litig.

IN RE NAVIENT CORPORATION SECURITIES LITIGATION

Civil No. 17-8373 (RBK/AMD)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY CAMDEN VICINAGE

December 30, 2019

NOT FOR PUBLICATION

OPINION

KUGLER, United States District Judge:

This matter comes before the Court upon the Motion (Doc. 36) of Defendants Somsak Chivavibul, Christian M. Lown, John F. Remondi, and Navient Corporation (collectively "Defendants") to dismiss Plaintiff's consolidated Complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6). For the reasons expressed herein, Defendants' Motion is hereby DENIED.

I. BACKGROUND¹

a. Factual Background

Plaintiff brings this federal securities class action on behalf of all persons, excluding Defendants, who purchased or otherwise acquired the publicly-traded securities of Navient Corporation ("Navient") during the period from January 18, 2017 through November 20, 2018.

Navient, a publicly-traded corporation, is "one of the ten major loan servicers that have contracts with the Department of Education." (Doc. 33, ("Compl.") ¶34.) Defendants includeNavient, its Chief Executive Officer John F. Remondi, and its Chief Financial Officers during the class period, Somsak Chivavibul and Christian M. Lown.

Plaintiff brings this action under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, seeking to recover compensable damages caused by Defendants' alleged violations of federal securities laws. The consolidated Complaint (Doc. 33) alleges that, during the class period, Defendants made materially false and misleading statements regarding Navient's business, causing losses and damages among the holders of Navient securities.²

Plaintiff's claims arise from Defendants' response to lawsuits brought against Navient by the Consumer Financial Protection Bureau ("CFPB") and State Attorneys General from Illinois, Washington, Pennsylvania, California, and Mississippi. In these lawsuits, Navient was sued for allegedly running a "forbearance scheme," which Plaintiff describes as an "illegal scheme to cheat struggling student borrowers out of their rights to lower repayment plans" by improperly steering borrowers into forbearance status, rather than offering more financially sensible income-driven repayment (IDR) plans. (Compl. ¶2.)

Plaintiff claims that Navient could operate more efficiently and cost-effectively by steering borrowers into forbearance, whether or not it was financially appropriate for the borrower. Knowing this, Navient allegedly instructed its customer service representatives to "actively steer borrowers into forbearance" during phone conversations, rather than discuss IDR plans, which would necessitate a much lengthier conversation and reduce the number of customers each Navient employee could service. (Compl. ¶¶3-4.) This instruction to staff allowed Navient to decrease call length per borrower and thus "service more loans in shorter amounts of time." (Id. ¶¶3-4.) Additionally, forbearance-steering was profitable for Navient because staff could enroll a borrowerin forbearance over the phone, whereas IDR required borrowers to fill out and submit paperwork on their own and recertify their IDR application each year. (Id. ¶50-54.) There was no guarantee that borrowers would complete IDR steps on their own, potentially resulting in loans being placed into default or delinquent status. (Id.) In contrast, enrolling borrowers in forbearance over the phone guaranteed that loans would not reflect a default or delinquent status. (Id.) Plaintiff emphasizes that the status of loans affected executive bonuses, as well as influenced "the number of loans Navient would receive for servicing from the Department of Education." (Id. ¶4.) Forbearance also generated more income for Navient: interest that accrued during the forbearance period capitalized at the end of the forbearance period, potentially increasing monthly payments and overall repayment amount. (Id. ¶48.)

Lawsuits against Navient

On January 18, 2017, the start date of the class period, the CFPB and State Attorneys General ("AG") from Washington and Illinois filed the first set of lawsuits against Navient. (Compl. ¶59.) These suits alleged "multiple violations relating to predatory lending practices," including allegations relating to the forbearance scheme detailed above. (Id.)

That same day, Navient put out three press releases responding to the lawsuits. (Id. ¶¶62, 98.) Navient's press releases called the lawsuits politically motivated, stated that the allegations were unsubstantiated and false, denied the lawsuits' claim that Navient did not educate borrowers about IDR, and went on to highlight successful aspects of Navient's loan repayment system. (Id. ¶¶62, 98-100.) Based on Navient's response, analysts such as Credit Suisse did not downgrade Navient's rating. (Id. ¶64.) Plaintiff claims that Navient's denial—which Plaintiff alleges contained "false and materially misleading" statements—misled investors and artificially inflated stock prices. (Id. ¶¶66, 101.)

Plaintiff details several additional times where Defendants deny the substance of the CFPB and Washington and Illinois AG lawsuits. On January 23, 2017, Defendant Remondi commented on the lawsuits in an interview with The Washington Post. (Compl. ¶102.) In the interview, Remondi "categorically denied" the allegations contained in the government lawsuits, and stated that Navient would not be made economically better off by steering borrowers into forbearance. (Id.) On Feburary 24, 2017, Navient issued its annual report, the 2016 10-K, which stated that Navient promotes awareness of IDR plans and limits grants of forbearance, tailoring forbearance to each customer's "unique situation." (Id. ¶104-105.) This 10-K was signed by Defendants Remondi and Chivavibul. (Id.) In April 2017, Navient responded to a Bloomberg article which covered these lawsuits and insinuated that Navient did not act in the best interests of its borrowers. (Id. 108-109.) Navient's response said, "[s]tatements that Navient does not inform borrowers of their array of repayment options are patently false." (Id.)

As a result of the CFPB's lawsuit, the Department of Education's ("ED") Federal Student Aid ("FSA") office conducted an audit of "Navient's forbearance practices between March 20 and 24, 2017."³ (Compl. ¶8.) The audit finalized its conclusions in a May 18, 2017 report which found, among other things, that Navient was "placing borrowers into forbearance without providing them with other, more beneficial options." (Id.) FSA found that, in almost one out of ten calls with borrowers, forbearance was offered as the only option available, regardless of personal situation. (Id. ¶94.) Navient did not publicly disclose the completed audit at this point. (Id. ¶9.)

On October 5, 2017, the Pennsylvania AG filed a lawsuit against Navient. (Id. ¶121.) Similar to the existing litigation, this suit alleged that Navient failed to inform borrowers ofpotentially beneficial IDR options and "instead pushed borrowers into forbearance." (Id. ¶122.) This lawsuit differed from previous ones, however, in that it focused on more recent conduct by Navient, alleging that Navient's forbearance-steering scheme had continued into early 2017. (Id. ¶123.) Plaintiff asserts that investors reacted more negatively to the Pennsylvania AG allegations because they were "more expansive," included a more recent time period, and ultimately "led investors to question whether and to what extent Remondi had been telling the truth when denying the CFPB and States AG Complaints' allegations regarding Navient's forbearance practices." (Id. ¶127.) Once the Pennsylvania AG lawsuit was announced, Navient's stock price fell 14% from the previous day. (Id. ¶128.)

The same day the Pennsylvania AG announced the lawsuit, Navient issued a statement in the Globe Newswire calling the Pennsylvania AG's allegations "completely unfounded." (Compl. ¶129.) Remondi again echoed this statement on October 18, 2017 during an investor conference call, stating that the recent lawsuit was "baseless." (Id. ¶131.) On October 27, 2017, in Navient's quarterly report (10-Q) for the third quarter of 2017, Defendants Remondi and Lown stated that Navient promotes awareness of IDR and uses forbearance sparingly and uniquely. (Id. ¶134.) This 10-Q did not mention the FSA Audit. (Id. ¶137.) Similar statements were repeated on January 24, 2018, in a fourth quarter earnings call; on February 26, 2018, in Navient's annual report; and on May 3, 2018, in the 10-Q for Navient's first quarterly report of 2018. (Id. ¶¶138, 141, 146.)

On June 28, 2018, the California AG filed a complaint against Navient. (Compl. ¶150.) Similar to the CFPB and Pennsylvania, Illinois, and Washington lawsuits, the California AG alleged that Navient failed "to adequately disclose how students could attain income-repayment recertification." (Id. ¶150.)

The same day, Remondi issued a press release calling the allegations unfounded, and claiming that the lawsuit was merely seeking to place blame for the "failures of the higher education system." (Compl. ¶151.) Remondi repeated these statements on July 25, 2018 in an investor conference call, asserting that the CFPB and State AGs had no evidence to support their cases. (Id. ¶¶153-154.) On September 13, 2018, Remondi spoke about the lawsuits at an analyst conference, claiming that Navient had no examples of borrower accounts that supported the complaints' accusations. Navient's 10-Qs for the second and third quarter of 2018 continued to state that it was focused on promoting awareness of IDR, and limited forbearance to unique situations. (Id. ¶¶157, 164.)

The FSA Report and AP Article

On November 20, 2018, the last day of the class period, Senator Elizabeth Warren published on her website two things: (1) a letter she wrote to Defendant Remondi, accusing him of withholding and concealing the FSA Audit, and (2) the FSA Audit report itself. (Compl. ¶168....