Lloyd v. CVB Fin. Corp.
| Decision Date | 01 February 2016 |
| Docket Number | No. 13–56838.,13–56838. |
| Parties | Barry R. LLOYD, Plaintiff, and Jacksonville Police and Fire Pension Fund, Plaintiff–Appellant, v. CVB FINANCIAL CORPORATION; Christopher D. Myers; Edward J. Biebrich, Jr., Defendants–Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Timothy A. DeLange (argued), Niki L. Mendoza, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA, for Plaintiff–Appellant.
George T. Conway, III (argued), David M. Murphy, Warren R. Stern, Wachtell, Lipton, Rosen & Katz, New York, NY; Scott Vick, Jason T. Riddick, Rachelle S. Torres, Vick Law Group, APC, Los Angeles, CA, for Defendants–Appellees.
Before: HARRY PREGERSON, CONSUELO M. CALLAHAN, and ANDREW D. HURWITZ, Circuit Judges.
The last recession put the Garrett Group, a commercial real estate company, into serious financial trouble. In 2008, Garrett informed its largest creditor, CVB Financial Corporation ("CVB"), that it could not make payments on its loans. After the loans were restructured, Garrett informed CVB in early 2010 that it again could not make the required payments and was contemplating bankruptcy.
CVB nonetheless represented in 2009 and 2010 filings with the Securities and Exchange Commission ("SEC") that there was no basis for "serious doubt" about Garrett's ability to repay its borrowings. In 2010, the SEC served a subpoena on CVB, seeking information about its loan underwriting methodology and allowance for credit losses. The day after CVB announced receipt of the subpoena, its stock dropped 22%, and analysts noted the probable relationship between the subpoena and CVB's loans to Garrett, its largest borrower. A month later, CVB wrote down $34 million in loans to Garrett and placed the remaining $48 million in its non-performing category.
In this putative class action, Jacksonville Police & Fire Pension Fund ("Jacksonville") alleges violations of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b–5 promulgated thereunder, 17 C.F.R. § 240.10b–5. The district court granted CVB's motion to dismiss, holding that the Second Amended Complaint ("SAC") failed to plausibly allege that any of the statements by CVB challenged in the pleading were either knowingly or recklessly false or caused a loss to shareholders.
We affirm in part and reverse in part, finding that the SAC stated a claim as to two alleged misrepresentations. In doing so, we hold that the announcement of an SEC investigation related to an alleged misrepresentation, coupled with a subsequent revelation of the inaccuracy of that misrepresentation, can serve as a corrective disclosure for the purpose of loss causation. See Loos v. Immersion Corp., 762 F.3d 880, 890 n. 3 (9th Cir.2014) (reserving this question).
In late August or early September 2008, Garrett's Board of Advisors, including its Chief Operating Officer ("COO"), met to discuss an upcoming meeting with CVB. According to the COO, whom the SAC does not otherwise identify, the Board was told that management planned to inform CVB that Garrett had laid off twenty people, reduced salaries, and could not make payments on its loans. At the time, Garrett was CVB's largest borrower.
CVB officials and Garrett executives Paul Garrett and Kirk Wright, Garrett's Chief Executive Officer, met about two weeks later, in the fall of 2008. Two weeks after that meeting, Wright confirmed to the Board that CVB had been informed of the layoffs and salary reductions and told that Garrett could not meet its current obligations, including its loan payments to CVB.
CVB subsequently made an additional $10 million loan to Garrett, secured by an interest in rent in fifteen properties. When the new loan closed, Garrett was ninety days delinquent on its loan payments to CVB. Garrett used a quarter of the new loan to get current with CVB. Garrett's COO recalled that "CVB was trying to keep the house of cards standing." Other Garrett employees confirmed that Garrett's financial situation in 2008 and early 2009 was "rotten," with rental properties vacant for years, and that Garrett had considered bankruptcy.
In March 2009, CVB provided Garrett with $53 million in refinancing. CVB also made other modifications to Garrett loans in 2009.
On November 5, 2009, CVB issued a quarterly report, known as a Form 10–Q, for the period ending September 30, 2009. The 10–Q listed troubled loans and then stated that CVB was "not aware of any other loans as of September 30, 2009 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date." The loans to Garrett were not listed.
By the end of 2009, Garrett again became delinquent with CVB. According to Garrett's COO, in late December 2009 or early January 2010, Wright told his Board that Garrett needed to meet with CVB to address this situation.
The meeting with CVB occurred one week later, in early January 2010. A week after that, Wright reported back to the Garrett Board. Wright reported that Garrett told CVB it would file for bankruptcy unless the loans were modified. Garrett also discussed two other options with CVB: selling assets or bringing on a new equity partner. It also provided CVB with the financial projections and presentation it had used in unsuccessful attempts to woo new investors. Wright told the Board that Garrett had pleaded with CVB for more time to resolve the loan situation, but that no agreement had been reached.
CVB and Garrett continued negotiations about the loans throughout 2010. Garrett never again became current on its obligations to CVB.
On March 4, 2010, CVB filed a Form 10–K for calendar year 2009. The 10–K stated that CVB was "not aware of any other loans as of December 31, 2009 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their loan repayment terms." As with the previous 10–Q, this statement appeared after a list of non-performing or past-due loans. That list did not include the Garrett loans.
CVB made a nearly identical "no serious doubts" statement in a 10–Q filed on May 10, 2010. That statement differed from the previous "no serious doubts" statements only in that it was "as of March 10, 2010."
In May and June 2010, an anonymous blogger suggested that CVB was engaging in a "cycle of extend and pretend" with its loans to Garrett and others, often restructuring the loans at the end of the quarter or year, before FDIC audits. But, other analysts did not credit these blog posts, and neither did the market at large; CVB's stock price rose, climbing to $10.61 on July 26, 2010.
On July 26, 2010, CVB received a subpoena from the SEC. On August 9, 2010, after the stock market closed, CVB filed a form 10–Q for the second quarter of 2010, which disclosed receipt of the subpoena, stating:
The subpoena requests information regarding our loan underwriting guidelines, our allowance for credit losses and our allowance for loan loss calculation methodology, our methodology for grading loans and the process for making provisions for loan losses, and our provision for credit losses. In addition, the subpoena requests information regarding presentations we have given or conferences we have attended with analysts, brokers, investors or prospective investors.
The next day, CVB's stock fell 22%, from $10.30 to $8.00 per share, a loss of $245 million in market capitalization.
Several analysts commented on the subpoena. The blogger claimed that it "appear[s] to validate our overall concerns with the bank." Dow Jones specifically noted a connection to the Garrett loans:
Discussion of CVB Financial centers on its largest exposure, loans to a property company called the Garrett Group. Skeptics believe this exposure is backed by collateral whose market value is well below that of the loan amount. Some also question whether CVB extended a new loan to Garrett to help it pay existing loans, something Myers denies. He said the Garrett Group was current on its loans at the end of the second quarter, but the bank had reserves against the exposure.
Credit Suisse observed that the investigation appeared to pertain to the adequacy of CVB's reserves, including those for its largest borrower, Garrett, and the adequacy of CVB's disclosures. And, on August 11, FIG Partners wrote:
A month later, after the market closed on September 9, CVB announced that Garrett was unable to pay its loans as scheduled; the bank charged off $34 million in Garrett loans and characterized the remaining $48 million as nonperforming and impaired. CVB announced that it had $24.7 million in reserves for credit losses and was recording an additional $9.3 million to account for the $34 million charge-off. CVB also announced that it had only an equity interest, and no direct liens, on the fifteen properties that served as collateral for the largest loan to Garrett, which had a balance of $42.5 million, and that it was discounting the value of its UCC–1 filings on those properties to zero.
The next day, Credit Suisse published an analysis of CVB's announcement:
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