Carvelli v. Ocwen Fin. Corp.

• Decision Date: 15 August 2019
• Docket Number: No. 18-12250,18-12250
• Citation: 934 F.3d 1307
• Parties: Karen A. CARVELLI, individually and on behalf of all others similarly situated, Plaintiff, University of Puerto Rico Retirement System, Lead Plaintiff, Plaintiff - Appellant, Ryan Huseman, Consolidated Plaintiff, v. OCWEN FINANCIAL CORPORATION, Ronald M. Faris, Michael R. Bourque, Jr., Defendants - Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

934 F.3d 1307

Karen A. CARVELLI, individually and on behalf of all others similarly situated, Plaintiff,University of Puerto Rico Retirement System, Lead Plaintiff, Plaintiff - Appellant,Ryan Huseman, Consolidated Plaintiff,

v.OCWEN FINANCIAL CORPORATION, Ronald M. Faris, Michael R. Bourque, Jr., Defendants - Appellees.

No. 18-12250

United States Court of Appeals, Eleventh Circuit.

August 15, 2019

Mitchell M.Z. Twersky, Ian D. Berg, Matthew Enrico Guarnero, Atara Hirsch, Todd L. Kammerman, Lawrence D. Levit, Jake Nachmani, Abraham Fruchter & Twersky, LLP, NEW YORK, NY, Julie Prag Vianale, Kenneth J. Vianale, Vianale & Vianale, LLP, BOCA RATON, FL, for Plaintiff - Appellant.

John Patrick Coffey, Jason Moff, Jonathan Mark Wagner, Kramer Levin Naftalis & Frankel, LLP, NEW YORK, NY, for Defendants - Appellees.

Before WILLIAM PRYOR, NEWSOM, and BRANCH, Circuit Judges.

NEWSOM, Circuit Judge:

The University of Puerto Rico Retirement System purchased Ocwen Financial Corporation common stock at an allegedly inflated price after a series of statements by Ocwen’s officers implied that the company would emerge from a regulatory mess. When Ocwen’s stock price instead began to fall, the Retirement System brought a private securities-fraud action under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and the SEC’s Rule 10b-5, claiming that it had detrimentally relied on Ocwen’s materially misleading statements and omissions concerning the likelihood of achieving regulatory compliance. The district court dismissed the Retirement System’s complaint, finding that it had failed to identify any material misrepresentations or omissions or otherwise state a claim against Ocwen for securities fraud. After conducting our own detailed review of the challenged statements, we agree. Even considering the Retirement System’s allegations in the most favorable light, as we must, its complaint falls short of alleging any actionable misrepresentations or omissions under § 10(b) and Rule 10b-5 (and by extension § 20(a)) or any other cognizable securities-law violation.

I

A

Ocwen is a financial-services company that focuses primarily on mortgage servicing—in particular, by processing borrower payments, administering loan loss-mitigation operations, and managing foreclosures. Between 2009 and 2012, Ocwen grew from big to bigger, expanding its portfolio from approximately 350,000 loans with an unpaid principal balance of roughly $50 billion to more than 1.2 million loans with a balance north of $200 billion. To manage the considerable amount of information required to administer all those loans, Ocwen used a software called REALServicing. Unfortunately for Ocwen, REALServicing didn’t really work—the software, as it turned out, was incapable of properly tracking borrowers’ accounts and payments, and it recorded inaccurate information about interest, late fees, escrow accounts, or completed payments for up to 90% of the loans in the system.

According to the Retirement System’s complaint—the allegations of which we accept as true for present purposes—these problems resulted from REALServicing’s fundamental design flaws. For example, REALServicing required the use of more than 10,000 comment codes and flags, but it had no complete data dictionary defining them, so Ocwen employees had no common understanding of what the codes meant or how they should be utilized. REALServicing also "lacked necessary automation and functionality," and thus required constant manual workarounds, which were prone to human error. And perhaps most importantly, REALServicing "lacked the system capacity to process the large number of loans acquired by Ocwen, resulting in long periods of system unavailability."

These systemic shortcomings caused Ocwen to fail to timely and accurately apply borrower payments and maintain accurate account statements, to charge unnecessary and unauthorized fees, to impose force-placed insurance on borrowers who already had adequate coverage, and, worst of all, to initiate wrongful foreclosures on numerous loans. An outside consultant found that REALServicing had limited functionality and that Ocwen’s "lack of business process automation had resulted in excessive manual processes," which "posed significant risk in a heightened compliance environment." These and other similar issues prompted Ocwen’s former Head of Servicing to describe REALServicing as "an absolute train wreck" and to lament that "[e]very business unit in the entire organization[ ] lacked sufficient controls to prevent mistakes and to detect when mistakes occur." Another former Head of Servicing similarly—if less colorfully—worried that Ocwen "could not service loans on REALServicing in compliance with applicable laws."

Those concerns were apparently well-placed; the Consumer Financial Protection Board filed a civil action against Ocwen in 2012 for "violating consumer financial laws at every stage of the mortgage servicing process." Other federal and state entities followed suit. Ocwen signed a consent order with 49 state attorneys general in 2013 that "required Ocwen to provide over $2 billion in relief to wronged homeowners and subject itself to a monitor ... and a monitoring committee"; a consent order with the New York Department of Financial Services in 2014 that required Ocwen to adopt a "system of robust internal controls and oversight" and pay $150 million in fines and restitution; and a consent order with the California Department of Business Oversight in 2015 that required Ocwen to pay a $2.5 million fine and stop acquiring new mortgage-servicing rights in California until it could satisfactorily comply with the Department’s requests for information.

The present suit arises from a series of statements that Ocwen made between 2015 and 2017, the years immediately following the federal and state regulatory actions. During this period, Ocwen stated, among other things, that it had "invested heavily in compliance and risk management," such that its "operations [were] now mature and delivering improved controls and results," and that it "expect[ed] the next round of results from the National Mortgage Settlement monitor to show that [it] ha[d] made progress in improving [its] internal testing and compliance monitoring." Ocwen also asserted that it "believe[d] it ha[d] effective controls in place to ensure compliance with the California Homeowners Bill of Rights and all single point of contact requirements under federal and state laws." In a 2015 earnings call with investors, President and CEO Ron Faris told investors that Ocwen was "committed to correcting any deficiencies, remediating any borrower harm, and improving our compliance management systems and customer service." And although Faris acknowledged that Ocwen would incur an expected $50 million in regulatory monitoring costs for the year, he also assured investors that "over time, as we demonstrate ongoing compliance and as the monitors roll off, we should see these expenses decline."¹

Despite this optimistic outlook, the financial effects of Ocwen’s internal problems began to bubble to the surface in February 2016, when it released its Form 10-K for the 2015 fiscal year. Ocwen reported higher-than-expected monitoring and compliance costs in connection with its settlements and other regulatory and litigation matters. The company explained, in an accompanying presentation, that it had incurred $170 million in monitoring expenses in 2015 and that it expected elevated legal costs to persist in 2016. Following this news, the price of Ocwen common stock dropped 58%, falling from an opening price of $5.02 on February 29, 2016, to $2.11 on March 1, 2016.

Ocwen stock continued to plummet over the next few months, even while company officials continued to maintain that the company’s difficulties were not insurmountable. In July 2016, Ocwen’s Second Quarter Form 10-Q reported that "[w]e are ... intensely focused on improving our operations to enhance borrower experiences and improve efficiencies, both of which we believe will drive stronger financial performance through lower overall costs." The 10-Q further stated that "[w]e believe[ ] [our] significant investments in servicing operations [and] risk and compliance infrastructure over recent years will position us favorably relative to our peers." And in a conference call that same month, Faris said that "[a]s a Company we continue to make progress in resolving our legacy issues" and that "this legal spend is now largely behind us." He also stated that Ocwen "remain[ed] focused on compliance, risk management, and service excellence" and was "striving to regain approvals to be able to acquire [mortgage-servicing rights] again" and to "resolve [its] remaining legacy, regulatory, and legal concerns." On news that Ocwen was working toward a settlement with its monitor from the California Department of Business Oversight, Ocwen common stock rose 7.1% to close at $1.81 on July 28, 2016.

Over the next few months, Ocwen officials continued to express optimism about the prospect of overcoming regulatory hurdles, and Ocwen’s stock prices continued to climb. In an October 2016 press release, Ocwen’s board of directors stated that the company "remain[ed] focused on putting legacy matters behind us" and "continue[d] to progress towards a potential resolution with the California Department of Business Oversight to end the current consent order and associated third party auditor before year-end." On October 27, 2016, Ocwen’s share price rose 10.8% to close at $4.12.

But alas, trouble soon resurfaced. In February 2017, Ocwen spin-off Altisource revealed that the CFPB was weighing a potential enforcement action against it based on a violation of federal law that arose from REALServicing. And around the same time, Ocwen admitted in its Form 10-K for the period ending December 31, 2016, that it had spent $12.5 million in connection with investigations.

A new wave of regulatory actions followed. In ...