On November 14, 2018, the United States Court of Appeals for the Third Circuit affirmed the dismissal of and denial of leave to amend a putative class action complaint against Altisource Asset Management Corporation (“AAMC”) and certain of its former directors and officers under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Plaintiffs alleged that AAMC — a provider of asset management and corporate governance advising services related to mortgage servicing — made material misstatements concerning its relationships with the mortgage servicing company Ocwen Financial Corporation (“Ocwen”) and certain affiliated companies. City of Cambridge Ret. Sys. v. Altisource Asset Mgmt. Corp.,
—F. Supp. 3d—, 2018 WL 5931509 (3d Cir. Nov. 14, 2018). The appealed order was a July 5, 2017 decision of the District Court of the Virgin Islands that rejected plaintiffs’ motion to amend for the reasons noted in the District Court’s April 6, 2017 motion to dismiss decision, as reviewed in our prior post
. The Third Circuit affirmed, holding that plaintiffs failed to meet the pleading requirements under the Private Securities Litigation Reform Act (“PSLRA”) to plausibly allege that the statements in question were false and that amendment would have been futile.
Plaintiffs alleged that AAMC, which was spun off from Ocwen in 2012, “misrepresented the benefits attributable to its relationship with Ocwen” and failed to disclose that officers who served multiple affiliates of Ocwen, including AAMC, “widely disregarded” AAMC’s Related-Party Transaction Policy. Id.
at *5—6. More specifically, plaintiffs contended that (1) AAMC’s stated belief that an affiliate’s “access to Ocwen’s servicing expertise” helped to maximize the value of the loan portfolios and provided a competitive advantage was misleading because it did not disclose flaws in Ocwen’s servicing platform; and (2) AAMC’s chairman had not recused himself from related-party transactions, which rendered AAMC’s statement that executives adhered to the Related-Party Transaction Policy misleading. Plaintiffs also made allegations that statements by Ocwen and other Ocwen affiliates were false, but the Court declined to consider such statements because AAMC did not have “ultimate authority” over those statements. Id
. at *7.
With respect to statements regarding AAMC’s relationship with Ocwen, the Third Circuit emphasized that AAMC’s filings had, in fact, contained risk disclosures stating clearly that AAMC relied on an Ocwen affiliate as AAMC’s sole source of revenue, and that this affiliate depended entirely on Ocwen for loan servicing and would be at risk if it needed to find a different servicer. The Court characterized AAMC’s statements praising Ocwen as immaterial statements of subjective opinion, and rejected the suggestion that AAMC was obligated to disclose the flaws of a separate entity in its own filings, and in any event found that such a requirement would “make no sense” here because Ocwen’s alleged regulatory failures were well-known and typical of the mortgage servicing industry at the time. Id.
The Court also rejected plaintiffs’ claims with respect to statements regarding AAMC’s recusal policy, holding that plaintiffs failed to allege any false statements because they pointed to no instance in which AAMC failed to follow its recusal policy. Rather, plaintiffs’ allegations were based entirely on an SEC cease-and-desist order relating to Ocwen’s founder not recusing himself from a transaction between Ocwen and another Ocwen-affiliated entity; because Ocwen’s founder was also AAMC’s chairman, plaintiffs argued that this raised an “inference that [AAMC and its executives] acted in a similar manner with respect to AAMC.” Id
. The Court, while acknowledging that pleading requirements should be relaxed somewhat where factual information is “peculiarly within the defendant’s knowledge or control,” found these allegations amounted to impermissible “speculative fraud by hindsight” under the PSLRA. Id
This decision highlights that allegations of falsity must be based on a defendant’s statements about its own operations and cannot be based on mere inferences of falsity.