Martin v. Altisource Residential Corp.

ERIC MARTIN, Plaintiff, v. ALTISOURCE RESIDENTIAL CORPORATION, WILLIAM C. ERBEY,ASHISH PANDEY, KENNETH D. NAJOUR, ROBIN N. LOWE, andRACHEL M. RIDLEY, Defendants.

Civ. No. 15-0024

United States District Court, D. Virgin Islands.

March 16, 2017

NOT FOR PUBLICATION

OPINION

THOMPSON, U.S.D.J.¹

This matter comes before the Court upon a motion to dismiss brought by Defendants Altisource Residential Corporation ("RESI" or "Residential"), William C. Erbey ("Erbey"), Ashish Pandey ("Pandey"), Kenneth D. Najour ("Najour"), Robin N. Lowe ("Lowe"), and Rachel M. Ridley ("Ridley") (collectively, "Defendants"). (ECF Nos. 55, 56). Plaintiff Eric Martin ("Plaintiff") opposes. (ECF No. 60). The Court has decided this matter after considering the written submissions of the parties and oral argument on December 19, 2016. For the reasons set forth below, the Court will deny Defendants' motion to dismiss.

BACKGROUND

This case consists of a securities fraud claim for violation of Section 10(b) of the Securities Exchange Act of 1934.

Plaintiff's allegations are as follows:

Residential owns and manages single-family rental properties through the acquisition of sub-performing and non-performing residential mortgage loans. (Am. Compl. ¶ 3). RESI was a spin off from Ocwen Corporation. Ocwen has several spin offs from 2009 to 2012, creating ASPS in 2009 (id. ¶ 29) and Residential and AAMC from ASPS in December 2012 (id. ¶¶ 46-47). The four companies have continued to cooperate for their entire existence. Residential itself had no employees. AAMC manages Residential. Residential acquires and services loans through Ocwen. (Id. ¶ 4). ASPS manages the day-to-day operation of the rental properties—renovations, maintenance, leasing, etc. (Id.). For Residential, Ocwen, Altisource Asset Management Corporation ("AAMC") and Altisource Portfolio Solutions, S.A. ("ASPS"), Erbey was either the Chairman of the Board or the Chief Executive Officer, as well as the largest individual shareholder. (Id. ¶ 2). The other individual Defendants were simultaneously Chief Executive Officer of both Residential and AAMC, Chief Accounting Officer of Residential and Chief Financial Officer of AAMC, and Chief Financial Officers of both Residential and AAMC. (Id. ¶¶ 22-25).

Plaintiff and putative class members purchased or acquired shares in RESI between December 24, 2012 and December 22, 2014. (Id. ¶¶ 19, 291). During that time, Defendants stated that Ocwen provided a "competitive advantage" to RESI over competitors, that Ocwen was a "leader" in the industry, and that Ocwen utilized a superior business model. (See, e.g., id. ¶¶ 98, 100, 122). However, at the time, Ocwen was being investigated by both federal and state agencies, had been found to be violatingvarious regulations, and was subject to regulatory orders; individual Defendants necessarily were aware of these liabilities. (Id. ¶¶ 34-44, 63-81).

Additionally, Defendants stated all related party transactions were completed in accordance with internal company policies, when they were not. (See, e.g., id. ¶¶ 129-130). These representations allowed Defendants to artificially inflate Residential's stock price, obtain close to $1 billion in public equity, and improperly transfer millions of dollars between the companies for the benefit of the individual Defendants and to the detriment of stock holders. (Id. ¶¶ 8-9). Defendants' representations were made in order to draw investors and did in fact induce Plaintiff and putative class members to invest in RESI when they would not have had they known about the false statements. Plaintiff alleges that the statements were made within the putative class period—December 24, 2012 to December 22, 2014—and the stock dropped from a high of $33.69 per share on January 13, 2014 to a low of nearly $10 per share in response to disclosures that revealed Ocwen's liabilities and the improper related-party transactions. (Id. ¶ 13).

Defendants move to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b)(6). (ECF Nos. 55, 56). Defendants claim that Plaintiff has failed to plead with particularity that Defendants made any false statement or omission, or in the alternative, that Plaintiff has failed to plead with particularity facts giving rise to a strong inference of scienter, or in the alternative, that Plaintiff has failed to plead loss causation. Defendants contend that their statements were puffery, accurate statements of historical fact, or forward-looking, and that Plaintiff's complaint is nothing more than a challenge to defendants' business decisions, which is not actionable under Section 10(b) of the Securities and Exchange Act. This motion is presently before the Court.

LEGAL STANDARDS

I. Motion to Dismiss

A motion under Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of a complaint. Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). The defendant bears the burden of showing that no claim has been presented. Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005). When considering a Rule 12(b)(6) motion, a district court should conduct a three-part analysis. See Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011). "First, the court must 'take note of the elements a plaintiff must plead to state a claim.'" Id. (quoting Ashcroft v. Iqbal, 56 U.S. 662, 675 (2009)). Second, the court must accept as true all of a plaintiff's well-pleaded factual allegations and construe the complaint in the light most favorable to the plaintiff. Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009); see also Connelly v. Lane Const. Corp., No. 14-3792, 2016 WL 106159 (3d Cir. Jan. 11, 2016). However, the court may disregard any conclusory legal allegations. Fowler, 578 F.3d at 203. Finally, the court must determine whether the "facts are sufficient to show that plaintiff has a 'plausible claim for relief.'" Id. at 211 (quoting Iqbal, 556 U.S. at 679). If the complaint does not demonstrate more than a "mere possibility of misconduct," the complaint must be dismissed. See Gelman v. State Farm Mut. Auto. Ins. Co., 583 F.3d 187, 190 (3d Cir. 2009) (quoting Iqbal, 556 U.S. at 679).

II. Elements of a Claim for Securities Fraud

To establish a claim for violation of Rule 10b-5, the plaintiff must allege with particularity that: (1) the defendant "made a materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading"; (2) the"defendant acted with scienter"; and (3) the plaintiff's reliance on defendant's misstatement or omission injured the plaintiff. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir. 1997) (citing In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1243 (3rd Cir. 1989)); Galati v. Commerce Bancorp, Inc., 2005 WL 3797764, at *3 (D.N.J. Nov. 7, 2005), aff'd, 220 F. App'x 97 (3d Cir. 2007).

III. Heightened Pleading Requirement for Securities Fraud Claims

A securities fraud action "requires more than mere reference to the conventional standard applicable to motions under Rule 12(b)(6)." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002). Rather, the Private Securities Litigation Reform Act ("PSLRA"), codified at 15 U.S.C. § 78u-4 et seq., and Fed. R. Civ. P. 9(b) impose heightened pleading requirements that must be satisfied for a securities fraud complaint to survive a motion to dismiss. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 531 (3d Cir. 1999) (abrogated on other grounds); In re Burlington Coat Factory, 114 F.3d at 1424.

Applicable to the first element—material misrepresentation or omission—Rule 9(b) states: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). "This particularity requirement has been rigorously applied in securities fraud cases." In re Burlington, 114 F.3d at 1417 (citations omitted). Though Rule 9(b) does not require plaintiffs to plead every material detail of the fraud, it nevertheless "requires, at a minimum, that plaintiffs support their allegations of securities fraud with all of the essential factual background that would accompany the first paragraph of any newspaper story—that is, the who, what,when, where and how of the events at issue." In re Rockefeller, 311 F.3d at 217 (quotations and citations omitted).

Courts are sensitive, however, "to the fact that application of [Rule 9(b)] prior to discovery may permit sophisticated defrauders to successfully conceal the details of their fraud." Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284 (3d Cir. 1992) (quotations and citations omitted). "Accordingly, the normally rigorous particularity rule has been relaxed somewhat where the factual information is peculiarly within the defendant's knowledge or control." In re Burlington, 114 F.3d at 1418.

The PSLRA also mandates more particularized pleading of the material misrepresentation or omission. It requires plaintiffs to:

[S]pecify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

15 U.S.C. § 78u-4(b)(1)(B). This "particularity [requirement] . . . extends that of Rule 9(b) and requires plaintiffs to set forth the details of allegedly fraudulent statements or omissions, including who was involved, where the events took place, when the events took place, and why any statements were misleading." In re Rockefeller, 311 F.3d at 218.

Regarding the second element—scienter—the PSLRA also imposes a heightened pleading standard. Plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). To plead scienter in compliance with the PSLRA, plaintiffs must allege facts that either "(1) establish a motive and an...