PHILLIPS v. TRIAD GUARANTY INC. et al
Filing
108
MEMORANDUM OPINION AND ORDER signed by JUDGE N. C. TILLEY, JR on 3/30/2015; the Court affirms the Magistrate Judge's Order (Doc. # 87 ) striking Exhibits 8-11 to the Declaration of Robyn F. Tarnofsky, and Plaintiff's Motion to Strike (Doc. # 73 ) is GRANTED and Exhibits 8-11 are ordered struck. The Court rejects the Magistrate Judge's Recommendation (Doc. # 87 ), and Defendants' Mark K. Tonnesen's and Kenneth W. Jones' Motion to Dismiss (Doc. # 63 ) is GRANTED and the instant action is DISMISSED WITH PREJUDICE. (Sheets, Jamie)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
JAMES L. PHILLIPS, Individually
and on Behalf of All Others
Similarly Situated,
)
)
)
)
Plaintiff,
)
v.
)
)
TRIAD GUARANTY INC., MARK
)
K. TONNESEN, and KENNETH W. )
JONES,
)
)
Defendants.
)
1:09CV71
MEMORANDUM OPINION AND ORDER
The Order and Recommendation of the United States Magistrate Judge
(Doc. #87) was filed with the Court in accordance with 28 U.S.C. § 636(b)
and, on May 31, 2013, was served on the parties in this action. Counsel for
Defendants filed timely objections to the Order and Recommendation. (Doc.
#90.) Pursuant to 28 U.S.C. § 636(b)(1), the Court has appropriately
reviewed the portions of the Magistrate Judge’s Order and Recommendation
to which objection was made. The Court has made a determination that the
Order was not clearly erroneous or contrary to law. However, the Court has
made a de novo 1 determination to reject the Recommendation.
Lead Plaintiff Western Pennsylvania Electrical Employees Pension Fund
(referred to as “Plaintiff”) argues in response to Defendants’ objections to
the Recommendation that Defendants’ objection “does not contain any
1
I.
a.
The Magistrate Judge’s Order and Recommendation presents a
comprehensive procedural history and compilation of the factual background
in this case to which this Court directs the parties. (Doc. #87 at 1-8.) After
the issuance of the Order and Recommendation, Triad Guaranty, Inc.
(“Triad”) filed a petition for relief under Chapter 11 of the Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. The
petition operates as a stay of litigation against Triad. (Doc. #89 (citing 11
U.S.C. § 362(a).) On June 25, 2013, this Court entered an order
recognizing that the proceeding against Triad is stayed pending the outcome
of the Bankruptcy Court proceedings and ordering the clerk to terminate
Triad as a party to the instant action. (Doc. #91.) On October 18, 2013,
Plaintiff voluntarily dismissed Triad with prejudice. (Doc. #100.) Thereafter,
specific or particularized objections to [the Magistrate Judge’s] analysis, nor
does it identify a single error contained therein. Rather, it simply rehashes
the arguments raised in their Motion . . . .” (Doc. #92 at 2.) While
Defendants’ objections are similar to their arguments in support of their
motion to dismiss, Defendants have objected to specific findings and, as
such, those findings have received de novo review.
2
the parties filed notices of subsequently decided authority. (Docs. # 101103, 106.)
b.
Defendants Mark K. Tonnesen (“Tonnesen”) and Kenneth W. Jones
(“Jones”) (collectively “Defendants”) have objected to (1) the Order granting
Plaintiff’s Motion to Strike Exhibits 8-11 to the Declaration of Robyn F.
Tarnofsky (Docs. #66, 73) and (2) the Recommendation that Defendants’
Motion to Dismiss Plaintiff’s Second Amended Complaint (“SAC” or
“Complaint”) be denied (Doc. #63). 2
In the brief in support of their motion to dismiss and the objections to
the Order and Recommendation, Defendants repeatedly refer to and quote
from an earlier Recommendation to grant Defendants’ Motion to Dismiss the
First Amended Complaint. (See, e.g., Doc. #64 at 8-10, 14-15; Doc. #90 at
5-6, 7, 12-13, 16-20.) Defendants go so far as to argue that the “Court
should resist revisiting [the earlier] decisions, because under the ‘law of the
case’ doctrine, in the absence of extraordinary circumstances, when a court
In their objection, Defendants requested oral argument. In the Court’s
December 2, 2014, Order, the Court denied the request “[b]ecause the
parties have thoroughly briefed the matter, [and] oral argument will not aid
the Court’s decisional process.” (Doc. #107.)
3
2
decides upon a rule of law, that decision should continue to govern the same
issues in subsequent stages in the same case.” (Doc. #64 at 12; see also id.
at 14, 15 (describing what the Magistrate Judge “held”).) The earlier
Recommendation was never referred to this Court for adoption, because
Plaintiff filed a Second Amended Complaint before any party filed objections
to that Recommendation. (See Docs. #56, 59, 60.) Therefore, not only did
this Court not review the earlier Recommendation, that Recommendation
remained just that – a recommendation to this Court, which became moot
upon Plaintiff’s filing of the Second Amended Complaint. As much as
Defendants preferred the earlier Recommendation to the one before this
Court, the Magistrate Judge gave “considered review to [the earlier]. . .
recommendation. . . [and] addressed the second amended complaint and the
motions related thereto on their own merits.” (Recommendation p.34 n.6.)
This Court has done the same.
II.
Defendants have objected to the Order granting Plaintiff’s motion to
strike Exhibits 8-11 to the Declaration of Robyn F. Tarnofsky (Doc. #66).
Those exhibits are copies of Form 4 filed with the Securities and Exchange
Commission (“SEC”) showing that Defendants, among others, purchased
4
stock in Triad during the class period. The Order striking those exhibits
properly analyzed and applied relevant case law in doing so and was neither
clearly erroneous nor contrary to law. See Fed. R. Civ. P. 59(a). Therefore,
Defendants’ objection to the Order is denied, and the Order stands. Exhibits
8-11 to the Declaration of Robyn F. Tarnofsky (Doc. #66) are stricken.
III.
Next, Defendants have objected to that portion of the
Recommendation that Defendants’ Motion to Dismiss Plaintiff’s Second
Amendment Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure be denied.
“To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible
on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct.
1955 (2007)). “Facial plausibility” is “when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Id., 129 S. Ct. 1949. The
Court accepts as true all well-pleaded allegations and views the complaint in
5
the light most favorable to Plaintiff. See Mylan Labs, Inc. v. Matkari, 7 F.3d
1130, 1134 (4th Cir. 1993).
Plaintiff alleges violations of sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. Section 10(b) of the Securities Exchange Act of
1934 makes it unlawful “[t]o use or employ, in connection with the
purchase or sale of any security . . . any manipulative or deceptive device or
contrivance in contravention” of Commission rules and regulations. 15
U.S.C. § 78j. Commission Rule 10b-5 makes it unlawful for a person to
“employ any device, scheme, or artifice to defraud,” “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 are made, not misleading,” or “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. Section 20(a) provides, in relevant part, that
“[e]very person who, directly or indirectly, controls any person liable under
[the Act or related rule or regulation] shall also be liable jointly and severally
with and to the same extent as such controlled person . . . .” 15 U.S.C. §
78t.
6
To prevail in a securities fraud action, a plaintiff must show (1) a
material misrepresentation or omission, (2) scienter, (3) a connection with
the purchase or sale of a security, (4) reliance, (5) economic loss, and (6)
loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.
Ct. 1627, 1631 (2005). “These substantive elements of a securities fraud
claim are demanding.” Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 623
(4th Cir. 2008). While Rule 8(a)(2) of the Federal Rules of Civil Procedure
requires that a plaintiff include in his complaint only “a short and plain
statement of the claim showing that the pleader is entitled to relief,” a
plaintiff alleging securities fraud must do more. First, Rule 9(b) of the
Federal Rules of Civil Procedure requires a plaintiff alleging fraud to state his
claims “with particularity.” See Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d
462, 471 (4th Cir. 2011) (reviewing allegations of loss causation for
“sufficient specificity,” similar to Rule 9(b)’s requirement of particularity).
He must provide the “who, what, when, where, and how” of the alleged
fraud. United States ex rel. Willard v. Kellogg Brown & Root, Inc., 525 F3d
370, 79 (4th Cir. 2008) (internal quotations and citations omitted). In
addition, the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C.
§ 78u-4, provides “[e]xacting pleading requirements” in cases, such as this
7
one, where a plaintiff alleges that the defendant made false or misleading
statements. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
313, 127 S. Ct. 2499, 2504 (2007). Under the PSLRA, a plaintiff (1) “shall
specify each statement alleged to have been misleading and the reason or
reasons why the statement is misleading,” 3 and (2) “shall, with respect to
each act or omission . . . state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” Id. at §
78u-4(b)(1) and (2). In other words, the PSLRA provides heightened
pleading requirements beyond Rule 9(b) for the elements of
misrepresentation and scienter. Katyle, 637 F.3d at 471 n.5. The PSLRA
also states that “the plaintiff shall have the burden of proving that the act or
omission of the defendant . . . caused the loss for which the plaintiff seeks
to recover damages.” Id. at § 78u-4(b)(4). Defendants argue that Plaintiff
fails to plead sufficiently scienter, any false or actionable statements, and
loss causation and, therefore, object to the Recommendation’s suggestion
otherwise.
If a plaintiff alleges a false or misleading statement “upon information and
belief,” he must also “state with particularity all facts on which the belief is
formed.” 15 U.S.C. § 78u-4(b)(1)(B). Here, Plaintiff has not alleged false
and misleading statements upon information and belief.
8
3
A.
First, Defendants allege that Plaintiff has not sufficiently pled scienter.
Scienter is “a mental state embracing intent to deceive, manipulate, or
defraud.” Tellabs, Inc., 551 U.S. at 319, 127 S. Ct. at 2507. In the Fourth
Circuit, scienter also encompasses “severe recklessness,” Teachers’ Ret.
Sys. of La. v. Hunter, 477 F.3d 162, 183-84 (4th Cir. 2007), defined in the
securities fraud context as “’an act so highly unreasonable and such an
extreme departure from the standard of ordinary care as to present a danger
of misleading the plaintiff to the extent that the danger was either known to
the defendant or so obvious that the defendant must have been aware of
it,’” Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 343 (4th Cir.
2003) (quoting Phillips v. LCI Int’l, Inc., 190 F.3d 609, 621 (4th Cir. 1999)).
Although the PSLRA requires a plaintiff to “state with particularity
facts giving rise to a strong inference” of scienter, “Congress left the key
term ‘strong inference’ undefined.” Tellabs, Inc., 551 U.S. at 314, 127 S.
Ct. at 2504. The Supreme Court determined that “[t]o qualify as ‘strong’
within the intendment of [the PSLRA], . . . an inference of scienter must be
more than merely plausible or reasonable – it must be cogent and at least as
compelling as any opposing inference of nonfraudulent intent.” Id., 127 S.
9
Ct. at 2504; see also id. at 323, 127 S. Ct. 2509 (instructing that when
determining whether plaintiff has pled facts that give rise to a strong
inference of scienter, “the court must take into account plausible opposing
inferences”). “The inquiry . . . is whether all of the facts alleged, taken
collectively, give rise to a strong inference of scienter, not whether any
individual allegation, scrutinized in isolation, meets that standard.” Id. at
322-23, 127 S. Ct. 2509. “[W]hen the facts as a whole more plausibly
suggest that the defendant acted innocently – or even negligently – rather
than with intent or severe recklessness, the action must be dismissed.”
Cozzarelli, 549 F.3d at 624. “In order to establish a strong inference of
scienter, plaintiffs must do more than merely demonstrate that defendants
should or could have done more.” Public Emps.’ Ret. Ass’n of Colo. v.
Deloitte & Touch LLP, 551 F.3d 305, 314 (4th Cir. 2009). In addition, a
plaintiff must allege facts supporting a strong inference that each defendant
acted with the requisite scienter. Teachers’ Retirement Sys. of La., 477 F.3d
at 184.
1.
Defendants argue that “Plaintiff must allege that the misconduct itself
is rational” (Doc. #90 at 5), because “allegations of irrational conduct can
10
raise no cogent inference of scienter” (Doc. #64 at 13). In support of this
argument, Defendants cite Cozzarelli, 549 F.3d 618 and Atl. Gypsum Co.,
Inc. v. Lloyds Int’l. Corp., 753 F. Supp. 505 (S.D.N.Y. 1990), but neither
case is on point, particularly the latter as it does not involve allegations of
securities fraud. Moreover, it would not necessarily be irrational for a
reasonable person to infer that Defendants would intentionally price modified
pool insurance policies so low that the company was at risk of being unable
to cover the claims if the housing market deteriorated, considering the
possible net income if the market did not deteriorate. Nevertheless,
Plaintiff’s scienter allegations do not support a strong inference of intentional
or severely reckless conduct.
2.
Nearly all of the facts that Plaintiff alleges in an effort to give rise to a
strong inference of scienter are from confidential sources. 4 “When the
complaint chooses to rely on facts provided by confidential sources, it must
describe the sources with sufficient particularity to support the probability
As part of their argument that Plaintiff failed to adequately plead false or
misleading statements, Defendants argue that the Complaint’s confidential
witnesses are unreliable, an argument that applies equally as well to
Plaintiff’s failure to plead scienter sufficiently.
11
4
that a person in the position occupied by the source would possess the
information alleged or in the alternative provide some other evidence to
support their allegations.” Teachers’ Retirement Sys. of La., 477 F.3d at
174; see also In re Trex Co., Inc. Sec. Litig., 454 F. Supp. 2d 560, 573
(W.D. Va. 2006) (“A confidential witness’ testimony can be used in pleading
under the PSLRA so long as the testimony involves facts of which the
witness had personal knowledge.”). Plaintiff’s allegations fall short of this
requirement.
The confidential source identified as the “former Assistant Vice
President and Regional Underwriting Manager in Triad’s Horsham, PA office
was employed with the Company from 2003 through 2008” and “oversaw
three underwriters and provided underwriting in the Company’s ‘flow’
channel.” 5 (SAC ¶ 29 n.2.) Plaintiff has attributed its allegations of motive
to this confidential source. (See id. ¶ 29.) Even if Plaintiff had described
this source with sufficient particularity to support the probability that he 6
would know of Triad’s business interests, which it did not, these broad
This is the extent of Plaintiff’s description of this confidential source. As it
has done with this confidential source, the Court will describe each of
Plaintiff’s confidential witnesses to the complete extent that Plaintiff does.
6
Plaintiff refers to these confidential sources in the masculine form (SAC
p.10 n.1.), and so does the Court.
12
5
statements attribute no scienter to any defendant. See Ottmann, 353 F.3d
at 352 (noting that “courts have repeatedly rejected these types of
generalized motives – which are shared by all companies – as insufficient to
plead scienter under the PSLRA”).
The confidential source identified as the “former Triad Consultant
worked for Triad on and off from 1997 through 2007 . . . [and] was
responsible for developing the Company’s Bid Management Software, which
the Company used to bid on Modified Pool insurance.” (SAC ¶ 29 n.4.)
While Plaintiff has sufficiently pled facts to support the probability that this
confidential source would have the requisite knowledge attributed to him
(see id. ¶ 29), his statement provides nothing more than the same
generalized motive allegations as noted above which are insufficient to
attribute scienter.
The confidential source identified as the “former Assistant Vice
President of Data Warehousing worked at Triad in a variety of positions from
1998 until 2008, with the witness’s last position being Assistant Vice
President of Data Warehousing.” “[H]e was responsible for providing data
for financial and risk management reporting[,]” initially to Ken Foster and
later to Steve Haferman. (Id. ¶ 29 n.5.) Plaintiff does a better job of alleging
13
the responsibilities of the Assistant Vice President of Data Warehousing than
it does when describing the other confidential sources. However, this
makes little difference, because the facts that this confidential source
alleges are either immaterial (id. ¶ 29), admittedly not based on personal
knowledge (id. ¶ 48), or not plausibly based on personal knowledge based
on the confidential source’s job responsibilities (id. ¶ 62). In addition, the
confidential source allegedly described the Senior Vice President of Audit as
“raising red flags over the process of assessing risk.” (Id. ¶ 62.) However,
not only does Plaintiff not allege to whom the red flags were raised, but the
Senior Vice President of Audit left Triad in 2004 (id. ¶ 29 n.6.).
Plaintiff relies heavily on the confidential source identified as the
“former Vice President of Risk Analytics” who “worked for Triad from
November 2006 until August 2007.” The former employee initially reported
to Foster, whose title is not alleged, but who is alleged to have been hired
for his expertise in structured pool insurance. Then, the former employee
reported to Haferman, who was at some time Senior Vice President of Risk
Management. (Id. ¶ 29 n.6.) Plaintiff does not allege the job responsibilities
of this confidential source, and the title of Vice President of Risk Analytics is
too vague, especially in light of the similarly vague titles of the other
14
confidential sources, to infer those responsibilities. Other than alleging that
the former Vice President of Risk Analytics reported to Foster until early
2007, there are no allegations of the interactions between the two during
that time, how frequently the confidential source reported to Foster, what or
how he reported to Foster, or what interactions, if any, he had with Foster
after early 2007. In other words, Plaintiff seems to have assumed that by
simply alleging the confidential source’s vague title, employment period, and
individuals to whom he reported, it would be probable that the confidential
source would have personal knowledge of the facts attributed to him
throughout Plaintiff’s complaint.
Plaintiff’s description of this former employee supports the probability
that he would know certain facts alleged, (id. ¶¶ 29, 45, 48, 66-72), many
of which describe actions that he personally took, (id. ¶¶ 45, 48, 66-72).
However, while it is probable that the witness knew of actions he personally
took, Plaintiff’s allegations surrounding those actions fall short. While
Plaintiff alleges that this confidential source “ran the models” (id. ¶ 45),
Plaintiff does not allege when he did so, if this was part of his
responsibilities, or whether the data used was the actual data available to
Triad at the time that it would have been pricing the loans at issue.
15
Although Plaintiff alleges that this confidential source “personally began to
raise significant concerns about the prices and bidding . . . and
undocumented adjustments” (id. ¶ 66), Plaintiff does not allege to whom the
source raised these concerns. 7 In addition, Plaintiff has not alleged facts to
support the probability that this former employee would know the remainder
of the information attributed to him. (See id. ¶¶ 35-38, 40-44, 46-49, 58,
75 8.)
The confidential source identified as the “former Senior Vice President
of Audit” was a founder of Triad, “had risk management, audit, and
underwriting responsibilities[,]” but left its employment in December 2004.
However, “he remained in contact with his former colleagues[.]” (Id. ¶ 48
n.9.) The allegations attributed to him are actions that he took in 2003,
2004, and 2005 – well before the beginning of the class period. (E.g., id. ¶
Plaintiff has alleged that this source presented the results of his analysis to
Triad’s Credit Committee, and the Court will analyze separately whether the
content of that presentation supports an inference of scienter. See infra at
22-23.
8
Even if Plaintiff had sufficiently alleged facts to support the probability that
the former Vice President of Risk Analytics would know the facts attributed
to him in paragraph 75, those facts actually support an inference that Triad
did not act recklessly when, after an independent consulting firm allegedly
verified the results of the March 28, 2007, presentation, Triad prohibited
Foster from making adjustments to the company’s risk and pricing models
and from bidding live on any Modified Pool insurance transactions.
16
7
57.) At some point in time, he allegedly raised “red flags over the process
of assessing risk,” but Plaintiff does not allege to whom or when he did so.
(Id. ¶ 62.) He allegedly “raised serious concerns about Foster and the
Company’s inadequate reserves [and under-reporting of loss ratios on some
of its bulk transactions] in an October 2004 meeting with Darryl Thompson,
the Company’s then-CEO, and General Counsel Earl Wall.” (Id. ¶ 63.)
Plaintiff does not allege Thompson’s or Wall’s tenure at Triad, nor that the
former Senior Vice President of Audit notified Tonnesen or Jones. The
confidential source is alleged to have “again raised his concerns about the
reserves” in a January 3, 2005 e-mail with David Whitehurst, a member of
Triad’s Board of Directors. (Id.) He allegedly discussed the reserves in a
conference call in early 2006 “attended by representatives” from Ernst &
Young and Whitehurst. (Id.) Plaintiff does not allege that any of this
source’s concerns were made known to Tonnesen or Jones. Not only does
Plaintiff not allege that Tonnesen or Jones were informed of the former
Senior Vice President of Audit’s concerns about the company’s reserves, but
the former Senior Vice President of Audit’s employment with Triad ended
nearly two years before the class period is alleged to have begun. See In re
Trex Co., Inc. Sec. Litig., 454 F. Supp. 2d at 573 (finding information from
17
witnesses who were not employed during the class period to be unreliable).
The source of any of his knowledge thereafter is from “contact[s] with
former colleagues.” These allegations do not support the probability that the
former Senior Vice President of Audit had any personal knowledge of the
class period conduct at issue in the Complaint.
The confidential source identified as the “former Vice President of Risk
Analytics and Forecasting was employed with the Company from November
2006 through December 2007.” (Id. ¶ 51 n.11.) There are no facts alleging
the responsibilities of this position, with whom this confidential source
worked, or to whom he reported. Nevertheless, it is plausible that the
former Vice President of Risk Analytics and Forecasting would know his
motivation for evaluating Triad’s pricing/risk modeling and the content of his
findings that he presented on March 28, 2007 to the Credit Committee. (Id.
¶¶ 67-71.)
The confidential source identified as the “former Senior Vice
President/Director of Underwriting worked for Triad from 1993 until January
2007 and reported to Senior Vice President of Operations Shirley Gaddy
who, in turn, reported directly to Defendant Tonnesen.” (Id. ¶ 59 n.12.)
Although this confidential source’s title supports the probability that he
18
would have personal knowledge of the only alleged fact attributed to him,
“that the Company’s Risk Committee was responsible for setting the
underwriting guidelines[,]” it is immaterial to an inference of scienter. (Id. ¶
59.)
The confidential source identified as the “former Vice President of
Product and Strategic Development worked for Triad from approximately
August 2006 until August 2007” and “reported directly to Foster.” (Id. ¶ 59
n.13.) The confidential source alleges that, as members of the Risk
Management Committee, Tonnesen and Jones were provided certain
information and “’were very well aware’” of Triad’s loss rates and claims.
(Id. ¶ 59.) He also alleges that Tonnesen and Jones participated in Weekly
Operations Committee Meetings. (Id. ¶ 60.) However, the confidential
source is not alleged to have been a member of the Risk Management
Committee or the Weekly Operations Committee or to have attended any of
those meetings. He does not state at which meetings Tonnesen or Jones
would have received the referenced information or that he was at those
meetings to witness Tonnesen’s or Jones’ presence. See In re Coventry
Healthcare, Inc. Sec. Litig., No. 08:09-CV-2337-AW, 2011 WL 1230998,
*5 (D. Md. Mar. 30, 2011) (finding allegation that the witness periodically
19
attended meetings, at which defendants occasionally were present, not of
sufficient particularity to support inference that witness could reasonably
attribute scienter to defendants because there was no indication of when or
how frequently the witness attended the meetings where defendants were
alleged to have been present and no indication as to what meetings the
witness attended with defendants). In addition, Plaintiff does not allege
what responsibilities the title of Vice President of Product and Strategic
Development encompasses, what information the former Vice President of
Product and Strategic Development reported to Foster, or what interactions
the confidential source had with Foster.
3.
Next, the Complaint also includes a section entitled, “Additional
Scienter Allegations.” (SAC ¶¶ 175-181.) However, as a whole, these
allegations fail to support a strong inference of scienter. First, they rely
almost entirely on information provided by the confidential sources above.
(See id. ¶¶ 178, 180.) In addition, Plaintiff makes broad statements such as
“[t]he ongoing fraud as described herein could not have been perpetrated
over a substantial period of time, as has occurred, without the knowledge
and/or severe recklessness and complicity of the personnel at the highest
20
level of the Company, including” Tonnesen and Jones. (Id. ¶ 176.) Plaintiff
attempts to allege scienter as a result of Tonnesen’s and Jones’ “receipt of
information[,] . . . control over and/or receipt of Triad’s allegedly materially
misleading misstatements[,] and/or associations with the Company that
made them privy to confidential proprietary information concerning Triad[.]”
(Id.) Not only do some of these allegations sound like res ipsa loquitur,
which is insufficient, but case law could not be clearer that allegations such
as these are not enough to meet the pleading requirements for scienter in
securities fraud cases. See In re Cree, Inc. Sec. Litig., 333 F. Supp. 2d 461,
475 (M.D.N.C. 2004) (“Plaintiffs cannot claim that the individual
Defendants’ titles or positions . . . establish that they must have known of
the alleged fraud.”); Smith v. Circuity City Stores, Inc., 286 F. Supp. 2d
707, 715 (E.D. Va. 2003) (finding scienter allegations insufficient where
Plaintiff argued that “Defendants must have acted with scienter because
they were senior officers of Circuit City and ‘were privy to confidential and
proprietary information concerning Circuit City’ [and] that Defendants
obtained this confidential information through ‘internal corporate documents,
conversations and connections with other corporate officers and
employees’”); In re First Union Corp. Sec. Litig., 128 F. Supp. 2d 871, 888
21
(W.D.N.C. 2001) (finding “group pleading” where Plaintiffs alleged that
“because of [defendants’] positions as corporate officers, defendants must
have known of the allegedly false and misleading nature of the alleged
misstatements” “clearly inconsistent” with pleading requirements and
“contrary even to pre-Reform Act law”).
In addition to these allegations, Plaintiff also attaches to its Complaint
a copy of the written portion of the former Vice President of Risk Analytic’s
and the former Vice President for Risk Analysis and Forecasting’s March 28,
2007, presentation to the Credit Committee, for which Tonnesen and Jones
are alleged to have been present. (SAC ¶¶ 67, 178 & Ex. A.) Plaintiff
alleges, and the written portion of the presentation confirms, that, among
the “Near Term Recommendations,” was an immediate need for a process
for evaluating and bidding deals that included bid-specific, written
explanations of the choice of model settings and ROC, capital, and bid price;
disclosure and review of the sharing of responsibilities by Products, Risk
Management, and Finance of all model overrides; a standard package of
documentation and reports created and distributed; and formal approval
delegations and signoff. (Id. ¶ 70 & Ex. A at 12.) After the presentation,
Triad retained an independent consulting firm to evaluate the results, which
22
were allegedly confirmed. (Id. ¶ 73-74.) After the independent evaluation,
Triad allegedly prohibited Foster from making any adjustments to the risk
and pricing models and required all adjustments to be performed by Risk
Management. (Id. ¶ 75.) Triad also prohibited Foster from bidding live on
any more Modified Pool Insurance transactions without Hafterman’s initial
review. (Id.)
Plaintiff’s allegations as a whole do not support a strong inference of
scienter where a reasonable person would deem the inference of scienter
cogent and at least as compelling as any opposing inference one could draw
from the facts alleged. Instead, Plaintiff’s allegations support the more
convincing inference that Triad, Tonnesen, and Jones used their business
judgment when it came to the company’s pricing practices, were motivated
to succeed in the changing mortgage insurance industry, and, once aware
that independent evaluators recommended immediate changes to bidding,
revised the company’s practices for doing so. In other words, the inference
of scienter is not as strong as the opposing inference that Defendants were
conducting their business in an effort to build a stronger market share and, if
23
anything, may have been at most negligent in some of their practices. As a
result, Plaintiff has not sufficiently pled scienter for purposes of the PSLRA. 9
B.
Next, Defendants argue that not only has Plaintiff failed to plead
scienter sufficiently, but it also has not sufficiently alleged that Defendants
“made a false statement or omission of material fact.” Longman v. Food
Lion, Inc., 197 F.3d 675, 682 (4th Cir. 1999) (citation omitted). The Court
agrees.
A plaintiff must allege “a factual statement or omission – that is, one
that is demonstrable as being true or false.” Id. “[T]he statement must be
false, or the omission must render public statements misleading.” Id. “And
finally, any statement or omission of fact must be material.” Id. “A fact is
material if there is a substantial likelihood that a reasonable purchaser or
seller of a security (1) would consider the fact important in deciding whether
to buy or sell the security or (2) would have viewed the total mix of
information made available to be significantly altered by disclosure of the
The Court’s finding that Plaintiff failed to plead scienter adequately is a
sufficient basis on which to grant Defendants’ motion to dismiss. However,
for completeness, the Court will also address Defendants’ challenges to
Plaintiff’s allegations of false statement or omission of material fact and loss
causation.
24
9
fact.” In re PEC Solutions, Inc. Sec. Litig., 418 F.3d 379, 387 (4th Cir.
2005) (internal quotation omitted). With respect to an omission, “[t]he
securities laws require disclosure of information that is not otherwise in the
public domain, not information that has already been publicly – indeed,
officially – disclosed by the company.” Hillson Partners Ltd. P’ship v. Adage,
Inc., 42 F.3d 204, 212 (4th Cir. 1994) (explaining, in response to plaintiff’s
allegation that defendant’s failure to disclose in more detail its subsidiary’s
problems constituted an omission of material fact, that those problems were
already detailed in defendant’s annual report and Form 10K); Smith, 286 F.
Supp. 2d at 721 (“Disclosure of information already publicly available does
not materially alter the ‘total mix’ of available information.”).
A statement is considered “puffery,” and, therefore immaterial, if it is
“a certain kind of rosy affirmative commonly heard from corporate managers
and familiar to the marketplace – loosely optimistic statements that are so
vague, so lacking in specificity, or so clearly constituting the opinions of the
speaker, that no reasonable investor could find them important to the total
mix of information available.” In re Cable & Wireless, PLC, 332 F. Supp. 2d
896, 900 (E.D. Va. 2004) (citing Hillson Partners Ltd. P’ship, 42 F.3d at
213 & Raab v. Gen. Physics Corp., 4 F.3d 286, 288-90 (4th Cir. 1993)).
25
If a statement is forward-looking, the PSLRA provides a safe harbor
from liability if certain conditions are met. See 15 U.S.C. § 78u-5. A
statement is forward-looking if it is
(A) a statement containing projection of revenues, income
(including income loss), earnings (including earnings loss) per
share, capital expenditures, dividends, capital structure, or other
financial items;
(B) a statement of the plans and objectives of management for
future operations, including plans or objectives relating to the
products or services of the issuer;
(C) a statement of future economic performance, including any
such statement contained in a discussion and analysis of
financial condition by the management or in the results of
operations included pursuant to the rules and regulations of the
Commission;
(D) any statement of the assumptions underlying or relating to
any statement described in subparagraph (A), (B), or (C);
...
Id. at § 78u-5(i)(1).
Liability does not attach to a forward-looking statement if it is
“identified as a forward-looking statement, and is accompanied by
meaningful cautionary statements identifying important facts that could
cause actual results to differ materially from those in the forward-looking
statement[.]” Id. at § 78u-5(c)(1); see also 15 U.S.C. § 87u-5(c)(2) (Oral
forward-looking statements must direct listeners to “additional information
concerning factors that could cause actual results to materially differ from
26
those in the forward-looking statement” that “is contained in a readily
available written document” that includes “a cautionary statement[.]”).
“’Cautionary language is ‘meaningful’ if it conveys ‘substantive information
about factors that realistically could cause results to differ materially from
those projected in the forward-looking statement, such as, for example,
information about the issuer’s business.’” In re Humphrey Trust, Inc.
Securities Litigation, 219 F. Supp. 2d 675, 683-84 (D. Md. 2002) (citing
H.R. Conf. Rep. No. 104-369 (1995)). A forward-looking statement is also
afforded a safe harbor if “the plaintiff fails to prove that the forward-looking
statement . . . was made with actual knowledge by that person that the
statement was false or misleading[.]” Id. In addition, if the forward-looking
statement is immaterial, it is shielded from liability. 15 U.S.C. § 78u-5(c)(1).
Similarly, “projections of future performance not worded as guarantees are
generally not actionable.” Raab, 4 F.3d at 290 (pre-PSLRA).
1.
Nearly sixty pages of Plaintiff’s 126-page Second Amended Complaint
detail Defendants’ alleged material false and misleading statements or
omissions of material facts made on October 26, 2006, November 9, 2006,
January 25, 2007, March 7, 2007, April 26, 2007, May 9, 2007, July 25,
27
2007, August 9, 2007, August 31, 2007, October 24, 2007, October 25,
2007, November 9, 2007, February 13, 2008, and February 14, 2008. 10
(SAC ¶¶ 80-162.) 11 Plaintiff has clearly alleged the date, setting, content,
and speaker of each of the aforementioned statements. Plaintiff also alleges
the effect of the statements and the reasons why each of the statements
was materially false and misleading or omitted material facts that would
have made the statement not false or misleading.
However, few of these statements or omissions that Defendants are
alleged to have made are material statements or omissions of facts, and
Plaintiff has not alleged that those facts are actually false. Most of the
statements that Defendants are alleged to have made are puffery, forwardlooking, cautionary, or otherwise immaterial. In addition, throughout the
Plaintiffs have alleged a class period from October 26, 2006, to April 1,
2008. SAC p.1.
11
Within each of Defendants’ alleged statements quoted in the SAC,
Plaintiff has emphasized with italics and bold font particular sentences, some
of which are quoted in this Opinion with Plaintiff’s emphasis. However,
Plaintiff does not explain the importance, if any, of the emphasized
sentences. Plaintiff does not explain how it intends for those emphasized
sentences to be treated compared to the remainder of the statements
quoted in the SAC. Nevertheless, the Court has analyzed each sentence
within each larger statement to determine if Plaintiff has sufficiently alleged
that Defendants made a false statement or omission of material fact. See 15
U.S.C. § 78u-4(b)(1).
28
10
class period, publicly available information informed investors of the
potential risks associated with the mortgage insurance industry and Triad’s
business specifically. As for the reasons why certain statements or
omissions are allegedly misleading, Plaintiff relies largely on confidential
witnesses; however, as explained above, Plaintiff has failed to allege
sufficient facts to determine that the confidential witnesses probably had
personal knowledge of the facts attributed to them.
2.
a.
Plaintiff has alleged that, on October 26, 2006, Triad issued a press
release in which it reported net income, diluted earnings per share, the
effects of realized investment losses and realized investment gains,
increased earned premiums, expected loss ratio, and increased reserves. (Id.
¶ 80 p.38.) Tonnesen reported that, “Our operating income . . . set a record
this quarter,” expenses were higher, and reserves and stockholders’ equity
were up. (Id.) These allegations are the extent of the alleged statements in
the October 26, 2006, press release that are factual and material. See In re
PEC Solutions, Inc. Sec. Litig., 418 F.3d at 387 (defining “materiality”);
29
Longman, 197 F.3d at 682 (defining “fact”). Plaintiff does not allege that
any of these facts are false.
That same day, Tonnesen and Jones are alleged to have participated in
a conference call with various securities analysts. (SAC ¶¶ 82-84.) The
only factual material statements among the statements that Plaintiff alleges
Tonnesen and Jones made are Jones’ reporting of the evolution of the
portfolio and the upward trend in the Alt-A and ARM segments in both
Primary and Modified Pool, which contributed to higher earned premium
rates in the several prior quarters, (id. ¶ 82 p.39), and his explanation of the
effect of the seasoning of the book and the seasonality associated with the
third quarter on reserves (id. ¶ 84 p.40). But, Plaintiff does not allege that
these facts are false.
Plaintiff also alleges that Triad reported a risk-to-capital ratio of 12.0:1
as of September 30, 2006. (Id. ¶ 81.) Plaintiff argues that, because it
believes that Triad was “undervaluing the risk associated with its insurance
policies,” “Triad was significantly understating its risk-to-capital ratio.” (Id. ¶
91(h).) However, Plaintiff does not allege that using Triad’s risk and capital
as they were recorded on Triad’s books as of September 30, 2006, would
30
total a ratio different than 12.0:1. In other words, Plaintiff does not allege
that reported risk-to-capital ratio was actually false.
The remainder of the October 26 statements are either puffery (e.g.,
id. ¶ 84 p.42 (“[T]here’s a lot of wind at our back . . .”); see also id. ¶ 80
p.38-39, ¶ 83, ¶ 84 p.40-42) or explanatory cautionary statements (e.g., id.
¶ 82 p.39 (describing fourth quarter change to the timing of processing of
data that comes late from lenders and the effect of the change on Triad’s
reported defaults); see also id. ¶ 83, ¶ 84 p.41-42). The statements of
puffery are the type of “rosy affirmative” opinions that “no reasonable
investor could find . . . important to the total mix of information available,”
see In re Cable & Wireless, PLC, 332 F. Supp. 2d at 900 (defining
“puffery”), especially in light of the material factual information also
contained in the press release. As such, they are not actionable. The
explanatory, cautionary statements inform investors of expected changes
and remind them of inherent risks. As with similar cautionary statements
that Plaintiff quotes, it would seem strange that these alleged statements
warning investors would be actionable under securities law.
31
b.
Plaintiff also alleges that Triad’s report for the third quarter of fiscal
year 2006 filed with the Securities and Exchange Commission (“SEC”) on
November 9, 2006, “reaffirmed the financial results and statements
announced in the [October 26] press release” and contained three false
statements. 12 (SAC ¶ 87.) The only one of the three statements that could
be construed as a factual material statement is, “Our Modified Pool
insurance in force at September 30, 2006 grew significantly during the past
year primarily due to our strong production in the structured bulk channel.”
(Id. ¶ 87 p.43.) Not only does Plaintiff not allege that fact is false, but
Plaintiff actually cites that information as a fact in its substantive
allegations. (See id. ¶¶ 50, 52.) The other two statements that Plaintiff
alleges are false – statements of a belief in continued business opportunities
and the company’s objective for growth – are “[s]oft, puffing statements
[that] generally lack materiality because the market price of a share is not
In addition to Plaintiff’s quotation of excerpts from Triad’s third quarter
Form 10-Q, Defendants attached to their brief in support of their motion to
dismiss excerpts from this Form 10-Q. Because the Court can take judicial
notice of the content of relevant SEC filings, particularly those cited in the
Complaint, Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 881 (4th
Cir. 2014), the Court has reviewed Triad’s complete Form 10-Q for the third
quarter of 2006 (“2006 3Q Form 10-Q”).
32
12
inflated by vague statements predicting growth.” Raab, 4 F.3d at 289
(internal quotations and citations omitted). In addition, the quoted excerpts
from the third quarter report for 2006 do not alter the total mix of
information available to the public when compared to the complete third
quarter report. See 2006 3Q Form 10-Q (discussing, among other things,
loss reserves, forward-looking statements, profitability factors, growth in
insurance in force, pay option ARMs, factors affecting Modified Pool
insurance, risk characteristics, effect of interest rates on persistency, captive
reinsurance, net losses and loss adjustment expenses, credit risk, liquidity,
statutory surplus and reserves, risks and uncertainties affecting future plans,
expectations, and performance). Plaintiff also attempts to argue that the
Sarbanes-Oxley certifications are false and misleading by grouping them
together with the statements in paragraphs 80-84 and 87-89, “which
touted, among other things, the Company’s loan portfolio, credit quality, and
pricing objectives[.]” (SAC ¶¶ 88-89, 91.) This argument fails because
Plaintiff has not alleged that the material facts were false.
33
3.
a.
Plaintiff next alleges that, on January 25, 2007, Triad issued a press
release in which Triad reported a decrease in its net income and diluted
earnings per share, and the effects of its realized investment losses. (Id.
¶ 93.) Tonnesen reported an on-target increase in defaults and the number
of paid claims, a “significant[]” increase in the average cost per paid claim,
the “impact of the slowing housing market” on “mitigation efforts,” “[a]
larger percentage of . . . claims paid . . . [that] were full option settlements,
[which] caus[ed] the average severity on both Primary and Modified Pool
business to increase . . .,” the necessity “to adjust the severity factors”
used in “reserving methodology” which increased reserves and incurred
losses, and an “increase in severity factors [which] was the major driver of
the $24.2 million increase in reserves during the quarter, although a portion
of the increase was attributable to changes in . . . frequency factors and the
natural growth and seasoning of [the] portfolio.” (Id. ¶ 93 p.47.) Tonnesen
also reported “a 28% increase in insurance in force from the end of 2005,”
a 29% increase in earned premiums for the fourth quarter, a 25% increase
in earned premiums for the full year, an increase of “only 5% during 2006”
34
of “reserved default counts,” and a drop in the “expense ratio from the
fourth quarter . . . to 22.8% . . . primarily the result of the increase in
written premiums.” (Id. ¶ 93 p.47-48.) Triad allegedly attached an exhibit
to the press release which reported, among other things, a 29% premium
growth, an increase in year-end reserves of “just 5%[,]” and “default counts
[which] showed a moderate increase.” (Id. ¶ 95.) These are the only
allegations of material fact in the press release, and Plaintiff does not allege
that these facts are false.
On the same day, Tonnesen and Jones participated in a conference
call with various securities analysts. (Id. ¶ 96.) Tonnesen is alleged to have
said, “roughly $5.8 million [of the reserve change] is associated with normal
change in the default inventory[,] . . . roughly $4.9 million has to do with
the changing expectations and model refinements on frequency[,] . . . [and]
$12.6 million, [sic] is a function of the new trends in severity, which
became apparent only this quarter[;]” “year-end reserve defaults are up just
5%[;]” and “normal changes in the default inventory added $5.8 million to
the reserve” in the fourth quarter. (Id. ¶ 96 p.49.) Tonnesen also allegedly
reported an increase of 28% in the insurance in force, “growth in the
modified pool line[,]” “moderate increases” in defaults, and the “highest ever
35
flow market share at 7.7%.” (Id. ¶ 96 p.50, 51.) He also said that Triad
“exited 2006 with a higher credit quality portfolio in terms of FICO scores
than we had at the beginning of the year.” (Id. ¶ 96 p.50.) These are the
only material factual statements allegedly made in the conference call, and
Plaintiff has not alleged these facts are false.
Triad allegedly reported a risk-to-capital ratio of 12.5:1 as of
December 31, 2006. (Id. ¶ 94.) However, not only has Plaintiff not alleged
that this ratio was false, but it alleged the ratio as a fact among its
substantive allegations. (Id. ¶ 56 (“Indeed, although Triad’s risk-to-capital
ratio was 12.5-to-1 at December 31, 2006, by the end of the Class Period,
the ratio ballooned to 20.5-to-1 . . . .”).)
The remainder of the alleged statements on January 25, 2007, are
inactionable puffery (e.g., id. ¶ 93 p.47 (“Our fundamentals remain
strong.”); see also id. at ¶ 93, ¶ 95, ¶ 96 p.49-53), or otherwise immaterial
or forward-looking cautions (e.g., id. ¶ 96 p.50 (“[W]e expect total earned
premium growth to slow somewhat in 2007[,] . . . the total number of loans
in default in both our primary and modified pool business to trend upward[,]
. . . [and] that overall severity will continue to trend upward.”); see also id. ¶
96 p.50, 51). Furthermore, in light of Triad’s filing of its Form 10-Q for the
36
third quarter of 2006 on November 9, 2006, these statements are not
actionable because they do not alter the total mix of information available to
the public. See 2006 3Q Form 10-Q (discussing, among other things, loss
reserves, forward-looking statements, factors affecting profitability, effect of
growth of insurance in force, pay option ARMs, factors affecting the
Modified Pool insurance, captive reinsurance, persistency, net losses and
loss adjustment expense, factors affecting reserves, credit risk management,
liquidity and capital resources, statutory surplus and statutory contingency
reserve, and various risks and uncertainties that can affect future plans,
expectations, and performance).
b.
Plaintiff also alleges that Triad’s annual report for the fiscal year 2006
filed with the SEC on March 7, 2007, “reaffirmed the financial results and
statements announced in the [January 25, 2007,] press release” and
contained additional false statements. 13 (SAC ¶ 102.) Unlike other alleged
statements that Plaintiff quotes, most of the statements that Plaintiff quotes
from the Form 10-K are material and factual. For example, Plaintiff alleges
The Court has taken judicial notice of the complete Form 10-K for the
fiscal year 2006 (“2006 Form 10-K”). See supra n.12.
37
13
that Triad stated, “Through the structured bulk channel, we participate in
bids for structured bulk transactions that meet our loan quality and pricing
criteria,” and “[W]e have expanded the risk characteristics that we pursue in
both the Primary and Modified Pool marketplaces . . . .” (Id. ¶ 102 p.55, 56;
see also id. ¶ 102 p.55-56 bullet pts. 3 & 5.) However, Plaintiff has not
alleged that these facts are false.
Plaintiff also quotes statements of puffery (see id. ¶ 102 p.55, 56
bullet pts. 2, 4, 7) that are immaterial and forward-looking statements (see
id. ¶ 102 p.56 bullet pt. 6) that are surrounded by meaningful cautionary
language throughout the Form 10-K. Furthermore, the selected passages
from the Form 10-K do not alter the total mix of information available to the
public when the entire Form 10-K is reviewed. See 2006 Form 10-K
(discussing, among other things, premium rates, risk management,
underwriting process, reinsurance, loss reserves and reserves for losses and
loss adjustment expenses, direct risk in force, regulation, risk factors,
forward-looking statements, factors affecting profitability, insurance in force,
risk in force, persistency, paid claims, severity, liquidity and capital
resources, statutory surplus and statutory contingency reserve, and various
risks and uncertainties relevant to future plans, expectations, and
38
performance). In sum, the statements that Plaintiff has quoted from the
Form 10-K are not actionable.
4.
a.
Next, Plaintiff alleges that statements made in Triad’s April 26, 2007,
press release are materially false and misleading or omitted material facts.
Triad reported its net income, diluted earnings per share, effect of realized
investment gains, growth in insurance in force, top line growth in earned
premiums, building of reserves, and quarterly loss ratio. (SAC ¶ 108 p.5960.) Plaintiff has not alleged that these material facts, the only such facts in
the quoted press release excerpt, are false.
Plaintiff has also alleged that Tonnesen and Jones made materially
false statements or omitted material facts during a conference call with
various securities analysts the same day. (Id. ¶ 110.) The only alleged
material factual statements are those by Jones reporting Triad’s increase in
primary and modified pool insurance in force, structured transaction volume,
decrease in seed rate, increase in average basis points, increase in earned
premiums, percentage of portfolio attributed to pay option ARMs, and debtto-capital ratio, (id. ¶ 110 p.60, 62), and by Tonnesen reporting that Triad’s
39
flow production was the strongest since 2003, (id. ¶ 110 p.61). Plaintiff
has not alleged these facts are false.
Plaintiff has alleged that Triad reported a risk-to-capital ratio of 13.8:1
as of March 31, 2007. For the same reasons as explained above, supra at
30-31, this statement is not actionable.
The remainder of the statements made on April 26, 2007, are
inactionable puffery, cautionary, or forward-looking statements. For
example, Tonnesen allegedly stated, “Changes in the market place . . . have
favored our business. We view this as an opportunity for Triad.” (SAC ¶
108 p.59; see also id. ¶ 108 p.59, 60, ¶ 110 p.60-62.) Among the alleged
cautionary statements is Tonnesen’s warning, “That said, it remains difficult
navigating through unsettled times . . . [,]” and “These products continue to
perform as expected but require our ongoing diligent review as they season
further.” (Id. ¶ 108 p.59, 60; see also id.) As noted earlier with similar
alleged cautionary statements, it would seem strange if these statements
were actionable under securities law when they inform the public of
difficulties and challenges in the mortgage insurance industry, particularly
with respect to Triad’s portfolio of business. Forward-looking statements
tinged with puffery include, among others, “[W]e continue to see strong
40
growth in the Alt-A segments and in mortgages with the potential for
negative amortization, primarily pay option ARMs.” (Id. ¶ 110 p.60; see also
id. ¶ 110 p.61, 62.) In addition, Jones made a forward-looking statement
that Triad was “looking at putting on a committed credit facility in the $75
million to $100 million range to give us some additional flexibility to continue
to pursue the business opportunities that we see in the market now.” (Id. ¶
110 p.62.) Indeed, Triad would report in its second quarter reporter for
2007, 14 that on June 28, 2007, Triad “entered into a three-year $80.0
million revolving unsecured credit facility with three domestic banks to
provide short term liquidity for insurance operations and general corporate
purposes.” 2007 2Q Form 10-Q at 7, 35. Plaintiff does not allege that Triad
did not enter into such an agreement. Moreover, in light of the publicly
available information from, for example, Triad’s 2006 annual report, these
statements do not alter the total mix of information.
b.
Plaintiff alleges that Triad’s quarterly report for the first quarter of
fiscal year 2007 filed with the SEC on May 9, 2007, “reaffirmed the
The Court has taken judicial notice of the complete second quarter Form
10-Q (“2007 2Q Form 10-Q”). See supra n.12.
41
14
financial results and statements announced in the press release” and made
two false statements. (SAC ¶ 116.) The only material factual statement
that Plaintiff includes in its excerpts reports that “the number of Modified
Pool defaults subject to deductibles and those without deductibles increased
. . . .” (Id.) However, Plaintiff does not allege that that fact is false. The
other statement is mere inactionable puffery. Furthermore, when combined
with the information presented in the complete Form 10-Q for the first
quarter of 2007, 15 these selected statements do not alter the total mix of
information available to the public. See 2007 1Q Form 10-Q (discussing,
among other things, statutory requirements, loss reserves, forward-looking
statements, profitability factors, earned premiums, growth in insurance in
force, trends in production, risk in force, indicators of possible increased
risk, seasonality of portfolio, captive reinsurance, net losses and loss
adjustment expenses, severity, loss reserve model, credit risk, various risks
and uncertainties related to future plans, expectations, and performance,
and no material change in market risk exposure since 2006 Form 10-K).
The Court has taken judicial notice of the complete Form 10-Q for the first
quarter of 2007 (“2007 1Q Form 10-Q”). See supra n.12.
42
15
Plaintiff also attempts to argue that the Sarbanes-Oxley certifications
are false and misleading by grouping them together with the statements in
paragraphs 116 and 117, “which touted, among other things, the success
of the Company’s Modified Pool portfolio and risk management strategies.”
(SAC ¶¶ 117, 119.) This argument fails because Plaintiff has not alleged
that the material facts are false.
5.
a.
Plaintiff also alleges that statements made in Triad’s July 25, 2007,
press release were materially false and misleading or omitted material facts.
Triad allegedly reported its net income, diluted earnings per share, effect of
realized investment gains, total insurance in force, and new insurance
written. (Id. ¶ 121 p.67-68.) These are the only material factual statements
in the press release, and Plaintiff does not allege that these facts are false.
Plaintiff alleges statements that Tonnesen and Jones made to
securities analysts during a conference call on the same day were also
materially false and misleading or omitted material facts. (Id. ¶ 123.)
Tonnesen allegedly reported Triad’s risk-to-capital ratio, growth in insurance
in force, high loan-to-value lending, decline in pay option ARMs, reduction in
43
live bids in the structured bulk market, trading of stock below book value,
raising of $80 million, and customer’s FICO scores. (Id. ¶ 123 p.68-71.)
Jones allegedly stated that “the pay-option ARM product line right now is
performing better on a vintage-to-vintage basis than the rest of the product.
That is as it pertains to our most recent pay-option ARM business[.]” (Id. ¶
123 p.72.) He also reported that the pay-option ARMs in 2004 and 2005
were not performing as well. (Id.) These are the only statements of material
fact made during the conference call, and Plaintiff has not alleged that these
facts are false.
The remainder of statements made on July 25, 2007, are statements
of puffery, cautionary forward-looking statements, or otherwise immaterial
statements, none of which is actionable. (See id. ¶ 121 p.67, ¶ 123 p.6872.) Moreover, they do not alter the total mix of information available to the
public at the time, which included the 2006 annual report and the 2007 first
quarter report.
b.
Plaintiff also alleges that Triad made false and misleading statements
in its quarterly report for the second quarter of fiscal year 2007 filed with
the SEC on August 9, 2007. (Id. ¶ 130.) Plaintiff alleges that the Form 1044
Q 16 “reaffirmed the financial results and statements announced in the [July
25, 2007] press release” and made two additional false statements. (Id.)
The only material factual statement quoted is “the number of Modified Pool
defaults subject to deductibles and those without deductibles increased at
June 30, 2007 from June 30, 2006[,]” but Plaintiff does not allege that fact
is false. The remaining statements are inactionable puffery. In addition,
when compared to the complete Form 10-Q for the second quarter of 2007,
the quoted statements do not alter the total mix of information available to
the public. See 2007 2Q Form 10-Q (discussing, among other things,
statutory capital, surplus, and contingency reserves, loss reserves, the $80
million credit facility, forward-looking statements, profitability factors, loans
in default, new insurance written, factors affecting structured bulk
transactions, loan-to-value risk, indicators of possible increased risk, risk in
force, seasonality of portfolio, net losses and loss adjustment expenses,
mitigation efforts, severity, growth in insurance in force, reserve model,
various risks and uncertainties related to future plans, expectations, and
Plaintiff mistakenly alleges in paragraph 130 that Triad made false and
misleading statements in its “2007 first quarter 10-Q.” (Emphasis added.)
However, the context of the paragraph supports the conclusion that Plaintiff
meant to refer to the second quarter Form 10-Q, as it does elsewhere in
paragraph 130 and in surrounding paragraphs.
45
16
performance, and risk factors). Plaintiff also alleges that Tonnesen and
Jones made materially false statements or omitted material facts when they
signed Sarbanes-Oxley certifications “which, [along with statements
contained in paragraphs 130 and 131], touted, among other things, the
success of the Company’s Modified Pool portfolio and risk management
strategies,” (SAC ¶ 131, 133), but those statements are not actionable
because Plaintiff has not alleged that material facts are false.
6.
Plaintiff also alleges that Defendants made materially false statements
or omissions in their August 31, 2007, press release, just days after Triad
announced that it had drawn the $80 million principal amount of the credit
facility. (Id. ¶¶ 135, 140.) In addition to reporting a decline in stock price,
Tonnesen allegedly stated, “The decision to draw down these funds was
made by the Board of Directors at a regularly scheduled Board meeting and
not in response to any liquidity issues. In fact, at June 30, 2007, we had
$26.7 million cash on hand and a very liquid portfolio of municipal and
corporate bonds at our disposal. These bonds, totaling $618 million, of
which $592 million are municipal bonds, have an average credit quality at
the AAA level.” (Id. ¶ 140.) He also allegedly reported that the proceeds of
46
the loan were with the holding company and were invested in short-term
instruments. (Id.) Plaintiff does not allege that these material facts are false.
The remainder of Tonnesen’s alleged statements are inactionable puffery.
(Id.)
7.
a.
Next, Plaintiff alleges that Defendants made materially false
statements or omissions in an October 24, 2007, press release in which
Triad reported its net loss, diluted loss per share, the effect of realized
investment gains, net of taxes, total insurance in force, new insurance
written, and “no Modified Pool transactions in the third quarter of 2007
. . . .” (Id. ¶ 143 p.82.) Plaintiff does not allege these material facts are
false. Plaintiff also alleges that Tonnesen and Jones made false statements
during a conference call with securities analysts the following day. (Id. ¶¶
146-47.) Tonnesen allegedly reported that Triad had “ceased originating”
“primary bulk product” which accounted for 13% of Triad’s total portfolio,
that early payment default trends were of significant focus, that the portfolio
consisted of 68% 100%-LTV, and that Triad had $600 million plus of hard
capital, $100 million of excess of loss coverage, and $185 million of current
47
captive balances. (Id. ¶ 146 p.83-84, 85; ¶ 147 p.86.) Jones allegedly
reported that “[o]n a risk adjusted basis, we were well in excess of AAA
risk-to-capital ratio using standard in force risk adjusted capital model[,]”
that the supplemental information contained components of Triad’s capital
position, that Triad had drawn down its $80 million credit facility, and that it
had $100 million of liquidity in the holding company. (Id. ¶ 146 p.83.)
Plaintiff has not alleged these material facts are false.
Plaintiff has alleged that Triad reported its risk-to-capital ratio of
17.8:1 as of September 30, 2007, (id. ¶ 144), but Plaintiff has failed to
allege that the ratio itself is false, even though Plaintiff believes that the
variables used to determine the ratio underestimate Triad’s true risk. See
supra at 30-31. The remainder of the statements in the press release and
conference call are inactionable puffery or cautionary statements. (SAC ¶
143 p.82-83; ¶ 146 p.83-87.)
b.
Plaintiff also alleges that Triad made materially false statements or
omissions in its quarterly report for the third quarter of fiscal year 2007 on
48
Form 10-Q, filed with the SEC on November 9, 2007. 17 (Id. ¶ 152.) Plaintiff
alleges that Triad “reaffirmed the financial results and statements announced
in the [October 24, 2007] press release” and made one additional false
statement. (Id.) However, the statement alleged to have been false is
nothing more than a statement of puffery and is, therefore, not actionable.
Furthermore, when compared to the complete third quarter report, the
excerpted statements do not alter the total mix of information available to
the public. See 2007 3Q Form 10-Q (discussing, among other things,
statutory capital, surplus, and contingency reserve, loss reserves, the drawdown of the $80 million credit facility, forward-looking statements,
profitability factors, losses and loss adjustment expenses, mortgage
originations in market, reduced volume, trend in new insurance written,
factors affecting structured bulk transactions, credit quality, loan type, and
loan-to-value of new insurance written, indicators of increased risk, risk in
force, seasonality of portfolio, mitigation, various risks and uncertainties
related to future plans, expectations, and performance, and risk factors). In
addition, as with Triad’s previous Sarbanes-Oxley certifications, Plaintiff also
The Court has taken judicial notice of the complete Form 10-Q for the
third quarter of 2007 (“2007 3Q Form 10-Q”). See supra n.12.
49
17
alleges they were materially false and misleading or omitted material facts
because, along with statements in paragraph 152, they “touted, among
other things, the success of the Company’s Modified Pool portfolio and risk
management strategies[.]” (Id. ¶ 153, 155.) However, Plaintiff has not
alleged material facts are false.
8.
Next, Plaintiff alleges that Triad made materially false and misleading
statements or omissions in its February 13, 2008, press release. (SAC ¶
157.) Triad allegedly reported its net loss, diluted loss per share, and effect
of realized investment losses. (Id.) Tonnesen allegedly explained that Triad’s
new guidelines addressing loan-to-value limitations, credit scores, and loan
documentation led to reduced fourth quarter production. (Id.) Plaintiff has
not alleged that these material facts, the only ones in the press release, are
false. The remaining statements in the press release are either inactionable
puffery (e.g., “[W]e took a leadership role in our industry . . . .”), cautions
(“[A]t this time, we can give no assurance that we will be able to
successfully implement our plan.”), or cautionary forward-looking statements
(“Our new guidelines . . . are expected to further limit production in 2008.”).
(Id.)
50
Plaintiff also alleges that Tonnesen made false statements to securities
analysts during a conference call on February 14, 2008. (Id. ¶ 159.)
Tonnesen is alleged to have said that “during the fourth quarter, we
implemented tighter underwriting guidelines [for] loan-to-value limitations,
credit scores and loan documentation and also incorporate [sic] volume
limitations in distressed markets,” “we have eliminated products and
programs that present high volatility,” “fourth quarter production . . . fell . . .
[,]” and “[w]e have also established at the Board level a special committee
to review financing and capital-raising alternatives.” (Id. ¶ 159 p.92, 93.)
These are the only statements of material fact made during the conference
call, and Plaintiff does not allege the facts are false. The remainder of the
statements are inactionable puffery (e.g., “. . . we believe that these
guidelines will go a long way toward ensuring a long-term quality portfolio
. . .”) or forward-looking cautionary statements (e.g., “[T]he short-term
consequence will be to restrict our over-all volume of business.”). (Id. ¶ 159
p.92; see also id. ¶ 159 p.92-94.)
Plaintiff also alleges that Triad reported a risk-to-capital ratio of 20.5:1
as of December 31, 2007. (Id. ¶ 158.) Just as before, Plaintiff has not
51
alleged that the ratio is false, even though it believes that the information
used to calculate that ratio underestimates Triad’s risk. See supra at 30-31.
9.
In addition, not only has Plaintiff failed to allege sufficiently that
Defendants made materially false and misleading statements or omitted
material facts to make such statements not false or misleading, but its
allegations explaining why the statements are materially false and misleading
also fall short. As it must, Plaintiff has alleged reasons why the statements
are materially false and misleading or omitted material facts to make such
statements not false or misleading. See 15 U.S.C. § 78u-4(b)(1). However,
nearly all of the alleged reasons why the statements are materially false and
misleading or omitted material facts are born of information from confidential
sources. (See SAC ¶ 91(a)-(f), (h); ¶ 100(a)-(h); ¶ 114(a)-(c), (e)-(g); ¶
119(a)-(d), (f); ¶ 128(a)-(g), (i)-(j); ¶ 133(a)-(c), (e)-(f); ¶ 142(a)-(b), (d)-(f); ¶
150(a)-(c), (e)-(f); ¶ 155(a)-(d), (f); ¶ 161(a)-(c), (e)-(f).) As detailed above,
for most of the confidential sources, Plaintiff has not sufficiently pled facts
to support the probability that the source would have personal knowledge of
the information. Other reasons why Plaintiff alleges the statements are
materially false and misleading include “Triad’s credit quality was not ‘very
52
encouraging’,” quoting from Tonnesen’s statement in the October 26, 2006,
press release. (Id. ¶ 91(g).) Plaintiff cites to paragraphs 54 through 56 for
support, but those paragraphs merely argue that Triad’s risk-to-capital ratios
and statutory contingency reserve underestimated its risk, even though
Plaintiff does not allege those reported figures were actually false. (See ¶¶
54-56.) This explanation provides no support for Plaintiff’s allegation as to
why Tonnesen’s statement would have been false and misleading, even if
the Court had found such a statement materially factual, which it did not.
The other reasons Plaintiff gives to explain why statements are materially
false and misleading or omitted material facts are similarly infirm.
In sum, Plaintiff has not sufficiently pled false statements or omissions
of material fact and has not sufficiently pled the reasons why the alleged
statements were materially false and misleading.
C.
The final element of Plaintiff’s securities fraud claim that Defendants
challenge is loss causation. Unlike the PSLRA’s heightened pleading standard
for alleging materially false and misleading statements and scienter, the
PSLRA does not “impose[] a more stringent pleading requirement” for loss
causation. Teachers’ Ret. Sys. of La., 477 F.3d at 185 (noting, though, that
53
the PSLRA “does explicitly state that a plaintiff must prove loss causation in
that the defendants’ material misrepresentations or omissions caused the drop
in the stock’s value”). Nevertheless, a plaintiff must allege “with sufficient
specificity to enable the court to evaluate whether the necessary causal link
exists” that the defendant’s misrepresentations and omissions proximately
caused the plaintiff’s economic loss. Id. at 185-86. A plaintiff is not required
to allege that the fraud was the sole cause of a security’s decline, but he must
show that the alleged fraud was “one substantial cause of the investment’s
decline in value.” Katyle, 637 F.3d at 472. The challenge for a plaintiff comes
“’when the plaintiff’s loss coincides with a marketwide phenomenon causing
comparable losses to other investors[.]’” Id. at 471 (quoting Lentell v. Merrill
Lynch & Co., 396 F.3d 161, 174 (2d Cir. 2005)). Similarly, the claim will fail
if the plaintiff “has not adequately pled facts which, if proven, would show
that its loss was caused by the alleged misstatements [or omissions] as
opposed to intervening events.” Id. In addition, while a plaintiff may frame
its loss causation argument around corrective disclosures, in this case, Plaintiff
has alleged that a previously concealed risk materialized, 18 causing its loss.
There are periodic references in the Complaint that suggest Plaintiff may
have been alleging loss causation based on corrective disclosures; however,
the bulk of allegations sound in materialization of risk.
54
18
Teachers’ Ret. Sys. of La., 477 F.3d at 187 n.3; SAC § VI. The Court finds
that Plaintiff has sufficiently pled loss causation.
Plaintiff alleges that “Defendants’ fraudulent scheme artificially inflated
Triad’s stock price by failing to disclose” a number of things. (SAC ¶ 188.)
Alleging artificially inflated stock price “will not itself constitute or
proximately cause the relevant economic loss.” Dura Pharm, Inc., 544 U.S.
at 342-43 (explaining why allegation of inflated purchase price is
insufficient). However, unlike the plaintiff in Dura Pharmaceuticals, Inc.,
Plaintiff does much more than merely allege that it “paid artificially inflated
prices for [Triad] securities and . . . suffered damage[s] thereby.” Id. at 340
(first alteration added).
Plaintiff alleges that after Triad made its revelation after the market
closed on August 27, 2007, that it had drawn down the entire $80 million
credit facility, Triad’s stock fell 24% on August 28 and fell again on August
29, a combined price drop of 35.2% in two days from $25.00 on August 27
to $16.20 on August 29. 19 (SAC ¶¶ 136, 138.) Plaintiff also alleges that
after Triad’s announcement on October 24, 2007, of a net loss of$31.8
However, allegedly, Triad’s stock rebounded on September 4, 2007, to
$17.65, the trading day following Triad’s “reassurances” to the market on
August 31, 2007. (SAC ¶ 141.)
55
19
million for the third quarter, the stock fell by 30.94% “on unusually high
trading volume.” 20 (Id. ¶ 145.) Plaintiff alleges that as a result of Triad’s
revelatory 2007 annual report filed after the market closed on April 1,
2008, 21 and subsequent analyst commentary, Triad’s stock fell 59% from
$5.25 on April 1 to $2.15 on April 4. (Id. ¶ 166.) After press releases in
May and June 2008 reporting a first quarter net loss of $150 million, denial
of its efforts to appeal suspension as an approved insurer of Freddie Mac,
failure of negotiations for a capital infusion, and run-off, Triad’s shares were
allegedly trading at $1.22 on “extremely heavy trading volume” by June 19,
2008, down 40.5% from $2.05 on June 18. (Id. ¶¶ 168-170.)
In an effort to distinguish Triad’s stock price declines during the class
period from other market factors, Plaintiff alleges that it applied “wellaccepted methodologies” and found that “the timing and magnitude of
Triad’s stock price declines negate any inference that the losses [it] suffered
. . . were caused by changed market conditions, macroeconomic or industry
factors or Company-specific facts unrelated to the Defendants’ fraudulent
Plaintiff alleges that while Triad’s stock rebounded after this loss, it was a
result of the false and misleading statements Defendants made the day
before or the day of the increase in stock value. (See id. ¶¶ 149, 154, 160.)
21
April 1, 2008, is the end of the class period.
56
20
conduct.” (Id. ¶ 199.) Allegedly, Triad’s stock price on the relevant dates
“reacted with a high statistical significance to [Triad’s] revelations.” (Id.)
Plaintiff then provides comparisons by way of narration and charts of the
stock price changes on the relevant dates for Triad, the Russell 2000 Index,
and the Equally-Weighted Index of Returns of MGIC Investment Cop, Radian
Group, and PMI Group. (See id. ¶¶ 200-205.) Although Plaintiff does not
detail the “well-accepted methodologies” or explain how their application
“negate[s] any inference” that Plaintiff’s losses were caused by something
other than Defendants’ fraud, for the pleading stage, Plaintiff has sufficiently
alleged with particularity loss causation to enable the Court to determine
that a necessary causal link could exist.
D.
In conclusion, Plaintiff has not sufficiently pled scienter or materially
false statements or omissions to support a claim under section 10(b) of the
Securities Exchange Act. Because Plaintiff has not sufficiently pled a
violation of section 10(b), Plaintiff’s claim of a violation of section 20(a) of
the Securities Exchange Act also fails. See, e.g., Katyle, 637 F.3d at 478
n.11 (affirming dismissal of section 20(a) claim because of plaintiff’s failure
to allege a predicate violation of section 10(b)).
57
IV.
For the reasons stated herein, the Court affirms the Magistrate
Judge’s Order (Doc. #87) striking Exhibits 8-11 to the Declaration of Robyn
F. Tarnofsky, and Plaintiff’s Motion to Strike (Doc. #73) is GRANTED and
Exhibits 8-11 are ordered struck. The Court rejects the Magistrate Judge’s
Recommendation (Doc. #87), and Defendants’ Mark K. Tonnesen’s and
Kenneth W. Jones’ Motion to Dismiss (Doc. #63) is GRANTED and the
instant action is DISMISSED WITH PREJUDICE.
This the 30th day of March, 2015.
/s/ N. Carlton Tilley, Jr.
Senior United States District Judge
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