City of St. Clair Shores General Employees Retirement System v. Lender Processing Services, Inc. et al

Filing 57

REPLY to response to motion re 45 MOTION to dismiss Amended Complaint filed by Jeffrey S. Carbiener, Francis K. Chan, Lee A. Kennedy, Michelle Kersch, Lender Processing Services, Inc.. (Attachments: # 1 Declaration, # 2 Exhibit)(Roberts, Lyle)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
JACKSONVILLE DIVISION
)
)
)
)
)
)
Plaintiff,
) Case No. 3:10-cv-01073-TJC-JBT
)
vs.
) Honorable Timothy J. Corrigan
)
LENDER PROCESSING SERVICES, INC., et al. )
)
Defendants.
)
)
)
CITY OF ST. CLAIR SHORES GENERAL
EMPLOYEES’ RETIREMENT SYSTEM,
Individually and on Behalf of All Others Similarly
Situated,

DEFENDANTS’ REPLY MEMORANDUM OF LEGAL AUTHORITY IN FURTHER
SUPPORT OF THEIR MOTION TO DISMISS

TABLE OF CONTENTS
TABLE OF AUTHORITIES.............................................................................................................ii
INTRODUCTION .............................................................................................................................1
ARGUMENT .....................................................................................................................................2
I.

Plaintiffs’ Attempt to Rewrite Their Complaint is Improper and Without Any
Factual Support......................................................................................................................2

II.

Plaintiffs Have Not Adequately Pled the Elements of Their Claims...................................5
A.
The Janus Decision Requires Plaintiffs to Identify Which Individual
Defendant(s) Had “Ultimate Authority” Over Each Alleged Misstatement...........5
B.
Plaintiffs Fail to Adequately Plead Falsity...............................................................7
1.
LPS’ Financial Statements...........................................................................7
2.
LPS’ Statements About Its Attorney Network and Foreclosure
Documentation Issues ..................................................................................9

III.

Plaintiffs Fail to Adequately Plead a Strong Inference of Scienter....................................11

IV.

Plaintiffs Fail to Adequately Plead Loss Causation ...........................................................13

i

TABLE OF AUTHORITIES
CASES
Chamberlain v. Reddy Ice Holdings, Inc.,
757 F. Supp. 2d 683 (E.D. Mich. 2010) .................................................................................. 8
City of Roseville Employees’ Ret. Sys. v. Horizon Lines, Inc.,
713 F. Supp. 2d 378 (D. Del. 2010)...................................................................................... 8
City of Tuscaloosa v. Harcros Chems.,
158 F.3d 548 (11th Cir. 1998) ................................................................................................ 6
Cole v. Health Mgmt. Assocs.,
No. 2:07cv00484-FtM-UA-DNF, 2009 WL 2713178 (M.D. Fla. July 17, 2009) .................... 8
Cutsforth v. Renschler,
235 F. Supp. 2d 1216 (M.D. Fla. 2002) ................................................................................. 9
FindWhat Investor Grp. v. FindWhat.com,
No. 10-10107, 2011 WL 4506180 (11th Cir. Sept. 20, 2011)................................................ 14
Griffin Indus. v. Irvin,
496 F.3d 1189 (11th Cir. 2007) ............................................................................................ 10
Grossman v. Nationsbank,
225 F.3d 1228 (11th Cir. 2000) .............................................................................................. 5
Hawaii Ironworkers Annuity Trust Fund v. Cole,
No. 3:10CV371, 2011 WL 3862206 (N.D. Ohio Sept. 1, 2011).............................................. 5
In re Coinstar Inc. Sec. Litig.,
No. C11-133 MJP, 2011 WL 4712206 (W.D. Wash. Oct. 6, 2011)..................................... 5, 6
In re Van der Moolen Holding N.V. Sec. Litig.,
405 F. Supp. 2d 388 (S.D.N.Y. 2005) .................................................................................. 8
Janus Capital Grp., Inc. v. First Derivative Traders,
131 S. Ct. 2296 (2011) ................................................................................................... 5, 6, 7
Loftin v. KPMG LLP,
No. 02-81166-CIV, 2003 WL 22225621 (S.D. Fla. Sept. 10, 2003)........................................ 4
Meyer v. St. Joe Co.,
No. 5:11-cv-27/RS-EMT, 2011 WL 3750324 (N.D. Fla. Aug. 24, 2011)........................ 14, 15

ii

Mizzaro v. Home Depot, Inc.,
544 F.3d 1230 (11th Cir. 2008) ............................................................................ 1, 11, 12, 13
Nat’l Junior Baseball League v. Pharmanet Dev. Grp., Inc.,
720 F. Supp. 2d 517 (D.N.J. 2010) ....................................................................................... 15
Oxford Asset Mgmt., Ltd. v. Jaharis,
297 F.3d 1182 (11th Cir. 2002) ........................................................................................ 4, 10
Philadelphia Fin. Mgmt. of San Francisco, LLC v. DJSP Enters., Inc.,
No. 10-161261-CIV, 2011 WL 4591541 (S.D. Fla. Sept. 30, 2011)........................................ 9
Phillips v. Scientific-Atlanta, Inc.,
374 F.3d 1015 (11th Cir. 2004) ............................................................................................ 11
Steiner v. MedQuist, Inc.,
No. 04-5487, 2006 WL 2827740 (D.N.J. Sept 29, 2006)..................................................... 8

iii

INTRODUCTION
Despite its length, the Amended Class Action Complaint (the “Complaint”) is not
complicated. Plaintiffs allege that all of Lender Processing Services’ (“LPS” or the “Company”)
revenues and other financial metrics from 2008 to 2010 were “artificially inflated” by the
Company’s foreclosure documentation practices and receipt of administrative fees from
attorneys. Moreover, Plaintiffs allege that LPS misled investors when it told them that its
attorney network was “independent” and failed to fully disclose its business problems prior to the
end of the Class Period.
In their Opening Memorandum, however, Defendants demonstrated that Plaintiffs’
theory of fraud lacks any factual support demonstrating falsity, scienter, or loss causation. In
particular, Plaintiffs have not adequately alleged that any of LPS’ financial results were actually
misstated. Moreover, the Complaint and its attached documents affirmatively demonstrate that
LPS did not control the network attorneys and Plaintiffs offer no factual allegations suggesting
that LPS failed to accurately disclose what it knew about the foreclosure documentation issues.
As for scienter, this case is on all fours with the Eleventh Circuit’s Mizzaro decision, which
affirmed the dismissal of a similar complaint. Finally, none of the “disclosures” about LPS that
led to stock price declines actually provided the market with any “new” news about the alleged
improper business practices, completely undermining the existence of loss causation.
Plaintiffs have no effective response to these fatal pleading deficiencies.

Instead,

Plaintiffs use their Opposition to substantially and impermissibly rewrite their Complaint.
Plaintiffs now assert that the foreclosure documentation issues and attorney administrative fees
were part of an improper business model that was used to cross-sell LPS’ default services to
existing clients. Plaintiffs claim that, as a result, Defendants misled investors because they failed
to inform them that this improper business model was the real source of the Company’s entire
default services revenue.

1

Plaintiffs’ new theory is just as factually deficient as their old theory. Plaintiffs point to
no documents or confidential witness statements that offer even a shred of support for the
existence of this “improper business model.” Moreover, the entire idea is belied by LPS’ actual
financial performance following the Class Period, which continues to include significant
revenues from its default services business.
Plaintiffs’ attempt to use their new fraud theory to correct all of their pleading
deficiencies is equally unavailing. According to Plaintiffs, every statement that LPS made about
its revenues was false because it did not disclose the “real source” of LPS’ default services
revenues. Similarly, Plaintiffs claim that Defendants must have known about the improper
business practices because they supposedly accounted for all of LPS’ default services revenues.
And, inevitably, Plaintiffs assert that they have adequately pled loss causation because investors
were never fully informed about the scheme. All of these arguments fail for the same reason:
Plaintiffs’ new fraud theory is pure invention. The Court should dismiss the Complaint with
prejudice.
ARGUMENT
I.

Plaintiffs’ Attempt to Rewrite Their Complaint is Improper and Without Any
Factual Support
The gravamen of the Complaint is that LPS had foreclosure documentation problems and

engaged in illegal attorney fee-splitting, thereby “artificially inflat[ing]” LPS’ reported financial
results during the Class Period. Compl. ¶ 131(h). As set forth in Defendants’ Opening
Memorandum, this claim is specious. Open. Mem. at 16-18. First, Plaintiffs do not allege that
LPS’ reported revenues and profits were inaccurate. Open. Mem. at 16. Second, LPS met its
financial guidance in 2010, even after disclosing its foreclosure documentation problems. Open.
Mem. at 17. Finally, the revenues associated with the foreclosure documentation issues and the
attorney network were not material to LPS’ financial results, constituting less than 6% of LPS’

2

overall revenues (even assuming that all of the revenues associated with DocX and the attorney
network could be attributed to improper business practices). Open. Mem. at 18.
Instead of addressing these pleading deficiencies, Plaintiffs have decided to
impermissibly rewrite the Complaint in their Opposition.

Plaintiffs first point to an LPS

prospectus and annual Form 10-K filing (cited in the Complaint for completely different
propositions) for the unremarkable proposition that the Company seeks to “cross-sell” its services
to existing clients. Opp. at 5. Plaintiffs proceed to discuss LPS’ attorney network and assert,
without factual foundation (see Open. Mem. at 18-21), that LPS provided free foreclosure
services to its clients “through illegal kick-backs and referral fees from attorneys in LPS’s
network.” Opp. at 6. At this point, however, Plaintiffs veer off into an entirely new theory of
fraud found nowhere in their Complaint. Instead of the improper business practices leading
directly to “artificially inflated” revenues as originally pled, Plaintiffs now assert that Defendants
used the free foreclosure services associated with the attorney network to cross-sell “both
existing and new customers on additional service categories across the full default services
‘spectrum.’” Opp. at 6. According to Plaintiffs, as a result of this cross-selling, LPS then
obtained a “huge increase in the volume of paid services” and utilized robo-signing and other bad
document practices to handle that increased business. Opp. at 6 (emphasis in original). All of
this activity had the asserted effect of driving “default services revenue from $473 million in
2007 (29% of total revenues) to a staggering $1.06 billion in 2010 (43% of total revenues).”
Opp. at 7 (emphasis in original).
Plaintiffs’ new fraud theory is barely tethered to the Complaint and has no basis in reality.
In their Opposition, Plaintiffs do not identify a single document, confidential witness statement,
or other factual source that offers any factual support for their new assertions that (a) LPS’
attorney network was cross-sold to obtain new business; and (b) that all, or even a significant
part, of the increase in default services revenues between 2008 and 2010 were the result of this

3

cross-selling in combination with the alleged improper business practices. Accordingly, this
Court should afford these assertions no weight in evaluating Defendants’ motion to dismiss.
Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1188 (11th Cir. 2002) (court must accept all
well-pleaded facts as true, but “conclusory allegations, unwarranted deductions of fact or legal
conclusions masquerading as facts will not prevent dismissal”).1
Not only is there no factual support for Plaintiffs’ new fraud theory, it is clearly
contradicted by Plaintiffs’ own arguments. As Plaintiffs are forced to concede, LPS’ default
services business consisted of seven subsidiaries, only two of which (DocX and LPS Default
Solutions) had anything to do with the alleged improper business practices. Opp. at 4-5.
Moreover, the “huge increase” in default services business came at a time when the number of
foreclosure filings in the United States skyrocketed to “7.4 times the historical average.” Opp. at
6. It is therefore no surprise that a company in the business of providing foreclosure-related
services increased its revenues. Finally, and perhaps most tellingly, Plaintiffs fail to identify any
adverse financial effect from the supposed “revelation” of the improper business model at the end
of the Class Period. LPS has continued to earn significant revenues from its default services
business. See LPS Earnings Release, at Ex. D (July 25, 2011) (approximately 40% of LPS
revenues in 4Q 2010, 1Q 2011, and 2Q 2011 attributable to default services business), attached
as Exhibit 1.
Plaintiffs’ attempt to salvage their case by rewriting the Complaint in their Opposition
should be rejected. As a threshold matter, it is procedurally impermissible. Loftin v. KPMG
LLP, No. 02-81166-CIV, 2003 WL 22225621, at *6 (S.D. Fla. Sept. 10, 2003) (“[Plaintiff] may
not recharacterize his Complaint in a brief responding to a motion to dismiss, as a court
reviewing a motion to dismiss may examine only the allegations of the Complaint.” (citing
1

Indeed, the proof that there is no factual support for Plaintiffs’ new fraud theory is right on the page –
the operative section of the Opposition’s Statement of Facts at page 6 contains no citations to the Complaint or
any exhibits.

4

Grossman v. Nationsbank, 225 F.3d 1228, 1231 (11th Cir. 2000)). Moreover, even if it were
permissible, Plaintiffs’ claims still must be dismissed based on the absence of any factual support
for their new theory of fraud.
II.

Plaintiffs Have Not Adequately Pled the Elements of Their Claims
A.

The Janus Decision Requires Plaintiffs to Identify Which Individual
Defendant(s) Had “Ultimate Authority” Over Each Alleged Misstatement

In its decision in Janus, the Supreme Court held that the maker of a statement for
purposes of securities fraud liability “is the person or entity with ultimate authority over the
statement, including its content and whether and how to communicate it.” Janus Capital Grp.,
Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 (2011) (emphasis added). As set forth in
Defendants’ Opening Memorandum, Plaintiffs’ Complaint runs afoul of Janus by failing to
adequately allege that any of the individual Defendants had “ultimate authority” over the alleged
misstatements in the Complaint. Open. Mem. at 14-15.
Plaintiffs are unable to deny that their Complaint lacks the necessary allegations of
“ultimate authority.” Instead, Plaintiffs attempt an end-run around the decision by effectively
inventing two exceptions to its holding. First, Plaintiffs argue that Janus’ holding does not apply
to corporate insiders who make statements about their corporation. Opp. at 10. Plaintiffs are
wrong. As courts have recently held, “the Court’s interpretation of the verb ‘to make’ is an
interpretation of the statutory language in question in this case, and therefore cannot be ignored
simply because defendants are corporate insiders.” Hawaii Ironworkers Annuity Trust Fund v.
Cole, No. 3:10CV371, 2011 WL 3862206, at *4 (N.D. Ohio Sept. 1, 2011); see also In re
Coinstar Inc. Sec. Litig., No. C11-133 MJP, 2011 WL 4712206, at *10 (W.D. Wash. Oct. 6,
2011) (same).
Second, Plaintiffs argue, in the alternative, that Janus’ holding does not apply to
“individual speakers who utter statements in their capacity as company officials.” Opp. at 11.
Plaintiffs then purport to identify where in the Complaint they have specifically cited statements

5

that “quote[] the precise words used by the speaker.” Opp. at 10-11. In support of their position,
Plaintiffs point to a passage in Janus where the Court noted that in the “ordinary case, attribution
within a statement or implicit from surrounding circumstances is strong evidence that a statement
was made by – and only by – the party to whom it is attributed.” 131 S. Ct. at 2302.
Nowhere in Janus, however, does the Court hold that statements made by individuals in
their capacity as company officials constitute an “ordinary case.”

Indeed, Justice Breyer

suggested just the opposite when he observed that “Every day, hosts of corporate officials make
statements with content that more senior officials or the board of directors have ‘ultimate
authority’ to control.” 131 S. Ct. at 2301 (Breyer, J., dissenting). Moreover, and contrary to
Plaintiffs’ hyperbole, it is not “a radical departure from common sense” to find that the members
of the Board of Directors are the proper individual defendants in a securities fraud case. The
company is the primary defendant – the corporate officials were acting as its agents – and it is the
Board that has ultimate authority over the company and its public statements. Open. Mem. at 15;
see City of Tuscaloosa v. Harcros Chems., 158 F.3d 548, 557 n.9 (11th Cir. 1998) (“senior
officers of a corporation normally are agents and servants of the corporation”).
Even if Plaintiffs were correct that “individual speakers who utter statements in their
capacity as company officials” have “ultimate authority” over their statements, this standard
means that Plaintiffs cannot assert, as they do in the Complaint (see Compl. ¶ 26), that an
individual Defendant is liable for statements personally made by his or her co-defendants. See
Coinstar, 2011 WL 12206, at *10 (dismissing claims against three defendants that were based on
statements made by co-defendants). For example, Defendant Kersch, who is a Senior Vice
President for Marketing and Corporate Communications, is alleged to have personally made only
a handful of statements that appeared in various news stories. See Opp. at 11 (listing out
Complaint references). Plaintiffs appear to concede that Ms. Kersch can be liable only for her

6

statements and, at the same time, none of her individual co-defendants can be liable for her
statements.
Janus mandates the dismissal of the Complaint as currently pled. Even if the Court
disagrees, however, the Opposition makes it clear that any claim against an individual Defendant
based on a misstatement not adequately alleged to have been “personally uttered, wr[i]t[ten],
and/or signed” by that individual Defendant must be dismissed. Opp. at 10.
B.

Plaintiffs Fail to Adequately Plead Falsity
1.

LPS’ Financial Statements

The Complaint repeatedly asserts that LPS’ financial statements were false because the
alleged improper business practices caused the Company’s “revenues and other financial
metrics” to be “artificially inflated” and Defendants “failed to disclose known trends, demands,
commitments, events, and uncertainties that were reasonably likely to have a material effect” on
the Company’s results. Compl. ¶ 131(h), (i) (this paragraph is then cross-referenced throughout
the Complaint). However, Defendants have already demonstrated that Plaintiffs have failed to
adequately plead the existence of any artificially inflated revenues (the revenues were all actually
earned by the Company) or any known trend or uncertainty that had a material effect on the
Company’s results. Open. Mem. at 16-18.
Plaintiffs make no effort to refute Defendants’ arguments, thereby effectively abandoning
their allegations that LPS’ actual financial results were false.

Instead, they now make

unsupported allegations that the real problem with LPS’ financial statements is that while the
Company attributed its success to “increasing demand” for its services, it failed to note that the
“source and cause” of this demand was the alleged improper business practices. Opp. at 14-16.
Plaintiffs’ new falsity allegations are as deficient as their old ones. Plaintiffs provide no
factual support for their new fraud theory that the alleged improper business practices were the
“source and cause” of LPS’ increased default services revenues.

7

See Section I, supra.

Accordingly, Plaintiffs cannot assert that failing to disclose this information was a material
omission. Cole v. Health Mgmt. Assocs., No. 2:07cv00484-FtM-UA-DNF, 2009 WL 2713178,
at *5-*8 (M.D. Fla. July 17, 2009) (dismissing complaint where plaintiffs failed to plead with
particularity any facts showing that defendants’ statements regarding its debt differed from the
“true” facts).
Even if Plaintiffs had provided this factual support, they fail to adequately plead that LPS
put the “source and cause” of its revenues at issue. In direct contrast to the cases cited in the
Opposition, Plaintiffs point to no affirmative statements made by Defendants concerning the
relationship between its attorney network, the processing of foreclosure documents, and
revenues. For example, Plaintiffs rely upon the decision in Chamberlain v. Reddy Ice Holdings,
Inc., 757 F. Supp. 2d 683 (E.D. Mich. 2010) for the proposition that LPS was required to disclose
its alleged improper business model. Opp. at 15. However, in Chamberlain, the defendants
affirmatively attributed their financial success to their “ability to compete on price, service and
quality in a ‘highly competitive’ packaged ice industry” while failing to inform investors that
they had “entered into . . . market division agreements with their major competitors for the
express prohibited anti-competitive purpose of driving up prices.” Id. at 709.2 Plaintiffs here do
not allege any such direct nexus between the general statement that there was an “increasing
demand” for LPS’ default services and the alleged improper business practices. At no point did
LPS attribute this increasing demand to its attorney network or how it processed foreclosure
documentation. See Cutsforth v. Renschler, 235 F. Supp. 2d 1216, 1229-30, 1235-36, 1238,

2

The other cases relied upon by Plaintiffs involve a similar nexus between the affirmative statements
about the source of revenues and the alleged material omission. See City of Roseville Employees’ Ret. Sys. v.
Horizon Lines, Inc., 713 F. Supp. 2d 378, 389 (D. Del. 2010) (company attributed increased revenues to
negotiated rate increases and other competitive practices when actual source was illegal price-fixing, bidrigging and customer-allocation scheme); Steiner v. MedQuist, Inc., No. 04-5487, 2006 WL 2827740, at *16
(D.N.J. Sept 29, 2006) (company attributed revenues to increased sales to customers and acquisitions when
actual source was illegal billing scheme); In re Van der Moolen Holding N.V. Sec. Litig., 405 F. Supp. 2d 388,
400-01 (S.D.N.Y. 2005) (company attributed its ability to maintain good results to NYSE trading business
when, in fact, its traders were generating revenue by engaging in practices that violated NYSE rules).

8

1240-41, 1248-49, 1256 (M.D. Fla. 2002) (repeatedly rejecting plaintiffs’ argument that
defendants’ statements were false or misleading where plaintiffs failed to establish a connection
between alleged omitted information and defendants’ statements).
In a recent decision, a district court in this Circuit considered similar securities fraud
allegations brought against a company relating to the processing of foreclosure documents. See
Philadelphia Fin. Mgmt. of San Francisco, LLC v. DJSP Enters., Inc., No. 10-161261-CIV, 2011
WL 4591541 (S.D. Fla. Sept. 30, 2011). In Philadelphia Management, the company allegedly
did make affirmative statements about its “rigorous” processes to ensure the “efficient” and
“accurate” handling of foreclosures. Id. at *14. Nevertheless, the court dismissed the claims
because, inter alia, the plaintiffs (a) failed to “allege that [the company] did not use the
technology it claimed or that these systems did not improve the firm’s efficiency and accuracy”;
and (b) admitted that the company “constantly hired and trained new employees to keep up with
the skyrocketing demand for its services.” Id. In contrast to Philadelphia Management, the
alleged false statement in this case regarding “increasing demand” for the Company’s services
has a far more attenuated connection to the allegedly omitted information. Moreover, Plaintiffs
admit that there was an “increasing demand” for LPS’ default services. Opp. at 5-6. Under these
circumstances, LPS’ attribution of its increased revenues to “increasing demand” is not an
actionable misstatement or any misstatement at all.
2.

LPS’ Statements About Its Attorney Network and Foreclosure
Documentation Issues

Plaintiffs allege only one affirmative misstatement about LPS’ attorney network, i.e., that
the Company provides its clients with access to “a nationwide network of independent
attorneys.” Open. Mem. at 18. As set forth in Defendants’ Opening Memorandum, however, all
of the factual allegations used by Plaintiffs to suggest that these attorneys were not “independent”
either fail to create that inference or are directly contradicted by the documents relied upon by
Plaintiffs in their Complaint. Open. Mem. at 18-21.

9

Apparently realizing that their own factual allegations betray their arguments, Plaintiffs
rely upon an unpublished district court decision to assert that it is inappropriate for this Court to
consider the validity of their factual allegations by reviewing the Complaint and its attached
exhibits. Opp. at 16-17. That is simply not the law in this Circuit. As the Eleventh Circuit has
repeatedly stated, a court is only required to consider the well-pleaded facts contained in a
complaint. Oxford Asset Mgmt., 297 F.3d at 1188. Accordingly, a court is “not require[d] to
ignore specific factual details of the pleading in favor of general or conclusory allegations.
Indeed, when the exhibits contradict the general and conclusory allegations of the pleading, the
exhibits govern.” Griffin Indus. v. Irvin, 496 F.3d 1189, 1205-06 (11th Cir. 2007). It is therefore
completely appropriate for Defendants to “rely[] on the Newland testimony” (Opp. at 16) and the
other exhibits attached to the Complaint to contradict Plaintiffs’ general and conclusory
allegations that the attorneys were not independent. Plaintiffs’ failure to respond to these
arguments should be treated as a waiver.
Beyond incorrectly stating the relevant law, Plaintiffs merely reiterate their unsupported
belief that the network attorneys played a “central role” in Defendants’ scheme, “which in turn
drove LPS’s revenue increase.” Opp. at 17. Plaintiffs engage in the same futile exercise in an
attempt to support the Complaint’s allegations that LPS failed to adequately disclose its
foreclosure documentation problems following the Company’s internal investigation. Opp. at
18-20.

Plaintiffs do not address Defendants’ arguments that Plaintiffs (a) have failed to

demonstrate that any of the disclosures about LPS’ foreclosure documentation problems were
false, and (b) appear to be demanding a level of detail in those disclosures that is not required by
law. Open. Mem. at 21-23. Instead, Plaintiffs offer another three-page summary of their new
fraud theory and conclude that LPS had an obligation to disclose the alleged improper business
model when it discussed its foreclosure document problems.

10

Plaintiffs simply are unable to provide any well-pleaded factual allegations that support
the existence of material misstatements. Accordingly, the Complaint must be dismissed.
III.

Plaintiffs Fail to Adequately Plead a Strong Inference of Scienter
Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Plaintiffs must

allege facts sufficient to create a strong inference of fraud “for each defendant with respect to
each violation.” Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1016 (11th Cir. 2004). In
attempting to meet this pleading burden, Plaintiffs fall woefully short.
Plaintiffs rely on the “core operations” doctrine and argue that this doctrine is consistent
with Eleventh Circuit law. Opp. at 22-23. In fact, the Eleventh Circuit has repeatedly rejected
allegations that defendants “must have known” about alleged fraud (whether brought as a “core
operations,” “group pleading” or any other “must have known” theory) on the grounds that such
allegations are conclusory and speculative. Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 125051 (11th Cir. 2008) (rejecting allegations that defendants must have known about fraud based on
its “breadth and amount”). Instead, a complaint must allege “facts showing how knowledge of
the fraud would or should have percolated up to senior management.” Id. at 1251.
Similarly, Plaintiffs’ claims here are conclusory and speculative. Plaintiffs’ scienter
allegations rest entirely on the assertion that Defendants “are deemed to have known of LPS’
improper business model,” which was “the source of almost half the Company’s total revenues.”
Opp. at 22-23 (emphasis in original). Plaintiffs’ argument that there was an improper business
model that generated half of LPS’ revenue is entirely without factual support. See Section I,
supra. Moreover, Plaintiffs do not even attempt to allege (a) how Defendants would have or
could have known about the foreclosure documentation problems prior to LPS’ 2009 internal
investigation of the DocX subsidiary; or (b) how Defendants would have or could have known
about alleged improprieties related to its attorney network, given that there was no finding during
the Class Period by any court or governmental agency that LPS’ practices were improper. See

11

Open. Mem. at 11-12, 26-27. Simply noting that two of the individual Defendants sometimes
visited the DocX subsidiary is clearly insufficient. Open. Mem. at 25-26.
Plaintiffs also rely on the Eleventh Circuit’s holding in Mizzaro, but a close examination
of that case (as opposed to Plaintiffs’ cursory references to it) reveals that it is actually fatal to
Plaintiffs’ claims. Opp. at 20, 21, 25, 26. In Mizzaro, Home Depot (similarly to LPS here) was
subject to a flurry of negative publicity, litigation, and government investigations related to
allegations that it had engaged in improper business practices. 544 F.3d at 1243-46. These
allegedly improper business practices related to Home Depot’s use of “return to vendor”
chargebacks for defective merchandise. The Eleventh Circuit affirmed the dismissal of the case
on scienter grounds and cited a number of reasons that apply equally to this case.
Confidential Witnesses Provide No Direct Evidence of Fraud: The Mizzaro court noted
that the confidential witnesses cited in the complaint did not claim that any of the individual
defendants expressly ordered or even suggested that Home Depot employees committed fraud.
Nor did these confidential witnesses claim that any of the individual defendants knew about the
alleged fraud. Id. at 1247-48. Here, Plaintiffs cite statements of no less than 17 confidential
witnesses, yet, as in Mizzaro, none of those witnesses identify any communications suggesting
that the individual Defendants knew of any improper business practices prior to the Company’s
internal investigation in 2009.
Amount of Fraud is Speculative: In Mizzaro, the plaintiffs alleged, based on public
speculation about how many improper chargebacks had occurred at a single Home Depot store,
that the fraudulent practices amounted to $1 billion in revenues per year. Id. at 1251. Not
surprisingly, the Eleventh Circuit found that this claimed amount was “wholly speculative” and
unreliable. Id. Likewise, Plaintiffs here offer no factual basis for their claim that the attorney
network and the foreclosure documentation problems were “the source of almost half the
Company’s total revenues by the end of the Class Period.” Opp. at 23-24 (emphasis in original).

12

At best, Plaintiffs rely on the unremarkable fact that, like most companies, LPS “cross-sells” its
services to its customers. Opp. at 5-6. As in Mizzaro, this is “far too shaky a foundation” to
support an inference of scienter. 544 F.3d at 1251.
Type of Fraud Would Be Difficult for Senior Management to Detect: The Eleventh
Circuit found that “lying to some vendors to obtain excessive rebates” was something that could
be done by lower-level employees without the necessary participation of senior corporate
officers. Id. Similarly, in this case, the key foreclosure documentation problems occurred at
DocX, a small LPS subsidiary, and involved operational activities by lower-level employees.
Like in Mizzaro, the types of improper business practices at issue – e.g., surrogate signing –
clearly did not require the participation of LPS senior officers. Open. Mem. at 6-7.
Lack of Suspicious Stock Sales: As the Eleventh Circuit explained, the absence of insider
stock sales or purchases timed to maximize returns on nonpublic information “weighs against
inferring scienter.” Mizzaro, 544 F.3d at 1253. Like the plaintiffs in Mizzaro, Plaintiffs here fail
to allege that any of the individual Defendants engaged in suspicious stock sales or purchases.
Based on the Mizzaro decision alone, it is clear that the Plaintiffs have failed to
adequately plead a “strong inference” of scienter.
IV.

Plaintiffs Fail to Adequately Plead Loss Causation
Plaintiffs fail to adequately plead loss causation because none of the disclosures that led

to LPS stock price declines actually “revealed” any new information about Defendants’ supposed
fraud. Open. Mem. at 31-34. In response to this argument, Plaintiffs trot out a series of feints
and dodges that cannot prevent the dismissal of their claims.
First, relying on a single, out-of-circuit district court opinion, Plaintiffs assert that
Defendants’ loss causation arguments cannot be considered on a motion to dismiss because they
are “intensely fact-specific.”

Opp. at 30.

Plaintiffs simply ignore that numerous courts,

including courts in this Circuit, have dismissed complaints where it is clear that the facts revealed

13

in an alleged corrective disclosure could not plausibly have caused the plaintiff’s loss because
those facts were previously known and digested by the market. See Open. Mem. at 30; Meyer v.
St. Joe Co., No. 5:11-cv-27/RS-EMT, 2011 WL 3750324, at *7 (N.D. Fla. Aug. 24, 2011)
(dismissing complaint where alleged corrective disclosure was “entirely based on previously
disclosed facts and offer[ed] nothing new concerning prior improper practices”).
Second, Plaintiffs argue, based on their new fraud theory, that the Harris complaint (filed
and dismissed in 2008) alleging illegal fee-splitting, as well as the related news articles and
Company disclosures, “did not disclose that the alleged illegal fee-splitting and undue control
LPS exerted over its attorneys was systemic, and integral to the rise in the Company’s default
services revenues.” Opp. at 31. Even if this new fraud theory could be properly raised in an
Opposition (see Section I, supra), it actually undermines Plaintiffs’ contention that the April 16,
2009 Dow Jones Bankruptcy Review article they rely upon as a “corrective disclosure” on this
topic led to any loss. The Dow Jones article ignores the dismissal of the Harris complaint and
baldly suggests that the fee-splitting might have had a nationwide impact, but is completely silent
on the topic of whether it had any relationship to the increase in LPS’ default services revenues.
See FindWhat Investor Grp. v. FindWhat.com, No. 10-10107, 2011 WL 4506180, at *121 n.29
(11th Cir. Sept. 20, 2011) (“Causation . . . requires the Plaintiff to demonstrate the joinder
between an earlier false or deceptive statement, for which the defendant was responsible, and a
subsequent corrective disclosure that reveals the truth of the matter . . . .”). In other words, if the
Harris complaint and related items were not corrective disclosures, then neither was the Dow
Jones article, which offers no information about the alleged fee-splitting that supports Plaintiffs’
new fraud theory.
Third, Plaintiffs claim that the April 3, 2010 Wall Street Journal (WSJ) article revealed
“several new facts that were not in LPS’s 2009 Form 10-K” about the foreclosure documentation
problems. Opp. at 32. It is not enough, however, for an article to simply reveal “several new

14

facts.” Instead, the key is whether “[t]he author . . .add[s] significant original insight that
identifies, reveals, or corrects prior misstatements, omissions, or improper accounting practices.”
Meyer, 2011 WL 3750324, at *6 (emphasis added). The WSJ article does not provide any
information that qualifies as “significant original insight.” For example, where an investigation
of the United States Attorney for the Middle District of Florida could only have been civil and/or
criminal in nature, the article’s disclosure that the investigation was criminal was hardly an
insight. Nat’l Junior Baseball League v. Pharmanet Dev. Grp., Inc., 720 F. Supp. 2d 517, 561
n.34 (D.N.J. 2010) (“To the extent that [alleged corrective disclosures] merely provided more
details about [] public disclosures, they are insufficient to establish loss causation.”) Moreover,
the article did not state or even remotely suggest that the foreclosure documentation problems
were the “true source” of LPS’ default services revenues.
Finally, Plaintiffs argue that the total mix of information released to the public in the
period from October 1-4, 2010 revealed to investors that the attorney network and improper
foreclosure documentation practices were “the Company’s true revenue source.” Opp. at 33-34.
Plaintiffs’ reading of the October 1, 2010 and October 4, 2010 disclosures is unsupported by the
actual texts. The inflammatory video from Congressman Alan Grayson, to which the cited
October 1 disclosure refers, alleges (without factual basis) that LPS’ improper conduct was
organized, but does not allege that LPS “controlled” the network attorneys or that there was some
elaborate fraudulent scheme by which LPS generated all of its default services revenues.
Meanwhile, LPS, in its October 4 press release, denied that there were any widespread problems
with its business practices and disclosed that DocX constituted “less than one percent of LPS’
revenue.” The October 2010 disclosures, considered individually or collectively, cannot possibly
be said to have revealed the existence of the fraud posited by Plaintiffs’ new fraud theory.

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Dated: October 21, 2011
By: /s/ Lyle Roberts
LYLE ROBERTS
Admitted pro hac vice
JAMES P. SMITH, III
Admitted pro hac vice
DEWEY & LeBOEUF LLP
1101 New York Avenue, NW
Washington, D.C. 20005
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]
CHARLES P. PILLANS III
Florida Bar No. 0100066
PATRICK P. COLL
Florida Bar No. 0084670
BEDELL, DITTMAR, DEVAULT,
PILLANS & COXE, P.A.
The Bedell Building
101 East Adams Street
Jacksonville, Florida 32202-3303
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]
Attorneys for Defendants Lender Processing
Services, Inc., Jeffrey S. Carbiener, Lee A.
Kennedy, Francis K. Chan, and Michelle M.
Kersch

16

CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 21st day of October, 2011, I electronically filed the
foregoing with the Clerk of Court using the CM/ECF system, which will send a Notice of
Electronic Filing to all counsel of record.
/s/ Lyle Roberts
Lyle Roberts