In re Bofi Holding, Inc.

• Decision Date: 21 March 2018
• Docket Number: Case No.: 3:15–cv–02324–GPC–KSC
• Court: U.S. District Court — Southern District of California
• Parties: IN RE BOFI HOLDING, INC. SECURITIES LITIGATION

302 F.Supp.3d 1128

IN RE BOFI HOLDING, INC. SECURITIES LITIGATION

Case No.: 3:15–cv–02324–GPC–KSC

United States District Court, S.D. California.

Signed March 21, 2018

ORDER GRANTING MOTION TO DISMISS WITH PREJUDICE

[ECF No. 144]

Hon. Gonzalo P. Curiel, United States District Judge

Before the Court is a motion to dismiss the Third Amended Class Action Complaint (the "TAC") filed by Defendants BofI Holding, Inc. ("BofI"), Gregory Garrabrants, Andrew J. Micheletti, Paul J. Grinberg, Nicholas A. Mosich, and James S. Argalas. (ECF No. 144.) The motion is fully briefed. For the reasons explained below, Lead Plaintiff has failed to allege with particularity essential elements of its securities fraud claims. The Court therefore GRANTS the motion to dismiss with prejudice.

I. Background

In this consolidated putative securities fraud class action, purchasers of BofI's¹ stock assert claims against BofI and several corporate officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On February 1, 2016, the Court appointed Houston Municipal Employees Pension System as the Lead Plaintiff (ECF No. 23), and on April 11, 2016, Lead Plaintiff filed a First Amended Complaint (the "FAC") (ECF No. 26). Defendants filed a motion to dismiss the FAC on the grounds that the FAC (1) failed to identify false or misleading statements and (2) did not plead sufficient facts giving rise to a strong inference of scienter. (ECF No. 37.) The Court granted in part and denied in part. (ECF No. 64.) The Court noted that many of the misrepresentations alleged in the FAC fell "short of the PSLRA's [Private Securities Litigation Reform Act] heightened standards," but because a securities plaintiff "need only plead a single materially false misrepresentation to survive a motion to dismiss," the Court's conclusion that the FAC alleged at least some material misrepresentations meant that the Court did not need to "dwell on those aspects of the Complaint" that did not meet the PSLRA's standards. (Id. at 15.) The Court found, however, that the FAC's allegations were insufficient to create a "strong inference of scienter on the parts of Defendants Micheletti, Grinberg, Mosich, and Argalas," and dismissed the claims against those defendants without prejudice. (Id. at 25–27.)

On November 25, 2016, Lead Plaintiff filed a Second Amended Complaint (the "SAC"). (ECF No. 79.) Defendants again moved to dismiss. (ECF No. 88.) Again, the Court granted in part and denied in part. (ECF No. 113.) The Court first addressed Defendants' reassertion that Lead Plaintiff's pleadings failed to identify any material misrepresentations. Noting that the SAC—like the FAC—was excessive in length, the Court found it helpful to delineate which of the alleged misrepresentations were actionable, and which were not. The Court explained that the SAC alleged "actionable fraudulent or misleading statements as to BofI's loan underwriting practices and as to its internal controls and compliance infrastructure, but [did] not sufficiently demonstrate[ ] that Defendants' statements about its Allowance for Loan Losses (ALL), Net income/diluted price per share, Loan–to–Value Ratio (LTV), or undisclosed lending partnerships are actionable under the securities laws." (Id. at 9.) Noting that the SAC added no new allegations of scienter on the parts of Micheletti, Grinberg, Mosich, and Argalas, the Court again granted the motion to dismiss the Section 10(b) claims against them. (Id. at 3.) The Court nonetheless found the new "control person" allegations sufficient to state plausible Section 20(a) claims against all Defendants. (Id. at 58.)

On September 29, 2017, Defendants filed a motion for judgment on the pleadings in which they argued Lead Plaintiff had not pled with sufficient particularity that a disclosure of the falsity of Defendants' misrepresentations caused Lead Plaintiff loss. (ECF No. 123.) The Court agreed and granted the motion. (ECF No. 134.) The Court explained that the corrective disclosures identified in the SAC—a complaint filed in federal court against BofI and a series of articles posted on the website Seeking Alpha —either were irrelevant to the alleged misrepresentation or did not actually reveal any fraud to the market. Because that was the first time Defendants argued that Lead Plaintiff failed to plead loss causation adequately, the Court granted Lead Plaintiff leave to amend. (Id. at 21.)

On December 22, 2017, Lead Plaintiff filed the now-operative TAC. (ECF No. 136.) As Lead Plaintiff explains in its memorandum in opposition to the instant motion, the TAC is intended to be responsive not only to the Court's judgment on the pleadings ruling, but also to the Court's earlier ruling on Defendants' motion to dismiss the SAC. (See ECF No. 148 at 1–2 n.2.) Defendants filed the instant motion to dismiss on January 19, 2018. (ECF No. 144.) Defendants argue that the new alleged misrepresentations in the TAC are not actionable and that the TAC again fails to plead loss causation adequately. Defendants also argue that because Section 20(a) claims require a violation of the securities laws, the TAC's failure to state a claim of violation of Section 10(b) requires dismissal of Lead Plaintiff's Section 20(a) claims. (Id. at 25.)

II. Legal Standard

A Rule 12(b)(6) motion attacks the complaint as not containing sufficient factual allegations to state a claim for relief. "To survive a motion to dismiss [under Rule 12(b)(6) ], a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). While "detailed factual allegations" are unnecessary, the complaint must allege more than "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. "In sum, for a complaint to survive a motion to dismiss, the non-conclusory ‘factual content,’ and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. U.S. Secret Serv. , 572 F.3d 962, 969 (9th Cir. 2009).

A claim of fraud must comply with Rule 9(b), which requires the complaint to state with particularity the circumstances constituting fraud. See Fed. R. Civ. P. 9(b). Satisfaction of this heightened standard requires delineating "the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation." Odom v. Microsoft Corp. , 486 F.3d 541, 553 (9th Cir. 2007) (quoting Schreiber Distrib. Co. v. Serv–Well Furniture Co. , 806 F.2d 1393, 1400 (9th Cir. 1986) ). The complaint must also indicate "what is false or misleading about a statement, and why it is false," and "be specific enough to give defendants notice of the particular misconduct that they can defend against the charge and not just deny that they have done nothing wrong." Vess v. Ciba–Geigy Corp. USA , 317 F.3d 1097, 1106 (9th Cir. 2003) (quoting Bly–Magee v. California , 236 F.3d 1014, 1019 (9th Cir. 2001) ). In the Ninth Circuit, Rule 9(b)'s heightened pleading standard applies to all element of a securities fraud claim, including loss causation. Or. Pub. Empls. Ret. Fund v. Apollo Grp. Inc. , 774 F.3d 598, 605 (9th Cir. 2014).

III. Discussion

The elements of Lead Plaintiff's Section 10(b) claims, which assert a violation of Rule 10b–5 (see TAC ¶ 274), are (1) a material misrepresentation or omission, (2) scienter, (3) in connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. Dura Pharms., Inc. v. Broudo , 544 U.S. 336, 341–42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). In addition to Rule 9(b)'s application to such claims, the Private Securities Litigation Reform Act ("PSLRA") imposes heightened pleading requirements for the elements of falsity and scienter. With respect to each alleged misrepresentation, the PSLRA mandates that the complaint "(1) ‘specify each statement alleged to have been misleading [and] the reason or reasons why the statements 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, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 321, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). "Absent a duty to disclose, an omission does not give rise to a cause of action under § 10(b) and Rule 10b–5.... An actionable omissions claim arises only when disclosure is ‘necessary ... to make the statements made, in light of the circumstances under which they were made, not misleading.’ " Retail Wholesale & Dep't Store Union Local 338 Ret. Fund v. Hewlett–Packard Co. , 845 F.3d 1268, 1278 (9th Cir. 2017) (quoting 17 C.F.R. § 240.10b–5(b) ).

As discussed in Lead Plaintiff's memorandum in opposition, the TAC retains the misrepresentations deemed actionable by the Court in its earlier ruling, but it also adds new instances of alleged material misrepresentations. The TAC groups the alleged misrepresentations into three categories: (1) statements regarding BofI's internal controls, compliance infrastructure, and risk management; (2) statements regarding BofI's underwriting standards and credit quality requirements; and (3) statements regarding regulatory investigations. (ECF No. 148 at 2.) In the analysis that follows, the Court describes the misrepresentations alleged,² and then assesses whether the corresponding alleged corrective disclosures satisfy Rule 9(b)'s heightened pleading standard. With respect to the first two categories—statements regarding internal controls and underwriting standards—the Court concludes that the allegations of loss causation are inadequate to satisfy Rule 9(b). As for the third...