District Of New Jersey Upholds Securities Fraud Action Against Major Student Loan Servicer Based Upon Alleged Forbearance Scheme Harming Borrowers
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  • District Of New Jersey Upholds Securities Fraud Action Against Major Student Loan Servicer Based Upon Alleged Forbearance Scheme Harming Borrowers
     
    01/07/2020
    On December 30, 2019, Judge Robert B. Kugler of the United States District Court for the District of New Jersey denied a motion to dismiss a putative class action raised under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against a student loan servicer (the “Company”) and certain of its officers (collectively “Defendants”).  In Re Navient Corp. Secs. Litig., No. CV 17-8373 (RBK/AMD), 2019 WL 7288881 (D.N.J. Dec. 30, 2019).  Plaintiff claimed that Defendants made false or misleading statements about lawsuits brought against the Company by the Consumer Financial Protection Bureau (“CFPB”) and several State Attorneys Generals (“AGs”) for a “forbearance scheme” that allegedly harmed student borrowers in the repayment process.  The Court denied Defendants’ motion to dismiss for failure to state a claim, finding that plaintiff adequately pleaded falsity, scienter, and loss causation.
     
    The Company is a loan servicer that contracts with the Department of Education (“DOE”).  On January 18, 2017, the CFPB sued the Company for alleged predatory lending practices, claiming that it steered borrowers into forbearance rather than discussing income-driven repayment (“IDR”) plans.  Several State AGs filed lawsuits raising similar allegations.  In response, the DOE reviewed the Company’s forbearance practices and allegedly issued a report on May 18, 2017, finding that the Company often placed borrowers into forbearance without adequately informing them of other options.
     
    Throughout 2017, the Company publicly denied the allegations made in the lawsuits, claiming that they were politically motivated and unsubstantiated.  In October, the Pennsylvania AG filed a lawsuit against the Company, alleging that its scheme continued into early 2017.  The next day, the Company’s stock price fell 14%.  In 2018, the Company continued to deny the allegations and did not mention the DOE review.  On November 20, 2018, United States Senator Elizabeth Warren published a letter regarding the DOE review and explained how it validated the allegations in the lawsuits and contradicted the Company’s public statements.  The Company’s stock price fell 11% and complaints followed.
     
    The Court denied Defendants’ motion to dismiss.  First, it found that Defendants’ motion relied on several documents that were not incorporated into the pleadings by reference or appropriate for judicial notice.  Specifically, the Court held that a response prepared by the DOE in response to news articles about its review was neither incorporated into the Complaint by reference nor sufficiently shown to have been authentic for purposes of the motion to dismiss.  The Court also declined to rely on portions of the summary judgment record from the CFPB lawsuit, reasoning that the Company could seek summary judgment later.  The Court also held that plaintiff was entitled to rely on factual allegations taken from the CFPB and AG complaints even though they were not based on plaintiffs’ own investigation, noting that the CFPB and AG allegations were based on reasonable inquiries.
     
    With respect to Defendants’ merits arguments, the Court held that the Complaint, relying on confidential witnesses, sufficiently described the Company’s forbearance practices and how its employees followed scripts and flowcharts prepared by management to steer borrowers into forbearance.  The Court also found that plaintiff sufficiently pled scienter because the Complaint alleged management had access to the DOE review.  The Court also held that the Complaint sufficiently alleged that the individual defendants had a motive to deceive investors in order to increase their own compensation and to appear in greater compliance with DOE guidelines and that the alleged forbearance scheme related to core operations of the Company.  In addition, the Court found that the Complaint adequately plead loss causation because it alleged that Defendants’ misrepresentations artificially inflated the Company’s stock price and that the Pennsylvania AG’s lawsuit and news articles revealed the alleged truth to the market.
    CATEGORIES: Causation, Fraud, Scienter

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