In re Capstead Mortg. Corp. Securities Litigation, CIV.A.3:98-CV-1716-L.
| Decision Date | 31 March 2003 |
| Docket Number | No. CIV.A.3:98-CV-1886-L.,No. CIV.A.3:98-CV-1847-L.,No. CIV.A.3:98-CV-2196-L.,No. CIV.A.3:98-CV-1802-L.,No. CIV.A.3:98-CV-1978-L.,No. CIV.A.3:98-CV-2054-L.,No. CIV.A.3:98-CV-2232-L.,No. CIV.A.3:98-CV-1809-L.,No. CIV.A.3:98-CV-2087-L.,No. CIV.A.3:98-CV-1958-L.,No. CIV.A.3:98-CV-1761-L.,No. CIV.A.3:98-CV-2029-L.,No. CIV.A.3:98-CV-1716-L.,No. CIV.A.3:98-CV-1849-L.,No. CIV.A.3:98-CV-2109-L.,No. CIV.A.3:01-CV-0698-L.,No. CIV.A.3:98-CV-1718-L.,No. CIV.A.3:98-CV-1948-L.,No. CIV.A.3:98-CV-1977-L.,No. CIV.A.3:98-CV-1828-L.,No. CIV.A.3:98-CV-2538-L.,No. CIV.A.3:98-CV-1860-L.,No. CIV.A.3:98-CV-1885-L.,No. CIV.A.3:98-CV-1827-L.,CIV.A.3:98-CV-1716-L.,CIV.A.3:98-CV-1718-L.,CIV.A.3:98-CV-1761-L.,CIV.A.3:98-CV-1802-L.,CIV.A.3:98-CV-1809-L.,CIV.A.3:98-CV-1827-L.,CIV.A.3:98-CV-1828-L.,CIV.A.3:01-CV-0698-L.,CIV.A.3:98-CV-1847-L.,CIV.A.3:98-CV-1849-L.,CIV.A.3:98-CV-1860-L.,CIV.A.3:98-CV-1885-L.,CIV.A.3:98-CV-1886-L.,CIV.A.3:98-CV-1948-L.,CIV.A.3:98-CV-1958-L.,CIV.A.3:98-CV-1977-L.,CIV.A.3:98-CV-1978-L.,CIV.A.3:98-CV-2029-L.,CIV.A.3:98-CV-2054-L.,CIV.A.3:98-CV-2087-L.,CIV.A.3:98-CV-2109-L.,CIV.A.3:98-CV-2196-L.,CIV.A.3:98-CV-2232-L.,CIV.A.3:98-CV-2538-L. |
| Citation | 258 F.Supp.2d 533 |
| Parties | In re CAPSTEAD MORTGAGE CORPORATION SECURITIES LITIGATION<SMALL><SUP>1</SUP></SMALL> |
| Court | U.S. District Court — Northern District of Texas |
Anthony Chu, James A Caputo, Spector Roseman & Kodroff, San Diego, CA, Kirk B Hulett, Milberg Weiss Bershad Hynes & Lerach, San Diego, CA, Marc R Stanley, Stanley Mandel & Iola, Dallas, TX, Robert M Roseman, Spector Roseman & Kodroff, Philadelphia, PA, for Marvin J. Netsky, Marks Brothers Inc., Eric Beane.
Christopher Lometti, Schoengold & Sporn, New York, NY, for The Carpenters and Joiners of America Local 3127 Pension Fund.
Jeffrey L. Kodroff, Robert M. Roseman, Marc R. Stanley, Spector Roseman & Kodroff, Philadelphia, PA, Roger L. Mandel, Stanley Mandel & Iola, Dallas, TX, Vincent R. Cappucci, Entwistle & Cappucci, New York, NY, for Jane C. Schwartz, Martin Friedman, Ronald Lewis.
Marc R. Stanley, Spector Roseman & Kodroff, Philadelphia, PA, for Ruth Wiggin, Robert Pope, Mary Walls, Gerald Streit, Shari Levy, Robert A. Staub, Theodore P. Laporte, W. John Maxey, Theodore Kaplan, Selma Kaplan Jack Goldstein, Henry Rosenberg.
Marc R. Stanley, Spector Roseman & Kodroff, Philadelphia, PA, Roger L. Mandel, Stanley Mandel & Iola, Dallas, TX, for Richard Kopelman, Frank Lanzillotti, Abram Weiss, Doris Harte.
Marc R. Stanley, Spector Roseman & Kodroff, Philadelphia, PA, Miles Tepper, Schoengold & Sporn, New York, NY, Robert M. Roseman, Spector Roseman & Kodroff, Philadelphia, PA, for Charles S. Zucker.
G. Paul Howes, Kirk B. Hulett, Thomas E. Egler, William S. Lerach, Milberg Weiss Bershad Hynes & Lerach, San Diego, CA, Marc R. Stanley, Spector Roseman & Kodroff, Philadelphia, PA, Roger L. Mandel, Stanley Mandel & Iola, Dallas, TX, for Pearl Peckerman, Ira Monti, Ann Monti.
Martha A. Evans, Roberts & Smaby, Dallas, TX, Terrell W. Oxford, Susman Godfrey, Dallas, TX, for Med-Plan, Inc., Casey Ploszaj, Laura Kleinschmidt DeGrange, Lauren DeGrange.
Aaron Brody, Jules Brody, Tzivia Brody, Stull Stull & Brody, New York, NY, Joseph D. Ament, Much Shelist Freed Denenberg Ament & Eiger, Chicago, IL, Robert J. Hill, Roger F. Claxton, Claxton & Hill, Dallas, TX, for Mary Jean Nally, Thomas E. Nally.
Jules Brody, Stull Stull & Brody, New York, NY, Mel E. Lifshitz, Bernstein Liebhart & Lifshitz, New York, NY, Stanley Bernstein, Kreindler & Kreindler, New York, NY, for Howard Gunty, Inc., Yvonne Missry.
Fred T. Isquith, Wolf Haldenstein Adler Freeman & Herz, New York, NY, Michael D. Napoli, Robert E. Wolin, Kirkpatrick & Lockhart, Dallas, TX, for Robert Markewich.
Alfred G. Yates, Jr., Law Offices of Alfred G. Yates, Pittsburgh, PA, Marc R. Stanley, Stanley Mandel & Iola, Dallas, TX, William S. Lerach, Milberg Weiss Bershad Hynes & Learch, San Diego, CA, Steven E. Cauley, Cauley Geller Bowman & Coates, Little Rock, AR, for Lew G. Kachulis.
Robert J. Hill, Claxton & Hill, Dallas, TX, for Ralph Aker, Lorraine Love, Stephen Rozenfeld.
Roger F. Claxton, Claxton & Hill, Dallas, TX, for Irene Mohr, Mel Mohr.
Marc R. Stanley, Spector Roseman & Kodroff, Philadelphia, PA, Roger L. Mandel, Stanley Mandel & Iola, Dallas, TX, Marvin L. Frank, Rabin & Peckel, New York, NY, Sherri R. Savett, Todd Collins, Berger & Montague, Philadelphia, PA, for Teresa M. Grimm.
Gloria Ohsman North, Law Offices of Gloria Ohsman North, Boca Raton, FL, for Barry Kon.
Danny S Ashby, Robert H. Mow, Jr., Stephen G. Gleboff, Walter Graves Pettey, III, Hughes & Luce, Dallas, TX, David Allen Dodds, George W. Bramblett, Jr., Kerry McHugh Breaux, Noel M.B. Hensley, Haynes & Boone, Dallas, TX, Gerald C Conley, James L. Truitt, Timothy E. Taylor, Andrews & Kurth, Dallas, TX, James D McCarthy, Diamond McCarthy Taylor Finley, Bryant & Lee, Dallas, TX, Wendy Susan Leavitt, Steel Hector & Davis, Miami, FL, for Capstead Mortgage Corporation, Ronn K Lytle, Christopher T Gilson, Julie A Moore, Andrew F Jacobs, Andrew F Rudluff.
Danny S Ashby, Robert H. Mow, Jr., Stephen G. Gleboff, Walter Graves Pettey, III, Hughes & Luce, Dallas, TX, Gerald C Conley, James L. Truitt, Timothy E. Taylor, Andrews & Kurth, Dallas, TX, James D McCarthy, Diamond McCarthy Taylor Finley, Bryant & Lee, Dallas, TX, for William H. Rudluff.
Robert S. Summerhays, Weil Gotshal & Manges, Dallas, TX, for Ernst & Young.
Before the court are Defendant Capstead Mortgage Corporation's Motion to Dismiss, filed February 20, 2001; and The Individual Defendants' Motion to Dismiss, filed February 20, 2001. After careful consideration of the motions, responses, replies, appendices,2 and the applicable law, the court grants Defendant Capstead Mortgage Corporation's Motion to Dismiss, and grants the Individual Defendants' Motion to Dismiss.
This is a consolidated securities fraud putative class action alleging fraud-on-the market. Plaintiffs are individual persons or entities that purchased or otherwise acquired shares of Defendant Capstead Mortgage Corporation's ("Capstead" or "Company") common stock between April 17, 1997 and June 25, 1998 (the "Class Period"). Defendants are Capstead and five individuals who served as senior officers or directors of Capstead, or its subsidiary, Capstead, Inc.: Ronn K. Lytle ("Lytle"), Christopher T. Gilson ("Gilson"), Julie A. Moore ("Moore"), Andrew F. Jacobs ("Jacobs") and William H. Rudluff ("Ruduff') (collectively the "Individual Defendants").3
According to Plaintiffs' Amended Complaint,4 Capstead is a Dallas-based real estate investment trust ("REIT") whose stock is publicly traded and listed on the New York Stock Exchange under the symbol "CMO." As a REIT, Capstead is not required to pay corporate income taxes as long as it distributes substantially all of its taxable income to its shareholders.
Capstead was formed in 1985. Initially, it structured and managed mortgage investments; however, in 1992, the company shifted its business strategy, and moved into mortgage-servicing. Mortgage servicing entails collecting from borrowers a monthly mortgage payment (the principal, interest and any amount that goes into escrow for taxes and insurance); remitting the principal and interest to entities that own the loans; managing the escrow accounts and payments from them (including, paying mortgage related expenses such as taxes and insurance, making advances to cover delinquent payments, contacting delinquent mortgagors and general loan administration). In addition, the Company manages the delinquency and foreclosure process on behalf of the mortgage investors. For this service, the mortgage servicer receives a small percentage of the outstanding principal balance. The ideal loan for a mortgage servicer lasts the entire term of the loan and is always paid on time.
During the Class Period, Capstead invested in mortgage-backed securities. At that time, much of the Company's earnings came from profits derived from its mortgage-servicing portfolio, which included fixed and adjustable-rate mortgage ("ARM") securities, as well as purchases of interest-only securities, which were entitled to receive the interest, but not the principal, from pools of mortgage-backed securities. Capstead also acquired through bulk purchases the rights to service mortgage loans originated by other financial institutions. In exchange for servicing the loans, Capstead received a contractual percentage of the outstanding monthly principal balance of the mortgage loans it serviced, as well as other ancillary revenues such as late fees. Capstead's investments in mortgage securities and its servicing of mortgage loans were subject to risks, including declines in interest rates resulting in higher prepayments of the mortgage loans underlying the Company's mortgage securities and the loans underlying its mortgage-servicing rights.
During 1996, the Company reported growing earnings and increased its quarterly dividends to shareholders from less than $0.30 per quarter to more than $0.55. The Company's stock increased from $14 to $16 per share in early 1996 to $22 to $25 per share a year later. Sometime in 1996, Capstead's stock price declined to about $19 per share because of market concerns about short-tem interest rates and their effect on the Company's ability to maintain its growth in earnings and revenues. In April 1997, Defendants began making statements extolling the strength and diversification of the Company's portfolio and its increased investment in interest-only strip securities.
As Defendants reported growing financial results, with an increasing dividend payment in each quarter, they assured investors that despite interest-rate fluctuations, Capstead could generate a sustainable 20% return on equity and an 8% earnings-per-share growth rate because it had "carefully hedged against changing interest rates," and designed its portfolio to mix adjustable-rate mortgages with interest-only strips.
By late summer 1997, the mortgage industry grew concerned about a bond rally. Defendants represented to the investing public that Capstead's business was strong and could deliver stable growth despite volatility in interest rates because of its asset...
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