Carvelli v. Ocwen Financial Corp.

          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 ...