PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
No. 17-2471
______
CITY OF CAMBRIDGE RETIREMENT SYSTEM, On
behalf of
itself and all others similarly situated, et al.
v.
ALTISOURCE ASSET MANAGEMENT CORP; WILLIAM
C. ERBEY;
KENNETH NAJOUR; ASHISH PANDEY; ROBIN LOWE,
Denver Employee Retirement Plan,
Appellant
______
On Appeal from the District Court
of the Virgin Islands
(D.C. No. 1-15-cv-00004)
District Judge: Honorable Harvey Bartle, III
______
Argued May 24, 2018
Before: KRAUSE, ROTH and FISHER, Circuit Judges.
(Filed: November 14, 2018)
Steve W. Berman, Esq.
Hagens Berman Sobol Shapiro
1301 2nd Avenue, Suite 2000
Seattle, WA 98101
Vincent A. Colianni, II, Esq.
Colianni & Colianni
1138 King Street
Christiansted, VI 00820
Kevin K. Green, Esq. [ARGUED ]
Hagens Berman Sobol Shapiro
533 F Street, Suite 207
San Diego, CA 92101
Counsel for Appellant
Walter C. Carlson, Esq. [ARGUED]
Sidley Austin
One South Dearborn Street
Chicago, IL 60603
Chad C. Messier, Esq.
Dudley Topper & Feuerzeig
1000 Frederiksberg Gade
2
P.O. Box 756
St. Thomas, VI 00804
David S. Petron, Esq.
Sidley Austin
1501 K Street, N.W.
Washington, DC 20005
Counsel for Appellee Altisource Asset Management
Corp
John L. Hardiman, Esq.
Julia A. Malkina, Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Counsel for Appellee William C. Erbey
______
OPINION OF THE COURT
______
FISHER, Circuit Judge.
Commenting on the economic calamity that was the
South Sea Bubble—in which he lost a considerable fortune—
Sir Isaac Newton is said to have remarked, “I can calculate the
motions of the heavenly bodies, but not the madness of the
3
people.” 1 Throughout its history, the trade of public securities
has proven to be both a powerful engine of economic growth
and an occasionally harsh reminder that what goes up must
come down.
In this securities fraud class action, former shareholders
allege that Altisource Asset Management Corporation and
several of its officers (collectively AAMC) inflated the price
of its stock through false and misleading statements. When
these mistruths were revealed to the market, the allegation
goes, the price of AAMC’s stock plummeted, costing
shareholders billions of dollars. The District Court dismissed
the complaint for failure to state a claim, concluding that
Plaintiffs failed to satisfy the requirements of the Private
Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u–
4. We agree and affirm.
I
A. Factual Background 2
1. William Erbey and Ocwen Financial
AAMC is one of several independent, but affiliated,
companies founded by William Erbey. The first company,
Ocwen Financial, was created in 1988 and became the
country’s largest purchaser of non-performing mortgage loans
in the 1990s. Companies earn profit from non-performing
mortgages by either efficiently foreclosing on the underlying
1
Edward Chancellor, Devil Take the Hindmost 69
(1999). The earliest accounts of Newton’s comment vary
slightly. See Joseph Spence, Anecdotes, Observations, and
Characters 368 (Samuel Singer, ed., 1820).
2
This factual background, unless otherwise indicated,
is taken from the operative complaint and accepted as true.
Krieger v. Bank of Am., N.A., 890 F.3d 429, 434 (3d Cir. 2018).
4
properties or by bringing the loans to current status. Once
current, the mortgages can either provide a reliable stream of
income or be resold at a premium. Ocwen came to specialize
in the servicing of non-performing loans. Mortgage servicing
is essentially a specialized form of debt collection, but in the
context of non-performing mortgages it is a notoriously
difficult and labor-intensive task. Ocwen gradually
transitioned from primarily servicing its own loans to acquiring
mortgage servicing rights from others. Large mortgage holders
sometimes contract with third parties for loan servicing,
typically paying the servicer a fee based on the unpaid principal
balance of the serviced properties. Business was thin for
Ocwen during the housing boom of the late 1990s and early
2000s because rising property values limited the number of
non-performing mortgages. The large banks, which owned a
majority of U.S. mortgages, were generally able to manage
their own (comparatively few) non-performing loans.
The 2008 housing crisis changed this picture. As droves
of borrowers fell behind on their mortgages, the largest
mortgage holders found themselves ill-equipped to service the
ballooning number of delinquent, non-performing loans. This
led to widespread corner-cutting—e.g., robo-signing of
foreclosure documents, fraudulent affidavits, and other abusive
servicing practices—which culminated in the 2012 National
Mortgage Settlement. Under this agreement, the nation’s five
largest mortgage holders, all banks, agreed to provide more
than $50 billion worth of relief to mistreated homeowners.
What was the National Mortgage Settlement?, Consumer Fin.
Prot. Bureau (updated May 10, 2018), perma.cc/CA8Z-E8HC.
In this environment, Ocwen’s experience in servicing
non-performing mortgages proved exceptionally
advantageous—and profitable. As banks sought to avoid the
financial hazards and regulatory scrutiny of servicing non-
5
performing and sub-prime loans, Ocwen was there to buy up
staggering quantities of mortgage servicing rights. From 2009
to 2013, Ocwen’s servicing portfolio grew from approximately
350,000 properties to more than 2.8 million. Consent Order
Pursuant to New York Banking Law § 44 at 2, In the Matter of
Ocwen Fin. Corp., N.Y. Dep’t Fin. Servs. (Dec. 22, 2014),
perma.cc/26XF-VMM2 (hereinafter the 2014 DFS Consent
Order). The aggregate unpaid principal balance of the
properties Ocwen serviced correspondingly grew from $50
billion to more than $464 billion. Id. By the end of 2013,
Ocwen had become the fourth largest mortgage servicer in the
U.S., and the largest servicer of sub-prime loans. Id. at 1. In
addition to efficiently servicing and foreclosing on distressed
properties, Ocwen also led the industry with programs
designed to help underwater borrowers stay in their homes. See
Patricia A. McCoy, Barriers to Foreclosure Prevention During
the Financial Crisis, 55 Ariz. L. Rev. 723, 763–64 (2013).
Ocwen’s willingness to expand its role in the mortgage
industry made it attractive to investors looking for
opportunities to re-enter the market following the 2008 crisis.
Ocwen’s growth and success did not pass without
notice, however. When Ocwen sought to acquire yet another
large portfolio of mortgage servicing rights in 2011, the New
York Department of Financial Services (DFS) raised concerns
about Ocwen’s growth and scalability. As a condition of DFS
approval for the acquisition, Ocwen agreed to abide by a
detailed set of servicing and staffing standards. Agreement on
Mortgage Servicing Practices, N.Y. Dep’t Fin. Servs. (Sep. 1,
2011), perma.cc/M6JW-XEET (hereinafter the 2011 DFS
Agreement). The following year, DFS conducted “a targeted
examination” of Ocwen, which “identified gaps in the
servicing records of certain loans that . . . indicate[d] non-
compliance” with the 2011 agreement. Consent Order Pursuant
6
to New York Banking Law § 44 at 2–3, In the Matter of Ocwen
Loan Serv., LLC, N.Y. Dep’t Fin. Servs. (Dec. 5, 2012),
perma.cc/5FA8-7SCG (hereinafter the 2012 DFS Consent
Order). As a result, DFS and Ocwen entered into the 2012
consent order, which required Ocwen to install an independent,
on-site monitor to ensure compliance with the 2011 agreement.
Id. at 4. These regulatory actions did not appear to hinder
Ocwen’s financial health, however, as the company’s stock
nearly doubled in the six months following the 2012 order.
2. The Ocwen Spin-offs
Also in December 2012—and directly relevant to this
case—Ocwen completed the spin-off of several independent
companies related to its core mortgage servicing business.
Those companies were Altisource Portfolio Solutions (ASPS),
Altisource Residential Corporation (RESI), and the appellee,
Altisource Asset Management Corporation (AAMC). 3 As
explained and depicted below, each of these spin-offs—in
conjunction with Ocwen—would work together to profit from
various opportunities within the broader real estate market.
Organizational Chart as of December 31, 2012
3
AAMC and RESI were not spun-off from Ocwen
directly. ASPS was spun-off from Ocwen in 2009, and in 2012
AAMC and RESI were both spun-off from ASPS.
7
RESI was created to capitalize on the nationwide
decline in home ownership and the consequent increase in
demand for rental properties. RESI would acquire non-
performing loans, with Ocwen providing the loan servicing. If
the mortgage could be brought current, RESI would sell the
loan for a profit. If not, RESI would foreclose on the home,
take title, and maintain it as a rental property, with property
management services provided by ASPS. This strategy for
converting non-performing loans into rental properties—if
8
performed efficiently—offered significant financial savings
over the conventional approach of purchasing such properties
at foreclosure auctions. RESI had no employees, and received
asset management and corporate governance services from
AAMC, which itself had only seven employees. RESI—
AAMC’s only client—paid AAMC a management fee based
on RESI’s available assets. Overall, the Ocwen-affiliated
companies were highly interrelated and shared a significant
number of corporate officers. For each company, William
Erbey was the largest individual shareholder and served as
Chairman of the Board.
At first, it appeared as if Erbey and his passel of
affiliated companies could do no wrong, and the stock price of
each company enjoyed a meteoric rise. AAMC, in particular,
began 2013 trading at around $75 per share, but by January
2014 had risen as high as $1,196 per share. Only one year later,
however, AAMC had fallen to $160 a share. Each of the other
Ocwen companies suffered a similar fate. The claims period in
this case—April 19, 2013 through January 12, 2015—includes
the bulk of this precipitous rise and fall, which resulted, at least
in part, from the persistent regulatory actions taken against
Ocwen during the same time period.
3. Regulatory Pressure
By December 2013, Ocwen was the largest non-bank
mortgage servicer in the U.S. On December 19, 2013, Ocwen
entered into a consent order with the Consumer Financial
Protection Bureau (CFPB) and authorities in 49 states and the
District of Columbia. Consent Judgment, Consumer Fin. Prot.
Bureau v. Ocwen Fin. Corp., No. 13-cv-2025 (D.D.C. Dec. 19,
2013), perma.cc/5KZP-MW6R (hereinafter the 2013 CFPB
Consent Order). A CFPB investigation of Ocwen had
uncovered systemic consumer protection violations, largely
9
attributed to Ocwen’s breakneck acquisition of mortgage
servicing rights in the preceding years. Pursuant to the 2013
CFPB consent order, Ocwen agreed to refund over $125
million to borrowers who had been wrongfully foreclosed upon
and to provide $2 billion in principal reduction to underwater
homeowners. Id. at 9–10. Ocwen also agreed to abide by the
standards outlined in the National Mortgage Settlement, id. at
9, becoming the first non-bank to do so.
Throughout 2014, Ocwen and its affiliates also attracted
more scrutiny from DFS and other government actors. In
February, DFS halted a proposed $2.7 billion sale of mortgage
servicing rights to Ocwen from Wells Fargo. Second Amended
Complaint (SAC) ¶ 164. DFS also sent a public letter to Ocwen
voicing its concern with “potential conflicts of interest”
between the Ocwen-related companies. Letter from Benjamin
M. Lawsky, Superintendent, N.Y. Dept. of Fin. Servs., to
Timothy Hayes, General Counsel, Ocwen Fin. Corp. (Feb. 26,
2014), perma.cc/5C52-ZPJ9 (hereinafter the 2014 DFS Letter).
And later in the year, the Department of Housing and Urban
Development (HUD) shut RESI out of a government-
sponsored auction of distressed properties. SAC ¶ 166.
In December 2014, Ocwen entered into yet another
consent order with DFS, precipitated by the findings of the
compliance monitor installed under the 2012 consent order.
2014 DFS Consent Order at 2. The monitor identified several
significant servicing violations by Ocwen, including (1) failing
to confirm that it had the right to foreclose before initiating
foreclosure proceedings, (2) failing to ensure that its
representations during foreclosure proceedings were correct,
(3) pursuing foreclosure while loan modification applications
were pending, and (4) failing to ensure that no foreclosure
actions were pursued against active duty servicemembers. Id.
at 5–6. As had the CFPB, the DFS compliance monitor traced
10
many of these problems to widespread technological
deficiencies in Ocwen’s servicing platform. As Ocwen
acquired companies and loan portfolios, it also inherited the
myriad proprietary computer systems used to service those
loans. Id. at 6–7. Ocwen’s efforts to combine these legacy
systems had resulted in a number of incompatibilities that
produced incorrect or outdated loan information. Id. The
monitor also identified several conflicts of interest among the
Ocwen-affiliated companies, specifically finding that Erbey
had not recused himself from several transactions between
Ocwen and ASPS, resulting in higher costs for Ocwen. Id. at
9. Pursuant to the 2014 DFS consent order, Ocwen agreed to
pay $150 million in relief to New York homeowners, and
Erbey agreed to resign his positions at Ocwen, ASPS, RESI,
and AAMC. Id. at 10, 17–18.
None of the above-mentioned regulatory actions were
brought against AAMC, nor did any action identify improper
conduct by Erbey relative to his role at AAMC.
B. Procedural History
The initial complaint in this class action was filed on
January 16, 2015 by City of Cambridge Retirement System.
After being appointed as lead plaintiff, Denver Employees
Retirement Plan filed a significantly revised amended
11
complaint, which it captioned its “Consolidated Complaint.” 4
AAMC filed a motion to dismiss the complaint under Federal
Rule of Civil Procedure 12(b)(6), which the District Court
granted. Roughly three weeks later, Plaintiffs sought leave to
reopen the case and further amend the complaint, attaching a
proposed second amended complaint to its motion. After
considering the proposed complaint, the District Court denied
leave to amend as futile. Plaintiffs then filed this timely appeal.
II
The District Court had jurisdiction under 28 U.S.C. §
1331 and 15 U.S.C. § 78aa. We have jurisdiction under 28
U.S.C. § 1291. Generally, a district court’s denial of leave to
amend is reviewed for abuse of discretion. United States ex rel.
Customs Fraud Investigations, LLC v. Victaulic Co., 839 F.3d
242, 248–49 (3d Cir. 2016). Leave to amend is properly denied
if amendment would be futile, i.e., if the proposed complaint
4
Plaintiffs continue to contend that the District Court
should not have counted the “Consolidated Complaint” as an
amended complaint. This contention is both wrong and
irrelevant. There were not—as is frequently the case—multiple
complaints in need of consolidation, so the only purpose of the
revised complaint was to make substantive amendments. In
any event, because the District Court dismissed due to futility,
the number of prior opportunities Plaintiffs had to amend is
immaterial. See In re Adams Golf, Inc. Sec. Litig., 381 F.3d
267, 280 & n.12 (3d Cir. 2004) (affirming denial of leave to
amend because proposed second amended complaint was
futile); United States ex rel. Customs Fraud Investigations,
LLC v. Victaulic Co., 839 F.3d 242, 252 (3d Cir. 2016)
(suggesting that denial of leave to amend the initial complaint
would have been justified if the proposed amendment would
have been futile).
12
could not “withstand a renewed motion to dismiss.” Jablonski
v. Pan Am. World Airways, Inc., 863 F.2d 289, 292 (3d Cir.
1988). “In assessing ‘futility,’ the district court applies the
same standard of legal sufficiency as applies under Rule
12(b)(6).” In re Burlington Coat Factory Sec. Litig., 114 F.3d
1410, 1434 (3d Cir. 1997). And as to this legal determination,
our review is plenary. Morrow v. Balaski, 719 F.3d 160, 165
(3d Cir. 2013).
In determining whether Plaintiffs’ proposed second
amended complaint states a claim under Rule 12(b)(6), we
accept all well-pleaded allegations as true and draw all
reasonable inferences in favor of the plaintiff. Id. However,
“we disregard threadbare recitals of the elements of a cause of
action, legal conclusions, and conclusory statements.” James
v. City of Wilkes-Barre, 700 F.3d 675, 681 (3d Cir. 2012).
III
A. The Elements of a Rule 10b–5 Claim
The proposed complaint charges AAMC with securities
fraud in violation of § 10(b) of the Securities Exchange Act of
1934, 48 Stat. 881, 15 U.S.C. § 78j, and Securities and
Exchange Commission (SEC) Rule 10b–5, 17 C.F.R. §
240.10b–5. 5 The 1934 Act prohibits the use of “any
manipulative or deceptive device” in connection with “the
purchase or sale of any security registered on a national
securities exchange.” 15 U.S.C. § 78j(b). More specifically,
Rule 10b–5 makes it unlawful for any person—in connection
with the sale of any security—“[t]o make any untrue statement
5
Plaintiffs’ proposed complaint also alleges that
AAMC violated § 20(a) of the Securities Exchange Act of
1934. They do not discuss this allegation on appeal, and we do
not consider it in reaching our conclusion.
13
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.”
17 C.F.R. § 240.10b–5(b). To state a claim under Rule 10b–5,
a plaintiff must allege:
(1) a material misrepresentation (or omission);
(2) scienter, i.e., a wrongful state of mind;
(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 (2005)
(internal quotation marks, citations, and emphasis omitted). In
this case—and as is typical—the principal contentions relate to
only three elements: a material misrepresentation (or
omission), scienter, and loss causation. See Cal. Pub. Emps.
Ret. Sys. v. Chubb Corp., 394 F.3d 126, 143 (3d Cir. 2004).
In addition to Rule 12(b)(6), pleadings in Rule 10b–5
actions must also satisfy the particularity requirements of both
Rule 9(b) and the Private Securities Litigation Reform Act
(PSLRA), 15 U.S.C. § 78u–4. Id. Rule 9(b) provides that any
fraud allegation “must state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P.
9(b). The PSLRA prescribes yet greater particularity relative to
the elements of material misrepresentation and scienter. With
respect to material misrepresentation, the PSLRA requires that
a complaint “specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation . . . is made on information
and belief, . . . all facts on which that belief is formed.” 15
U.S.C. § 78u–4(b)(1). With respect to scienter, complaints
14
must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of
mind.” Id. § 78u–4(b)(2)(A). 6
Far from mere technicalities, enforcement of such
pleading requirements helps avoid the “abusive” practice of
plaintiffs with “largely groundless claim[s] . . . simply tak[ing]
up the time of a number of other people, with the right to do so
representing an in terrorem increment of the settlement value.”
Dura, 544 U.S. at 347 (first quoting H.R. Rep. No. 104–369,
at 31 (1995) (Conf. Rep.); then quoting Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 741 (1975)). To that end,
the PSLRA seeks “to curb frivolous, lawyer-driven litigation,
while preserving investors’ ability to recover on meritorious
claims.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 322 (2007). Allowing claims only in cases of true fraud
avoids converting private securities actions into “a partial
downside insurance policy” against the vicissitudes of the
market. Dura, 544 U.S. at 347–48.
B. Plaintiffs’ Claims
Plaintiffs base their fraud claims on two principal
classes of statements made by AAMC. First, Plaintiffs argue
that AAMC misrepresented the benefits attributable to its
relationship with Ocwen. For example, in its 2012 Annual
Report filed with the SEC, AAMC stated:
6
Because the District Court ruled on futility grounds
alone, remand would be appropriate if we were to determine
that the complaint suffered only from a lack of particularity.
Burlington Coat Factory, 114 F.3d at 1435. However, because
we conclude that the complaint “would not survive a Rule
12(b)(6) motion even if pled with more particularity,” no
remand is necessary. Id.
15
[W]e believe that [RESI’s] access to Ocwen’s
servicing expertise helps it to maximize the value
of its loan portfolios and provides it with a
competitive advantage over other companies
with a similar focus.
J.A. 275. Plaintiffs allege that this statement was “materially
false and misleading because [it] portrayed Ocwen as a benefit
and a ‘competitive advantage’ to RESI, when Ocwen was
neither,” SAC ¶ 138, because of its outdated servicing platform
and regulatory violations.
The second category of alleged misrepresentations
concerns AAMC’s stated policy of requiring its officers—
Erbey in particular—to recuse themselves from any
transactions involving other Ocwen-affiliated companies. In its
2013 Annual Report, AAMC stated:
Each of our executive officers is also an
executive officer of [RESI] and has interests in
our relationship with [RESI] that may be
different than the interests of our
stockholders. . . . We follow policies, procedures
and practices to avoid potential conflicts with
respect to our dealings with [ASPS], Ocwen and
[RESI], including our Chairman [Erbey]
recusing himself from negotiations regarding,
and approvals of, transactions with these
entities . . . .
J.A. 324. Plaintiffs allege that this disclosure was “false and
misleading because it omits to disclose that the Related-Party
Transaction Policy was widely disregarded by Defendant
Erbey and others.” SAC ¶ 144.
The District Court concluded that Plaintiffs’ allegations
failed to plausibly allege either a material false statement or
16
loss causation. It did not reach the question of scienter, but on
appeal AAMC has renewed its argument that the complaint
should fail on that basis as well. The following sections will
analyze whether either class of alleged misrepresentations by
AAMC is sufficient to survive a challenge under Rule 12(b)(6)
and the PSLRA. 7 With regard to the statements concerning
AAMC’s relationship with Ocwen, we conclude that Plaintiffs
have not plausibly alleged that the statements were false, and,
therefore, we need not determine whether Plaintiffs
sufficiently pled scienter or loss causation. With regard to
AAMC’s recusal policy, we conclude that Plaintiffs’ failure to
identify a single AAMC transaction in which Erbey—or some
other officer—improperly participated renders its allegations
too speculative to meet the PSLRA’s strict requirements.
1. Falsity
The complaint contains dozens of statements from
various Ocwen-affiliated companies—not only, or even
primarily, AAMC—that Plaintiffs characterize as material
misrepresentations. On the question of falsity, then, the first
issue to address is the legal significance of statements made by
companies other than AAMC. Rule 10b–5 makes it unlawful
for any person to “make any untrue statement of a material
fact,” 17 C.F.R. § 240.10b–5(b), and, with regard to this rule,
“the maker of a statement is the person or entity with ultimate
authority over the statement,” Janus Capital Grp., Inc. v. First
Derivative Traders, 564 U.S. 135, 142 (2011). Therefore, in
considering whether AAMC made any material
7
In general, a complaint that satisfies the PSLRA’s
heightened pleading standards will also satisfy Rule 9(b)’s
requirements.
17
misrepresentations, we will consider only the statements of
AAMC (and not RESI, Ocwen, or other affiliated companies).
i. Statements Concerning AAMC’s Relationship with
Ocwen
As detailed above, Ocwen underwent significant
regulatory scrutiny before, during, and after the claims period,
and multiple regulatory bodies sanctioned it for improper
servicing practices. In various filings and public statements,
AAMC described its relationship with RESI and, in turn,
RESI’s relationship with Ocwen. Plaintiffs allege that (1)
AAMC knew that Ocwen’s servicing platform was severely
flawed and therefore a detriment to AAMC, and (2) AAMC’s
failure to disclose this information about Ocwen constituted a
material omission.
AAMC provided a detailed explanation of its
relationship with Ocwen in its 2013 Annual Report under the
heading “Risks Related to Our Management and Our
Relationships with [ASPS], Ocwen, and [RESI]”:
[RESI] is contractually obligated to service the
residential mortgage loans that it acquires.
[RESI] does not have any employees, servicing
platform, licenses or technical resources
necessary to service its acquired loans.
Consequently, [RESI] has engaged Ocwen to
service the non-performing and sub-
performing . . . loans it acquires. If for any
reason Ocwen is unable to service these loans at
the level and/or the cost that [RESI]
anticipates, . . . an alternate servicer may not be
readily available on favorable terms, or at all,
which could have a material adverse effect on
[RESI].
18
J.A. 323, 324. Thus, the annual report explained that RESI
depended on Ocwen for loan servicing and would be at risk if
it needed to find a different servicer. The same report also made
clear that, because RESI was AAMC’s sole source of revenue,
any risk to RESI applied in equal measure to AAMC. J.A. 309–
10.
Plaintiffs argue that, in order to make this report (and
others like it) not misleading, AAMC was obligated to disclose
its awareness of problems with Ocwen’s servicing platform.
But in the context in which these statements were made, there
was nothing false or misleading about AAMC’s assertions. The
above-quoted report does not imply anything about the quality
of Ocwen’s loan servicing, only its capacity (high) and its cost
(low). Plaintiffs have not alleged that AAMC had any reason
to believe that Ocwen, whatever its flaws, would be unable to
service all of the loans RESI sent its way. Nor is there any
allegation that Ocwen ever did fail to meet its servicing
obligation to RESI. Given that context, there was nothing
misleading about AAMC’s disclosed reliance on Ocwen. By
contrast, suppose AAMC knew at the time of this report that
Ocwen would soon be unable to take on any additional
mortgage servicing rights obligations. In that case, AAMC’s
19
statement would be misleading because what it identified as a
possible risk, was, in truth, known to be imminent. 8
In effect, Plaintiffs suggest that AAMC’s reference to
Ocwen carried some form of implied warranty. Plaintiffs
exhaustively catalogue Ocwen’s regulatory violations, but cite
no authority to support the conclusion that AAMC was
obligated to disclose the flaws of a separate entity in its own
filings. Even assuming that such an obligation could arise in
some cases, it would make no sense to impose such a
requirement where, as here, the allegedly “concealed”
information—Ocwen’s regulatory failures—was not only
well-known, but typical of most mortgage servicers at the time.
McCoy, supra, 55 Ariz. L. Rev. at 748 (noting a 2011 Treasury
Department investigation, which concluded that each of the ten
largest servicers in the Home Affordable Modification
Program was deficient); Vincent Di Lorenzo, Corporate
Wrongdoing: Interactions of Legal Mandates and Corporate
Culture, 36 Rev. Banking & Fin. L. 207, 226 (2016)
8
The complaint highlights other AAMC statements
praising Ocwen, e.g., “We intend to capitalize on the servicing
capabilities of Ocwen, which we view as superior relative to
other servicers in terms of cost, management experience,
technology infrastructure and platform scalability.” SAC ¶
136. Such statements are not false because they clearly convey
a subjective opinion. Moreover, we have consistently held that
such “vague and general statements of optimism” are non-
actionable precisely because they are not material, i.e., a
reasonable investor would not base decisions on such
statements. See In re Advanta Corp. Sec. Litig., 180 F.3d 525,
538–39 (3d Cir. 1999), abrogated on other grounds as
recognized by Inst. Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242,
276 (3d Cir. 2009).
20
(describing mortgage servicing as a “distinct industry-wide
example of improper conduct,” and discussing a 2015
Comptroller of the Currency investigation, which found
repeated noncompliance with servicing standards by several
parties to the 2012 National Mortgage Settlement); see
generally Matthew Goldstein, Rachel Adams, & Ben Protess,
How Housing’s New Players Spiraled Into Banks’ Old
Mistakes, N.Y. Times, June 26, 2016, goo.gl/GoYTqv.
Under Rule 10b–5, the misleading nature of a statement
is evaluated “in the light of the circumstances under which” it
is made. 17 C.F.R. § 240.10b–5(b). As was clear under these
circumstances, AAMC’s statements about Ocwen were
relevant only insofar as RESI—and, by extension, AAMC—
depended on Ocwen to service the mortgages it acquired.
AAMC had no reason to believe that Ocwen would be unable
to fill this role, so its statements to this effect were not
misleading.
ii. Statements Concerning AAMC’s Recusal Policy
AAMC claimed in various disclosures that it had
“policies, procedures and practices” to avoid potential conflicts
with respect to the other Ocwen-affiliated companies. J.A. 324.
In particular, these policies required Erbey to “recus[e] himself
from negotiations regarding, and approvals of, transactions
with” those companies. Id. Plaintiffs allege that these
statements were false and misleading because, in reality, Erbey
had not recused himself from decisions concerning several
related-party transactions. To support this allegation, the
complaint primarily relies on a 2015 cease-and-desist order
issued by the SEC, which concluded that Erbey had failed to
recuse himself from certain transactions between Ocwen and
another affiliated company, HLSS. According to Plaintiffs, this
finding “raises a strong inference that [the defendants] acted in
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a similar manner with respect to AAMC.” SAC ¶ 145; see id.
at ¶ 107 (quoting In the Matter of Home Loan Serv. Sols., Ltd.,
SEC Release No. 3713, 2015 WL 5782427, at *1–2 (Oct. 5,
2015)).
By their own admission, Plaintiffs’ allegation regarding
AAMC’s recusal policy relies on an inference from Erbey’s
conduct with regard to two separate companies. Even
accepting that the stringent pleading requirements applicable
to Rule 10b–5 actions should be “relaxed somewhat where the
factual information is peculiarly within the defendant’s
knowledge or control,” Burlington Coat Factory, 114 F.3d at
1418, we cannot credit factual allegations, such as this, which
do not rise “above the speculative level,” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007). By not identifying a single
AAMC transaction in which Erbey improperly participated,
the complaint attempts to establish falsity through the very sort
of “speculative fraud by hindsight that the [PSLRA] was
intended to eliminate.” In re Rockefeller Ctr. Properties, Inc.
Sec. Litig., 311 F.3d 198, 225 (3d Cir. 2002).
*
Plaintiffs allege that AAMC misrepresented both the
benefits of its relationship with Ocwen and its adherence to a
recusal policy designed to protect against conflicts of interest.
However, Plaintiffs have failed to sufficiently plead falsity as
to either category. The statements concerning AAMC’s
relationship with Ocwen were not misleading in the context in
which they were made because AAMC’s reliance on Ocwen
only extended to its ability to service the loans acquired by
AAMC. Likewise, the complaint does not plausibly allege that
AAMC’s statements about its recusal policy were false or
misleading. Instead, it simply speculates that Erbey must have
violated the AAMC recusal policy because he is suspected to
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have done so with other companies. Neither allegation satisfies
the PSLRA’s strict standards for stating a claim.
2. Scienter and Loss Causation
Even if Plaintiffs had sufficiently alleged that AAMC
made false or misleading statements, this alone would not be
enough to survive a motion to dismiss. Plaintiffs must also
plead facts sufficient to create a “strong inference” that AAMC
intended to defraud shareholders (scienter), 15 U.S.C. § 78u–
4(b)(2)(A), and adequately allege that, when the truth was
revealed about those fraudulent statements, Plaintiffs suffered
an economic harm as a result (loss causation), Dura, 544 U.S.
at 341-42. Both factors are predicated upon a sufficient
pleading of false or misleading statements. Because we hold
that Plaintiffs failed to satisfy this first requirement, we decline
to go so far as to postulate whether AAMC may have intended
to defraud shareholders with non-fraudulent statements. Nor
do we speculate whether statements made—that do not correct
or contradict misleading statements by AMMC—could
reasonably have caused economic harm to Plaintiffs. Instead,
we conclude our analysis at our finding of no falsity and hold
that Plaintiffs have not stated a claim upon which relief can be
granted.
IV
The economic harm suffered by AAMC’s investors is
certainly regrettable, but Plaintiffs fail to plausibly allege that
this harm arose from fraud. When a stock experiences the rapid
rise and fall that occurred here, it will not usually prove
difficult to mine from the economic wreckage a few
discrepancies in the now-deflated company’s records. See H.R.
Rep. No. 104–369, at 31 (1995) (Conf. Rep.). Hindsight,
however, is not a cause of action. In passing the PSLRA,
Congress concluded that the very stability of our capital
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markets depends on forestalling meritless suits while
preserving for “defrauded investors” the “indispensable tool”
of private litigation. Id. Because Plaintiffs’ complaint falls on
the wrong side of this carefully-struck balance, we will affirm
the decision of the District Court.
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