KAREN A. CARVELLI, individually and on behalf of all others similarly situated, Plaintiff,
v.
OCWEN FINANCIAL CORPORATION, RONALD M. FARIS, MICHAEL R. BOURQUE, JR., Defendants - Appellees. UNIVERSITY OF PUERTO RICO RETIREMENT SYSTEM, Lead Plaintiff, Plaintiff - Appellant, RYAN HUSEMAN, Consolidated Plaintiff,
Appeal
from the United States District Court for the Southern
District of Florida D.C. Docket No. 9:17-cv-80500-RLR
Before
WILLIAM PRYOR, NEWSOM, and BRANCH, Circuit Judges.
NEWSOM, CIRCUIT JUDGE.
The
University of Puerto Rico Retirement System purchased Ocwen
Financial Corporation common stock at an allegedly inflated
price after a series of statements by Ocwen's officers
implied that the company would emerge from a regulatory mess.
When Ocwen's stock price instead began to fall, the
Retirement System brought a private securities-fraud action
under §§ 10(b) and 20(a) of the Securities Exchange
Act of 1934 and the SEC's Rule 10b-5, claiming that it
had detrimentally relied on Ocwen's materially misleading
statements and omissions concerning the likelihood of
achieving regulatory compliance. The district court dismissed
the Retirement System's complaint, finding that it had
failed to identify any material misrepresentations or
omissions or otherwise state a claim against Ocwen for
securities fraud. After conducting our own detailed review of
the challenged statements, we agree. Even considering the
Retirement System's allegations in the most favorable
light, as we must, its complaint falls short of alleging any
actionable misrepresentations or omissions under § 10(b)
and Rule 10b-5 (and by extension § 20(a)) or any other
cognizable securities-law violation.
I
A
Ocwen
is a financial-services company that focuses primarily on
mortgage servicing-in particular, by processing borrower
payments, administering loan loss-mitigation operations, and
managing foreclosures. Between 2009 and 2012, Ocwen grew from
big to bigger, expanding its portfolio from approximately
350, 000 loans with an unpaid principal balance of roughly
$50 billion to more than 1.2 million loans with a balance
north of $200 billion. To manage the considerable amount of
information required to administer all those loans, Ocwen
used a software called REALServicing. Unfortunately for
Ocwen, REALServicing didn't really work-the software, as
it turned out, was incapable of properly tracking
borrowers' accounts and payments, and it recorded
inaccurate information about interest, late fees, escrow
accounts, or completed payments for up to 90% of the loans in
the system.
According
to the Retirement System's complaint-the allegations of
which we accept as true for present purposes-these problems
resulted from REALServicing's fundamental design flaws.
For example, REALServicing required the use of more than 10,
000 comment codes and flags, but it had no complete data
dictionary defining them, so Ocwen employees had no common
understanding of what the codes meant or how they should be
utilized. REALServicing also "lacked necessary
automation and functionality," and thus required
constant manual workarounds, which were prone to human error.
And perhaps most importantly, REALServicing "lacked the
system capacity to process the large number of loans acquired
by Ocwen, resulting in long periods of system
unavailability."
These
systemic shortcomings caused Ocwen to fail to timely and
accurately apply borrower payments and maintain accurate
account statements, to charge unnecessary and unauthorized
fees, to impose force-placed insurance on borrowers who
already had adequate coverage, and, worst of all, to initiate
wrongful foreclosures on numerous loans. An outside
consultant found that REALServicing had limited functionality
and that Ocwen's "lack of business process
automation had resulted in excessive manual processes,"
which "posed significant risk in a heightened compliance
environment." These and other similar issues prompted
Ocwen's former Head of Servicing to describe
REALServicing as "an absolute train wreck" and to
lament that "[e]very business unit in the entire
organization[] lacked sufficient controls to prevent mistakes
and to detect when mistakes occur." Another former Head
of Servicing similarly-if less colorfully-worried that Ocwen
"could not service loans on REALServicing in compliance
with applicable laws."
Those
concerns were apparently well-placed; the Consumer Financial
Protection Board filed a civil action against Ocwen in 2012
for "violating consumer financial laws at every stage of
the mortgage servicing process." Other federal and state
entities followed suit. Ocwen signed a consent order with 49
state attorneys general in 2013 that "required Ocwen to
provide over $2 billion in relief to wronged homeowners and
subject itself to a monitor . . . and a monitoring
committee"; a consent order with the New York Department
of Financial Services in 2014 that required Ocwen to adopt a
"system of robust internal controls and oversight"
and pay $150 million in fines and restitution; and a consent
order with the California Department of Business Oversight in
2015 that required Ocwen to pay a $2.5 million fine and stop
acquiring new mortgage-servicing rights in California until
it could satisfactorily comply with the Department's
requests for information.
The
present suit arises from a series of statements that Ocwen
made between 2015 and 2017, the years immediately following
the federal and state regulatory actions. During this period,
Ocwen stated, among other things, that it had "invested
heavily in compliance and risk management," such that
its "operations [were] now mature and delivering
improved controls and results," and that it
"expect[ed] the next round of results from the National
Mortgage Settlement monitor to show that [it] ha[d] made
progress in improving [its] internal testing and compliance
monitoring." Ocwen also asserted that it
"believe[d] it ha[d] effective controls in place to
ensure compliance with the California Homeowners Bill of
Rights and all single point of contact requirements under
federal and state laws." In a 2015 earnings call with
investors, President and CEO Ron Faris told investors that
Ocwen was "committed to correcting any deficiencies,
remediating any borrower harm, and improving our compliance
management systems and customer service." And although
Faris acknowledged that Ocwen would incur an expected $50
million in regulatory monitoring costs for the year, he also
assured investors that "over time, as we demonstrate
ongoing compliance and as the monitors roll off, we should
see these expenses decline."[1]
Despite
this optimistic outlook, the financial effects of Ocwen's
internal problems began to bubble to the surface in February
2016, when it released its Form 10-K for the 2015 fiscal
year. Ocwen reported higher-than-expected monitoring and
compliance costs in connection with its settlements and other
regulatory and litigation matters. The company explained, in
an accompanying presentation, that it had incurred $170
million in monitoring expenses in 2015 and that it expected
elevated legal costs to persist in 2016. Following this news,
the price of Ocwen common stock dropped 58%, falling from an
opening price of $5.02 on February 29, 2016, to $2.11 on
March 1, 2016.
Ocwen
stock continued to plummet over the next few months, even
while company officials continued to maintain that the
company's difficulties were not insurmountable. In July
2016, Ocwen's Second Quarter Form 10-Q reported that
"[w]e are . . . intensely focused on improving our
operations to enhance borrower experiences and improve
efficiencies, both of which we believe will drive stronger
financial performance through lower overall costs." The
10-Q further stated that "[w]e believe[] [our]
significant investments in servicing operations [and] risk
and compliance infrastructure over recent years will position
us favorably relative to our peers." And in a conference
call that same month, Faris said that "[a]s a Company we
continue to make progress in resolving our legacy
issues" and that "this legal spend is now largely
behind us." He also stated that Ocwen "remain[ed]
focused on compliance, risk management, and service
excellence" and was "striving to regain approvals
to be able to acquire [mortgage-servicing rights] again"
and to "resolve [its] remaining legacy, regulatory, and
legal concerns." On news that Ocwen was working toward a
settlement with its monitor from the California Department of
Business Oversight, Ocwen common stock rose 7.1% to close at
$1.81 on July 28, 2016.
Over
the next few months, Ocwen officials continued to express
optimism about the prospect of overcoming regulatory hurdles,
and Ocwen's stock prices continued to climb. In an
October 2016 press release, Ocwen's board of directors
stated that the company "remain[ed] focused on putting
legacy matters behind us" and "continue[d] to
progress towards a potential resolution with the California
Department of Business Oversight to end the current consent
order and associated third party auditor before
year-end." On October 27, 2016, Ocwen's share price
rose 10.8% to close at $4.12.
But
alas, trouble soon resurfaced. In February 2017, Ocwen
spin-off Altisource revealed that the CFPB was weighing a
potential enforcement action against it based on a violation
of federal law that arose from REALServicing. And around the
same time, Ocwen admitted in its Form 10-K for the period
ending December 31, 2016, that it had spent $12.5 million in
connection with investigations.
A new
wave of regulatory actions followed. In April 2017, a
multi-state mortgage committee representing more than 20
states and the North Carolina Office of the Commissioner of
Banks issued a cease-and-desist order that prohibited Ocwen
from acquiring new mortgage-servicing rights until the
company proved that it could effectively manage its
mortgage-escrow accounts. The CFPB also got involved again,
filing an action in the United States District Court for the
Southern District of Florida alleging that Ocwen had violated
its earlier settlement with the CFPB and the state attorneys
general. See Complaint, Consumer Fin. Prot.
Bureau v. Ocwen Fin. Corp., et al., No. 9:17-cv-80496
(S.D. Fla. Apr. 20, 2017). The day the CFPB filed its
complaint, Ocwen's stock price fell 53.9%, from $5.46 to
$2.49.
B
Based
on what they alleged to be Ocwen's unrealistically
optimistic statements and its failure to disclose the extent
of its software-related problems, the Retirement System and
several other investors filed a putative class action in
August 2017, asserting claims for securities fraud under
§ 10(b) of the Securities Exchange Act and Rule 10b-5 as
well as violations of § 20(a) of the Act. The complaint
claimed that "[d]espite knowing of [its] system failures
and REALServicing's woeful ineffectiveness in servicing
loans," Ocwen continued to "tout[] [its] purported
compliance with the Regulator Settlements, its supposed
commitment to borrowers, and the effectiveness of [its]
internal controls over financial reporting, while at the same
time failing to disclose that REALServicing was a
dysfunctional system incapable of servicing mortgages."
According to the Retirement System, Ocwen made dozens of
materially misleading statements and failed to disclose the
extent of its problems, all the while knowing that it would
be cost-prohibitive to remediate the errors and properly
reconcile its accounts.
Ocwen
moved to dismiss, arguing that the complaint didn't
sufficiently allege any material misrepresentations or
omissions under the Securities Exchange Act or Rule 10b-5.
The district court agreed, concluding that each complained-of
representation was either immaterial puffery or opinion, an
exempt forward-looking statement, or a statement that the
Retirement System had failed to allege was actually
false.[2] In the alternative, the district court
concluded that the Retirement System's complaint
"improperly trie[d] to re-cast Ocwen's supposed
mismanagement and regulatory failures as false statements
under 10b-5." The district court also explained that,
because the Retirement System had failed to adequately plead
a § 10(b) violation, any claims against the individual
defendants under § 20(a) necessarily failed as well. The
court dismissed the Retirement System's claims with
prejudice, and this appeal followed.
II
Section
10(b) of the Securities Exchange Act of 1934 prohibits the
"use or employ, in connection with the purchase or sale
of any security . . . [of] any manipulative or deceptive
device or contrivance in contravention of such rules and
regulations as the [SEC] may prescribe as necessary or
appropriate in the public interest or for the protection of
investors." 15 U.S.C. § 78j(b). One such rule, Rule
10b-5, makes it unlawful for "any person," in
connection with the purchase or sale of a security, "to
make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the
statements made, in the light of the circumstances under
which they were made, not misleading." 17 C.F.R. §
240.10b-5(b). Although not explicitly laid out in the text,
the Supreme Court has implied a private right of action for
investors under Rule 10b-5. See, e.g., Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
318-19 (2007).
To
state a claim for securities fraud under Rule 10b-5, a
plaintiff must allege the following elements: "(1) a
material misrepresentation or omission; (2) made with
scienter; (3) a connection with the purchase or sale of a
security; (4) reliance on the misstatement or omission; (5)
economic loss; and (6) a causal connection" between the
misrepresentation or omission and the loss, commonly called
"loss causation." Mizzaro v. Home Depot,
Inc., 544 F.3d 1230, 1236-37 (11th Cir. 2008)
(quotations omitted). Here, we are focused primarily on the
first element-whether the Retirement System properly alleged
that Ocwen is responsible for any material misrepresentations
or omissions.
A
misrepresentation or omission is material if, "in the
light of the facts existing at the time," a
"reasonable investor, in the exercise of due care, would
have been misled by it." FindWhat Investor Grp. v.
FindWhat.com, 658 F.3d 1282, 1305 (11th Cir. 2011)
(citation omitted). In other words, materiality depends on
whether a "substantial likelihood" exists that a
"reasonable investor" would have viewed a
misrepresentation or omission as "significantly
alter[ing] the 'total mix' of information made
available." S.E.C. v. Morgan Keegan & Co.,
678 F.3d 1233, 1245 (11th Cir. 2012) (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976)).[3] When it comes to omissions specifically,
the Supreme Court has clarified that "[s]ilence, absent
a duty to disclose, is not misleading under Rule 10b-5."
Basic, 485 U.S. at 239 n.17. Rather, absent a duty,
material information needn't be disclosed unless its
omission would render misleading other information that an
issuer has disclosed. Matrixx Initiatives, Inc.
v. Siracusano, 563 U.S. 27, 44 (2011).
The
question of materiality is not subject to a bright-line test,
see id. at 30, but instead depends on the specific
circumstances of each case, including the totality of
information available to investors, see id. at
37-45. The materiality requirement aims to strike a balance
between protecting investors and allowing companies to
distribute information without perpetual fear of liability-in
essence, to ensure that not every minor misstatement provides
litigation fodder for disgruntled investors.
Before
moving on to discuss the particular statements-and
omissions-at issue in this case, we should pause briefly to
explain the triple-layered pleading standard that a private
securities plaintiff like the Retirement System faces. To
survive a motion to dismiss, a securities-fraud claim brought
under Rule 10b-5 must satisfy not only the run-of-the-mill
federal notice-pleading requirements, see Federal
Rule of Civil Procedure 8(a)(2), but also the heightened
pleading standards found in Federal Rule of Civil Procedure
9(b) and the special fraud pleading requirements imposed by
the Private Securities Litigation Reform Act of 1995, 15
U.S.C. § 78u-4. Failure to meet any of the three
standards will result in a complaint's dismissal. See
Corsello v. Lincare, Inc., 428 F.3d 1008, 1012 (11th
Cir. 2005).
Rule
9(b) requires a plaintiff to "state with particularity
the circumstances constituting fraud or mistake"-which
in the securities-fraud context, we've explained,
requires a plaintiff to allege specifically (1) which
statements or omissions were made in which documents or oral
representations; (2) when, where, and by whom the statements
were made (or, in the case of omissions, not made); (3)the
content of the statements or omissions and how they were
misleading; and (4)what the defendant received as a result of
the fraud. FindWhat, 658 F.3d at 1296. The
PSLRA-with some overlap-requires a complaint to "specify
each statement alleged to have been misleading" and
"the reason or reasons why the statement is
misleading." 15 U.S.C. § 78u-4(b)(1)(B). It also
requires, "with respect to each act or omission
alleged," that a complaint "state with
particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind."
Id. § 78u-4(b)(2)(A). The required state of
mind, we have held, is an "intent to defraud or severe
recklessness on the part of the defendant."
FindWhat, 658 F.3d at 1299 (quoting Edward J.
Goodman Life Income Tr. v. Jabil Circuit, Inc., 594 F.3d
783, 790 (11th Cir. 2010)). And a "strong
inference" is one that is "cogent and at least as
compelling as any opposing inference one could draw from the
facts alleged." Tellabs, 551 U.S. at 324.
Although scienter may be inferred from an aggregate of
factual allegations, it must be alleged with respect to each
alleged violation of the statute. FindWhat, 658 F.3d
at 1296.
Turning
to the claims at issue in this case, the Retirement System
alleges that Ocwen made numerous material misrepresentations
and omissions because, at the time the company was touting
improvements and painting a rosy picture of its future
prospects, it remained out of compliance with regulatory
settlements and, more importantly, remained unable to remedy
that noncompliance. After careful review, we find that none
of Ocwen's statements rises to the level of an actionable
misrepresentation of material fact. Some statements are
immaterial puffery, some are mere statements of opinion, some
fall within the PSLRA's safe-harbor for forward-looking
statements, and still others are simply not alleged to be
false. Additionally, we find that the Retirement System
failed to allege any actionable omissions-nothing that Ocwen
failed to disclose rendered already-disclosed information
misleading in context. Matrixx, 563 U.S. at 44. We
will explain, in turn, our conclusions in more detail.
A
1
The
district court determined that the majority of Ocwen's
statements were nonactionable because they constituted
immaterial "puffery." Puffery comprises
generalized, vague, nonquantifiable statements of corporate
optimism. See Omnicare, Inc. v. Laborers Dist. Council
Const. Indus. Pension Fund, 135 S.Ct. 1318, 1326 (2015)
(differentiating between "mere puffery" and
"determinate, verifiable statement[s]" about a
company's products). The puffery "doctrine"
presumes a relatively (but realistically) savvy consumer-the
general idea being that some statements are just too
boosterish to justify reasonable reliance. In general
parlance, "puffing" is "seller's or
dealer's talk in praise of the virtues of something
offered for sale." Webster's Third New International
1838 (2002). Perhaps closer to home for our purposes, it
refers to an "expression of an exaggerated opinion-as
opposed to a factual misrepresentation-with the intent to
sell a good or service." Black's Law Dictionary 1428
(10th ed. 2014). As Judge Learned Hand once put it,
"[t]here are some kinds of talk which no sensible man
takes seriously, and if he does he suffers from his
credulity." Vulcan Metals Co. v. Simmons Mfg.
Co., 248 F. 853, 856 (2d Cir. 1918). Think, for example,
Disneyland's claim to be "The Happiest Place on
Earth." Or Avis's boast, "We Just Try
Harder." Or Dunkin Donuts's assertion that
"America runs on Dunkin." Or (for our teenage
readers) Sony's statement that its PlayStation 3
"Only Does Everything." These boasts and others
like them are widely regarded as "puff"- big claims
with little substance.
While
these slogans may be of relatively recent vintage, puffery
itself-and in particular its relevance to the law-is nothing
new. The concept "derives from a common-law defense to
the tort of deceit or fraudulent misrepresentation."
Restatement (Second) of Torts § 542 cmt. e (Am.
Law Inst. 1977). The legal origins of the term
"puffery," so far as we can tell, trace back at
least as far as a nineteenth-century English case involving a
manufacturer's promise to compensate customers if they
contracted the flu after properly using its "carbolic
smoke ball"-a rubber ball and tube that allowed users to
inhale vapors purported to prevent disease. See Carlill
v. Carbolic Smoke Ball Co., [1893] 1 Q, B. 256 (Eng.
Wales CA). After a customer who came down with the flu tried
unsuccessfully to collect, she sued the company. Id.
At trial, the manufacturer defended by labeling its statement
"mere puff"-sales talk. Id. Although the
manufacturer lost because the panel determined that it made a
valid offer to contract by placing the promised compensation
in escrow, the panel's opinion also accepted that some
advertisements-"mere puff"- clearly aren't
meant to be taken seriously. See id.[4]
Back to
the present. While this Court has accepted the puffery
defense in the common-law context, we've yet to apply it
in a reported securities-fraud case. See Next Century
Commc'ns Corp. v. Ellis, 318 F.3d 1023, 1028-29
(11th Cir. 2003) (characterizing a comment concerning
"strong performance" as nonactionable puffery in a
Georgia fraud suit).[5] We see no basis for not doing so, however,
and in fact the defense seems a particularly good fit in the
securities context. Rule 10b-5 prohibits untrue statements of
a material fact, with "material" defined
to mean something that a reasonable investor would view
"as having significantly altered the 'total mix'
of information made available." Morgan Keegan,
678 F.3d at 1245 (citation omitted). Excessively vague,
generalized, and optimistic comments-the sorts of statements
that constitute puffery-aren't those that a
"reasonable investor," exercising due care, would
view as moving the investment-decision needle-that is,
they're not material.
As the
Third Circuit has explained, "[t]o say that a statement
is mere 'puffing' is, in essence, to say that it is
immaterial, either because it is so exaggerated ('You
cannot lose.') or so vague ('This bond is
marvelous.') that a reasonable investor would not rely on
it in considering the 'total mix of [available]
information.'" Hoxworth v. Blinder, Robinson
& Co., 903 F.2d 186, 200-01 (3d Cir. 1990) (citation
and internal quotation marks omitted). So too the Eighth
Circuit: "A statement is not material and is mere
puffery, if it is 'so vague and such obvious hyperbole
that no reasonable investor would rely upon [it].'"
In re Stratasys, Ltd. S'holder Sec. Litig., 864
F.3d 879, 882 (8th Cir. 2017) (citation and internal
quotation marks omitted); see also Eisenstadt v. Centel
Corp., 113 F.3d 738, 746 (7th Cir. 1997) ("Mere
sales puffery is not actionable under Rule 10b-5.").
Statements that our sister circuits have recently deemed
puffery in the securities-fraud context include, for example,
proclamations that a company "expect[s] to continue to
allocate significant resources" to regulatory
compliance, Singh v. Cigna Corp., 918 F.3d 57, 64
(2d Cir. 2019), "generalized statements about [a
company's] transparency, quality, and
responsibility," Emp's Ret. Sys. v. Whole Foods
Mkt., Inc., 905 F.3d 892, 902 (5th Cir. 2018), and a
description of company products as being
"unmatched" in "reliability, quality and
connectivity," In re Stratasys, 864 F.3d at
882.
One
final point-an asterisk of sorts-before proceeding to
consider how Ocwen's statements stack up. Materiality is
itself a mixed question of law and fact-as the Supreme Court
recognized in TSC Industries, a materiality
determination "requires delicate assessments of the
inferences a 'reasonable shareholder' would draw from
a given set of facts and the significance of those inferences
to him, and these assessments are peculiarly ones for the
trier of fact." 426 U.S. at 450. That a statement smacks
of puff is certainly a strong indicator of immateriality.
But-and here's the caveat-it's not necessarily a
clincher. A conclusion that a statement constitutes puffery
doesn't absolve the reviewing court of the duty to
consider the possibility-however remote-that in context and
in light of the "total mix" of available
information, a reasonable investor might nonetheless attach
importance to the statement. Morgan Keegan, 678 F.3d
at 1245.[6] Accordingly, when considering a motion to
dismiss a securities-fraud action, a court shouldn't
grant unless the alleged misrepresentations-puffery or
otherwise-are "so obviously unimportant to a reasonable
investor that reasonable minds could not differ on the
question of their importance." Ganino v. Citizens
Util. Co., 228 F.3d 154, 162 (2d Cir. 2000) (citation
omitted).
2
So,
what of Ocwen's statements promising, among other things,
that it continued "to devote substantial resources to .
. . regulatory compliance and risk management efforts,"
that its investments in those areas were "now mature and
delivering improved results," that it felt "good
about the progress" it had made towards its
"national mortgage settlement compliance," and that
it had "taken a leading role in helping to stabilize
communities most affected by the financial crisis"? The
district court reasoned that these statements-and others like
them- weren't the sort that a reasonable investor could
possibly regard as significant because "Ocwen never said
it was in compliance with regulations but rather made vague
statements about its efforts towards compliance." In
short, Ocwen's statements were puffery.
The
Retirement System raises two objections. First, it contends
that Ocwen's statements can't be nonactionable
puffery because Ocwen did not "genuinely or reasonably
believe them." Br. of Appellant at 22 (quoting IBEW
Local Union No. 58 Pension Trust Fund and Annuity Fund v.
Royal Bank of Scotland Grp.,783 F.3d 383, 392 (2d Cir.
2015)). This argument fails. Whether a statement was made in
bad faith or without a reasonable basis is irrelevant to the
question whether the statement is nonetheless so airy as to
be insignificant. Certainly, such considerations could (and
very well may be) relevant to whether the statements were
made with the requisite level of scienter or whether the
statements are entitled to safe-harbor protection (more on
that later)-but what matters for materiality
purposes is whether a statement is of a type that a
reasonable investor would find relevant to investment
decision-making. Put another way, "[t]he anti-fraud
provisions of the securities laws are plainly disinterested
with immaterial statements, no matter the state of mind of
the speaker." Edward J. Goodman, 594 F.3d at
796; see also W. Page Keeton, et al., Prosser
and Keeton on ...