Golden v. BofI Holding, Inc. et al

Filing 113

ORDER Denying in Part and Granting in Part Defendants' 88 Motion to Dismiss Lead Plaintiff's Second Amended Complaint. Signed by Judge Gonzalo P. Curiel on 5/23/17. (dlg)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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IN RE:

Case No. 3:15-CV-02324-GPC-KSC

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BofI HOLDING, INC. SECURITIES
LITIGATION.

CLASS ACTION

ORDER DENYING IN PART AND
GRANTING IN PART
DEFENDANTS’ MOTION TO
DISMISS LEAD PLAINTIFF’S
SECOND AMENDED
COMPLAINT

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[Dkt. No. 88]

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Before the Court is a Motion to Dismiss the Second Amended Complaint filed

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by Defendants BofI Holding, Inc., Gregory Garrabrants, Andrew J. Micheletti, Paul J.

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Grinberg, Nicholas A. Mosich, and James S. Argalas. Dkt. No. 88-1. The motion

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has been fully briefed. Lead Plaintiff Houston Municipal Employees Pension System

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(“Lead Plaintiff” or “HMEPS”) filed an opposition response on February 3, 2017,

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Dkt. No. 94, and Defendants filed a reply on February 17, 2017, Dkt. No. 95-1. Upon

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review of the moving papers, the applicable law, and for the foregoing reasons the

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Court hereby DENIES in part and GRANTS in part Defendants’ Motion to Dismiss.
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INTRODUCTION & PROCEDURAL HISTORY

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The facts of this case are familiar to both the Court and the parties and were

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recited at length in the Court’s Order Granting in Part and Denying in Part

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Defendants’ Motion to Dismiss the Consolidated Class Action Complaint (“CAC”).

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See generally Dkt. No. 64. In that order (the “First Motion to Dismiss Order”), the

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Court concluded that Lead Plaintiff had stated a viable claim for securities fraud

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under Section 10(b) of the 1934 Securities Act, Rule 10b-5 promulgated thereunder,

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and Section 20(a) of the Securities Act — one that met the heightened pleading

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standard of Rule 9(b) and the Private Securities Litigation Reform Act (PSLRA) —

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against Defendant BofI Holding, Inc. (BofI) and Defendant Gregory Garrabrants.

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The Court, however, dismissed Defendants Andrew Micheletti, Paul Grinberg,

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Nicholas Mosich, and James Argalas from the action, having concluded that Lead

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Plaintiff failed to plead enough for the Court to find that they acted with the requisite

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scienter or control to be liable under Section 10(b) or Section 20(a).
Lead Plaintiff filed their Second Amended Class Action Complaint1 (“SAC”)

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on November 25, 2016. Dkt. No. 79. The SAC, comprised of 147 pages and 471

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paragraphs of allegations, is virtually identical to the CAC. Compare SAC, Dkt. No.

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79 with CAC, Dkt. No. 26. It contains just 10 more pages of text and 23 more

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paragraphs of allegations than the CAC. Id. Although the Court granted Lead

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Plaintiff, in its First Motion to Dismiss Order, leave to amend both their Section 10(b)

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and Section 20(a) claims against Micheletti, Grinberg, Mosich, and Argalas, the new

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allegations in the SAC are directed at Section 20(a) liability only. As Lead Plaintiff

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stated in the SAC: “Plaintiff filed this Second Amended Complaint primarily to make

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clear it asserts Section 20(a) claims against those Defendants notwithstanding the

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Defendants never moved to dismiss the original class action complaint, Dkt. No. 1, because it was
consolidated with a number of other civil actions before dispositive motions were filed. The
Consolidated Class Action Complaint (“CAC”), the subject of the previous and first motion to
dismiss, followed the Court’s consolidation order.
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Court’s dismissal of the Section 10(b) claims against them. Plaintiff also, however,

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retains Section 10(b) claims against those Defendants in this Complaint to preserve

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them for appeal or in the event discovery reveals additional information supporting

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those claims.” SAC, Dkt. No. 79 at 12 n.6. In other words, the SAC contains no new

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allegations as to Lead Plaintiff’s previously dismissed Section 10(b) claims against

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Micheletti, Mosich, Grinberg, and Argalas, but does contain new allegations as to

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their Section 20(a) liability. Accordingly and to the extent that Lead Plaintiff has not

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provided the Court with new allegations or argument as to the Section 10(b) liability

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of Micheletti, Mosich, Grinberg and Argalas, the Court stands by its previous ruling.

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See First Motion to Dismiss Order, Dkt. No. 64.
Defendants moved to dismiss the SAC on December 23, 2016. Dkt. No. 88-1.

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In it, Defendants primarily argue that Lead Plaintiff has failed to state Section 10(b)

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claims against the remaining individual defendants — Micheletti, Grinberg, Mosich,

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and Argalas — and that it has also failed to state Section 20(a) claims against those

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defendants. See generally id. Yet while the focus of their motion to dismiss — per

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the Court’s December 15, 2016 Order Denying Defendants’ Ex Parte Application for

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An Order Increasing The Page Limits On The Briefing, Dkt. No. 87 — was on Lead

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Plaintiff’s amendments to the complaint, the tenor of the motion to dismiss

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unmistakably seeks to persuade the Court to revisit the conclusions made in its First

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Motion to Dismiss Order. In fact, in its conclusion, Defendants state in no uncertain

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terms that “the Court [should] grant their motion to dismiss the SAC for failure to

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meet the heightened pleading requirements of the PSLRA, and in particular to

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dismiss plaintiff’s claims against Defendants Micheletti, Grinberg, Mosich and

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Argalas, with prejudice.” Dkt. No. 88-1 at 31.

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Mindful of the fact that the Second Amended Complaint supersedes the First

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Amended Complaint, see Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896

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F.2d 1542, 1546 (9th Cir. 1989), the Court has accepted, in part, Defendants’

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invitation to revisit Lead Plaintiff’s Section 10(b) claims. The SAC, like the CAC,
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has identified over a hundred of BofI’s statements as false and misleading. See, e.g.,

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Dkt. No. 79 at ¶¶ 246-370. While the Court continues to adhere to the view that some

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of these statements are actionable under the securities laws — and therefore, that

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Lead Plaintiff has pleaded enough to survive a motion to dismiss — the Court is also

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convinced that many of them are not. As such and to the extent that Defendants have

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challenged certain categories of statements as inadequate to support a securities fraud

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claim, the Court has rendered a decision below for the purpose of whittling down the

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actionable fraudulent statements and narrowing the scope of future discovery. The

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Court’s underlying conclusion, however, has not changed, as it continues to find that

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many of BofI’s statements concerning its loan underwriting standards and internal

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controls were sufficiently false or misleading when made to survive the motion to

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dismiss and, specifically, the heightened pleading requirements of the PSLRA and

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Rule 9(b).

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FACTUAL BACKROUND

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Founded in 1999, BofI2 is a federally-chartered Internet bank that operates

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from its headquarters in San Diego, California. See SAC ¶ 3. BofI is not your typical

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bank. Instead of relying on brick-and-mortar branches to generate business, BofI

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offers its products through retail distribution channels, such as websites, online

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advertising, a call center of salespeople, referrals from financial advisory firms, and

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referrals from affinity groups. Id. BofI is in the business of providing consumer and

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business products, including checking, savings, and time-deposit accounts, and

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services, such as financing for residential and commercial real estate, business, and

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vehicles. Id. ¶¶ 2-3. BofI is also in the business of consumer and business lending.

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Id. ¶ 32. BofI engages in Single Family Mortgage Secured Lending, Multifamily

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Mortgage Secured Lending, Commercial Real Estate Secured and Commercial

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“BofI” will refer to both the holding company and its subsidiary, BofI Federal Bank. SAC ¶ 2.
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Lending, Specialty Financial Factoring, Prepaid Cards, and Auto, RV, and other

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consumer-related lending. Id.

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BofI has grown tremendously in recent years. Id. ¶ 5. Over the last five years,

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total deposits increased to $5.2 billion, signaling 235% growth, and net income

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increased from $20.6 million in fiscal year 2011 to $82.7 million in fiscal year 2015.

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Id. Development of the bank’s loan portfolio propelled BofI’s growth during these

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years. Id. ¶ 44. From 2011 to 2015, BofI’s loan portfolio grew from $1.33 billion to

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$5 billion, representing 274% in growth. Id. By the end of calendar year 2015, BofI

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had a loan portfolio worth $5.715 billion. Id. ¶ 32. From September 4, 2013 to

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February 3, 2016 (the putative “Class Period”), Lead Plaintiff HMEPS and other class

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members similarly situated purchased BofI’s common stock. Id. ¶ 1. During the

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Class Period, BofI’s stock reached a high of $142.54 per share, representing a

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1,100% increase over its initial public offering of $11.50 per share in 2005. Id. ¶ 6.

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As of January 22, 2016, HMEPS had 63,032,258 in common stock shares

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outstanding. Id. ¶ 34.

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On October 13, 2015, The New York Times reported that a formal internal

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auditor at BofI had filed a federal whistleblower lawsuit (“the Erhart Case”)3 alleging

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that BofI was engaged in widespread misconduct. Id. ¶ 20. After the Erhart Case

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was filed, the price of BofI’s stock fell by $10.72 per share (or $42.87 per share on a

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pre-split adjusted basis), or by 30.2%, and closed at $24.78 on October 14, 2015. Id.

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¶ 21. The total capital loss amounted to $675 million. Id. The price of Defendants’

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stock then continued to decrease through February 3, 2016 (i.e., the last day of the

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Class Period). Id. ¶ 22. Lead Plaintiff now alleges that the decline in the market

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value of BofI’s securities caused Lead Plaintiff, along with the other Plaintiffs, to

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suffer significant damages. Id.

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Erhart v. BofI Holding, Inc., Case No. 15-cv-2287-BAS-NLS (S.D. Cal).
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In addition to BofI, Lead Plaintiff has named five individuals as defendants in

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this action, all of whom served as BofI executives throughout the Class Period.

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Gregory Garrabrants is the Chief Executive Officer (CEO), President, and a Director

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of BofI. Id. ¶ 35. He has held the CEO position since 2007 and been President and

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Director since 2008. Id. Andrew J. Micheletti is BofI’s Executive Vice President

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and Chief Financial Officer (CFO), and has held those positions throughout the Class

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Period. Id. ¶ 36. Paul J. Grinberg is a member of BofI’s Board of Directors and has

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been the Chairman of the Board Audit Committee, the Board Compensation

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Committee, and a member of the Board Nominating Committee for the Class Period.

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Id. ¶ 37. Nicholas A. Mosich has served as the Vice Chairman of BofI’s Board of

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Directors and as a member of the Board Audit Committee throughout the Class

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Period. Id. ¶ 38. James S. Argalas served as a member of the Board of Directors and

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a member of the Board Audit Committee throughout the Class Period. Id. ¶ 39.

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1. Defendants’ Alleged Fraudulent Scheme
The gravamen of Lead Plaintiff’s claims is that Defendants materially

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misrepresented the risk of investing in BofI by engaging in knowing and reckless

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conduct that rendered the bank a “materially-less safe investment than investors were

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led to believe.” Id. ¶ 23. The Defendants, Lead Plaintiff alleges, sold themselves as

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offering “significant cost savings and operation efficiencies derived from its

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purported branchless business model, as well as low loan losses.” Id. ¶ 7. Yet while

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Defendants touted themselves as a “careful, prudent institution” and emphasized their

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“conservative loan-underwriting standards,” Lead Plaintiff alleges that the bank

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actually had a “troubled identity that resorted to lax lending practices and other

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unlawful conduct to fraudulently boost its loan volume and earnings.” Id. ¶¶ 1, 8.

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By way of numerous false and misleading representations, BofI allegedly

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concealed the actual risk of loss present on its ledger and deceived investors as to its

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true financial condition. In their more than 140-page complaint, Lead Plaintiff

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identifies hundreds of statements or omissions that were allegedly false or misleading
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when made and offers voluminous contentions why those statements amounted to

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misrepresentations. The heart of Lead Plaintiff’s allegations concerns Defendants’

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deviations from BofI’s loan underwriting standards, inadequate internal control and

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audit measures, inaccurate financial results and risk figures, undisclosed related-party

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transactions, and other violations of the federal securities laws.
2. Defendants’ False and Misleading Statements

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Lead Plaintiff has identified four types of misleading statements made by BofI

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during the Class Period: 1) SEC filings; 2) conference calls about the results in SEC

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filings; 3) press releases about the results in SEC filings; and 4) earnings calls.4 Id. ¶¶

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47, 246-370. With regards to the SEC filings, Lead Plaintiff has specifically

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identified Defendants’ 2013 Form 10-K, 2014 Form 10-K, and 2015 Form 10-K as

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misleading, id. ¶¶ 255, 309, & 367, as well as Defendants’ 10-Q forms for Quarters 1

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through 3 of 2014, Quarters 1 through 3 of 2015, and Quarter 1 of 2016, id. ¶¶ 261,

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274, 288, 318, 332, 344, 393. Most of the press releases and conference calls that

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Lead Plaintiff has identified refer specifically to BofI’s financial earnings as

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published in the respective SEC filings.

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LEGAL STANDARD

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Federal Rule of Civil Procedure (“Rule”) 12(b)(6) permits dismissal for

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“failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6).

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Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable

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legal theory or sufficient facts to support a cognizable legal theory. See Balistreri v.

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Pacifica Police Dep’t., 901 F.2d 696, 699 (9th Cir. 1990). Under Rule 8(a)(2), the

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plaintiff is required only to set forth a “short and plain statement of the claim showing

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that the pleader is entitled to relief,” and “give the defendant fair notice of what the

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While Lead Plaintiff identifies many statements made by BofI throughout the SAC, the Court’s
analysis focuses on those statements identified by Lead Plaintiff in the section entitled “Materially
False and Misleading Statements Issued During the Class Period.” See ¶¶ 246-370.
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. . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly,

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550 U.S. 544, 555 (2007).

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A complaint may survive a motion to dismiss only if, taking all well-pleaded

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factual allegations as true, it contains enough facts to “state a claim to relief that is

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plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly,

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550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual

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content that allows the court to draw the reasonable inference that the defendant is

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liable for the misconduct alleged.” Id. “Threadbare recitals of the elements of a

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cause of action, supported by mere conclusory statements, do not suffice.” Id. “In

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sum, for a complaint to survive a motion to dismiss, the non-conclusory factual

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content, and reasonable inferences from that content, must be plausibly suggestive of

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a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969

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(9th Cir. 2009) (citations omitted).

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DISCUSSION
The SAC’s voluminous allegations assert that BofI engaged in widespread

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wrongdoing during the Class Period. For instance, Lead Plaintiff argues that BofI

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violated the “Ability to Repay Rule,” 12 C.F.R. § 1026, see SAC ¶¶ 17-24; that it

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engaged in illicit lending partnerships that ran afoul of the Office of the Comptroller

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of the Currency (OCC)’s guidance on payday lending, see id. ¶¶ 24-36; that it

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violated the Bank Secrecy Act, among other laws, by making loans to foreign

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nationals without proper vetting, see id. ¶¶ 40-46; that it violated 12 C.F.R. § 215 by

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failing to disclose related-party loans made to its senior officers, see id. ¶¶61-68; and

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more. Defendants, in turn, spend a fair amount of their briefing explaining why

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BofI’s conduct did not amount to a violation of any of these rules or regulations. See,

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e.g., Dkt. No. 88-1 at 17 (explaining why the SAC’s allegations do not demonstrate a

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violation of 12 C.F.R. § 1026, the Ability to Repay Rule).

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The Court observes, however, that the Section 10(b) inquiry — and by
extension the Section 20(a) inquiry — is not tantamount to an investigation into
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fiduciary misconduct or internal corporate mismanagement. See Santa Fe Indus., Inc.

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v. Green, 430 U.S. 462, 479 (1977) (“Congress by [enacting] s 10(b) did not seek to

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regulate transactions which constitute no more than internal corporate

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mismanagement.”); see also Retail Wholesale & Dep’t Store Union Local 338 Ret.

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Fund, 845 F.3d 1268, 1278 (9th Cir. 2017) (rejecting plaintiff’s interpretation of

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Section 10(b) liability because it would “turn all corporate wrongdoing into securities

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fraud.”); In re GlenFed, Inc. Sec. Litig., 11 F.3d 843, 849 (9th Cir. 1993) (“Fiduciary

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misconduct or internal mismanagement of a corporation is an area traditionally left to

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state law, not federal securities law.”), vacated and remanded by In re GlenFed Sec.

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Litig., 60 F.3d 591 (9th Cir. 1995) (en banc) (holding that Rule 9(b) does not require

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inference of scienter).

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Rather, the Court, here, is concerned with whether BofI made material

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misrepresentations or omissions in its public statements — that is, whether it lied.

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See 15 U.S.C. § 78u–4(b)(1) (creating private actions for when defendants make an

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“untrue statement of a material fact” or “omit[ ] to state a material fact necessary in

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order to make the statements made, in the light of the circumstances in which they

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were made, not misleading”). As such, the Court’s analysis focuses, not on whether

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any specific violation of law was committed, but whether the Lead Plaintiff has

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identified public statements that were rendered false or misleading by the facts

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alleged in the complaint, including those facts suggesting that BofI’s banking

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practices had fun afoul of the law.

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With this background in mind, the Court conducts the following analysis and

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concludes that Lead Plaintiff has pleaded actionable fraudulent or misleading

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statements as to BofI’s loan underwriting practices and as to its internal controls and

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compliance infrastructure, but has not sufficiently demonstrated that Defendants’

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statements about its Allowance for Loan Losses (ALL), Net income/diluted price per

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share, Loan-to-Value Ratio (LTV), or undisclosed lending partnerships are actionable

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under the securities laws.
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I. Violations of Section 10(b) of the Exchange Act

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Section 10(b) of the Securities Exchange Act makes it unlawful for “any

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person . . . [t]o use or employ, in connection with the purchase or sale of any security

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registered on a national securities exchange . . . any manipulative or deceptive device

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or contrivance in contravention of such rules and regulations as the Commission may

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prescribe as necessary or . . . for the protection of investors.” 15 U.S.C. § 78j(b).

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Rule 10b–5 implements this provision by making it unlawful to “make any untrue

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statement of material fact or to omit to state a material fact necessary in order to make

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the statements made, in light of the circumstances under which they were made, not

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misleading . . . .” 17 C.F.R. § 240.10b–5(b). Rule 10b-5 also makes it unlawful for

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any person “[t]o employ any device, scheme, or artifice to defraud” or “[t]o engage in

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any act, practice, or course of business which operates or would operate as a fraud or

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deceit upon any person, in connection with the purchase or sale of any security.” 17

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C.F.R. § 240.10b–5(a), (c).

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To state a securities fraud claim under 10(b) of the Act and Rule 10b-5, a

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plaintiff must show (1) a material misrepresentation or omission, (2) scienter, (3) in

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connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and

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(6) loss causation.5 Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). A

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complaint alleging claims under Section 10(b) and Rule 10b-5 must also satisfy the

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pleading requirements of both the PSLRA and Rule 9(b). In re Verifone Holdings,

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Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012).

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Any complaint alleging fraud must comply with Rule 9(b), which requires the

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complaint to state with particularity the circumstances constituting fraud. Fed. R.

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Civ. P. 9(b). Malice, intent, knowledge, and other conditions of a person’s mind may

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Defendants do not, and have never, challenged the third, fourth, or fifth elements of the prima
facie case. The Court will follow suit and address whether Lead Plaintiff’s allegations have met the
first and second elements.
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be alleged generally. Id. To satisfy this heightened pleading requirement, the

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plaintiff must set forth “the time, place, and specific content of the false

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representations as well as the identities of the parties to the misrepresentation.”

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Odom v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007) (internal citations

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omitted). In addition, the complaint must indicate “what is false or misleading about

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a statement, and why it is false” and “be specific enough to give defendants notice of

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the particular misconduct that they can defend against the charge and not just deny

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that they have done anything wrong.” Vess v. Ciba–Geigy Corp. USA, 317 F.3d

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1097, 1107 (9th Cir. 2003) (internal citations omitted).

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Complaints alleging violations of Section 10(b) of the Exchange Act must also

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comply with the Private Securities Litigation Reform Act, codified at 15 U.S.C.

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§ 78u–4(b)(1). The PSLRA imposes a heightened pleading requirement for securities

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fraud actions brought under § 10(b) and Rule 10b-5, requiring that falsity and scienter

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be plead with particularity. Amgen, Inc. v. Conn. Ret. Plans & Trust Funds, 133

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S. Ct. 1184, 1200 (2013); Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990

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(9th Cir. 2009). Congress enacted it into law in 1995 to curb abuses of securities

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fraud litigation. Amgen, 133 S. Ct. at 1200. Such abuses included “nuisance filings,

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targeting of deep-pocket defendants, vexatious discovery request and manipulation by

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class action lawyers.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320

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(2007).

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Under the PSLRA’s heightened pleading instructions, a complaint alleging that

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a defendant made a false or misleading statement must: “(1) ‘specify each statement

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alleged to have been misleading [and] the reason or reasons why the statement is

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misleading,’ 15 U.S.C. § 78u–4(b)(1); and (2) ‘state with particularity facts giving

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rise to a strong inference that the defendant acted with the required state of mind,’

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§ 78u–4(b)(2).” Tellabs, 551 U.S. at 321. In order for an omission to be actionable,

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the omitted information must have been “necessary . . . to make the statements made,

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in light of the circumstances under which they were made, not misleading.” Retail

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Wholesale, 845 F.3d at 1278.

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Actionable misrepresentations or omissions must also be material to investors.

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15 U.S.C. § 78u–4(b)(1)(A)–(B). “The materiality of the misrepresentation or an

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omission depends upon whether there is ‘a substantial likelihood that it would have

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been viewed by the reasonable investor as having significantly altered the ‘total mix’

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of information made available’ for the purpose of decisionmaking by stockholders

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concerning their investments.” Retail Wholesale, 845 F.3d at 1274 (quoting Basic

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Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)).

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1. Material Misrepresentations

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Determining the sufficiency of material misrepresentations alleged in a

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securities fraud complaint requires a court to make two inquiries. First, and as stated

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above, the court must assess “the reason or reasons” why the statements are

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misleading. 15 U.S.C. § 78u–4(b)(1). Second, and often as a threshold matter, the

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court must also analyze whether the statement itself could be a misleading statement

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under Section 10(b).

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“[A] statement is misleading if it would give a reasonable investor the

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impression of a state of affairs that differs in a material way from the one that actually

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exists.” Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008). In

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assessing whether a statement is actionable or not, the Ninth Circuit distinguishes

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between “puffery” and misrepresentations. In re Cutera Sec. Litig., 610 F.3d 1103,

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1111 (9th Cir. 2010). “‘Puffing’ concerns expressions of opinion, as opposed to

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knowingly false statements of fact.” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc.,

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774 F.3d 598, 606 (9th Cir. 2014). “Mere puffery” is “extremely unlikely to induce

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consumer reliance.” Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d 1038, 1053

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(9th Cir. 2008). Consumer reliance, in turn, is affected “by specific rather than

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general assertions.” Id. “Thus, a statement that is quantifiable, that makes a claim as

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to the ‘specific or absolute characteristics of a product,’ may be an actionable
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statement of fact while a general, subjective claim about a product is non-actionable

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puffery.” Id. In other words, misleading statements must be “capable of objective

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verification.” Retail Wholesale, 845 F.3d at 1275.

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“Vague statements of optimism like ‘good,’ ‘well-regarded,’ or other feel good

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monikers” are not capable of objective verification and are not actionable. See In re

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Cutera Sec. Litig., 610 F.3d at 1111. Statements that are preceded by qualifiers such

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as “We believe” are similarly not actionable as they cannot be measured as true or

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false on an objective standard. See Or. Pub. Empls. Ret. Fund, 774 F.3d at 606-07.

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Aspirational statements, that emphasize commitment to certain values or goals, are

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not capable of objective verification either. See Retail Wholesale, 845 F.3d at 1276.

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Also generally immune from Section 10(b) challenges, are “forward-looking

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statements.” See U.S.C. § 78–u5(i)(1)(A) (PSLRA “safe harbor” provision for

13

certain forward-looking statements); see also In re Cutera Sec. Litig., 610 F.3d at

14

1111. Forward-looking statements, unlike actionable statements, are not “descriptive

15

of historical fact.” S.E.C. v. Todd, 642 F.3d 1207, 1221 (9th Cir. 2011) (quoting

16

Ronconi v. Larkin, 253 F.3d 423, 430 (9th Cir. 2001)).

17

A. Loan Underwriting Standards

18

The allegations set forth in the SAC demonstrate with sufficiently particularity

19

that many of BofI’s statements concerning its loan underwriting standards and credit

20

quality were materially false and misleading at the time they were made.

21

CEO Garrabrants, in a press release and a conference call concerning BofI’s

22

Q1 2015 results filed November 4, 2014, made a variety of statements that

23

highlighted BofI’s “record” financial results as the result of “strong credit discipline.”

24

See SAC ¶ 319.

25
26
27

[1] Garrabrants also touted that “[w]e continue to have an unwavering
focus on credit quality of the bank and have not sacrificed credit quality
to increase origination.” He further claimed that “[o]ur strong credit
discipline and low loan to value ratio of portfolio had resulted in

28
13
3:15-CV-02324-GPC-KSC

1
2
3
4

consistently low credit losses and servicing costs.” Id. ¶ 324 (emphasis
added).
[2] In the release, Garrabrants was quoted as stating, in relevant part, that
BofI’s “[s]trong loan growth was achieved while maintaining high quality
credit standards[.]” Id. ¶ 320 (emphasis added).

5
6
7
8
9
10
11
12

[3] “For all multifamily and commercial loans, we rely primarily on the

cash flow from the underlying property as the expected source of
repayment . . . In evaluating a multifamily or commercial credit, we
consider all relevant factors including . . . [assets, payment history at BofI,
other financial resources, net operating income, debt service, and
appraised value].” Id. ¶ 305.
[4] “Each loan, regardless of how it is originated, must meet underwriting
criteria set forth in our lending policies and the requirements of applicable
lending regulations of our federal regulators.” Id. ¶ 250 (made with
respect to loan underwriting standards generally).

13
14
15
16

[5] “[W]e continue to originate only full documentation, high credit
quality, low loan-to-value, jumbo single-family mortgages and have not
reduced our loan rates for these products.” Id. ¶ 298 (made with regard to
single-family loan origination).

17

After having reviewed these statements, for a second time, the Court is still

18

convinced that they were false or misleading when made. There is ample evidence in

19

the SAC, as was the case with the CAC, that BofI was not adhering to high credit

20

quality standards and that it had, in fact, begun to “sacrifice credit quality to increase

21

origination” and that its “strong loan growth” was not the result of “maintaining high

22

credit quality standards.”

23

In reaching this conclusion, the Court was particularly influenced by the

24

allegations attributed to a handful of confidential witnesses, which — if true —

25

demonstrate that much of BofI’s loan growth was due to management’s knowing

26

loosening of credit quality standards.

27

Take the allegations attributed to CW 1, for example. CW 1 was a former

28

Senior Underwriter at BofI’s San Diego Headquarters. SAC ¶ 54. According to
14
3:15-CV-02324-GPC-KSC

1

CW 1, “beginning in early 2014” him and his group “were being pressured by BofI’s

2

Executive Vice President and Chief Credit Officer Thomas Constantine, as well as

3

Leigh Porter, who was in charge of BofI’s Multifamily–Income Property Lending

4

group, to underwrite loans that CW 1 was not comfortable signing off on and that did

5

not make economic sense for BofI to issue.” Id. CW 1 went on to give an example

6

of such a loan.

7

In mid-2014, CW 1 worked on a loan for a multi-family property in Laguna

8

Beach, California that was to be leveraged at a LTV of 70% to 75%. Id. ¶ 55.

9

“According to CW 1, the borrower sought a cash-out refinancing loan of several

10

million dollars but had bad credit and no cash.” Id. CW 1 then recalled how he

11

“reviewed bank statements provided by the borrower that showed less than a $100

12

balance in some accounts, including one account that had a negative balance.” Id.

13

These facts led CW 1 to believe that the borrower “was using the property basically

14

to support a lifestyle the borrower no longer had the money to support” and that her

15

“spending habits outstripped her income.” Id. ¶¶ 55, 57. CW 1 further noted that

16

BofI had “already issued a highly leveraged refinancing loan for a mixed-use

17

property to the same borrower” and that “since the first cash-out refinancing loan

18

from BofI, the borrower had taken on an additional $80,000 in debt from Mercedes-

19

Benz, which CW 1 believed indicated the borrower had recently purchased a new

20

luxury vehicle.” Id. ¶¶ 56-57. CW 1 then noted that for these reasons and because

21

“the operating standards of the property showed barely any cash flow” — the primary

22

factor assessed by BofI for multifamily and commercial loans, see supra statement

23

[3] — she recommended against financing the property. Id.

24

Notwithstanding his recommendation, however, BofI issued the loan. The

25

SAC recounts how CW 1 expressed her concerns about the approval to the Chief

26

Credit Officer, Thomas Constantine, but that he brushed them aside saying “that the

27

transaction was a good deal for BofI” because, “even if it had to foreclose on the

28

underlying properties,” BofI would take control of a valuable property. See id. ¶ 58.
15
3:15-CV-02324-GPC-KSC

1

The SAC further alleges that Constantine’s comments were “at odds with the ability-

2

to-repay/QM rule, which does not include a property’s foreclosure value among the

3

factors that should be considered in determining a borrower’s ability to repay a loan.”

4

Id. ¶ 59
CW 1, however, was not the only former employee who described BofI’s

5
6

lending practices differently than executive management. CW 2, who worked in the

7

Multifamily–Income Property Lending group and later in the Commercial &

8

Industrial (C&I) Lending Group, worked on a multimillion-dollar C&I loan in mid-

9

2014 for a property located in downtown San Diego. Id. ¶ 63. According to CW 2,

10

the property was owned by an individual who had hoped to build a hotel on the

11

property and the borrower was a limited liability company. Id. ¶¶ 63-64. CW 2

12

explained that the property “had been listed for sale for three years at approximately

13

$13 million, which . . . indicated that the property was not worth $13 million.”

14

Id. ¶ 63. As such, when an appraiser, who was a friend of Chief Credit Officer

15

Constantine, appraised the property at $18 million, CW 2 “refused to recommend the

16

loan.” Id. CW 2 explained that his refusal to approve the loan was also due, at least

17

in part, to a “suspicious clause” in the borrower’s LLC agreement that CW 2 “thought

18

was part of a scam designed for the owner to regain ownership of the property.” See

19

id.

20

CW 2 informed Constantine and the BofI loan originator that he would not

21

approve the loan, and he maintained his position even after Constantine “pressured”

22

him to approve it. Id. ¶ 65. Nonetheless, however, Garrabrants, eventually approved

23

the loan upon Constantine’s recommendation, for between $11 and $13 million

24

dollars with an appraised value of $18 million. Id. According to CW 10, a senior

25

underwriter who worked at BofI just prior to the Class Period, it was not unusual for

26
27
28
16
3:15-CV-02324-GPC-KSC

1

BofI’s executive management to fund loans that other underwriters “declined to sign

2

off on,” as was the case for the loan that CW 2 refused to approve.6 Id. ¶ 68.
The allegations attributed to CW 1 and CW 2, at the very least, render “false or

3
4

misleading” BofI’s statements in November 2014 that they “ha[d] not sacrificed

5

credit quality to increase origination” and that the Company’s “strong loan growth

6

was achieved while maintaining high quality credit standards.” Both statements were

7

made by BofI’s CEO Garrabrants, the former during a conference call with analysts

8

and investors, in which Micheletti participated, and the latter in the corresponding

9

press release. Both are affirmative statements about the origins of BofI’s “record”

10

financial results. And both represent to the public that the Company had increased its

11

revenue without resorting to “race-to-the-bottom” tactics, and specifically, that BofI

12

had not sacrificed credit quality to issue more loans. The above-mentioned

13

confidential witness allegations, however, and to say nothing of the other allegations

14

in the complaint, render that affirmative message not just misleading, but untrue.

15

A statement is misleading it if would give a reasonable investor the

16

“impression of a state of affairs that differs in a material way from the one that

17

actually exists.” Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir.

18

2002). The CW allegations recited above make evident that the reality of BofI’s loan

19

underwriting practices, on the ground, in 2014, differed materially from the

20

representations made by BofI in its disclosures made in November 2014. While

21

BofI’s management assured investors that its loan originations were the result of

22

anything but deteriorating credit standards, former underwriters at BofI painted a

23
24
25
26
27
28

6

As the Court stated in its previous Motion to Dismiss Order, see Dkt. No. 64 at 18 n.5, the fact that
CW 10 worked at BofI before the Class Period does not diminish the probative value of his
allegations. The Court finds that CW 10’s allegations are relevant insofar as they corroborate the
allegations of other CWs and tend to indicate that BofI was engaged in a pattern of misconduct that
began before the Class Period and extended into it.
17
3:15-CV-02324-GPC-KSC

1

picture of a bank that made end-runs around the procedures, controls, and persons

2

tasked with ensuring that the Company adhered to high credit standards.

3

Former underwriters were “pressured” by BofI’s management to approve loans

4

that the underwriters refused to recommend because they did not meet high credit-

5

quality standards. Those employees, in turn, expressed their concerns to upper-level

6

management — including the Executive Vice President/Chief Credit Officer

7

(Constantine), the Chief Legal Officer (Bar-Adon), the Chief Lending Officer

8

(Swanson), and the CEO (Garrabrants) — about loans that were approved in spite of

9

their conclusions. Members of management, however, were not only unreceptive to

10

these reservations, but at times they acted in spite of them. That management then

11

sought approval from corporate executives, such as Garrabrants, for loans that

12

assigned underwriters would not approve, lends even greater support to the notion

13

that BofI’s management was circumventing conservative underwriting procedures to

14

increase loan origination. Misrepresentations concerning the origins of BofI’s loan

15

growth, moreover, would undoubtedly have been material to potential investors as the

16

development of BofI’s loan portfolio was the primary driver of the Company’s

17

growth during the Class Period and, thus, a key metric in attracting and retaining

18

investors.

19

In reaching this conclusion, the Court is not persuaded by Defendants’

20

murmurings questioning the reliability of Lead Plaintiff’s confidential witnesses or

21

the particularized nature of their allegations. See Dkt. No. 88-1 at 18 n.8. As the

22

Court stated in its First Motion to Dismiss Order, the Court finds that the CWs are

23

described with sufficient detail to meet the standard laid out in Zucco Partners and in

24

In re Daou Sys., Inc., 411 F.3d 1006, 1015-16 (9th Cir. 2005). See First Motion to

25

Dismiss Order. Dkt. No. 64 at 17 (citing Zucco Partners, 552 F.3d at 991). What is

26

more, the Court is also confident that the specific CW allegations referenced in this

27

Order are reliable and based upon personal knowledge. See Zucco, 552 F.3d at 991.

28

As loan underwriters, CW 1 and CW 2 were in a position to evaluate the credit
18
3:15-CV-02324-GPC-KSC

1

quality of BofI’s potential borrowers, to identify any indicia of risk apparent in the

2

loans they worked on, and to speak to the “pressure” they felt to issue imprudent

3

loans. They had personal knowledge about the loans referenced in the SAC and they

4

would be in a position to testify to that anecdotal evidence were this case to go to

5

trial. See Berson, 527 F.3d at 985 (concluding that CW allegations were sufficiently

6

particularized if it was plausible that they “would know” or “could reasonably

7

deduce” a certain fact about the company). Accordingly, there is no reliability issue

8

at this stage.

9

Moreover, the Court is also satisfied that the CW allegations recounted above

10

are sufficiently particularized to withstand scrutiny under the PSLRA and Rule 9(b).

11

The SAC captures tremendous details concerning the CWs’ experiences at BofI. It

12

includes general statements about how the CWs viewed BofI’s underwriting practices

13

and specific examples detailing how the approval of particular loans contradicted

14

management’s representations about its underwriting practices. The CWs identified

15

above described when the challenged loans were approved (in mid-2014), who

16

approved them or did not approve them (i.e., the underwriter), what their terms were,

17

and under what circumstances they were approved. Such descriptions are more than

18

sufficient to state the circumstances constituting fraud and provide the “reason or

19

reasons” why BofI’s representations that it had not sacrificed loan and credit quality

20

to increase loan origination, made on November 14, 2014, were false or misleading

21

when made.

22

B. Internal Controls & Compliance Infrastructure

23

The Court likewise concludes here, as it did in its First Motion to Dismiss

24

Order, that Lead Plaintiff has identified actionable false and misleading statements

25

made by BofI about the adequacy of its compliance infrastructure and internal

26

controls.

27
28
19
3:15-CV-02324-GPC-KSC

1

The SAC highlights, for instance, the following statements made by

2

Garrabrants, during a conference call, concerning the state of staffing in BofI’s

3

various compliance departments:

4
5
6
7
8
9
10

[1] “We have made significant investments in our overall compliance
infrastructure over the past several quarters, including BSA and AML
compliance. We believe that we are on the same page with our regulators
about their expectations.” Id. ¶ 299 (referencing quarter results before
August 7, 2014) (emphasis added).
[2] “We have spent a significant amount of money on BSA/AML
compliance upgrades and new systems and new personnel. We have also
been beefing up our compliance teams.” Id. (statement made August 7,
2014) (emphasis added).

11

Lead Plaintiff contends that these representations were rendered “false and

12

misleading” by CW allegations indicating that BofI had not adequately staffed its

13

BSA and AML compliance along with other internal control departments. The Court

14

agrees.

15

At least two of the confidential witnesses described their departments as being

16

insufficiently staffed. CW 3, a former BSA and Third Party Risk Officer who was in

17

charge of the department, stated that BofI’s “BSA and Third Party Risk Department

18

Team was “understaffed consisting of only three members” throughout his tenure. Id.

19

CW 9, a senior accounting officer who reported to Garrabrants, albeit before the

20

Class Period, similarly stated that his department was “short-staffed and [that]

21

Garrabrants did not allow CW 9 to hire additional personnel.” Id. ¶ 166.

22

CW 3, moreover, not only described his department as “understaffed” but also

23

described an interaction between himself and CEO Garrabrants that strongly suggests

24

that Garrabrants, too, knew that CW 3’s department was understaffed.

25

CW 3, the SAC explains, was responsible for “develop[ing] bank staff” and

26

for “remediating regulatory issues” with BSA examinations and internal audits, and

27

reported, for a time, directly to John Tolla, BofI’s Chief Governance Risk and

28

Compliance Officer and Senior Vice President of Compliance and Audit. Id. ¶ 126.
20
3:15-CV-02324-GPC-KSC

1

As such and by virtue of his position and responsibility at the Company, CW 3 was

2

also in the position to attend meetings with senior executives, including CEO

3

Garrabrants. Id. ¶ 126. At one such meeting, a couple of weeks after CW 3 joined

4

BofI, CW 3 told management that he “needed a lot more people in the BSA

5

department because of the risk Garrabrants was causing BofI to take on.” Id. And in

6

response, Garrabrants stated that CW 3’s tombstone was going to read “died

7

understaffed.” Id.

8
9

The allegations attributed to these CWs render “false or misleading” BofI’s
representations about the investment and money it was spending on personnel to run

10

its internal control departments. “[A] statement is misleading if it would give a

11

reasonable investor the impression of a state of affairs that differs in a material way

12

from the one that actually exists.” Berson, 527 F.3d at 985. The above statements

13

were made by Garrabrants during a conference call about BofI’s Q4 earnings on

14

August 7, 2014. Id. ¶ 297. Both statements represented to investors that BofI had

15

made “significant investments” in their compliance infrastructure, and specifically

16

that they had hired “new personnel” and “beef[ed] up [thei]r compliance teams” in

17

the preceding quarters. Id. The CW allegations, however and which the Court takes

18

as true at this stage of the proceeding, give an impression of a different state of

19

affairs.

20

The message that BofI sent to investors and analysts about its internal control

21

efforts was the opposite of the message it sent to the individuals in charge of

22

implementing the Company’s policies. Through the above statements, BofI

23

communicated to its investors that it valued internal controls so much that it invested

24

heavily in upgrades and new personnel to carry them out. The above allegations,

25

however, give every indication that BofI was not receptive to investing in new

26

personnel, that it was not concerned about the stated need for new personnel, and that

27

it did not hire new personnel even after requests from key employees were made. As

28

CW 3 himself stated, his department was “understaffed,” it had been that way for
21
3:15-CV-02324-GPC-KSC

1

CW 3’s entire tenure at BofI, which extended into the Class Period, and it had

2

remained that way despite pleas made to executive management. The Court

3

moreover concludes that such misrepresentations would have been material to

4

investors because whether BofI had the human capacity to enforce its internal

5

controls would inevitably affect its ability to carry out the compliance systems meant

6

to protect the bank, and its stock, from risk.

7

The Court further concludes that the level of detail provided by CW 3 is

8

sufficiently particularized to withstand Rule 9(b) and PSLRA scrutiny. CW 3 has

9

provided the Court with the information it needs to deduce that the individual had

10

knowledge of the staffing needs of the BSA and Third Party Risk Department, that he

11

was competent to form an opinion about those needs, and that he would have been in

12

a position to communicate and interact with executive management about those

13

needs. Accordingly, the allegations provided by CW 3, and bolstered by those of

14

CW 8, supply the “reason or reasons” why BofI’s August 2014 statements about its

15

compliance efforts were false and misleading when made.

16

Defendants nonetheless seek to undermine the probative value of these

17

“understaffed” allegations by arguing that they are conclusory and that they otherwise

18

lack a temporal nexus with the allegedly false statements made by BofI on August 7,

19

2014. Dkt. No. 88-1 at 18-19. The Court disagrees.

20

Defendants argue that Lead Plaintiff’s allegation, contributed to CW 3, that the

21

BSA/AML department was “understaffed” at “three members” is irrelevant because it

22

is not clear how “this number of staff members constituted ‘understaffing.’” Dkt. No.

23

88-1 at 18. Defendant argues that Lead Plaintiff should have, instead, presented facts

24

showing “how other similarly situated banks staff their compliance programs or

25

provide details for why this staffing level actually created the risk plaintiff speculates

26

might exist.” Id. Defendants’ argument, however, ignores the fact that Garrabrants

27

himself corroborated CW 3’s “conclusion” when he said that CW 3 would “die

28
22
3:15-CV-02324-GPC-KSC

1

understaffed.” Indeed, Garrabrants’ reaction to CW 3’s assertion confirms that he,

2

too, believed the department to be “understaffed.”

3

Defendants’ other means of undermining Lead Plaintiff’s “understaffed”

4

allegations involves questioning whether CW 3’s narrative coincided with the above-

5

mentioned statements made by Garrabrants on August 7, 2014. Defendants argue

6

that CW 3’s allegations lack probative value as to the “false or misleading” nature of

7

Garrabrants’ August 2014 statements because Lead Plaintiff does not specify when

8

CW 3 and Garrabrants interacted and because it is “likely” that the meeting took

9

place before the Class Period. The Court grants Defendants that the interaction

10

between CW 3 and Garrabrants likely took place before the Class Period. The SAC

11

described CW 3 as working at BofI “prior to and during the Class Period” and the

12

alleged meeting occurred “a couple of weeks after CW 3 joined BofI.”

13

Yet that Garrabrants’ comment “likely” occurred before the Class Period does

14

not strip the allegation of its probative value, as Defendants allege. CW 3 said his

15

department was “understaffed” with only “three employees” throughout his time at

16

BofI, which extended into the Class Period (beginning September 4, 2013). That fact

17

alone demonstrates that the short staffing CW 3 complained of persisted into the

18

Class Period and at most within a year of the above statements. While it is true that

19

Lead Plaintiff has not demonstrated how long the “understaffing” existed, or whether

20

it remained true until August 7, 2014 and the preceding “several quarters,” the Court

21

is nonetheless satisfied that the proximity between Garrabrants’ “died understaffed”

22

statement, CW 3’s employment at BofI, and the August 7, 2014 statements is

23

sufficiently close to warrant the reasonable inference that no changes had been made

24

in the interim and that the BSA department remained understaffed during the quarters

25

that were the subject of Garrabrants’ statements.

26

The PSLRA and Rule 9(b) only require that Lead Plaintiff provide

27

particularized reasons why a statement was false or misleading at the time it was

28

made, not that Lead Plaintiff prove its entire case in the complaint and without the
23
3:15-CV-02324-GPC-KSC

1

benefit of reasonable inferences. In fact, the opposite is true. See Garfield v. NDC

2

Health Corp., 466 F.3d 1255, 1264 (4th Cir. 2006) (Even under PSLRA’s heightened

3

standards, the court “continues to give all reasonable inferences to plaintiffs”). The

4

allegations attributed to CW 3 and CW 8 have put BofI on notice of the

5

“circumstances constituting fraud, ” see Rule 9(b), and demonstrate that there is

6

nothing “frivolous” about Lead Plaintiff’s claims that BofI’s compliance departments

7

were understaffed, see Amgen, 133 S. Ct. at 1200 (reiterating that Congress enacted

8

the PSLRA to curb abuses of securities fraud litigation). Accordingly, the Court is

9

satisfied that the above statements made by Garrabrants are actionable as false and

10

misleading statements at this stage of the litigation.

11

2. Scienter

12

Plaintiffs must plead scienter with particularity to survive a motion to dismiss a

13

§ 10(b) claim. Scienter encompasses the intent to deceive, manipulate, and defraud.

14

In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1053 (9th Cir. 2014) (quoting Ernst &

15

Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976)). To satisfy the requisite state of

16

mind in the Ninth Circuit, “a complaint must ‘allege that the defendant[ ] made false

17

or misleading statements either intentionally or with deliberate recklessness.’”

18

Zucco, 552 F.3d at 991 (citation omitted). Recklessness involves “a highly

19

unreasonable omission, involving . . . an extreme departure from the standards of

20

ordinary care, and which presents a danger of misleading buyers or sellers [of] that

21

[which] is either known to the defendant or is so obvious that the actor must have

22

been aware of it.” In re NVIDIA, 768 F.3d at 1053 (internal citations omitted). Facts

23

showing mere recklessness or a motive to commit fraud and opportunity to do so,

24

provide some reasonable inference of intent, but are not sufficient to establish a

25

strong inference of deliberate recklessness. In re VeriFone, 704 F.3d at 701. Thus, to

26

establish a strong inference of deliberate recklessness, plaintiffs must “state facts that

27

come closer to demonstrating intent, as opposed to mere motive or opportunity.” In

28

re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999) (abrogated on
24
3:15-CV-02324-GPC-KSC

1

other grounds by South Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir.

2

2008)).

3

A. Holistic Review

4

As stated above, a complaint brought under the PSLRA is well-plead if the

5

facts give rise to a “strong inference” that the defendants acted with the requisite state

6

of mind. In assessing the sufficiency of allegations under Rule 10(b)(5) a district

7

court must view the allegations holistically, not in isolation. In re VeriFone, 704 F.3d

8

at 702-03 (discussing holistic review as required by the Supreme Court in Matrixx

9

Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1324 (2011)). That is not to say that

10

the court cannot, if it chooses, “engage in an individualized discussion of the

11

complaint’s allegations,” but rather that it should not “unduly focus on the weakness

12

of individual allegations to the exclusion of the whole picture.” Id. At this stage, the

13

court must test for allegations of scienter sufficient to justify the case to proceed

14

against the defendant. New Mexico State Inv. Council v. Ernst & Young LLP, 641

15

F.3d 1089, 1103 (9th Cir. 2011).

16

B. BofI’s Scienter

17

In order for a Section 10(b) claim to lie against BofI, the Court must find a

18

strong inference of scienter for the corporate defendant. Generally speaking, such an

19

inference must be made by pleading scienter as to the individual executive or director

20

who made the misstatement. Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736,

21

743 (9th Cir. 2008).

22

In assessing the scienter of corporate officers, the Ninth Circuit has often

23

spoken in terms of what is not enough to create a strong inference that a corporate

24

officer acted with scienter. In South Ferry the Ninth Circuit tackled the question of

25

whether and when the “core operations inference” — that is, the inference that key

26

company officers have knowledge of facts critical to a business’ core operations or

27

important transactions — is sufficient to meet the strict pleading standards of the

28

PSLRA. 542 F.3d at 781. There, the court concluded that an officers’ position
25
3:15-CV-02324-GPC-KSC

1

within a company was not sufficient, on its own, to create a strong inference of

2

scienter, but that a kind of “core inference plus” would be sufficient. Id. at 784-85.

3

By way of example, the South Ferry court noted that plaintiffs might be able to meet

4

the PSLRA requirement by relying on the core operations inference and by alleging

5

that specific information had been conveyed to management relating to the fraud. Id.

6

at 785. In Zucco, the Ninth Circuit made clear that SOX certifications are not

7

sufficient “without more” to satisfy the PSLRA requirements. Zucco, 552 F.3d at

8

1004. Finally, in In re Rigel Pharm., Inc. Sec. Regulation, the Ninth Circuit

9

concluded that allegations of “routine corporate objectives,” or executive

10

compensation based upon corporate goals, were not sufficient by themselves to create

11

a strong inference of scienter, despite the element of motive involved. See 697 F.3d

12

869, 884 (9th Cir. 2012).

13

Defendants, in this second motion to dismiss, have not proffered any new legal

14

arguments undermining the Court’s previous conclusion that Lead Plaintiff’s

15

allegations, when viewed holistically, establish that Defendant Garrabrants — and

16

BofI by extension — made the above statements relating to loan underwriting

17

standards and internal control investment and enforcement with the requisite scienter.

18

See First Motion to Dismiss Order, Dkt. No. 64. The Court, therefore, adopts that

19

part of its holding in full. See id. at 22-25.

20

In relevant part, the Court explained in its previous order that the same facts

21

that established the falsity of the above-mentioned statements also sufficed to

22

demonstrate that they were made with knowledge or recklessness of their falsity. See

23

In re Read-Rite Corp. Sec. Litig., 335 F.3d 843, 846 (9th Cir. 2003).

24
25
26
27
28

The complaint sets forth a number of facts from which the Court can infer
that CEO Gregory Garrabrants knew that BofI was deviating from its
stated lending practices and failing to maintain adequate internal and audit
controls. For one, Plaintiffs’ allegations indicate that Garrabrants was
actually complicit in misconduct. Confidential Witness 7, who had once
attended a meeting with Garrabrants to discuss negative audit findings,
stated that Garrabrants not only brushed his findings “under the rug,” CAC
26
3:15-CV-02324-GPC-KSC

1
2
3
4
5
6
7
8
9
10
11
12
13
14

¶ 147, but “cleaned up” audit reports that he disagreed with. Id. ¶ 174.
Then, according to a former BofI Assistant Vice President/Senior
Processor of Income Property Lending Operations, Garrabrants had
instructed employees to do no further background checks on foreign
nationals if their name did not appear on the Office of Foreign Asset
Control (OFAC) list. Id. ¶ 134. Confidential witnesses who worked at
BofI before the Class Period made similar allegations of Garrabrants’
complicity. See id. ¶ 133 (stating that Garrabrants had instructed BofI’s
Executive Vice President and Chief Credit Officer to underwrite loans
even though they were missing TINs); id. ¶ 173 (stating that Garrabrants
interfered with the audit committee’s duties). Plaintiffs’ allegations also
set forth facts indicating that Defendant was aware – or should have been
aware – of misconduct occurring at the bank. The Complaint contains
allegations of a third party risk officer who stated that Garrabrants had
said the officer’s tombstone would read “died understaffed,” in response
to the officer’s assertion that they needed more people in the Bank Secrecy
Act department. Id. ¶ 124. Plaintiffs also alleged that a senior underwriter
even went so far as to leave concerns about a multi-million dollar loan
directly with Garrabrants’ assistant, in order to explain why her boss
should not have recommended that Garrabrants approve a specific loan
over her objection. Id. ¶¶ 61-64.

15
16
17
18
19
20
21
22
23
24
25

Viewing these allegations holistically, and in light of the fact that
Garrabrants was the CEO of BofI throughout the Class Period, had signed
the SOX certifications on the company’s quarterly and yearly earnings
throughout the Class Period, and made repeated representations that BofI
had sound underwriting and audit procedures during the Class Period, the
Court finds that Plaintiffs have alleged a strong inference of scienter as to
Garrabrants. The opposing inference that Defendants would have the
Court adopt — that is, that the confidential witnesses are nothing more
than “disgruntled” and “low-level” employees making unsubstantiated
statements, see ECF No. 41 at 4-5 & ECF No. 37 at 17 — is not as strong
as the inference that Garrabrants knowingly misrepresented BofI as
having conservative credit guidelines, adequate internal controls, and as
being in compliance with regulatory obligations. Accordingly, Plaintiffs
have sufficiently plead scienter so as to survive Defendants’ motion to
dismiss.

26
27

Id. Accordingly, and in light of no compelling new argument to the contrary, the

28

Court yet again holds that the allegations in the SAC are sufficient to demonstrate
27
3:15-CV-02324-GPC-KSC

1

that Garrabrants, and BofI by extension, made, at the very least, the above-mentioned

2

statements regarding BofI’s loan origination practices and internal controls with the

3

requisite scienter.

4

3. Non-actionable misrepresentations

5

A. Allowance for Loan Losses

6

Lead Plaintiff challenges successive Form 10-Ks and Form 10-Qs issued by

7

BofI during the Class Period as containing actionable false and misleading statements

8

about BofI’s allowance of loan losses (“ALL”).7 SAC ¶ 247 (Form 10-K 2013),

9

¶ 257 (Form 10-Q Q1 2014), ¶ 270 (Form 10-Q Q2 2014), ¶ 284 (Form 10-Q Q3

10

2014), ¶ 303 (Form 10-K 2014), ¶ 314 (Form 10-Q Q1 2015), ¶ 328 (Form 10-Q Q2

11

2015), ¶ 340 (Form 10-Q Q3 2015), ¶ 361 (Form 10-K 2015), ¶ 387 (Form 10-Q Q1

12

2016). Lead Plaintiff also challenges a statement made by Garrabrants about the

13

ALL during a Q3 2014 conference call. SAC ¶ 293. Defendants counter that Lead

14

Plaintiff has failed to demonstrate that BofI’s ALL was “false or that it was

15

insufficient to cover estimable and probable losses to BofI’s portfolio.” Dkt. No. 88-

16

1 at 22. The Court agrees, but adds that many of the challenged statements identified

17

by Lead Plaintiff are not actionable to begin with.8
The ALL, as Defendants explain and as Lead Plaintiff does not dispute, “is a

18
19

valuation reserve established and maintained by a bank to cover losses that are

20

probable and estimable in its portfolio.” Dkt. No. 88-1 at 21. The Third Circuit

21

described the loan loss reserve as follows in Shapiro v. UJB Fin. Corp.:

22

statement of condition, or balance sheet, account set up by a bank based
on its expectations about future loan losses. As losses occur, they are

23
24
25
26
27
28

7

As Defendants point out, an alternative name for the ALL is Allowance for Loan and Leases
Losses (ALLL). The Court further notes that “loan loss reserves” is another synonym for the
ALLL. See Shapiro v. UJB Fin. Corp., 964 F.2d 272, 280-82 (3d Cir. 1992).
8
A recently published case, City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align
Tech., Inc., --- F.3d ---, 2017 WL 1753276 (9th Cir. May 5, 2017), does not disturb the Court’s
conclusion as the Court finds that Lead Plaintiff has failed to demonstrate that BofI’s ALL
statements were false or misleading when made.
28
3:15-CV-02324-GPC-KSC

1

charged against this reserve. That is, the loan account is credited and the
reserve account is debited. The reserve is established by a debit to an
expense account called the loan loss provision, with a corresponding
credit to the loan loss reserve.

2
3
4

964 F.2d 272, 281 (3d Cir. 1992) (citing American Bankers Assoc., Banking

5

Terminology 215 (1989)). According to the Shapiro court, and based on its review of

6

financial authorities, calculating and assessing the adequacy of the loan loss reserve is

7

no straightforward task as there is “no single method for evaluating and setting loan

8

loss reserves, perhaps because no method has proven foolproof.” See id. (citing C.

9

Edward McConnell, Loan Loss Reserve Mgmt. & Unwise Lending Practices, in Bank

10

Credit 354 (Herbert V. Prochnow ed. 1981)). And “[n]o matter what method is used,

11

the economic judgments made in setting loan loss reserves can be validated only at

12

some future date.” See id. (citing McConnell).

13

With this background in mind, the Court concludes that the majority of the

14

statements that Lead Plaintiff quotes from the Form 10-Ks and Form 10-Qs are not

15

actionable as misleading because they are not “objectively verifiable.”
BofI explained that . . . [1] “[w]e are committed to maintaining the
allowance for loan losses at a level that is considered to be commensurate
with estimated probable incurred credit losses in the portfolio . . . ”9

16
17
18

[2] “[t]he Company’s goal is to maintain the allowance for loan losses
(sometimes referred to as the allowance) at a level that is considered to be
commensurate with estimated probable incurred credit losses in the
portfolio” and that [3] “the Company believes that the allowance for loan
losses is adequate at September 30, 2013.”

19
20
21
22
23
24
25
26
27
9

28

This statement is repeated verbatim with regards to the 2014 Form 10-K and 2015 Form 10-K.
See ¶¶ 303, 361.
29
3:15-CV-02324-GPC-KSC

3

[4] “BofI reiterated its goal in maintaining ALL, as described earlier in
Form 10-Qs filed by BofI, and, further, assured that “[it] believes that the
allowance for loan losses is adequate at December 31, 2013[.]”10
SAC ¶¶ 247, 257, 270, 284, 303, 314, 328, 340, 361, 387. These statements are

4

classic corporate “puffery.” Aspirational statements about what BofI is “committed

5

to” and what its “goals” are, are not objectively verifiable. See Retail Wholesale, 845

6

F.3d at 1276 (aspirational statements, that emphasize commitment to certain values or

7

goals, are not capable of objective verification). Statements of opinion, like those

8

prefaced with “We believe,” are similarly not actionable. See Or. Pub. Empls. Ret.

9

Fund, 774 F.3d at 606-07. Accordingly and because the Court cannot quantify these

1
2

10

statements for their truth or falsity, they are not actionable.
Those statements that are “capable of objective verification,” however, do not

11
12

fare any better. Lead Plaintiff argues that each of BofI’s stated loan loss reserve

13

calculations11 were false and misleading when made because:

14

(i) BofI engaged in lax lending practices that subject the Company to
significant risk of loss and potential regulatory and government actions
(see ¶¶ 43-157); (ii) BofI’s ALL failed to account for likely losses on high
risk loans BofI underwrote and originated, including loans BofI made
pursuant to off-balance sheet activities (see ¶¶ 151-57); (iii) BofI’s offbalance sheet activities included undisclosed lending partnerships with
Quick Bridge, BofI Properties, and others (see ¶¶ 69-108); (iv) BofI’s
average LTV failed to account for undisclosed high risk loans BofI issued
(see ¶¶ 43-157); and (v) BofI failed to implement and enforce adequate
internal controls (see ¶¶ 158-66).

15
16
17
18
19
20
21

SAC ¶ 255. The SAC mistakes quantity for quality. Pointing the Court to hundreds

22

of paragraphs of allegations of fraud generally is not the same as providing the Court

23
24
25
26
27
28

10

This statement is repeated verbatim with regards to the Q3 2014 Form 10-Q, 2015 Q1 Form 10Q, Q2 2015 Form 10-Q, Q3 2015 Form 10-Q, and Q1 2016 Form 10-Q. See ¶¶ 284, 314, 328, 340,
387.
11
Each of these statements are virtually identical, and differ only with regards to the date and
corresponding ALL. See, e.g., ¶ 247 (“In the 2013 Form 10-K, BofI also reported $2.3 billion
in loans held for investment, and ALL of $14.182 million, as of June 30, 2013.”)

30
3:15-CV-02324-GPC-KSC

1

with particularized “reason or reasons” why BofI’s loan loss calculations were false

2

or misleading at the time they were made. See Metzler Inv. GMBH v. Corinthian

3

Colleges, Inc., 540 F.3d 1049, 1070 (9th Cir. 2008) (“But this Circuit has consistently

4

held that the PSLRA’s falsity requirement is not satisfied by conclusory allegations

5

that a company’s class period statements regarding its financial well-being are per se

6

false based on the plaintiff’s allegations of fraud generally.”) (emphasis in original).

7

This lack of specificity is reason alone to dismiss this category of statements.

8

See Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir. 2002) (“Although the

9

allegations here are voluminous they do not rise to the level of specificity required

10

under the PSLRA”) overturned on other grounds by Proctor v. Vishay

11

Intertechnology Inc., 584 F.3d 1208 (9th Cir. 2009). For even taking as true all of

12

Lead Plaintiff’s allegations concerning BofI’s “lax lending practices,” “off-balance

13

sheet activities,” “average LTV,” “failure to account for likely loan losses,” and

14

“[in]adequate internal controls,” and comparing them to the above statements, the

15

Court is still left speculating as to why those facts rendered BofI’s loan loss reserve

16

calculations false at the time they were made. For example, at paragraph ¶ 154 of the

17

SAC, Lead Plaintiff recounts BofI’s policy on the allowance for loan losses. Lead

18

Plaintiff has not, however, explained how that policy has been violated or how the

19

existence of that policy otherwise renders BofI’s loan loss reserve calculations false

20

or misleading.

21

Similarly, at ¶ 155, Lead Plaintiff asserts that BofI “consistently maintained a

22

low ALL” that was a half to a whole percentage point below the average ALL for

23

comparable financial institutions and that was allegedly attributable to “strong credit

24

discipline.” And yet, Lead Plaintiff has failed to explain how merely having a low

25

loan loss reserve is enough to render its loan loss calculation false or misleading. As

26

the Third Circuit explained in Shapiro, loan loss reserve calculations are a question of

27

economic judgment and can be calculated and evaluated in a variety of ways. The

28

Court, therefore and absent any ascertainable theory of how BofI specifically
31
3:15-CV-02324-GPC-KSC

1

materially misrepresented its ALL calculation, cannot conclude that BofI’s loan loss

2

reserve calculation was a falsehood as opposed to an economic judgment that, in

3

hindsight, proved to be unwise or imprudent or negligent.12 See In re GlenFed, Inc.

4

Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994) (“In order to allege the circumstances

5

constituting fraud, plaintiff must set forth facts explaining why the difference

6

between the earlier and the later statements is not merely the difference between two

7

permissible judgments, but rather the result of a falsehood.”); see also South Ferry,

8

542 F.3d at 784 (“The purpose of this heightened pleading requirement was generally

9

to eliminate abusive securities litigation and particularly to put an end to the practice

10

of pleading “fraud by hindsight.”).
Accordingly, the Court finds that BofI’s loan loss reserve calculations, along

11
12

with its statements about how it calculates that figure,13 are insufficiently pleaded to

13

withstand scrutiny under Rule 9(b) and the PSLRA.

14

B. Net Income and Diluted Shares
Lead Plaintiff asserts that BofI’s statements announcing its net income and

15
16

diluted price per share were also false and misleading when made for the same

17

“reason or reasons” identified above. See SAC ¶ 246 (Form 10-K 2013), ¶ 256 (Form

18

10-Q Q1 2014), ¶ 269 (Form 10-Q Q2 2014), ¶ 283 (Form 10-Q Q3 2014), ¶ 302

19

(Form 10-K 2014), ¶ 313 (Form 10-Q Q1 2015), ¶ 327 (Form 10-Q Q2 2015), ¶ 339

20

(Form 10-Q Q3 2015), ¶ 360 (Form 10-K 2015), ¶ 386 (Form 10-Q Q1 2016).

21
22
23
12

24
25
26
27
28

Indeed, even if Lead Plaintiff could have made such a demonstration, it is doubtful that Lead
Plaintiff, given the way they chose to organize the complaint, could have successfully argued that
the SAC’s allegations gave rise to a strong inference that the allegedly false or misleading ALL
statements had been made with the requisite scienter.
13
See SAC ¶¶ 247, 303, 361 (“[A]llowance for loan losses is maintained at a level estimated to
provide for probable incurred losses in the loan portfolio,” . . . [] “management performs an ongoing
assessment of the risks inherent in the portfolio.”); see also id. ¶ 293 (“[o]ur current level of loan
loss reserve reflects the low-risk and low loan-to-value ratio in the current portfolio.”).

32
3:15-CV-02324-GPC-KSC

1

The Court, however, finds that the “reason or reasons” provided by Lead

2

Plaintiff, which are the same as those identified supra Section I.3.A, do not state with

3

sufficient particularity why BofI’s stated income and diluted price per share,

4

specifically, were false or misleading when made. See Metzler, 540 F.3d at 1070

5

(“But this Circuit has consistently held that the PSLRA’s falsity requirement is not

6

satisfied by conclusory allegations that a company’s class period statements regarding

7

its financial well-being are per se false based on the plaintiff’s allegations of fraud

8

generally.”). By asserting that the “reason or reasons” giving rise to the falsity of

9

these statements span hundreds of paragraphs of factual allegations, Lead Plaintiff

10

left it up to the Court to infer falsity from the SAC’s allegations of fraud generally.

11

Lead Plaintiff, however, cannot place that onus upon the Court as it is their

12

responsibility to explain with particularity why the misconduct alleged in the SAC

13

rendered BofI’s net income and diluted price per share false at the time they were

14

announced. Accordingly, the Court finds that BofI’s statements concerning its

15

income and diluted price per share do not provide an independent basis for securities

16

fraud.

17
18

C. Loan-to-Value Ratio
The last category of financial results that Lead Plaintiff challenges are BofI’s

19

loan-to-value or LTV figures. See SAC ¶ 248 (Form 10-K 2013), ¶ 258 (Form 10-Q

20

Q1 2014), ¶ 271 (Form 10-Q Q2 2014), ¶ 285 (Form 10-Q Q3 2014), ¶ 304 (Form

21

10-K 2014), ¶ 315 (Form 10-Q Q1 2015), ¶ 329 (Form 10-Q Q2 2015), ¶ 339 (Form

22

10-Q Q3 2015), ¶ 362 (Form 10-K 2015), ¶ 388 (Form 10-Q Q1 2016). Defendants

23

argue that Lead Plaintiff has failed to demonstrate that these figures were false or

24

misleading because the SAC’s anecdotal allegations concerning loans issued with

25

high LTVs are not enough to render the LTV numbers false or misleading. The Court

26

agrees.

27

Again, and as an initial matter, a couple of the SAC’s statements about BofI’s

28

weighted LTV average are not actionable because they are not “capable of objective
33
3:15-CV-02324-GPC-KSC

1

verification.” Paragraphs 304 and 248 of the SAC include the following allegedly

2

false and misleading statements made by BofI:

5

BofI stated that “[w]e believe our weighted-average LTV of
[54.68%/55.98$] at origination has resulted and will continue to result in
the future, in relatively low average loan defaults and favorable write-off
experience.”

6

SAC ¶¶ 248, 304. Yet as explained above, statements of opinion, such as those

7

prefaced with “we believe” are not actionable because subjective and optimistic

8

statements about the Company’s future cannot be measured for its truth or falsity.

9

Accordingly, the Court concludes that these statements cannot be false or misleading.

3
4

10
11

See Or. Pub. Empls. Ret. Fund, 774 F.3d at 606-07.
That said, the main crux of Lead Plaintiff’s LTV argument is that BofI

12

materially misrepresented its loan-to-value averages in the Form 10-Ks and Form

13

10 Qs issued during the Class Period. The Court turns to this next.

14

According to Lead Plaintiff, BofI’s stated weighted LTV ratios were false and

15

misleading when made because “BofI’s average LTV failed to account for

16

undisclosed high risk loans BofI issued. (See ¶¶ 43-157).” See, e.g., SAC ¶¶ 248,

17

255. Yet as Defendants point out, the SAC does not “show that BofI’s disclosed

18

average and median LTV ratios are false, as the average and median easily accounts

19

for the handful of higher LTV loans alleged in the SAC.” Dkt. No. 88-1 at 26. For

20

instance, at ¶¶ 55, 64, 187-190, the SAC describes a number of loans that were made

21

with high LTVs, upwards of 70%. But the mere fact that BofI issued some loans with

22

high LTVs is not enough to render the loan-to-value ratio false.

23

The statements that Lead Plaintiff identifies as false and misleading in BofI’s

24

Q1 2014 10-Q disclose that BofI had $139,120,000 in multifamily loans with a LTV

25

between 66%–75%; $6,332,000 in multifamily loans with a LTV of 76%–80%;

26

$1,886,000 in multifamily loans with a LTV greater than 80%; along with $2,087,000

27

in commercial loans with a LTV between 61%–70%; and $943,000 in commercial

28

loans with a LTV of 71%–80%. See, e.g., SAC ¶ 258. The Court has no reason to
34
3:15-CV-02324-GPC-KSC

1

believe, and Lead Plaintiff has offered no such reason demonstrating, that the high

2

LTV loans identified by the SAC are not included within these disclosed figures.

3

Accordingly, the Court has no basis for concluding that the LTV ratios were false or

4

misleading when made, even when considering the LTV calculations in light of the

5

anecdotal allegations in the complaint.

6

The Court further concludes, and as it stated in greater detail above, that the

7

other “reason or reasons” offered by Lead Plaintiff to explain the LTV ratios’ falsity,

8

the same as those stated supra Section I.3.A, are likewise insufficiently particularized

9

to withstand review. The SAC’s general allegations of fraud are inadequate to

10

demonstrate that BofI’s LTV calculations, as reported in their financial disclosures,

11

were false and misleading when made. See Metzler, 540 F.3d at 1071 (“But this

12

Circuit has consistently held that the PSLRA’s falsity requirement is not satisfied by

13

conclusory allegations that a company’s class period statements regarding its

14

financial well-being are per se false based on the plaintiff’s allegations of fraud

15

generally.”). Accordingly, the Court concludes that BofI’s statements concerning its

16

LTV ratios do not provide an independent basis for securities fraud.

17
18

D. Lending Partnerships
Another theory of fraud that Lead Plaintiff proffers is that Defendants made

19

“false or misleading statements” about lending partnerships that they did not disclose

20

to investors. The SAC asserts that BofI entered into a number of lending partnerships

21

with companies that made high-risk loans and in so doing “deceptive[ly]

22

transfer[red]” those “high-risk loans off BofI’s balance sheet to artificially improve

23

the Company’s performance.” Defendants, in turn, seek to undermine these

24

allegations by arguing, in part, that Lead Plaintiff has failed to demonstrate that it had

25

any duty to disclose those lending partnerships in its public filings.

26

The Court reiterates, however, that the Section 10(b) inquiry is not solely

27

concerned with whether any of BofI’s alleged lending partnerships amounted to

28

regulatory violations, but whether or not BofI materially misrepresented those
35
3:15-CV-02324-GPC-KSC

1

partnerships. See Santa Fe, 430 U.S. at 473-74 (holding that “Only conduct

2

involving manipulation or deception is reached by Section 10(b) or Rule 10b-5” and

3

that Section 10(b) does not create a federal cause of action for fiduciary breaches and

4

corporate misconduct not involving manipulation or fraud). With that framework in

5

mind, therefore, the Court must focus, here, on whether any of Defendants’

6

statements about its lending partnerships materially misrepresented the state of those

7

partnerships.14
Lead Plaintiff identifies the following statements about BofI’s undisclosed

8
9
10

lending partnerships, which appear in successive 10-Qs and 10-Ks issued during the
Class Period, as false and misleading:

11

BofI described its off-balance sheet commitments as of June 30, 2013 to
consist of [1] “commitments to originate loans with an aggregate
outstanding principal balance of $246.0 million, commitments to sell
loans with an aggregate outstanding principal balance at the time of sale
of $106.3 million[.]” BofI further stated that it has [2] “no commitments
to purchase loans, investment securities or any other unused lines of
credit.” BofI indicates further down in the 2013 Form 10-K that [3] “[t]he
fair value of off-balance sheet items is not considered material.

12
13
14
15
16
17

SAC ¶ 252 (2013 Form 10-K) (brackets added).15

18
19

As an initial matter, the Court notes that it is dubious whether or not the first
and third statements are actionable as a threshold matter. Statements about BofI’s

20
21
22
23
24
25
26
27
28

14

To the extent that the SAC could be viewed as asserting an omission theory of fraud based on
BofI’s undisclosed lending partnerships, the Court finds such a theory to be lacking. “Absent a duty
to disclose, an omission does not give rise to a cause of action under § 10(b) and Rule 10b–5.”
Retail Wholesale, 845 F.3d at 1278. Yet as Defendants point out, “Plaintiff identified no
affirmative duty requiring BofI to disclose the identity of these entities in its public filings.” Dkt.
No. 88-1 at 23.
15
Identical statements appear in the 10-K and 10-Q forms that followed this announcement. See
¶ 259 (Q1 2014 Form 10-Q), ¶ 272 (Q2 2014 Form 10-Q), ¶ 286 (Q3 2014 Form 10-Q); ¶¶ 306-07
(2014 Form 10-K), ¶ 316 (Q1 2015 Form 10-Q), ¶ 330 (Q 2 2015 Form 10-Q), ¶ 342 (Q3 2015
Form 10-Q), ¶¶ 363-64 (2015 Form 10-K, mislabeled as 2014 Form 10-K), ¶ 389 (Q1 2016 Form
10-Q). The only material difference is the amount of BofI’s off-sheet origination commitments and
selling commitments as stated in each form.
36
3:15-CV-02324-GPC-KSC

1

“commitments” to take certain actions has the “aspirational” quality that was found

2

insufficient in Retail Wholesale, 845 F.3d at 1276. The Court further notes that

3

BofI’s “commitment” statements are also problematic because they are forward-

4

looking, as a “commitment” inherently involves a promise to take action in the future.

5

See Todd, 642 F.3d at 1221 (forward-looking statements, unlike actionable

6

statements, are not “descriptive of historical fact.”). The Court also has its

7

reservations about the third statement’s actionability because whether the fair value

8

of an asset is “material” is a fact charged with business judgment about which two

9

reasonable minds could differ. See In re GlenFed., 42 F.3d at 1549 (“In order to

10

allege the circumstances constituting fraud, plaintiff must set forth facts explaining

11

why the difference between the earlier and the later statements is not merely the

12

difference between two permissible judgments, but rather the result of a falsehood.”).

13

Yet even if these statements are actionable as misleading, they are still

14

insufficient as a basis for securities fraud because Lead Plaintiff has failed to provide

15

sufficiently coherent and particularized reasons why these statements were rendered

16

“false or misleading” by BofI’s lending partnerships. The reasons offered by Lead

17

Plaintiff mirror those offered above, see supra Section I.3.A. It is, however, not

18

remotely clear to the Court how BofI’s “lax” lending practices, improperly calculated

19

ALL and LTV, or failure to enforce adequate internal controls renders BofI’s

20

“commitment to purchase loans, investments securities or any other unused lines of

21

credit” false or misleading.

22

Moreover and more importantly, Lead Plaintiff has also not explained how

23

BofI’s allegedly illicit and nondisclosed lending partnerships render the value of their

24

off-balance sheet commitments, as stated in the statements identified above, false or

25

misleading. Lead Plaintiff’s allegations concerning BofI’s lending partners, see SAC

26

¶¶ 69-113, focus on whether BofI’s undisclosed lending partnerships were

27

inconsistent with BofI’s “purported conservative and disciplined lending standards,”

28

rather than whether they were specifically inconsistent with the above statements.
37
3:15-CV-02324-GPC-KSC

1

For example, Lead Plaintiff asserts that BofI’s partnerships with the described entities

2

are problematic because the partners partake in “abusive marketing practices,” control

3

failures, and “unsafe and unsound lending.” Id. ¶ 72. But even if such conclusions

4

were true, the mere existence of a legally questionable relationship does not, on its

5

own, render the above statements false or misleading.

6

Lead Plaintiff’s allegations discuss the value of some of BofI’s lending

7

partnerships, but they do not provide enough details for this Court to conclude that

8

the money and business they earned from those partnerships, however fraught they

9

were, materially superseded their disclosed “commitments.” According to the SAC,

10

BofI was “primary responsible” for originating $184.08 million in loans for OnDeck,

11

id. ¶ 76, had a balance of $11.78 million in BofI-originated loans from its relationship

12

with QuickBridge, id. ¶ 83, and it issued a $31.9 million loan to Propel Tax at one

13

point, id. ¶ 96. Lead Plaintiff, however, has failed to explain how the value of these

14

loan originations was “material” or otherwise in excess of the loans that BofI planned

15

to originate off-sheet for any given fiscal period.
Accordingly, the Court concludes that BofI’s statements about the value and

16
17

commitments of its off-balance sheet activities are not actionable statements for

18

purposes of Lead Plaintiff’s securities fraud suit.16

19

II. Violations of Section 20(a) of the Exchange Act

20

Section 20(a) of the Securities Exchange Act codifies derivative liability for

21

those persons who “control” a primary violator of the Securities Exchange Act. 15

22

U.S.C. § 78t; see also Hateley v. S.E.C., 8 F.3d 653, 656 (9th Cir. 1993) (“As we

23

have stated, Section 20(a) is a means of imposing vicarious liability on controlling

24

persons”). Lead Plaintiff, accordingly and in addition to their Section 10(b) claims,

25
26
27
28

In making this conclusion, the Court does not foreclose the argument that BofI’s allegedly
undisclosed lending partnerships constitute a “reason or reasons” why BofI’s other actionable
statements were false and misleading when made.
16

38
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1

have alleged that the individual defendants — that is, Garrabrants, Micheletti,

2

Grinberg, Mosich, and Argalas — are vicariously liable as “controlling persons” of

3

BofI based upon BofI’s alleged predicate violation of § 10(b) of the Act.17 SAC

4

¶¶ 466-71.

5

1. Nature of Control Person Liability

6

Congress intended for control person liability under Section 20(a) “to prevent

7

evasion of the law by organizing dummies who will undertake the actual things

8

forbidden. In other words, § 20(a) was intended to impose liability on controlling

9

persons, such as controlling shareholders and corporate officers, who would not be

10

liable under respondeat superior because they were not the actual employers.”

11

Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1577 (9th Cir. 1990). As the

12

Eleventh Circuit explained in Laperriere v. Vesta Ins. Grp., Inc.:

13

In congressional hearings preceding the passage of the Act, Congress
referred to correcting the “dangerous and unreliable system of depending
upon dummy directors” that lacked any accountability or responsibility.
The House of Representatives Report accompanying the Act summarized
section 20(a) and clarified that Congress intended to achieve its purpose
by making a person who controls a person subject to the act . . . liable to
the same extent as the person controlled unless the controlling person
acted in good faith.

14
15
16
17
18
19

526 F.3d 715, 721 (11th Cir. 2008) (per curiam) (emphasis in original) (internal

20

citations and footnotes omitted). By holding persons who “were able, directly or

21

indirectly, to exert influence on the policy and decision-making process of others”

22

liable, Congress sought to hold accountable “the [person] who stands behind the

23

scenes and controls the [securities violator] who is in a nominal position of

24

authority.” Wool v. Tandem Computers Inc., 818 F.2d 1433, 1441 (9th Cir. 1987)

25
26
17

27
28

The Court previously determined that Lead Plaintiff had adequately stated control person liability
as to Garrabrants. See First Motion to Dismiss Order, Dkt. No. 64 at 27. Because Defendants have
failed to present new argument demonstrating why this conclusion should be disturbed, the Court
adheres to its previous decision.
39
3:15-CV-02324-GPC-KSC

1

(quoting 18 Cong. Rec. 8086, 8095 (1934)) (remarks of Rep. Lea) (additions in

2

original), reversed on other grounds by Hollinger, 914 F.2d 1564.

3

Accordingly, a defendant need not be primarily liable under Section 10(b), or

4

any other security law, in order to be liable under Section 20(a).18 See Teamsters

5

Local 617 Pension & Welfare Funds v. Apollo Grp., Inc., 690 F. Supp. 2d 959, 963

6

(D. Ariz. 2010). Rather, and as the Ninth Circuit has articulated, “a defendant

7

employee of a corporation who has violated the securities law will be jointly and

8

severally liable to the plaintiff, as long as the plaintiff demonstrates a primary

9

violation of federal securities law and that the defendant exercised actual power or

10

control over the primary violator.” Zucco, 552 F.3d at 990 (citations omitted).

11

The issue of control is a complex and fact-intensive question. See, e.g.,

12

Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000) (“Whether [the

13

defendant] is a controlling person is an intensely factual question, involving scrutiny

14

of the defendant’s participation in the day-to-day affairs of the corporation and the

15

defendant’s power to control corporate actions.”); see also Wool, 818 F.2d at 1441

16

(“the issue of control is a complex question of fact requiring a close examination of

17

the particular situation and organization”). And because “the concept of control, in

18

the context of the securities law, is an elusive notion for which no clear-cut rule or

19

standard can be devised, the two-pronged test for establishing control should be

20
21
22
23
24
25
26
27
28

18

The Court, in its First Motion to Dismiss Order, Dkt. No. 64, dismissed the Section 20(a) claims
without prejudice against Micheletti, Grinberg, Mosich, and Argalas based on the fact that Lead
Plaintiff had failed to allege primary securities violations against them. Lead Plaintiff had argued in
a conclusory fashion that their control person allegations against those defendants were legally
sufficient because their Section 10(b) violations against them were sufficient and because they
adequately alleged control. See Dkt. No. 40 at 31. Yet because the Court disagreed with Lead
Plaintiff’s premise and was not otherwise persuaded by their perfunctory argument as to control, it
dismissed the Section 20(a) allegations against Micheletti, Grinberg, Mosich, and Argalas. The
Court notes, however, that it is not bound by that reasoning now that Lead Plaintiff has amended
their Section 20(a) claims and fully briefed the legal issues concerning the sufficiency of those
claims as they pertain to Micheletti, Grinberg, Mosich, and Argalas. Defendants’ argument to the
contrary, therefore, is misplaced and unpersuasive.
40
3:15-CV-02324-GPC-KSC

1

construed liberally and flexibly.” Id.; see also Myzel v. Fields, 386 F.2d 718, 738

2

(8th Cir. 1967) (stating that Section 20(a) is “remedial” in purpose and should be

3

“construed liberally”).

4

2. The Prima Facie Case and the Good Faith Defense

5

Section 20(a) provides that:

6

Every person who, directly or indirectly, controls any person liable under
any provision of this chapter or of any rule or regulation thereunder shall
also be liable jointly and severally with and to the same extent as such
controlled person to any person to whom such controlled person is liable,
unless the controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause of
action.

7
8
9
10
11

15 U.S.C. § 78t.19 To state a prima facie case for Section 20(a) liability, a plaintiff

12

must prove: (1) “a primary violation of federal securities laws” and (2) “that the

13

defendant exercised actual power or control over the primary violator.” Howard, 228

14

F.3d at 1065. Because the Court has already determined that Lead Plaintiff has

15

adequately pleaded a primary violation of § 10(b) as to BofI, the current focus is on

16

whether Lead Plaintiff’s control person allegations are sufficient to hold Micheletti,

17

Grinberg, Argalas, and Mosich accountable for that primary violation.20

18

To establish the liability of a controlling person, “the plaintiff does not have the

19

burden of establishing that person’s scienter distinct from the controlled corporation’s

20

scienter.” See Arthur Children’s Trust v. Keim, 994 F.2d 1390, 1398 (9th Cir. 1993).

21

The plaintiff also does not have the burden of demonstrating that the defendant was a

22

culpable participant in the violation. Howard, 228 F.3d at 1065; see also Hollinger,

23
24
25
26
27
28

The definition of “person” under the Act includes a “company.” 15 U.S.C. § 78c(a)(9); Todd,
642 F.3d at 1223.
20
The Court observes that it has upheld Lead Plaintiff’s § 10(b) securities fraud claim against
Defendant Garrabrants as well as the corporate defendant, BofI. The SAC, however, predicates
“control person” liability only on the remaining individual Defendants’ control over BofI and not
over Garrabrants. See, e.g., SAC ¶ 470. Accordingly, the Court will analyze the sufficiency of
Lead Plaintiff’s control person allegations only as they pertain to BofI.
19

41
3:15-CV-02324-GPC-KSC

1

914 F.2d at 1575 (holding that plaintiff is not required to show “culpable

2

participation” to establish control person liability). Instead, the burden rests on the

3

defendant to plead and prove that “he acted in good faith and did not directly or

4

indirectly induce the act or acts constituting the violation.” Todd, 642 F.3d at 1223.

5

If, therefore, a defendant can demonstrate both a lack of scienter and an effective lack

6

of participation in the underlying violation, the defendant is entitled to a good faith

7

defense. Howard, 228 F.3d at 1066.

8
9

The SEC’s regulations define “control” as “ the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of a

10

person, whether through the ownership of voting securities, by contract, or

11

otherwise.” 17 C.F.R. § 230.45; see also Maher v. Durango Metals, Inc., 144 F.3d

12

1302, 1305 (10th Cir. 1998) (“The SEC’s definition of “control” reflects th[e]

13

remedial purpose” of section 20(a)”); Paracor Fin., Inc. v. Gen. Elec. Capital Corp.,

14

96 F.3d 1151, 1162 (9th Cir. 1996) ( “As the definition suggests our inquiry must

15

revolve around the ‘management and policies’ of the corporation, not around discrete

16

transactions.”). Furthermore and in the Ninth Circuit, indicia of control include:

17

“Whether the person managed the company on a day-to-day basis and was involved

18

in the formulation of financial statements, which is sufficient to presume control over

19

the transactions giving rise to the alleged securities violation.” Todd, 42 F.3d at 1223

20

(internal citations omitted); see also Howard, 228 F.3d at 1065.

21

“Ordinarily,” however, “the status or position of an alleged controlling person,

22

by itself is insufficient to presume or warrant a finding of power to control or

23

influence.” Wool, 818 F.3d at 1441. Yet “although a person’s being an officer or

24

director does not create any presumption of control. It is a sort of red light.” Arthur,

25

994 F.2d at 1397 (9th Cir. 1993) (citing 4 Loss & Seligman, Securities Regulation

26

1724 (1990)) (emphasis in Loss & Seligman). “It is,” moreover, “not uncommon for

27

control to rest with a group of persons, such as the members of the corporation’s

28

management.” Id.
42
3:15-CV-02324-GPC-KSC

1

3. Pleading Requirements of Section 20(a) Allegations

2

Before reaching the merits of Lead Plaintiff’s control person allegations, the

3

Court must first address the parties’ dispute concerning whether such allegations are

4

measured by the heightened pleading requirements of Rule 9(b) or by the more

5

permissive standard articulated in Rule 8(a). For the following reasons, the Court

6

concludes that Lead Plaintiff’s control-person allegations are sufficient if they meet

7

the notice-pleading standard.

8

Rule 8(a) requires a plaintiff to state “a short and plain statement of the claim

9

showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a). Such a claim must

10

be a plausible on its face. See Iqbal, 556 U.S. at 678. That is, the pleading must state

11

enough facts “to raise a reasonable expectation that discovery will reveal evidence”

12

of the misconduct alleged. Twombly, 550 U.S. at 545. Rule 9(b), by contrast and as

13

stated above, requires plaintiffs to “state with particularity the circumstances

14

constituting fraud.” Fed. R. Civ. P. 9(b). To satisfy the Rule 9(b) standard, a plaintiff

15

must identify the “who, what, when, where, and how of the misconduct charged,” as

16

well as “what is false or misleading about the [fraudulent statement], and why it is

17

false.” Evbeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010).

18

The Ninth Circuit has not yet had occasion to address whether a Section 20(a)

19

claim is or may be subject to the heightened pleading requirements of Rule 9(b). See,

20

e.g., Apollo, 690 F. Supp. 2d at 966. As a consequence and in the absence of such a

21

decision, district courts in this circuit have reached opposite conclusions. Some have

22

determined that only the less stringent standard of Rule 8(a) applies. See, e.g., id.

23

(holding that Rule 8(a) provides the governing pleading standard for Section 20(a));

24

see also In re Washington Mut., Inc. Sec. Deriv. & ERISA Litig., 259 F.R.D. 490,

25

502-04 (W.D. Wash. 2009) (concluding that Rule 8(a) applies to plaintiffs’ claims

26

under Section 15 of the Securities Act because “control person liability do[es] not

27

directly touch on circumstances that constitute fraud.”); In re Countrywide Fin. Corp.

28

Sec. Litig., 588 F. Supp. 2d 1132, 1201 (C.D. Cal. 2008) (concluding that “the control
43
3:15-CV-02324-GPC-KSC

1

element is not a circumstance that constitutes fraud and therefore need not be pled

2

with particularity”). Others have concluded that Rule 9(b) applies to control person

3

allegations. See, e.g., Shurlin v. Golden State Vintners Inc., 471 F. Supp. 2d 998,

4

1027 (N.D. Cal. 2006) (“Where a plaintiff asserts a section 20(a) claim based on an

5

underlying violation of section 10(b), the pleading requirements for both violations

6

are the same”); see also In re Ramp Networks, Inc. Sec. Litig., 201 F. Supp. 2d 1051,

7

1063 (N.D. Cal. 2002) (same); Howard v. Hui, 2001 WL 1159780, *4 (N.D. Cal.

8

Sept. 24, 2001) (concluding that “Plaintiff’s section 20(a) claim is an allegation of

9

fraud.”).

10
11
12

This Court, however, is not persuaded that Section 20(a) control person
allegations are governed under Rule 9(b).
Rule 9(b) requires a plaintiff alleging fraud to state with particularity the

13

circumstances constituting that fraud. Fed. R. Civ. P. 9(b). Naturally then, and as

14

described above, a plaintiff alleging securities fraud under § 10(b) of the Act must

15

comply with the heightened pleading requirements of Rule 9(b) (as well as the

16

PSLRA requirements). Tellabs, 551 U.S. at 319. As the Court concluded in the First

17

Motion to Dismiss Order and as it concludes again today, Lead Plaintiff has pleaded

18

with particularity that BofI made material misrepresentations or omissions with

19

scienter. Lead Plaintiff has, therefore, stated a primary violation of the securities

20

laws and met the first element of a Section 20(a) claim.

21

Thus and having already concluded that Lead Plaintiff has adequately pled a

22

§ 10(b) securities violation against BofI, the question then becomes whether any

23

other individuals can be held vicariously liable for that violation. To that end, the

24

second element of a Section 20(a) claim directs plaintiffs to proffer allegations

25

demonstrating that the defendant exercised actual power or control over the primary

26

violator such that that defendant, too, can be held accountable for the primary

27

violation.

28
44
3:15-CV-02324-GPC-KSC

1

What is necessary, however, to plead the circumstances constituting control

2

does not amount to circumstances constituting fraud. Liability for control-person

3

violations does not depend on the defendant’s “culpable participation” in the

4

underlying primary violation. That is to say, plaintiffs need not show that the

5

defendant “affirmatively participated in the alleged fraudulent securities transaction”

6

in order to be liable under Section 20(a). See Kersh v. Gen. Council of Assemblies of

7

God, 804 F.2d 546, 549-50 (9th Cir. 1986), overruled by Hollinger, 914 F.2d 1564

8

(“culpable participation” not required to plead Section 20(a) violation). There is also

9

no requirement that the plaintiff plead the scienter of the individual defendant in

10

order to state a Section 20(a) claim. See Arthur, 994 F.2d at 1398 (“If the plaintiff

11

had this obligation [to demonstrate scienter], the controlling person provision would

12

hardly make anyone liable who would not be so otherwise”). Rather, the § 20(a)

13

statute premises liability solely on the control relationship, subject to the good faith

14

defense. Hollinger, 914 F.2d at 1575 (“Thus, the statute premises liability solely on

15

the control relationship, subject to the good faith defense.”).

16

Whether there is a control relationship between the defendant and the primary

17

violator is a question separate and apart from the issue of fraud. The control inquiry,

18

as defined by the Ninth Circuit, does not require any analysis of the “who, what,

19

where, when, and how” of any discrete instance of fraud or any explanation of what

20

made a statement or action “misleading” or “false.” Rather, and contrary to what

21

Defendants suggest, the control analysis requires Courts to inquire into the “realities

22

of business relationships,” Wool, 818 F.2d at 1441, and the “management and

23

policies” of the corporation, 15 U.S.C. § 78t, and to identify indicia of control in

24

support of vicarious liability, Paracor Finance, 96 F.3d at 1162. As such, the focus

25

is not on the transactions giving rise to the alleged securities violation, but whether a

26

court can rightly presume control over those transactions by virtue of the relationship

27

between the defendant and the primary violator. See id. The allegations concerning

28
45
3:15-CV-02324-GPC-KSC

1

that relationship, therefore, need not include circumstances constituting fraud and

2

thus need not be plead under Rule 9(b).

3

Indeed, although the Ninth Circuit has yet to speak on this issue, the Eighth

4

Circuit has similarly concluded, in an uncontroversial manner, that questions of

5

control under Section 20(a) are analyzed under Rule 8(a). Lustgraaf v. Behrens, 619

6

F.3d 867, 875 (8th Cir. 2010). (“Unlike the first prong of our control-person tests,

7

where fraud is at issue, the second and third prongs involve questions of control and

8

are therefore analyzed under our ordinary notice-pleading standard.”).

9

The Court further notes that it is not persuaded by Defendants’ citation to In re

10

Volkswagen “Clean Diesel” Mktg., Sales Practices & Prod. Liab. Litig., 2017 WL

11

66281 (N.D. Cal. Jan. 4, 2017) in support of its position that Rule 9(b) applies. The

12

In re Volkswagen court relied on Howard v. Hui, which had cited to In re GlenFed

13

Sec. Litig., 60 F.3d 591 (9th Cir. 1995), and Berry v. Valence Tech., Inc., 175 F.3d

14

699 (9th Cir. 1999), for the proposition that Rule 9(b) applied to Section 20(a)

15

pleadings. In re GlenFed, however and upon which Berry relied, did not hold that

16

Rule 9(b) applies to the control element of a Section 20(a) violation. Accordingly

17

and in light of the fact that subsequent Ninth Circuit cases addressing Section 20(a)

18

pleading standards do not so state that control person allegations are analyzed under

19

Rule 9(b), the Court declines to apply such a heightened pleading standard. See, e.g.,

20

No. 84 Employer-Teamster Joint Council Pension Fund v. America West Holding

21

Grp., 320 F.3d 920, 945-46 (9th Cir. 2003); see also Apollo, 690 F. Supp. 2d at 969

22

(internal citation omitted) (concluding that In re GlenFed does not support position

23

that Rule 9(b) applied to control person allegations).

24

4. Control Person Allegations

25

Defendants argue that the SAC fails to state a Section 20(a) claim against

26

Micheletti and the Audit Committee Defendants. For the following reasons, the

27

Court concludes that Lead Plaintiff’s control person allegations are sufficient to state

28
46
3:15-CV-02324-GPC-KSC

1

a claim against Micheletti, Mosich, Argalas and Grinberg and further concludes that

2

this decision would not be disturbed even if Rule 9(b) applied.

3

A. Micheletti

4

A review of the complaint demonstrates that it properly alleges a control

5

relationship between Micheletti and BofI. Micheletti is BofI’s Executive Vice

6

President and Chief Financial Officer, and served BofI in these two capacities

7

throughout the Class Period. SAC ¶ 36. The SAC describes how Micheletti attended

8

weekly meetings at BofI every Friday at noon with Garrabrants, the Senior Vice

9

Presidents, and other “higher level employees”, id. ¶ 229, and also provides details on

10

his “regular” interactions with, and directions made to, a senior accounting officer,

11

id. ¶¶ 166, 177. The SAC further states that Micheletti authored and made statements

12

at presentations made to BofI’s investors on at least five occasions in September

13

2014, February 2014, March 2014, May 2014, and February 2015, id. ¶¶ 310-11.

14

That he spoke on behalf of BofI at conference calls with analysts and investors on

15

November 5, 2013, February 5, 2014, May 6, 2014, August 7, 2014, November 4,

16

2014, January 29, 2015, April 30, 2015, July 30, 2015, and October 29, 2015.

17

Id. ¶¶ 264, 277, 291, 297, 322, 355, 347, 353, 396. That he “reiterated the financial

18

results” for each quarter during those conference calls. Id. And that he signed

19

Sarbanes-Oxley certifications during the Class Period “attesting to their [his and

20

Garrabrants’] responsibility for and knowledge of disclosure controls and procedures

21

. . . as well as BofI’s internal control over financial reporting” for at least eleven

22

fiscal quarters. Id. ¶¶ 253-54, 260, 273, 287, 308, 317, 331, 342, 366, 392, 418.

23

These allegations are sufficient to plead a control violation against Micheletti.

24

Lead Plaintiff has demonstrated, and Defendants concede, that Micheletti was

25

involved in the day-to-day affairs of the corporation. As Executive Vice President

26

and CFO, Micheletti was a member of BofI’s executive management, a fact that is a

27

“red light” in and of itself. Arthur, 994 F.2d at 1397 (“although a person’s being an

28

officer or director does not create any presumption of control. It is a sort of red light
47
3:15-CV-02324-GPC-KSC

1

. . . . [and] [i]t is not uncommon for control to rest with a group of persons, such as

2

the members of the corporation’s management.”). Id. (emphasis in original). He also

3

attended weekly meetings with BofI’s CEO, Senior Vice Presidents, and other high-

4

ranking officers and had frequent interactions with lower-level staff, both of which

5

are probative of his day-to-day involvement in the company.

6

Countless other courts in this circuit have found allegations describing similar

7

executive and managerial responsibility and activities to be sufficient for Section

8

20(a) liability at the motion to dismiss stage. See In re Cylink Sec. Litig., 178 F.

9

Supp. 2d 1077, 1089 (N.D. Cal. 2001) (holding that allegation that defendants “by

10

virtue of their executive and managerial positions had the power to control and

11

influence [Cylink], which they exercised” sufficient to state a control claim against

12

the defendants); see also Backe v. Novatel Wireless, Inc., 642 F. Supp. 2d 1169, 1192

13

(S.D. Cal. 2009) (holding control person allegations sufficiently pleaded based upon

14

the executives’ “positions and their power to control public statements about

15

Novatel” and that defendants had access to confidential information concerning

16

company”); In re New Century, 588 F. Supp. 2d 1206, 1233 (C.D. Cal. 2008)

17

(holding that control personal liability was sufficiently pleaded because complaint

18

“alleged that the Officer Defendants controlled the operation of New Century, and

19

that this caused it to violate Section 10(b) and Rule 10(b)(5)”); In re Metawave

20

Comms. Corp Sec. Litig., 298 F. Supp. 2d 1056 (W.D. Wash. 2003) (concluding that

21

plaintiffs had “sufficiently pled that Defendants . . . exercised actual power or control

22

over any primary violators based on their positions as CEO and CFO”).

23

Lead Plaintiff has, moreover, also demonstrated that Micheletti was involved in

24

the preparation and presentation of financial statements, yet another indicator of

25

control. See Todd, 42 F.3d at 1223. Micheletti authored and spoke at investor

26

presentations that discussed BofI’s underwriting practices, credit quality, investment

27

summaries, and LTV ratios, among other topics. Micheletti also participated in

28

quarterly conference calls with Garrabrants, during which Micheletti “reiterated the
48
3:15-CV-02324-GPC-KSC

1

financial results” for the quarter and answered questions posed by investors, and

2

during which Garrabrants made statements about BofI’s credit quality standards and

3

its conservative underwriting criteria. Finally, Micheletti was also a signatory to

4

BofI’s quarterly SOX certifications which affirmed that the “financials statements,

5

and financial information included in th[e] report,” were fairly presented in “all

6

material respects.” SAC ¶ 253. That Lead Plaintiff has alleged that Micheletti had

7

actual authority over the preparation and presentation of financial statements made to

8

investors and other analysts is also more than sufficient to plead that he had the

9

requisite control over BofI. See Todd, 642 F.3d at 1223 (“Rather, the indicia of

10

“control” include whether the person managed the company on a day-to-day basis

11

and was involved in the formulation of financial statements . . . . Moreover, actual

12

authority over the preparation and presentation to the public of financial statements

13

is sufficient to demonstrate control.”) (emphasis added).

14

Furthermore, and contrary to what Defendants allege, Lead Plaintiff’s

15

allegations even go so far as to demonstrate that Micheletti had specific control over

16

the statements that the Court has found actionable. The majority of the exemplary

17

statements that the Court found actionable with respect to BofI’s loan underwriting

18

standards and regulatory compliance systems, supra Section I.1, were made by CEO

19

Garrabrants during conference calls that were led by Garrabrants and Micheletti.

20

Defendants argue that “it defies common sense to allege that Micheletti (who reports

21

to Garrabrants) had the power to ‘control’ Garrabrants’ oral statements during BofI’s

22

conference calls.” Dkt. No. 95 at 13. The Court disagrees.

23

The control person inquiry requires courts to inquire into the “realities of

24

business relationships” and to construe the standard “liberally and flexibly” in

25

accordance with that reality. Wool, 818 F.2d at 1441. In the instant case, the SAC

26

demonstrates that both Garrabrants and Micheletti were responsible for

27

communicating BofI’s financial results, as evidenced by the fact that they led the

28

quarterly conference calls. Together, they delivered a consistent message to investors
49
3:15-CV-02324-GPC-KSC

1

about its “record” financial results, its loan underwriting standards, and its internal

2

controls, a message that remained similar throughout the Class Period. It is also

3

important to recognize that Micheletti was not a silent bystander during these

4

conference calls. In fact, Micheletti was the one to reiterate the financial results, as

5

they appeared in BofI’s press release or SEC form, for each of the fiscal periods, see,

6

e.g., SAC ¶ 297, and he frequently made statements during those calls in response to

7

analyst inquiries, see, e.g., id. ¶ 300. That Micheletti was present and an active

8

participant during the conference calls where Garrabrants made the majority of the

9

actionable false and misleading statements is sufficient to establish that Micheletti

10

exercised control over the allegedly fraudulent statements at issue.

11

Defendants, instead, would have the Court conclude that Micheletti could not

12

have controlled Garrabrants because Garrabrants was Micheletti’s boss. Such an

13

assertion, however, ignores the reality that “control” can rest collectively with the

14

corporation’s management, see Arthur, 994 F.2d at 1397, and otherwise ignores the

15

reality that Micheletti, like Garrabrants, is a corporate fiduciary who has duties to the

16

Company in addition to Garrabrants. As such, the Court declines to adopt

17

Defendants’ unnecessarily narrow view of the relationship between BofI’s CEO and

18

CFO.

19

What is more, the Court is also not persuaded by Defendants’ argument that

20

Micheletti could not have exercised the requisite control over the actionable

21

statements because he did not speak, or write them, himself. Such a position belies

22

the purpose of Section 20(a) liability. Indeed, if Micheletti was the one who made

23

the challenged statements, he would not just be liable under Section 20(a) but under

24

Section 10(b), for a primary securities violation. See Arthur, 994 F.2d at 1398

25

(observing that if the plaintiff had the obligation to demonstrate that the controlling

26

person was a “culpable participant” in the alleged fraud, the controlling person

27

provision “would hardly make anyone liable who would not be so otherwise.”).

28
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Accordingly, the Court rejects the notion that such a granular level of control is

2

statutorily required to survive a motion to dismiss.

3

The Court’s conclusion is, moreover, consistent with that reached by the Ninth

4

Circuit in Wool v. Tandem. The Wool court found that a plaintiff had adequately

5

alleged a control relationship between the corporation and its Chief Executive

6

Officer, Chief Operating Officer, and Controller based upon the individual

7

defendants’ “direct involvement . . . in the day-to-day affairs of Tandem in general

8

. . . [and] in Tandem’s financial statements in particular.” 818 F.2d at 1441-42.

9

Similarly, here, Micheletti was involved in the day-to-day affairs of BofI and was an

10

active participant in the presentations that disclosed BofI’s financial statements and

11

contained the actionable fraudulent statements. Accordingly and given the key role

12

that Micheletti played during the conference calls, the Court concludes that Lead

13

Plaintiff has pleaded more than enough to establish, at this stage, that Defendant

14

Micheletti’s had a control relationship with BofI.

15
16

B. Audit Committee Defendants
Lead Plaintiff argues that Grinberg, Mosich, and Argalas are also liable as

17

control persons by virtue of their membership on the Audit Committee and the fact

18

that they signed allegedly false or misleading reports in BofI’s 2015 Proxy Statement.

19

Dkt. No. 94 at 18. While the Court is not convinced that the SAC demonstrates that

20

the Audit Committee defendants signed any actionable false or misleading statement,

21

the Court is nonetheless persuaded that the SAC has stated enough allegations to

22

warrant moving forward with its Section 20(a) allegations against the Audit

23

Committee Defendants.

24

Crucially, the SAC alleges that the Audit Committee Defendants each held a

25

position on the Board of Directors, a fact that has been deemed one of the “traditional

26

indicia of control” by the Ninth Circuit. See America West, 320 F.3d at 945

27

(explaining that Paracor Finance had denied § 20(a) liability because one of “the

28

traditional indicia of control,” that is, “having a seat on the board” was not present).
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Grinberg served throughout the Class Period as a Director, Chairman of the Board’s

2

Audit Committee, Chairman of the Board’s Compensation Committee, and a member

3

of the Board’s Nominating Committee. Id. ¶ 446. Mosich served throughout the

4

Class Period as a Director, Vice Chairman of the Board, and member of the Audit

5

Committee. Id. ¶ 447. Argalas served throughout the Class Period as a Director and

6

member of the Audit Committee. Id. ¶ 448. The SAC also alleges that all three

7

Audit Committee Defendants owned stock in the company, yet another one of the

8

“traditional indicia of control” repeated by Paracor Finance and America West. See

9

America West, 320 F.3d at 945 (“owning stock in the target company” was one of the

10
11

“traditional indicia of control.”)
The SAC also alleges that the Audit Committee members “were provided with

12

copies of the Company’s reports and press releases” at issue and that they had the

13

“opportunity to prevent their issuance or cause them to be corrected.” Id. ¶ 417.

14

Moreover, the SAC further demonstrates that the Board of Directors also kept tabs on

15

BofI’s conference calls, or at the very least that they had the power to listen in on

16

those calls and the opportunity to make corrections to the content of those calls where

17

appropriate. Id. ¶ 385 (Director Allrich, at an annual stockholder meeting, “clarified”

18

statements made by Micheletti or Garrabrants during an analyst call on October 14,

19

2015).

20
21
22

The SAC also describes, in detail, the responsibilities of the Audit Committee
members and of the Directors.
As Audit Committee members, Grinberg, Argalas and Mosich were, for

23

instance, primarily responsible for overseeing and monitoring: (1) the integrity of

24

BofI’s financial reporting process, financial statements, and systems of internal

25

controls; (2) compliance with legal and regulatory requirements; (3) the independent

26

auditor’s qualifications, independence and performance; and (4) the performance of

27

BofI’s internal audit function. Id. ¶ 376; see also id. ¶ 421. They were also in charge

28

of “review[ing] the policies and procedures adopted by the Company to fulfill its
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responsibilities regarding the fair and accurate presentation of financial statements in

2

accordance” with the SEC’s and other regulations. Id. ¶ 375. And they were required

3

to “[c]onfirm that the Company’s principal executive officer and principal financial

4

officers [we]re satisfying the certification requirements of . . . [SOX]” and to “review

5

disclosure[s] made to the Audit Committee by the CEO and CFO about significant

6

deficiencies and materials weaknesses in the design or operation of internal control

7

over financial reporting.” Id.

8

Furthermore and according to the 2015 Proxy Statement, quoted in the SAC,

9

the Audit Committee “report[s] regularly to the Board of Directors on risk-related

10

matters and provide[s] the Board of Directors with insight about [ ] management of

11

strategic, credit, interest rate, financial reporting, technology, liquidity, compliance,

12

operational and reputational risks.” Id. ¶ 450. The 2015 Proxy Statement goes on to

13

state that the Board “is actively involved in oversight and review of the Company’s

14

risk management efforts either directly or through its standing committees.” Id.

15

Defendant argues that these allegations are insufficient to hold the Audit

16

Committee Defendants accountable as control persons. They assert that Lead

17

Plaintiff has failed to demonstrate that “the Audit Committee, composed entirely of

18

non-executive ‘outside’ directors, was involved in the day-to-day business of BofI” or

19

that they “exercised control over the contents of BofI’s financial statements, press

20

releases, or earnings conference calls.” Dkt. No. 88-1. They argue that absent some

21

indication that the audit committee members “at a minimum, had the ability to control

22

the violator’s alleged fraudulent act,” the Section 20(a) allegations must fail. Dkt.

23

No. 95 at 9. It is, therefore, Defendants’ position that in order to survive the motion

24

to dismiss Lead Plaintiff needed to allege facts demonstrating that the Audit

25

Committee members had the ability to control BofI “with respect to the few

26

statements the Court previously identified as actionable.” Id. at 10. Yet because the

27

SAC fails to plead such facts, Defendants contend that Lead Plaintiff’s allegations

28
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1

amount to no more than a “general” assertion of control person liability “by virtue of

2

their positions on the Audit Committee and their duties thereon.” Id. at 13.

3

None of these arguments are compelling to the Court. First, the Court observes

4

that it does not agree with Defendants’ rigid interpretation of the Ninth Circuit’s

5

precedent concerning the § 20(a) prima facie case. Defendants argue that the SAC

6

must fail because it lacks factual allegations indicating that the Audit Committee

7

Defendants were involved in the day-to-day business of BofI and because it fails to

8

demonstrate that the Audit Committee Defendants had the specific ability to control

9

the actionable fraudulent statements identified above.

10

Defendants’ position, however, ignores the oft-repeated fact that “the concept

11

of control” has “no clear-cut rule or standard” and that it “should be construed

12

liberally and flexibly.” Wool, 818 F.2d at 1441. Defendants would have this Court

13

conclude that involvement in the day-to-day activities of the company is necessary to

14

state a prima facie case. Yet if that were true it would be difficult to hold any outside

15

director accountable for securities fraud, no matter how strong the showing that they

16

were “in some meaningful sense the persons who stood behind the alleged fraud.” Id.

17

(reiterating that the purpose of § 20(a) liability was to hold accountable “the person

18

who stands behind the scenes and controls the securities violator . . . . ”) (brackets

19

omitted). Defendants would also have the Court conclude that the prima facie case

20

requires Lead Plaintiff to demonstrate that the Audit Committee Defendants had the

21

specific ability to control the allegedly false and misleading statements that form the

22

basis of the primary violation. But if that were true, then the Court would be inching

23

dangerously close to shifting the burden of “culpable participation” to the plaintiff,

24

where it does not belong. Todd, 642 F.3d at 1223 (control person status is about

25

“whether the defendant exercised power or control over the primary violator, and the

26

plaintiff “need not show that the defendant was a culpable participant in the

27

violation.”).

28
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Even still, the fact of that matter is that the Ninth Circuit cases addressing the

2

prima facie burden simply do not adhere to the strict list of prerequisites that

3

Defendants propose.

4

Most recently, in America West — which Defendants do not cite — the Ninth

5

Circuit held that the plaintiffs had adequately pleaded control person liability because

6

they had alleged that the corporate defendants had a shareholder relationship with the

7

primary violator, owned 57.4% of stock in the target company, had members on the

8

Board, and had the power to elect the majority of the board and committee members.

9

320 F.3d at 945-46. Accordingly, the court concluded “Viewing the evidence in the

10

light most favorable to Plaintiffs, Plaintiffs have established a prima facie showing

11

that TPG and Continental were “controlling persons” . . .” Id. at 946. Notably, the

12

America West court did not analyze the defendants’ day-to-day control or scrutinize

13

the nexus between the defendant’s ability to control the primary violator and the

14

actionable misrepresentations.

15

Then, in Howard v. Everex, the defendants argued that the CEO and Chairman

16

of the Board could not be held liable as a controlling person because he had nothing

17

to do with the preparation of the financial statements that misrepresented the

18

company’s profitability. Id. at 1063. The court, however, disagreed and instead

19

concluded that the defendants “actual authority over the preparation and presentation

20

to the public of the financial statements” alone was “sufficient to make out a prima

21

facie case.” Id. at 1066 (emphasis added).

22

As for Wool v. Tandem, there, the court focused exclusively on the positions —

23

namely, President/CEO, Senior Vice President/Chief Operating Officer and Vice

24

President/Controller — held by the defendants, their direct involvement in the day-to-

25

day affairs of the corporation and their direct involvement in the corporation’s

26

financial statements. Id. Those factors alone, the court held, were sufficient to

27

satisfy the second element of control-person liability because they were sufficient

28

indicators of control to warrant a claim for vicarious liability. See id.
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Accordingly and because the Wool court did not analyze whether each of the

2

defendants had the power to control the specific misstatements of revenue that were

3

found actionable, but rather the financial statements in general, see id., the Court is

4

not persuaded that Wool instead supports Defendants’ position. Defendants cite to

5

Wool v. Tandem for the proposition that “Although it is not necessary to plead

6

scienter to state a Section 20(a) claim, plaintiff still must plead facts showing that the

7

defendant, at a minimum, had the ability to control the violator’s alleged fraudulent

8

act.” Dkt. No. 95 (citing 818 F.2d at 1441). Yet as stated above, the Wool court’s

9

holding was not so narrowly stated and as such, the Court is not convinced that Wool

10
11

offers the support claimed.
The Court is also not persuaded that Paracor Finance supports Defendants’

12

interpretation of the prima facie burden. Defendants posit, in a footnote, that “A

13

section 20(a) claim may not proceed against a defendant where it is not alleged that

14

he or she had authority to control the speaker with respect to the purportedly

15

wrongful statement.” Dkt. No. 95 at 9. This argument is misplaced. While the

16

Paracor Finance court did analyze at length the defendant-CEO’s alleged “control”

17

over the underlying securities violations, it did so at summary judgment. Here,

18

however, the Court is not evaluating whether Lead Plaintiff has proven control person

19

liability as a matter of law, but whether Lead Plaintiff has stated a claim sufficient “to

20

raise a reasonable expectation that discovery will reveal evidence of the misconduct

21

alleged.” Cafasso, 637 F.3d at 1055 (9th Cir. 2011) (internal citations and omitted).

22

Thus, just because the absence of control over the fraudulent acts at issue is enough to

23

defeat § 20(a) liability at summary judgment does not necessarily mean that a

24

plaintiff must allege such a specific degree of control at the pleading stage. See

25

Lustgraaf, 619 F.3d at 876 (panel concluded that authority was “inapplicable”

26

because it “was not a motion-to-dismiss case and its analysis involved facts that are

27

not part of a plaintiff’s prima facie burden.”).

28
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Furthermore, other courts in this circuit have similarly concluded that it was

2

appropriate to sustain Section 20(a) liability against audit committee defendants at the

3

motion to dismiss stage. As Lead Plaintiff points out, the court in Apollo concluded

4

that investors’ allegations as to an audit committee defendant’s control of the

5

company was sufficient to state a claim for control liability. 690 F. Supp. 2d at 975-

6

77. There, the Court found it sufficient that the defendant sat on the board, owned

7

stock, and that the allegedly false and misleading statements fell within the purview

8

of the audit committee’ duties, as alleged by the complaint. Id. at 976 (“the

9

allegations of [the defendant’s] Audit Committee responsibilities, in conjunction with

10

the broader control allegations, sufficiently allege control person status at this motion

11

to dismiss stage). Similarly, here, Lead Plaintiff has alleged that the Audit

12

Committee Defendants sat on the board, owned BofI stock, and that the allegedly

13

false and misleading statements made about the adequacy of BofI’s internal control

14

departments fell within the purview of the Audit Committee’s duties.

15

Fouad v. Isilon Sys., Inc. also supports Lead Plaintiff’s position. 2008 WL

16

5412397, *11-12 (W.D. Was. 2008). In that case, the court concluded that

17

membership on the audit committee, responsibility for internal controls, independent

18

auditors, and reviewing financial results, press releases and the Company’s code of

19

conduct was sufficient to state control person liability. Id. Defendants attempt to

20

distinguish this case by arguing that there, unlike here, “the audit committee ‘had

21

control over the very mechanism [i.e., revenue recognition standards] intended to

22

prevent the alleged fraud.’” Dkt. No. 95. The Court, however, is not persuaded by

23

Defendants’ misreading of the case.

24

The Fouad court stated that because the audit committee position “relates

25

directly to the subject of Plaintiffs’ fraud allegations,” the court “can infer that [the

26

individual defendants] had control over the very mechanisms intended to prevent the

27

alleged fraud.” Fouad, 2008 WL 5412397 at *12 (emphasis added). Similarly, here,

28

given that the Audit Committee Defendants “were provided with copies of the
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Company’s reports and press releases” and were responsible for “the integrity of

2

BofI’s financial reporting process, financial statements, and systems of internal

3

controls” and “the performance of BofI’s internal audit function,” the Court finds it

4

reasonable to infer that the Audit Committee Defendants had the ability to “control

5

the mechanisms” intended to prevent, at the very least, BofI’s misrepresentations as

6

to the sufficiency of its compliance infrastructure. See America West, 320 F.3d at

7

946 (plaintiff pleading Section 20(a) is entitled to the evidence viewed in the light

8

most favorable to them). In fact, Defendants’ own authority cites to Fouad for the

9

exact proposition that Defendants reject. See In re Galena Biopharma, Inc. Sec.

10

Litig., 117 F. Supp. 1145, 1200 (D. Oregon 2015) (“allegations of membership in a

11

committee whose responsibilities relate directly to the subject of the fraud allegations

12

are sufficient to plead control-person liability.”).

13

In sum, the Court concludes that Lead Plaintiff has sufficiently alleged a

14

control relationship between BofI and the Audit Committee Defendants. See Wool,

15

818 F.2d at 1441 (focus of 20(a) inquiry “should be on how to characterize the

16

relationship between the various alleged controlling persons and the alleged violator

17

of the securities laws.”). By virtue of their positions as Directors and their duties as

18

Audit Committee Members, including oversight of the Company’s financial reporting

19

and internal controls, the Court finds it reasonable to infer that Grinberg, Mosich, and

20

Argalas had the ability to directly or indirectly control, at the very least, BofI’s

21

statements concerning the adequacy of its internal controls and compliance

22

infrastructure, including those statements about BofI’s investments in staffing. The

23

statements that the Court has identified as actionable were made during conference

24

calls and press releases that accompanied and explained the financial results over

25

which the Audit Committee members had the power to correct and for which they

26

had the responsibility to manage. As such and in light of the “remedial” purpose of

27

Section 20(a) and the mandate to construe the statute “flexibly and liberally,” the

28

Court concludes that Lead Plaintiff has alleged enough against Mosich, Argalas, and
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1

Grinberg to survive the motion to dismiss. The burden now passes to Defendants to

2

demonstrate that “they acted in good faith and did not directly or indirectly induce the

3

act or acts constituting the violation or cause of action.” 15 U.S.C. § 78t(a).

4
5

Defendants’ Request for Judicial Notice
Generally, a court cannot consider matters outside of the complaint on a Rule

6

12(b)(6) motion to dismiss, unless those matters are: (1) authenticated documents that

7

have been incorporated by the complaint or (2) facts subject to judicial notice. Lee v.

8

City of Los Angeles, 250 F.3d 668, 689-90 (9th Cir. 2001). Documents may be

9

incorporated into a complaint when the plaintiff “refers extensively” to the document

10

or when the document forms the basis of the plaintiff’s claims. U.S. v. Ritchie, 342

11

F.3d 903, 908 (9th Cir. 2003). Courts may take judicial notice of adjudicative facts

12

that are “not subject to reasonable dispute.” Fed. R. Evid. 201(b). Indisputable facts

13

are those that are “generally known” or that “can be accurately and readily

14

determined from sources whose accuracy cannot be reasonably questioned.” Id.

15

Here, Defendants have requested that the Court take judicial notice of twenty

16

exhibits in connection with Defendants’ motion to dismiss the SAC. The exhibits fall

17

into one of four categories: (1) filings with the SEC, Exhibit 1; (2) filings in the

18

Erhart Case, Exhibits 8 and 11; (3) public records of federal agencies, Exhibits 3-6,

19

10-13, 16, 18; and (4) documents allegedly incorporated by reference by the SAC,

20

Exhibits 2, 7, 9, 14, 15, and 17. Dkt. No. 88-1. Lead Plaintiff, in response, opposes

21

Defendants’ request as to Exhibits 7, 8, 11, and 15 only, and concedes that the other

22

documents can be properly noticed though “not for the truth of the contents of those

23

documents.” Dkt. No. 94-3.

24

SEC filings are the proper subjects of judicial notice as they are not subject to

25

reasonable dispute. See Dreiling v. American Exp. Co., 458 F.3d 942, 946 n.2 (9th

26

Cir. 2006); see also In re New Century, 588 F. Supp. 2d at 1219-20 (taking judicial

27

notice of the SEC filings submitted by Defendants). Accordingly, the Court

28

GRANTS defendants’ request to take judicial notice of Exhibit 1, but the Court will
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1

not, as Lead Plaintiff requests, consider the document for the truth of the matters

2

asserted therein. See In re Bare Escentuals, Inc. Sec. Litig., 745 F. Supp. 2d 1052,

3

1067 (N.D. Cal. 2010) (granting defendants’ request to take judicial notice of SEC

4

filings, but specifying that they will not “where inappropriate” be considered for the

5

truth of the matter asserted.”); see also Curry v. Hansen Medical, Inc., 2012 WL

6

3242447, *3 (N.D. Cal. Aug. 10, 2012) (taking judicial notice of SEC filings, “but

7

not for the truth of the matters asserted therein.”)

8
9

Because the Court did not rely on the other documents included in Defendants’
request and because Defendants’ motion does not make clear how those documents

10

advance Defendants’ argument, the Court DENIES Defendants’ request to take

11

judicial notice of the remaining exhibits. See In re Washington Mutual, Inc. Sec.,

12

Deriv. & ERISA Litig., 259 F.R.D. 490, 495 (W.D. Wash. 2009); see also In re

13

Immune Response Sec. Litig., 375 F. Supp. 2d 983, 996 (S.D. Cal. 2005) (denying

14

defendants’ request for judicial notice in part because the court did not rely on the

15

document and found them irrelevant in deciding the motion to dismiss).

16

CONCLUSION

17

For the foregoing reasons, IT IS HEREBY ORDERED that:

18

1.

Defendants’ Motion to Dismiss, Dkt. No. 88, be DENIED as to the

19

Section 10(b) claims asserted against the corporate defendant BofI,

20

and Defendant Gregory Garrabrants and GRANTED as to

21

Defendants Andrew Micheletti, Nicholas Mosich, Paul Grinberg, and

22

James Argalas.

23

2.

Defendants’ Motion to Dismiss be DENIED as to the Section 20(a)

24

claims asserted against Garrabrants, Andrew Micheletti, Nicholas

25

Mosich, James Argalas, and Paul Grinberg.

26

3.

Defendants’ Motion to Dismiss be GRANTED as to those

27

statements, as identified by this Order, that concern BofI’s (1) Net

28

income/diluted price per share; (2) ALL; (3) LTV; and (4) Lending
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partnerships. Those statements are not actionable for purposes of this

2

securities fraud suit.

3

IT IS SO ORDERED.

4
5

Dated: May 23, 2017

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