In re 2007 Novastar Financial Inc., Securits. Lit.

Citation579 F.3d 878
Decision Date01 September 2009
Docket NumberNo. 08-2452.,08-2452.
PartiesIn re 2007 NOVASTAR FINANCIAL INC., SECURITIES LITIGATION, Robert W. Boyd, III, individually and on behalf of all others similarly situated; Bruce Gilmore; Steven J. Gedy; Norman Pelletier; James E. Murphy, on behalf of himself and all others similarly situated, Plaintiffs, Dr. Kevin Lester, Plaintiff-Appellant, Joshua Brown; Merri-Jo Hillaker; Charles McComb; Lois McComb; William Weakley; Alan James Bima, individually and on behalf of all others similarly situated; Gary M. Tanner; Lee M. Edison; Jack F. Dunbar, on behalf of himself and all others similarly situated; Durston Winesburg, on behalf of himself and all others similarly situated; Michael Owens, behalf of himself and all others similarly situated, Plaintiffs, v. Novastar Financial, Inc.; Scott F. Hartman; W. Lance Anderson; Gregory S. Metz, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Joseph D. Daley, argued, Thomas E. Eagler, Frederick Walters, Alexandra Bernay, Lauren Kerkhoff, on the brief, San Diego, CA, for appellant.

William F. Alderman, argued, San Francisco, CA, Michael Thompson, Brian D. Martin, on the brief, Kansas City, MO, for appellee.

Before BYE, COLLOTON and GRUENDER, Circuit Judges.

GRUENDER, Circuit Judge.

Kevin Lester appeals from the district court's1 order dismissing his class-action securities complaint under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), and concluding that any attempt to amend the complaint would be futile. For the reasons discussed below, we affirm.

I. BACKGROUND

We draw the relevant facts from the class's complaint because this appeal arises from the district court's grant of a motion to dismiss. See Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 648 (8th Cir.2001).

Novastar Financial, Inc. ("Novastar") is a publicly-traded company that originates, purchases, invests in, and services residential mortgages. Novastar is a subprime lender, offering loans to nonconforming borrowers with credit profiles that cannot satisfy the underwriting standards of conventional mortgage lenders. In addition to servicing individual loans, Novastar raises additional capital by bundling groups of loans into mortgage-backed securities and selling the rights to the income generated by these securities.

On February 20, 2007, Novastar announced its 2006 fourth-quarter and year-end financial results, which were well below analysts' expectations. In the same announcement, Novastar stated that it expected to earn far less income for the 2007 to 2011 fiscal years than it had previously anticipated. The announcement drove Novastar's stock price down by forty percent the next day. Within days, shares of Novastar stock were trading at less than thirty percent of their high in May 2006. In the weeks following the announcement, numerous Novastar investors filed separate class-action securities fraud lawsuits against Novastar and its officers and directors. The district court consolidated these various actions into a single class-action lawsuit and appointed Lester as the class's lead plaintiff. The class was composed of all persons who acquired Novastar's securities between May 4, 2006, and February 20, 2007 (the "class period").

On October 19, 2007, Lester filed the class's consolidated complaint. The 104-page complaint named as defendants Novastar its Chief Operating Officer, W. Lance Anderson; its Chief Executive Officer, Scott F. Hartman; and its Chief Financial Officer, Gregory S. Metz. It alleged that each defendant violated SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), by making false and misleading statements about Novastar's operations and financial health during the class period. The complaint began by describing the alleged deterioration of Novastar's underwriting standards and auditing processes and the alleged increasing number of loan defaults during the class period, drawing on information from former Novastar employees, including corporate credit managers, quality control auditors, underwriters, fraud investigators, and regional operations supervisors. Complaint at 11-34. Next, over the course of thirty-six pages, the complaint reproduced, either in their entirety or lengthy excerpts from, nineteen communications—including press releases, SEC filings, and conference call transcripts— issued by Novastar and the individual defendants during the class period that were allegedly false or misleading. Complaint at 34-70.2 The complaint concluded by alleging loss causation and setting forth the complaint's two counts, one for violations of Rule 10b-5 and § 10(b) and one for violations of § 20(a).

Novastar and its executives filed a motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), alleging that the complaint failed to comply with the PSLRA's heightened pleading requirements. Among other failings, Novastar argued that the complaint failed to allege any material misrepresentations or omissions and failed to plead facts establishing a strong inference of scienter. Novastar also suggested that the district court should not allow plaintiffs leave to amend their complaint because any such effort would be futile.

The district court granted Novastar's motion to dismiss, holding that the complaint did not satisfy the PSLRA's pleading requirements. Turning first to the PSLRA's requirement that the complaint "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading," 15 U.S.C. § 78u-4(b)(1), the court held that "Plaintiff has not specified the allegedly misleading statements, nor has he specified why the statements he has referred to are misleading." In re 2007 Novastar Fin., Inc., Sec. Litig., No. 07-0139-CV-W-ODS, 2008 WL 2354367, at *2 (W.D.Mo. June 4, 2008) (unpublished). Moreover, the court held that "Plaintiff has not explained how [the information from former Novastar employees] demonstrate[s] the falsity of any particular public statement." Id. at *3. Turning next to the PSLRA's requirement that the complaint "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," 15 U.S.C. § 78u-4(b)(2), the court held that the "Plaintiff does not compare (1) an allegedly false or misleading statement with (2) Defendants' prior receipt of information demonstrating that the statement would be false or misleading" and that "whatever minimal inference of fraudulent intent that can be gleaned from the Complaint is insufficient to allow the case to proceed." Id. at *4. The court found that Lester "has not presented facts creating an inference of scienter that is at least as strong as an inference that Defendants lacked fraudulent intent, and this failing constitutes an independent reason to dismiss the case." Id. The court also agreed with Novastar's contention that the investors should not be afforded an opportunity to amend because any such attempt would be futile. Id. at *5. In reaching that conclusion, the district court noted that "Plaintiff has not addressed this issue." Id. Lester appeals.

II. DISCUSSION
A. Dismissal Under the PSLRA

We review de novo the district court's dismissal of a securities fraud complaint for failure to comply with the PLSRA's heightened pleading requirements. In re Cerner Corp. Sec. Litig., 425 F.3d 1079, 1083 (8th Cir.2005). In reviewing the district court's dismissal, we "accept all factual allegations in the complaint as true[,] ... consider the complaint in its entirety[,] ... [and] take into account plausible opposing inferences." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-23, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).

The PSLRA goes beyond the ordinary pleading requirements described in Rules 8(a)(2) and 9(b) of the Federal Rules of Civil Procedure, requiring that

any private securities complaint alleging that the defendant made a false or misleading statement must: (1) "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading," 15 U.S.C. § 78u-4(b)(1); and (2) "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," § 78u-4(b)(2).

Tellabs, 551 U.S. at 321, 127 S.Ct. 2499 (alteration in original). "The Reform Act requires the court to dismiss the complaint if these requirements are not met." Kushner v. Beverly Enters., Inc., 317 F.3d 820, 826 (8th Cir.2003) (citing 15 U.S.C. § 78u-4(b)(3)). Lester contends that the district court erred in dismissing the complaint because it contained sufficient allegations of both falsity, § 78u-4(b)(1), and scienter, § 78u-4(b)(2).

We turn first to the question whether Lester's complaint contained sufficient allegations of falsity. The PSLRA's heightened pleading requirements compel the plaintiff to "plead the `who, what, when, where and how' of the misleading statements or omissions." Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir.2008) (quoting In re K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 890 (8th Cir.2002)). Plaintiffs alleging securities fraud must "plead their allegations of fraudulent misstatements and omissions with particularity." In re Navarre Corp. Sec. Litig., 299 F.3d 735, 743 (8th Cir. 2002). "[T]he complaint's facts must necessarily show that the defendants' statements were misleading." Cerner, 425 F.3d at 1083.

Lester argues that the district court erred in concluding that his complaint failed to specify the allegedly misleading statements. In support of his contention, he directs our attention to a section of his complaint titled, "Defendants' False and Misleading Statements Issued During the Class...

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