City of Cambridge Ret. Sys. v. Altisource Asset Mgmt. Corp

• Decision Date: 14 November 2018
• Docket Number: No. 17-2471,17-2471
• Citation: 908 F.3d 872
• Parties: 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
• Court: U.S. Court of Appeals — Third Circuit

908 F.3d 872

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

No. 17-2471

United States Court of Appeals, Third Circuit.

Argued May 24, 2018

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, 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

Before: KRAUSE, ROTH and FISHER, Circuit Judges.

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 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 Background²

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 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-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] noncompliance" with the 2011 agreement. Consent Order Pursuant 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

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 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 attributed to Ocwen's breakneck acquisition of...