Lubbers v. Flagstar Bancorp, Inc. et al

Filing 24

OPINION AND ORDER GRANTING DEFENDANTS MOTION TO DISMISS PLAINTIFFS AMENDED COMPLAINT. Signed by District Judge Bernard A. Friedman. (MVer)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
JUSTIN G. LUBBERS,
Plaintiff(s),
vs.

Civil Action No. 14-cv-13459
HON. BERNARD A. FRIEDMAN

FLAGSTAR BANCORP. INC.,
ALESSANDRO P. DINELLO, and
PAUL D. BORJA,
Defendants.
______________________________/

OPINION AND ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS PLAINTIFF’S AMENDED COMPLAINT
This matter is presently before the Court on defendants’ Motion to Dismiss Plaintiff’s
Amended Complaint [docket entry 19]. Plaintiff has filed a response in opposition and defendants
have filed a reply. Pursuant to E.D. Mich. LR 7.1(f)(2), the Court shall decide this motion without
a hearing. For the following reasons, the Court shall grant defendants’ motion to dismiss.
I. Background
Plaintiff brings this federal securities class action against Flagstar Bancorp., Inc.
(“Flagstar”) and two of its officers, Alessandro P. DiNello, Chief Executive Officer, and Paul D.
Borja, former Chief Financial Officer and current Senior Deputy General Counsel on behalf of all
persons and entities that purchased shares of Flagstar common stock during the period from October
22, 2013, to August 26, 2014 (“the class period”). Plaintiff alleges that during the class period,
Flagstar omitted material information and included misleading statements in its public disclosures
in violation of § 10(b) of the Securities and Exchange Act of 1934 (“Securities Act”), 15 U.S.C. §
78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission

(“SEC”). Further, plaintiff asserts that defendants DiNello and Borja, as controlling persons of
Flagstar, are liable under § 20(a) of the Securities Act for Flagstar’s § 10(b) and Rule 10b-5
violations.
Flagstar is the holding company for non-party Flagstar Bank, which, among other
activities, originates, acquires, sells, and services mortgage loans. Plaintiff alleges that after the
collapse of the mortgage industry in 2008, Flagstar began to cut corners and violate various
consumer protection laws. Am. Compl. ¶ 27. Plaintiff claims that in 2011, with mortgage
origination declining and mitigation and default servicing rising, Flagstar was forced to reduce its
non-interest expenses to boost retained earnings and meet the Federal Reserve’s stress tests. Id. ¶
33. One way Flagstar allegedly kept expenses low was by reducing personnel and investment in
technology systems. Id. ¶ 34. As a result, Flagstar allegedly experienced a backlog in processing
loan modification and loss mitigation applications, such that in September 2011 Fannie Mae
threatened to terminate Flagstar’s servicing rights on loans owned or guaranteed by Fannie Mae.
Id. ¶¶ 34-35. Plaintiff alleges that this reduction in personnel caused Flagstar to cut corners and
violate federal consumer protection laws and regulations, which caused the Consumer Financial
Protection Bureau (“CFPB”) to investigate Flagstar’s mortgage-related practices. Id. ¶ 3.1
On August 26, 2014, Flagstar filed a Form 8-K with the SEC that disclosed it had
commenced discussions with the CFPB regarding a potential settlement relating to “alleged
violations of various federal consumer financial laws arising from the Bank’s loss mitigation

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In support of plaintiff’s allegations, the complaint includes statements from nine
confidential witnesses who were former Flagstar employees with “first-hand knowledge of loan
modification, loss mitigation and default servicing throughout the relevant period, both prior to and
during the Class Period.” Id. ¶ 38; see generally id. ¶¶ 38-87.
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practices and default servicing operations dating back to 2011.” Id. ¶ 120. In that disclosure,
Flagstar stated that “[w]hile the Bank intends to vigorously defend against any enforcement action
that may be brought, it has commenced discussions with the CFPB staff to determine if a settlement
can be achieved.” Id. In response to this disclosure, Mark Palmer, an analyst at BTIG, LLC,
downgraded Flagstar’s rating and noted that the “allegations raise questions regarding servicing
operations amid uncertainty of potential rebound of its mortgage business.” Id. ¶ 121. On August
27, 2014, Flagstar’s stock fell $0.83 per share and closed at $17.66. Id. ¶ 122. With the market
speculating that “ a material settlement may be imminent” because “[Flagstar] felt it was necessary
to mention the company was in discussion with the CFPB,” Flagstar’s stock price continued to
decline and closed at $17.33 per share on August 28, 2014. Id. ¶¶ 123-24.
A month later, on September 29, 2014, the CFPB filed a Consent Order in an
administrative proceeding captioned, In the Matter of: Flagstar Bank, FSB, File No. 2014-CFPB0014, wherein the CFPB stated that Flagstar had violated §§ 1036(a)(1)(B) and 1031(C)(1) of the
Consumer Financial Protection Act (“CFPA”) by (1) failing to review loss mitigation applications
in a reasonable amount of time from at least 2011 to September 2013, id. ¶¶ 88-89; (2) withholding
information that borrowers needed in order to complete their loss mitigation applications for at least
a nine-month period from 2012 to 2013, id. ¶ 90; (3) denying loan modifications to qualified
borrowers by regularly miscalculating borrower income, id. ¶ 91; and (4) improperly prolonging
borrowers’ trial period plans for loan modifications, id. ¶ 92. The CFPB also found that Flagstar
violated various loss mitigation procedures and general servicing policies. Id. ¶ 93. Pursuant to the
stipulation, Flagstar did not admit or deny any of the findings of fact or conclusions of law, except
those facts necessary to establish the CFPB’s jurisdiction over Flagstar and the subject matter of the

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action. Id. ¶ 88.
On September 5, 2014, about a month before the CFPB filed the Consent Order, this
federal securities class action was filed. On February 3, 2015, plaintiff Rodney Boone, who
purchased shares of Flagstar’s common stock during the class period, filed an amended complaint.
Id. ¶ 18. Plaintiff alleges that he and others similarly situated suffered an investment loss because
Flagstar withheld material information from investors. Id. ¶ 13. Specifically, plaintiff alleges that
Flagstar’s public disclosures during the putative class period were misleading because they failed
to inform investors that the CFPB was investigating Flagstar. See id. ¶ 96. Plaintiff also alleges that
“[t]he threat of termination by Fannie Mae and Freddie Mac in 2011 and the risk of violations
evidenced in the audit by CFPB during the Class Period were known material events” that should
have been disclosed and that Flagstar “further materially misled investors by touting the efficiency
of their loss mitigation and default servicing practices in periodic filings with the SEC.” Id. ¶ 95.
Finally, plaintiff alleges that Flagstar misled investors when it sold its non-performing and defaulted
loans to Matrix Financial Services Corporation (“Matrix Financial”), but did not disclose to
investors that this sale did not absolve Flagstar of its liabilities relating to alleged violations of
consumer protection laws dating from 2011. Id. ¶¶ 98, 101.
Count I of the amended complaint asserts a violation of § 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder by the SEC against all defendants. Count II asserts a
violation of § 20(a) of the Securities Act against DiNello and Borja. Defendants move for dismissal
of all claims.
II. Legal Standards
A. Fed. R. Civ. P. 12(b)(6)

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To survive a motion to dismiss, “a complaint must contain sufficient factual matter
. . . to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing
Twombly, 550 U.S. at 556). “Threadbare recitals of all the elements of a cause of action, supported
by mere conclusory statements, do not suffice.” Id. The “complaint must contain either direct or
inferential allegations respecting all the material elements to sustain a recovery under some viable
legal theory.” Mezibov v. Allen, 411 F.3d 712, 716 (6th Cir. 2005). In deciding a motion to dismiss,
the Court “must construe the complaint in the light most favorable to the plaintiff and accept all of
the complaint’s factual allegations as true.” Ziegler v. IBP Hog Mkt., Inc., 249 F.3d 509, 512 (6th
Cir. 2001).
B. Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act
In addition to meeting the general pleading requirements of Fed. R. Civ. P. 12(b)(6),
“[a]llegations of securities fraud must, as must allegations of fraud generally, satisfy the
requirements of Rule 9(b) of the Federal Rules of Civil Procedure.” In re Comshare Inc. Secs.
Litig., 183 F.3d 542, 548 (6th Cir. 1999). Rule 9(b) requires that “[i]n alleging fraud or mistake, a
party must state with particularity the circumstances constituting fraud or mistake.” To satisfy Rule
9(b), “the plaintiff[], at a minimum, ‘must allege the time, place, and content of the alleged
misrepresentation . . . ; the fraudulent scheme; the fraudulent intent of the defendants; and the injury
resulting from the fraud.” Heinrich v. Waiting Angels Adoption Servs., Inc., 668 F.3d 393, 403 (6th
Cir. 2012) (citing U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d 634, 643 (6th Cir. 2003)).

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Allegations of securities fraud must also meet the heightened pleading standard of
the Private Securities Litigation Reform Act (“PSLRA”). The PSLRA was enacted to “curb
perceived abuses of the § 10(b) private action–‘nuisance filings, targeting of deep-pocket defendants,
vexatious discovery requests and manipulation by class action lawyers.’” Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 320 (2007) (quoting Merrill Lynch, Pierce, Fenner & Smith Inc.
v. Dabit, 547 U.S. 71, 81 (2006)). To this end, the PSLRA imposes additional pleading burdens in
securities fraud cases, including that the complaint must “specify each statement alleged to have
been misleading, the reason or reasons why the statement is misleading, and, if an allegation
regarding the statement or omission is made on information and belief, . . . state with particularity
all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B). Additionally, scienter must
be pled with particularity. See id. § 78u-4(b)(2). These requirements are purposefully demanding
and have been described as “exacting,” Tellabs, 551 U.S. at 313, and as an “elephant-sized boulder
blocking [a plaintiff’s securities] suit,” In re Omnicare, Inc. Secs. Litig., 769 F.3d 455, 461 (6th Cir.
2014).
C. Securities and Exchange Act Claims: § 10(b) and Rule 10b-5
“Section 10(b) of the Securities Exchange Act . . . and Rule 10b-5 ‘prohibit
fraudulent, material misstatements or omissions in connection with the sale or purchase of a
security.’” Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 570 (6th Cir. 2008) (quoting PR
Diamonds, Inc. v. Chandler, 364 F.3d 671, 680-81 (6th Cir. 2004)). Section 10(b) provides, in
relevant part:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce or of the
mails, or of any facility of any national securities exchange–

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***
(b) To use or employ, in connection with the purchase or sale of any
security registered on a national securities exchange or any security
not so registered, . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the
[SEC] may prescribe as necessary or appropriate in the public interest
or for the protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5, promulgated by the SEC under § 10(b) provides, in relevant part:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce, or of the
mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state
a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading, or
(c)To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. In order to state a claim under § 10(b) and Rule 10b-5, a plaintiff must plead
“(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon
the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Matrixx Initiatives,
Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011).
III. Analysis
A. Duty to Disclose Material Information
Plaintiff alleges that Flagstar’s public filings during the class period were misleading
because they failed to disclose that (1) the CFPB was investigating Flagstar for violations of the

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CFPA; (2) Fannie Mae had threatened to terminate Flagstar’s rights to loan servicing as early as
2011; (3) any reduction in headcount was driven by a failure to comply with consumer protection
regulations; and (4) Flagstar’s sale of loan servicing rights to Matrix Financial in December 2013
did not diminish Flagstar’s liability for violations of the CFPA dating from 2011.
“Before liability for non-disclosure can attach, the defendant must have violated an
affirmative duty of disclosure.” In re Sofamor Danek Grp., Inc., 123 F.3d 394, 400 (6th Cir. 1997).
An affirmative duty of disclosure arises if “(1) created by SEC statute or rule; (2) there is insider
trading; or (3) there was a prior statement of material fact that is false, inaccurate, incomplete or
misleading in light of the undisclosed information.” In re Ford Motor Co., Secs. Litig., 184 F. Supp.
2d 626, 631-32 (E.D. Mich. 2001). Plaintiff argues that Flagstar’s affirmative duty to disclose arises
from this third category.
“[A] corporation is not required to disclose a fact merely because a reasonable
investor would very much like to know the fact.” In re Time Warner, Inc., Secs. Litig., 9 F.3d 259,
267 (2d Cir. 1993). However, when a corporation makes a “voluntary disclosure,” it must speak
“fully and truthfully.” Helwig v. Vencor, Inc., 251 F.3d 540, 564 (6th Cir. 2001). A corporation
must “provide complete and non-misleading information with respect to subjects on which [it]
undertakes to speak.” Id. at 561. In other words, “a company may choose silence or speech
elaborated by the factual basis as then known–but it may not choose half-truths.” Id. The Sixth
Circuit has explained that the duty to speak “fully and truthfully” comes from Rule 10b-5:
The question . . . is not whether [a defendant’s] silence can give rise
to liability, but whether liability may flow from his decision to speak
. . . concerning material details . . . without revealing certain
additional known facts necessary to make his statements not
misleading. This question is answered by the text of Rule 10b-5(b)
itself: it is unlawful for any person to ‘omit to state a material fact
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necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading[.]
Rubin v. Schottenstein, Zox & Dunn, 143 F.3d 263, 268 (6th Cir. 1998) (quoting 17 C.F.R. §
240.10b-5(b)) (overruled on other grounds).
In securities fraud cases, “materiality depends on the significance the reasonable
investor would place on the withheld or misrepresented information.” Basic Inc. v. Levinson, 485
U.S. 224, 240 (1988). “Materiality can be established by proof of a ‘substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made available.’” Ind. State Dist. Council of
Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935, 943 (6th Cir.
2009) (quoting Zaluski, 527 F.3d at 571).
Courts must look to the context in which statements are made to determine whether
an omission renders prior statements misleading. See The MJK Family LLC v. Corp. Eagle Mgt.
Servs., Inc., No. 09-12613, 2009 WL 4506418, at *7 (E.D. Mich. Nov. 30, 2009). When examining
context, “[s]ome statements, although literally accurate, can become, through their context and
manner of presentation, devices which mislead investors.” McMahan & Co. v. Wherehouse Entm’t,
Inc., 900 F.2d 576, 579 (2d Cir. 1990). A material misrepresentation is therefore “measured not by
literal truth, but by the ability of the material to accurately inform rather than mislead prospective
buyers.” Id. “Thus, a court must not ‘pluck’ disclosures out of their context and analyze their truth
in a vacuum, but must look at the statements made in light of the circumstances and events that
create the context in which they were made.” MJK Family LLC, 2009 WL 4506418, at *7 (citing
City of Monroe v. Bridgestone Corp., 399 F.3d 651, 672 (6th Cir. 2005)). With these standards in
mind, the Court will now turn to each of the allegedly misleading disclosures cited by plaintiff.
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i. Disclosures Relating to Ongoing Regulatory Investigations
Plaintiff asserts that the following paragraph found in three Form 10-Qs that Flagstar
filed with the SEC on October 30, 2013, May 9, 2014, and July 29, 2014, was misleading:
From time to time, governmental agencies conduct
investigations or examinations of various mortgage related practices
of the Bank. Ongoing investigations relate to whether the Bank has
properly complied with laws or regulations relating to mortgage
origination or mortgage servicing practices and to whether its
practices with regard to servicing residential first mortgage loans are
adequate. The Bank is cooperating with such agencies and providing
information as requested. In addition, the Bank has routinely been
named in civil actions throughout the country by borrowers and
former borrowers relating to the origination, purchase, sale and
servicing of mortgage loans.
Am. Compl. ¶¶ 99, 114, 118.
Plaintiff argues that the introductory phrase “[f]rom time to time” gave the false
impression that investigations into Flagstar’s mortgage-related practices were routine, when in fact
Flagstar’s violations of consumer protection laws spurred the CFPB’s investigations. Id. ¶¶ 100,
115, 119. Plaintiff also argues that references to “ongoing investigations” were misleading because
Flagstar should have disclosed that the CFPB was specifically targeting Flagstar for CFPA
violations. Id. Further, plaintiff asserts that the above-cited paragraph is “materially misleading
because [it] fail[s] to disclose that Fannie Mae had threatened to terminate Flagstar’s rights to loan
servicing as early as 2011[.]” Id. Finally, plaintiff argues that “to warn that the untoward may occur
when the event is contingent is prudent; to caution that it is only possible for the unfavorable events
to happen when they have already occurred is deceit.” Pl.’s Resp. at 23 (quoting In re Van der
Moolen Holding N.V. Secs. Litig., 405 F. Supp. 2d 388, 400 (S.D.N.Y. 2005)).
Flagstar argues that because it disclosed its involvement with ongoing investigations,

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“no reasonable investor could have read Flagstar’s disclosures as negating the possibility of a CFPB
investigation or settlement.” Defs.’ Mot. at 13. In support, Flagstar points to the court’s statement
in In re Bank of America, that “where there is disclosure that is broad enough to cover a specific
risk, the disclosure is not misleading simply because it fails to discuss the specific risk.” Id. at 12
(quoting In re Bank of Am. AIG Disclosure Secs. Litig., 980 F. Supp. 2d 564, 579 (S.D.N.Y. 2013)).
Flagstar also cites Harris v. Ivax Corp., 182 F.3d 799 (11th Cir. 1999), where the court stated that
“when an investor has been warned of risks of a significance similar to that actually realized, she
is sufficiently on notice of the danger of the investment to make an intelligent decision about it
according to her own preferences for risk and reward.” Id. at 807.
The Court agrees with Flagstar and finds that even when considering the undisclosed
information, the above-cited paragraph is not misleading. First, the Court finds that plaintiff’s
argument regarding the misleading nature of the phrase “from time to time” to be nothing more than
a non-actionable, semantic quibbling. See Benzon v. Morgan Stanley Distribs., Inc., 420 F.3d 598,
612 (6th Cir. 2005) (rejecting plaintiffs’ 10b-5 argument as a “semantic quibble”). In Benzon,
plaintiffs argued that an investment prospectus was misleading for disclosing that brokers may
receive different compensation for selling certain share classes when in actuality brokers did earn
more under the existing pay structure. Id. The court of appeals dismissed plaintiffs’ claim as a
“semantic quibble” and found that, if anything, defendant’s disclosure put “prospective investors
on notice that there was a possibility that brokers were being compensated more highly for the sale
of certain class shares than others, such that investors could pursue that line of inquiry with their
financial advisors if they were concerned about broker incentives.” Id. (emphasis added).
The same is true of Flagstar’s disclosure. Even assuming the phrase “from time to

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time” may have conveyed the impression that investigations were routine, the disclosure was broad
enough to encompass the possibility that the CFPB was investigating Flagstar for not complying
with consumer protection laws. The paragraph found in the three Form 10-Qs stated that (1)
Flagstar was subject to governmental agency investigations; (2) there were ongoing investigations
into whether Flagstar had properly complied with laws and regulations relating to mortgage
servicing and origination; and (3) Flagstar was presently cooperating with such agencies. See Am.
Compl. ¶¶ 99, 114, 118. Although plaintiff would have liked to know that the CFPB was
specifically investigating Flagstar for violations of consumer protection laws and regulations,
Flagstar was under no duty to disclose this information to make the paragraph in the Form 10-Qs
not misleading. In other words, a reasonable investor would not have viewed the omitted fact (the
CFPB’s active investigation) as significantly altering the “total mix” of information available. See
Zaluski, 527 F.3d at 571. Flagstar’s disclosure was broad enough to put investors on notice of the
possibility that a governmental agency, like the CFPB, was investigating Flagstar’s practices.
The Court also rejects plaintiff’s catch-all argument that the above-cited paragraph
is misleading because it fails to disclose that Fannie Mae had threatened to terminate Flagstar’s
rights to loan servicing as early as 2011. “To constitute an omission there must be a relationship
between the omission and the statement itself, because it would be untenable not to have limits on
the scopes of subjects.” Norfolk Cnty. Ret. Sys. v. Tempur-Pedic Int’l, Inc., 22 F. Supp. 3d 669, 679
(E.D. Ky. 2014). There is no relationship between the alleged material omission of past Fannie Mae
threats and Flagstar’s disclosure regarding ongoing investigations by governmental agencies.
Because there is no relationship, it was not necessary for Flagstar to disclose these alleged Fannie
Mae threats “in order to make the statements made, in light of the circumstances under which they

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were made, not misleading.” 17 C.F.R. § 240.10b-5.
Plaintiff next asserts that the following statements in a Form 10-K that Flagstar filed
with the SEC on March 5, 2014, were misleading:
Expanded regulatory oversight over our business could
significantly increase our risks and costs associated with complying
with current and future regulations, which could adversely affect
our financial condition and results of operations.
As a result of increasing scrutiny and regulation of the
banking industry and consumer practices, we may face a greater
number or wider scope of investigations, enforcement actions and
litigation, thereby increasing our costs associated with responding to
or defending such actions.
***
The CFPB may reshape the consumer financial laws through
rulemaking and enforcement. Compliance with any such changes
may impact our operations.
The CFPB has broad and unique rulemaking authority to
administer and carry out the provisions of the Dodd-Frank Act with
respect to financial institutions that offer covered financial products
and services to consumers, including prohibitions against unfair,
deceptive or abusive practices in connection with any transaction
with a consumer for a consumer financial product or service, or the
offering of a consumer financial product or service. The concept of
what may be considered to be an “abusive” practice is new under the
law. Moreover, the Bank will be supervised and examined by the
CFPB for compliance with the CFPB’s regulations and policies.
While the full scope of the CFPB’s rulemaking and regulatory agenda
relating to the mortgage industry remains unclear, it has already been
active in issuing guidelines, rules and regulations affecting our
business, and it has also been active in enforcing consumer financial
protection laws against mortgage originators and servicers.
***
We may incur fines, penalties and other negative consequences
from regulatory violations, possibly even for inadvertent or
unintentional violations.
We maintain systems and procedures designed to ensure that
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we comply with applicable laws and regulations. However, some
legal and regulatory frameworks provide for the imposition of fines
or penalties for noncompliance even though the noncompliance was
inadvertent or unintentional and even though there was in place at the
time systems and procedures designed to ensure compliance.
Id. ¶¶ 106, 108, 110 (boldface, italics, and underlining in original).
Plaintiff argues that the statement “we may face a greater number or wider scope of
investigations” was misleading because it “gave the false representation that any investigation or
oversight would be in the future, when in fact Flagstar had been investigated since as early as 2011
by Fannie Mae and Freddie Mac[.]” Id. ¶ 107. This argument fails because plaintiff is again
quibbling with semantics. No reasonable investor could interpret this statement as negating the
possibility that investigations were currently underway. Just because Flagstar was exposed to the
possibility of a greater number of investigations does not mean that Flagstar was not currently
subject to any investigations. The Court also rejects plaintiff’s argument that this statement was
misleading because it did not mention threats from Fannie Mae and Freddie Mac. Because there is
no relationship between the alleged material omission (past Fannie Mae and Freddie Mac threats)
and the disclosure itself (that Flagstar may face a greater number of investigations in the future), no
disclosure was necessary.
The same analysis applies to Flagstar’s statement “what may be considered an
‘abusive’ practice is new under the law.” Plaintiff argues this statement was “belied by the
investigation by Fannie Mae in 2011 and the Letter received by the Company from Fannie Mae
which specifically listed practices that were abusive violations of consumer protection laws.” Am.
Compl. ¶ 109. Again, there is no relationship between a 2011 alleged Fannie Mae letter and a
generic statement informing investors that consumer protection laws and regulations are ever

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changing such that what is considered “abusive” under the law is new. As such, no disclosure was
necessary.
Finally, the Court rejects plaintiff’s argument that the statement “some legal and
regulatory frameworks provide for the imposition of fines or penalties for noncompliance even
though the noncompliance was inadvertent or unintentional and even though there was in place at
the time systems and procedures designed to ensure compliance” was false because “Fannie Mae
had exposed Flagstar violations that were neither inadvertent nor unintentional.” Id. ¶ 111. This
boilerplate statement regarding fines and penalties for noncompliance is too generic to be
misleading. Moreover, disclosure was not necessary because the alleged material omission (that
Fannie Mae had identified intentional violations in the past) has no relationship to the disclosure
itself (that there can be liability for unintentional and inadvertent noncompliance).
ii. Disclosures Relating to Non-Interest Expense Reductions
Plaintiff also asserts that the following public disclosures by Flagstar were
misleading: (1) a Form 8-K filed with the SEC on October 22, 2013, that included a press release
emphasizing that “non-interest expense decreased by $16 million during the quarter” and that
“compensation and benefits decreased . . . . driven by . . . a decrease in both headcount and contract
employees[,]” id. ¶ 97; (2) four Form 10-Qs filed with the SEC on October 30, 2013, May 9, 2014,
July 22, 2014, and July 29, 2014, that described decreases in non-interest expenses, id. ¶¶ 99, 114,
116, 118; (3) a Form 8-K filed with the SEC on January 22, 2014, that included a press release
emphasizing “workplace reductions” and “reduced operating costs,” id. ¶ 103; and (4) a Form 8-K
filed with the SEC on April 22, 2014, that included a press release where DiNello stated “cost
reductions” were achieved by “enhancing efficiency across the organization[, which] led to a

15

reduction of noninterest expense as we completed the previously announced workforce reduction,”
id. ¶ 112.
Plaintiff argues that these statements were misleading because they gave the false
impression that cost reductions were the result of business efficiency when they were in fact due to
Flagstar’s “failure to comply with consumer protection regulations that had caused Fannie Mae to
threaten to terminate Flagstar’s rights to loan servicing as early as 2011.” Id. ¶¶ 98,104, 113, 117.
Flagstar argues that it was not required to disclose that its “loss mitigation practices and default
servicing operations were not in compliance with federal financial consumer protection laws[,]” id.
¶¶ 6, 98, 102, 104, 111, 113, 117, because “disclosure is not a rite of confession, and companies do
not have a duty to disclose uncharged, unadjudicated wrongdoing.” Defs.’ Mot. at 14 (quoting City
of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir. 2014)).
Flagstar also argues that because it “accurately reported the objective fact of workforce and cost
reductions, the Company was not required to editorialize on all the possible reasons for why the
reductions occurred.” Defs.’ Reply at 5.
Various courts have analyzed omission liability under analogous circumstances. In
Miller v. Champion Enters., Inc., 346 F.3d 660 (6th Cir. 2003), plaintiff argued that a press release
announcing defendant’s quarterly earnings, which plaintiff conceded were technically accurate, was
misleading in light of the fact that defendant’s largest distributor was in danger of bankruptcy. The
court of appeals rejected plaintiff’s argument that this disclosure constituted a “half-truth,” noting:
Just because defendants issued a press release . . . does not mean that
they chose to speak on any situation that could possibly affect their
financial condition. Such a rule would require almost unlimited
disclosure on any conceivable topic related to an issuer’s financial
condition whenever an issuer released any kind of financial data.

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Id. at 682 (emphasis added). Similarly, in In re Ford Motor Co. Secs. Litig., 381 F.3d 563 (6th Cir.
2004), plaintiffs argued that Ford’s financial statements, while technically accurate, were misleading
“because Ford knew that such profits and sales were due to its sale of a defective product and that
the eventual public revelation of the defect would affect adversely Ford’s financial status.” Id. at
570. In rejecting plaintiffs’ argument, the court of appeals noted that “[b]ecause plaintiffs have not
alleged the historical inaccuracy of Ford’s financial and earnings’ statements, such statements are
not misrepresentations.” Id.
Likewise, in Galati v. Commerce Bancorp., Inc., No. 04-3253, 2005 WL 3797764
(D.N.J. Nov. 7, 2005), plaintiffs argued that Commerce Bank’s disclosures touting positive growth
in deposits were misleading in light of underlying criminal activity, which likely contributed to that
growth. In finding that plaintiffs had failed to specify any material omission, the court reasoned that
“as long as they are accurate, earnings statements themselves do not create liability under Rule 10b5” and “[t]o hold otherwise would be to establish per se liability under Rule 10b-5 for any material
information related to corporate earnings releases–a result that would be almost indistinguishable
from creating a general duty of disclosure.” Id. at *7.
The disclosures before the Court regarding headcount must be analyzed similarly to
those in Miller, In re Ford, and Galati. Like the plaintiffs in those cases, the plaintiff in the present
case does not contest the technical accuracy of Flagstar’s statements regarding reduction in
headcount and non-interest expenses. Instead, plaintiff seeks to impose liability on Flagstar for not
explaining the underlying circumstances necessitating these reductions. But there could be any
number of reasons why a corporation would reduce headcount and non-interest expenses, and to
require Flagstar to disclose all underlying circumstances would impose a general duty of unlimited

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disclosure whenever any kind of financial data is released. Because such a standard is not the law,
Flagstar was not required to disclose the alleged Fannie Mae threats.
iii. Disclosures Relating to Flagstar’s Sale of Mortgage Servicing Rights
Lastly, plaintiff asserts that a press release associated with a Form 8-K that Flagstar
filed with the SEC on December 18, 2013, was misleading. Am. Compl. ¶¶ 101-02. This press
release notified the public that Flagstar had entered into an “agreement to sell a substantial portion
of its mortgage servicing rights (“MSRs”) portfolio to Matrix Financial Services Corporation” and
that “[a] central component of this transaction is that Flagstar will act as the sub-servicer on all of
the mortgage loans underlying the MSRs being sold under the agreement.” See Defs.’ Mot., Ex. Q,
Pg ID 397. Plaintiff argues this press release was misleading because it failed to disclose that the
sale of servicing rights “did not end Flagstar Bank’s liability for violations of the CFPA[.]” Am.
Compl. ¶ 102. Plaintiff also argues that this statement was misleading because Flagstar should have
disclosed that “the sale was prompted by the threats of Fannie Mae and Ginne [sic] Mae to terminate
the Bank’s loan servicing agreements.” Pl.’s Resp. at 18 (citing Am. Compl. ¶ 101).
Flagstar argues it was under no duty to “editorialize” material objective facts in any
particular way, especially considering that Flagstar “made no representations about whether the sale
of MSRs to Matrix would impact the Bank’s liability for servicing of loans that occurred prior to the
sale[.]” Defs.’ Mot. at 19-20 (emphasis in original) (citing In re CRM Holdings, Ltd. Secs. Litig.,
No. 10 Civ. 975, 2012 WL 1646888, at *27 (S.D.N.Y. May 19, 2012)). The Court agrees. An
omission need only be disclosed when necessary to make a previous statement not misleading. See
17 C.F.R. § 240.10b-5(b). No reasonable investor could have interpreted Flagstar’s statement as
suggesting that the sale of MSRs to Matrix Financial absolved Flagstar of any liability for previous

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violations of the CFPA. Because Flagstar made no representations regarding Matrix Financial’s
impact on Flagstar’s liability for prior violations, the disclosure was not misleading.
Nor was Flagstar required to disclose that the sale of servicing rights was prompted
by threats from Fannie Mae and Ginnie Mae. There is no relationship between the alleged omission
(Fannie and Ginnie Mae threats) and the disclosure itself (sale of MSR rights). Even if it were true
that Flagstar sold its servicing rights because of Fannie Mae and Ginnie Mae threats, Flagstar would
still be under no obligation to disclose this information to make the announcement about Matrix
Financial not misleading. To hold otherwise would impose a general duty of unlimited disclosure,
requiring a company to list all reasons necessitating its business decisions. Because such a standard
is not the law, Flagstar was not required to disclose the alleged Fannie Mae and Ginnie Mae threats.

IV. Conclusion
For the aforementioned reasons, the Court concludes that plaintiff has failed to meet
his burden in pleading an actionable, material omission. Because plaintiff cannot satisfy the first
element of his § 10(b) and Rule 10b-5 claim, Count I of the amended complaint must be dismissed
and a discussion regarding the remaining elements of the § 10(b) claim is unnecessary. Further,
because plaintiff has failed to plead an actionable and material underlying omission to serve as the
predicate for § 20(a) liability, Count II against the individual defendants Borja and DiNello must also
be dismissed. See PR Diamonds, 91 F. App’x at 442-43. Accordingly,

IT IS ORDERED that defendants’ motion to dismiss plaintiff’s amended complaint

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[docket entry 19] is granted.

S/Bernard A. Friedman
BERNARD A. FRIEDMAN
SENIOR UNITED STATES DISTRICT JUDGE
Dated: February 10, 2016
Detroit, Michigan

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