Lord Abbett Affiliated Fund, Inc., et al v. Navient Corporation et al

Filing 55

MEMORANDUM. Signed by Judge Gregory M. Sleet on 9/6/2017. (mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
LORD ABBETT AFFILIATED FUND, INC., et
al., Individually and on Behalf of All Others
Similarly Situated,

)
)
)
)
Plaintiffs,
)
)
v.
)
)
NAVIENT CORPORATION, et al.,
)
)
Defendants.
)
~~~~~~~~~~~)

Civ. No. 16-112-GMS
CONSOLIDATED

MEMORANDUM

I.

INTRODUCTION
Lead Plaintiffs, referred to collectively as the Lord Abbett Funds, filed a consolidated

amended class action complaint (the "complaint") alleging violations of Sections 1O(b) and 20(a)
of the Securities Exchange Act of 1934 (the "Exchange Act") and Sections 11, 12(a)(2), and 15 of
the Securities Act of 1933 (the "Securities Act"). 1 (D.I. 36). Defendant Navient Corporation
("Navient") and the Individual Defendants have moved to dismiss the complaint pursuant to Fed.
R. Civ. P. 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"). 2 (D.I. 38). The Underwriter Defendants have joined in the motion to dismiss. 3 (D.I.

The Lord Abbett Funds are comprised of the Lord Abbett Affiliated Fund, Inc., the Lord
Abbett Equity Trust-Lord Abbett Calibrated Mid Cap Value Fund, the Lord Abbett BondDebenture Fund, Inc., and the Lord Abbett Investment Trust-Lord Abbett High Yield Fund.
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The Individual Defendants are John F. Remondi, Somsak Chivavibul, William M.
Diefenderfer, III, Ann Torre Bates, Diane Suitt Gilleland, Linda Mills, Barry A. Munitz, Steven
L. Shapiro, Jane J. Thompson, and Barry L. Williams.
3

The Underwriter Defendants are Barclays Capital Inc., Credit Suisse Securities USA LLC,
Deutsche Bank Securities Inc., Goldman, Sachs & Co., J.P. Morgan Securities, -LLC, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets LLC, RBS Securities Inc., and
Wells Fargo Securities LLC.
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42, D.I. 48). Navient, the Individual Defendants, and the Underwriter Defendants are referred to
herein collectively as the "Defendants." The court has subject matter jurisdiction over this action
pursuant to 28 U.S.C. § 1331 (federal question jurisdiction), 15 U.S.C. § 78aa Gurisdiction for
violations of the Exchange Act), and 15 U.S.C. § 77v Gurisdiction for violations of the Securities
Act). For the following reasons, the motion to dismiss is granted and the complaint is dismissed
with leave to amend.

II.

BACKGROUND
Navient is one of the country's largest servicers of student loans. (D.I. 43 at 3). The

company was formed in April 2014 through a spin-off from Sallie Mae. (D.I. 39 at 2; D.I. 36

ii

81). The complaint is based on various disclosures Navient made between April 17, 2014 and
December 28, 2015, which Defendants have helpfully grouped into three categories: (1) Navient's
'

allowance for loan losses and related financial metrics, (2) Navient's compliance culture, and (3)
Navient's credit facilities. (D.I. 36 ii 1; D.I. 39 at 7-8).

A.

Allowance for Loan Losses

Navient holds a significant portfolio of private education loans ("PELs") on which it earns
net interest income.

(D.I. 36

ii

12; D.I. 39 at 2).

When Navient concludes that a PEL is

uncollectible, the unrecoverable portion of the loan is charged against an allowance for loan losses.
(D.I. 36 ii 89). Navient estimates and maintains an allowance for loan losses at a level sufficient
to cover charge-offs expected over the next two years. (Id.). The complaint alleges that Navient
manipulated loan forbearances-temporary reprieves of distressed borrowers' payment
obligations-to avoid having to classify loans as delinquent. (Id. at

ii 1).

Reporting artificially

low delinquency rates allowed Navient to report artificially low loan loss provisions.

(Id.).

Because loan loss provisions were recorded as expenses against income, Navient was consequently

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able.to report artificially high net interest income. (Id.). In July 2015, Navient disclosed that it
increased its loan loss provision for its PEL segment of business 31. 7%. (Id. at if 177).
B.

Compliance Culture

Navient made several disclosures during the class period regarding its interactions with
federal regulators. For example, on May 9, 2014, Navient disclosed that its wholly-owned
subsidiary Navient Solutions, Inc. ("NSI") had received a civil investigative demand from the
Consumer Financial Protection Bureau ("CFPB") related to its disclosure and assessment of late
fees. (D.I. 36 if 98). On May 13, 2014, the Department of Justice issued a press release announcing
a $60 million settlement of allegations that NSI, Navient, and Sallie Mae charged military service
members excessive rates on student loans, in violation of the Servicemembers Civil Relief Act
("SCRA"). (Id. at if 100). In November 2014, Navient d!sclosed that its wholly-owned subsidiary
Pioneer received a civil investigative demand from the CFPB relating to the rehabilitation ofloans
and collection of defaulted student debt. (Id. at if 142). On February 27, 2015, the Department of
Education announced that it was terminating its contracts with Pioneer and four other private
collection agencies following a review by the Department's Federal Student Aid office, which
"found that agents of [the five entities] made materially inaccurate representations to borrowers
about the loan rehabilitation program." (Id. at iii! 42, 156). On August 24, 2015, Navient disclosed
that NSI received a notice from the CFPB that its Office of Enforcement was considering taking
legal action against NSI regarding its disclosure and assessment of late fees. (Id. at if 186). There
are several other allegations scattered throughout the .complaint regarding other regulations
governing Navient, compliance, and the SCRA. (See, e.g., Id. at iii! 19, 99, 146, 192, 221). For
the reasons explained below, it is difficult to grasp the entirety of the story the complaint is trying

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to tell with respect to Navient's compliance culture, other than the conclusory allegation that it
was not as good as claimed.

C.

Credit Facilities

Navient made several disclosures regarding its credit facilities. For example, on October
20, 2015, Navient disclosed that its borrowing capacity under credit facilities not identified in the
complaint had been reduced. (D.I. 36

~

60). On December 28, 2015, Navient disclosed that the

Federal Home Loan Bank of Des Moines ("FHLB-DM") was reducing the borrowing capacity
available to Navient's wholly-owned subsidiary HICA Education Loan Corporation. (Id.

at~

61).

The complaint alleges that these credit facilities were a source of low-cost borrowing and,
therefore, the reduction in aggregate borrowing capacity, had a material impact on Navient's
liquidity. (Id.

III.

at~

62).

STANDARD OF REVIEW
A.

Rule 12(b)(6)

Under Rule 8(a), a complaint must contain "a short and plain statement of the claim
showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Each allegation "must be
simple, concise, and direct." Fed. R. Civ. P. 8(d)(l). To survive a motion to dismiss under Rule
12(b)(6), a plaintiff must plead facts sufficient to "state a claim to relief that is plausible on its
face." Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009) (quoting Bell At!. Corp. v. Twombly, 550
U.S. 544, 570 (2007)). Courts must accept all well-pleaded factual allegations in the complaint as
true and draw all reasonable inferences in favor of the plaintiff. In re Rockefeller Ctr. Prop., Inc.
Sec. Litig., 311F.3d198, 215 (3d Cir. 2002). The court's review is limited to the allegations in

the complaint, exhibits attached to the complaint, documents incorporated by reference, and items

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subject to judicial notice. Siwulec v. J.M Adjustment Serv., LLC, 465 Fed. App'x 200, 202 (3d
Cir. 2012).

B.

Rule 9(b) & the PSLRA

All securities fraud claims are subject to the heightened pleading requirements of Fed. R.
Civ. P. 9(b) and the PSLRA. Inst. Inv'rs Grp. v. Avaya, Inc., 564 F.3d 242, 253 (3d Cir. 2009).
Rule 9(b) requires plaintiff to "state with particularity the circumstances constituting fraud or
mistake." Put another way, Rule 9(b) requires that a plaintiff set forth "the who, what, when,
where and how" of the alleged fraud. In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir.
1999). Under the PSLRA, plaintiffs must: (1) "specify each statement alleged to have been
misleading and the reason or reasons why the statement is misleading;" and (2) "state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind." Tellabs, Inc. v. Makar Issues & Rights, Ltd., 551 U.S. 308, 321 (2007) (internal citations
and punctuation omitted) (quoting 15 U.S.C. § 78u-4(b)(l) and 15 U.S.C. § 78u-4(b)(2)). "A
complaint can be long-winded, even prolix, without pleading with particularity." Williams v. WMX

Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997).

C.

Claims that Sound in Fraud

When Securities Act claims "are grounded in fraud rather than negligence," the heightened
pleading standard of Rule 9(b) applies. Cal. Public Employees' Ret. Sys. v. Chubb Corp., 394 F.3d
126, 161 (3d Cir. 2004). Rule 9(b) still applies to Securities Act claims despite an express
disavowal of fraud where the claims are "immersed in unparticularized allegations of fraud" and
"a core theory of fraud permeates the entire" complaint. Id. at 160.

Here, Plaintiffs have

superficially divided the allegations in their complaint between the Exchange Act claims and the
Securities Act claims, but they directly allege acts of fraud in support of their Securities Act claims.

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For example, the complaint alleges that Navient and its subsidiaries "were misleading borrowers
about the benefits of a federal student loan rehabilitation program," and "were engaged in improper
and unlawful loan servicing and debt collection practices." (D.I. 36 ii 287). These are allegations
of intentional misconduct. Plaintiffs also expressly incorporate by reference into their Securities
Act claims allegations of fraud alleged in support of their Exchange Act claims. (Id. at iii! 287,
297 (incorporating by reference iii! 21-33, 35-38, 42-45, 56, 59-65)). The incorporated allegations
include that "Navient engaged in a widespread and continual practice of concealing from
investors" delinquencies in PEL loans, (Id. at

ii 21); that "Navient senior management knew or

recklessly disregarded [Navient's] improper practices," (Id. at

ii

24); and that "developments

leading to the Company's disappointing quarterly results were previously known or available to"
Defendants, (Id. at ii 37). Accordingly, Plaintiffs' Securities Act claims are governed by Rule 9(b).

IV.

DISCUSSION
Defendants argue that the complaint should be dismissed, because it relies on puzzle

pleading that does not satisfy either the notice pleading standard of Rule 8(a) or the heightened
pleading standards of Rule 9(b) and the PSLRA. (D.I. 39 at 6). The court agrees. The 135-page
complaint quotes or references over forty SEC filings and press releases covering numerous
aspects of Navient's business without always identifying which portions of the statements are
supposedly false or misleading. (See, e.g., D.I. 36

iii! 90, 99,

100, 105, 106, 111, 116, 120, 121,

133, 140, 141).4 The purportedly misleading statements are not organized by category, making

4

See Dawes v. Imperial Sugar Co., 975 F. Supp. 2d 666, 693 (S.D. Tex. 2013) (discussing
proper and improper use of block quotes).
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the complaint repetitive. 5 (See, e.g., Id. at~~ 110, 127, 159, 174; see also Id. at~~ 92, 104, 115,
132, 166). The complaint frequently cross-references other paragraphs in the complaint making it
very difficult to follow. Several times, the complaint follows approximately fifty paragraphs of
alleged misstatements regarding different aspects of Navient's business with a single paragraph
alleging that the misstatements were false or misleading for any one of several reasons. (Id. at

~

143). "[T]he net effect of the pleading's format is to leave the reader. .. jumping from page to page
in an attempt to link the alleged statements to the background that supposedly makes them false
and misleading." Conlee v. WMS Indus., Inc., 2012 WL 3042498, at *4 (N.D. Ill. July 25, 2012).
"The court should not have to play connect-the-dots in order to identify the facts and trends upon
which plaintiffs base their claim." In re PetSmart, Inc. Sec. Litig. 61 F. Supp. 2d 982, 991 (D.
Ariz. 1999)).
As a result, Plaintiffs have failed to set forth a "short and plain" statement of their claims
and make each allegation "simple, concise and direct" in violation of Fed. R. Civ. P. 8. At the
same time, in contravention of the PSLRA, Plaintiffs have failed to craft a complaint in such a way
that a reader can determine precisely which statements (or portions of statements) are alleged to
be false or misleading, and the reason why each statement is false or misleading. "Until plaintiffs
specifically identify the statements on which they would like to proceed and the reasons why these
statements are false or misleading, neither the defendants nor the court can address these
allegations with the degree of particularity required by the PSLRA." In re Wilmington Trust Sec.

5

Several courts have expressed a preference for statements to be organized by category.
See, e.g., N Port Firefighters' Pension-Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d
722, 73 9 (N.D. Tex. 2013) (ordering plaintiffs to provide a chart of plaintiffs' allegations organized
under specific categories); May v. Barick, 1997 WL 314166, at *8 (C.D. Cal. Mar. 3, 1997)
("Plaintiffs failure to address defendants allegedly misleading statements individually, or even by
category, and to state why each statement, or category of statements is misleading, renders this
Courts' task, and the task of the defendants, excessively difficult.").
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Litig., 852 F. Supp. 2d 477, 490 (D. Del. 2012). Accordingly, Defendants' motion to dismiss is

granted with leave for Plaintiffs to amend the complaint. See Lauria v. Biosante Pharm., Inc., 968
F. Supp. 2d 951, 959 (N.D. Ill. 2013) (dismissing a complaint because "a plaintiff must allege facts
necessary to support his fraud claim in a clear and understandable manner"); In re PetSmart, Inc.
Sec. Litig. 61 F. Supp. 2d 982, 1001 (D. Ariz. 1999) (cautioning plaintiffs against refiling unless

they can "commit to a theory of who knew what when, who did what when, and why," which "may
foreclose certain litigation strategies," but is necessary to meet the pleading burdens).

V.

CONCLUSION
For the foregoing reasons, Defendants' motion to dismiss (D.I. 38) is granted with leave

for Plaintiffs to amend the complaint (D.I. 36). An appropriate order will be entered.

Dated: September _£___, 2017

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