Attorney: Murielle Stevens Walsh
Pomerantz Monitor July/August 2015
Judge Ungaro of the U.S. District Court for the Southern District of Florida has recently denied the motion to dismiss our complaint against Walter Investment Management and several of its officers.
The case alleges that the defendants misrepresented that the company had sound internal controls and was in compliance with federal regulations regarding mortgage servicing, when in fact one of the company’s primary subsidiaries, Green Tree Servicing, had engaged in rampant violations of federal consumer laws. Walter’s stock price declined when the company revealed that the government was investigating it for these violations. Defendants initially moved to dismiss our original complaint, arguing that the disclosure of the investigation was not enough to establish loss causation, a requirement for a securities fraud claim. The court agreed, because under applicable 11th Circuit standards, the disclosure of a government investigation and possible government action, standing alone, were not enough to establish loss causation. The theory is that an investigation means that there is merely some possibility that violations had occurred, which the court held is not certain enough to amount to a “corrective disclosure” that the company’s statements about legal compliance were wrong. The court did, however, grant us leave to amend the complaint.
Our second amended complaint included the new allegation that the government announced that it had decided to bring an enforcement action against the company to seek injunctive relief and fines. Importantly, analysts factored this development into their price target for Walter stock. We included these facts in our amended complaint; and the judge found that this disclosure was sufficient to establish loss causation – even though the initiation of a lawsuit by itself is not tantamount to a “corrective disclosure” either, because the company still could prevail at trial. But the Court held that the bringing of the government action moved the potential losses much closer to reality.
Ultimately, the company settled the government case, agreeing to injunctive relief and the payment of fines.
Whether disclosure of an investigation satisfies the “loss causation” requirement is a contentious issue in securities fraud litigation. Typically, it is such disclosures that actually trigger most of the losses; after that point, the market factors into the market price much of the risk of eventual litigation and its consequences.