Bar Mandalevy ex rel. Situated v. Bofi Holding, Inc.
| Decision Date | 07 December 2018 |
| Docket Number | Case No.: 17cv667-GPC-KSC |
| Parties | BAR MANDALEVY, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. BOFI HOLDING, INC., GREGORY GARRABTRANTS, ANDREW J. MICHELETTI, ESHEL BAR-ADON and PAUL J. GRINBERG, Defendants. |
| Court | U.S. District Court — Southern District of California |
Before the Court is Defendants' Motion to Dismiss Plaintiffs' Second Amended Complaint. Plaintiffs in this case had purchased shares of Defendant Bank of Internet Holding, Inc. Plaintiffs claim that the company and its executives made numerous false representations in public statements, which misled investors. When the truth of these misrepresentations were revealed in media reports, BofI's share price dropped.
The Court previously dismissed Plaintiffs' original Complaint, finding that most of the alleged misrepresentations were not actionable and that Plaintiffs had not adequately demonstrated loss causation for the actionable statements. Plaintiffs have filed an amended complaint which aims to cure the deficiencies of the previous pleading. Defendants now move to dismiss the Second Amended Complaint ("SAC"). For the reasons set forth below, the Court grants Defendants' motion.
BofI Holding operates as the holding company for BofI federal bank. SAC, ECF No. 38 ¶ 2. BofI provides consumer and business banking products in the United States. Id. BofI's common stock trades on the NASDAQ. Id. ¶ 3. Plaintiffs in this case purchased shares of BofI and claim that the revelation of a number of Defendants' misrepresentations caused the share price to drop. Id. ¶¶ 19, 24.
Defendant Gregory Garrabrants has served at all relevant times as BofI's CEO, President, and Director. Id. ¶ 26. Defendant Andrew Micheletti served as BofI's Executive Vice President and CFO. Id. ¶ 27. Defendant Eshel Bar-Adon served as the Chief Legal Officer and Executive Vice President. Id. ¶ 28. Defendant Paul Grinberg served as a member of the Board of Directors and as Chairman of the Board since February 16, 2017. Id. ¶ 29. Plaintiffs claim that Defendants made false or misleading statements on two subjects - the company's loans to criminals and governmental investigations into BofI.
On August 22, 2015, the New York Times ran a pre-Class Period article about BofI entitled, "An Internet Mortgage Provider Reaps the Rewards of Lending Boldly." SAC ¶ 36. The article stated that BofI had made loans to convicted criminals. Id. Moreover, a former internal auditor at BofI, Matt Erhart, allegedly uncovered widespread misconduct at BofI. Id. ¶ 37. In October 2015, Erhart filed a whistleblower protection lawsuit in this district. Id. Erhart's complaint claimed that BofI management may be altering company financials, BofI falsely responded to government subpoenas and inquiries, and BofI failed to disclose loans to criminals and politically exposed persons. Id.
On March 14, 2016, BofI filed a Form 8-K with the SEC, signed by Micheletti. Id. ¶ 67. The form states that BofI hired the law firm Dentons LLP to investigate whether there was support for the allegations of improprieties in Erhart's whistleblower complaint. Id. BofI asserted: "After an extensive investigation, Dentons advised the Audit Committee that, based on its investigation, it found no support for the conclusions of Mr. Erhart in the Complaint that the Bank or management engaged in wrongdoing or acts of fraud or impropriety." Id. On April 18, 2016, BofI issued a press release that referenced Erhart's whistleblower complaint and stated, "The absence of public enforcement actions highlight how disconnected these allegations are from the reality of BofI's highly compliant and top-performing business." Id. ¶ 68.
On October 26, 2016, Seeking Alpha published an article entitled, Id. ¶ 45; see also ¶ 117. The article ties BofI to making indirect loans to Jason Galanis, a convicted criminal. Id. ¶ 45. The author concludes: "My research leads me to believe that a reasonable person could infer that Galanis has a relationship with BofI that remains undisclosed to this date." Id.
On October 27, 2016, BofI conducted an earnings conference call, during which Garrabrants stated that "BofI has no interest credit exposure ownership of any loan, any kind of loan to Jason Galanis or any loan to Jason Galanis who is a guarantor including the $7 million loan mentioned" in the Seeking Alpha article. Id. ¶ 92.
On May 28, 2015, the SEC opened a Matter Under Inquiry ("MUI") into BofI. Id. ¶ 49. An MUI is an informal investigation and is generally less serious in nature than a formal investigation. Id. However, on February 11, 2016, the SEC closed the MUI and launched a formal investigation. Id. ¶ 51. In accordance with its investigation, on February 22, 2016, SEC subpoenaed BofI regarding: 1) related party transactions; 2) activities of the board, audit committee and a management regarding conflicts of interest; and 3) loans given to two specific entities. Id. ¶ 52. On October 19, 2016, the SECexpanded its investigation and issued a second subpoena that sought numerous documents related to single-family residential loans extended to non-resident aliens. Id. ¶ 55. According to a confidential witness identified as CW1, Garrabrants and Micheletti were aware of the formal SEC probe prior to March 2016. Id. ¶ 58. Moreover, CW1 discussed various federal investigations with Garrabrants in August 2015. Id. ¶ 60.
On April 28, 2016, BofI conducted an earnings conference call, during which Garrabrants stated that BofI "is in a strong regulatory standing, with no enforcement actions, has not been fined a single dollar by any regulatory agency and has not been required to modify its products or business practices." Id. ¶ 71. Garrabrants further stated that BofI "remain[s] in excellent regulatory standing." Id.
On August 2, 2016, BofI conducted an earnings conference call. Id. ¶ 78. Garrabrants acknowledged that "the nature of being a regulated entity is that we've constant dialogue with regulators, including the OCC, SEC, FDIC and the Fed." Id. Garrabrants further stated, "So we've not been asked any question or received any inquiry from any agency, including the SEC that would suggest concerns regarding financial misrepresentation, financial results, estimates, or other matters that would require an 8-K." Id. Garrabrants later reiterated, "We have not been asked any questions or received any inquiry that would suggest any concerns about our financials, financial misrepresentations, financial results estimates or anything else that would require the filing of an 8-K, meaning that would be material." Id.
On March 31, 2017, the New York Post published an article entitled, "Feds probe Bank of Internet for possible money laundering." Id. ¶ 100. The article stated that federal agents are investigating BofI for possible money laundering. Id. The article disclosed that the Justice Department, Office of the Comptroller of the Currency, SEC, and Treasury Department are all conducting an investigation. Id. The New York Post quoted Defendant Bar-Adon as stating that "there are no material investigations that would require public disclosure and BofI remains in good regulatory standing." Id.
That same day, BofI issued a press release in response to the New York Post article. Id. ¶ 101. BofI stated that the article "is nothing more than a rehash of baseless allegations that first surfaced over two years ago, and have been soundly refuted by BofI in court filings and on conference calls." Id. Moreover, BofI stated in the press release that the "Company has received no indication of, and has no knowledge regarding, such purported money laundering investigation." Id.
On April 6, 2017, the New York Post published a second BofI article entitled, "Feds Probe of Bank of Internet Helped by Aquarium Employee." Id. ¶ 126. This article reported that Kristi Procopio, a former marketing executive at BofI, "is telling authorities - including the San Diego US Attorney, the Securities and Exchange Commission and the FDIC - what she knows about alleged lax accounting and possible money laundering at BofI, court papers show." Id. The New York Post further stated that the "FDIC didn't immediately respond to an e-mail seeking comment on its investigation, which hasn't previously been reported." Id. On June 28, 2017, BofI's PR counsel stated that "there are no material investigations that would require public disclosure and BofI remains in good regulatory standing." Id. ¶ 106.
On October 25, 2017, the New York Post published a third BofI article entitled, "Bank of Internet Was under 16-month SEC investigation." Id. ¶ 130. The article disclosed that BofI was subject of a 16-month formal SEC investigation until June 2017. Id. ¶ 16. The article reported that the SEC investigation "was focused on alleged conflicts of interests, auditing practices, and loans made to two entities, according to subpoenas and government documents obtained by Probes Reporter, a publisher of investment research." ECF No. 32-9 at 1. These documents were "obtained through the Freedom of Information Act." Id.
On April 3, 2017, Plaintiffs filed a Class Action Complaint against Defendants which asserted a claim under Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), by way of violation of the SEC's Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffsalso alleged a count for violation of Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a). Plaintiffs claimed that Defendants violated Sections 10(b) and 20(a) by making misrepresentations about BofI's loans to criminals and government investigations.
Defendants countered with...
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