Virgin Islands District Court Dismisses Securities Fraud Claims For Failure To Allege Falsity And Loss Causation
04/18/2017On April 6, 2017, Judge Harvey Bartle III, sitting by designation in the United States District Court for the District of the Virgin Islands, dismissed a putative class action 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. City of Cambridge Ret. Sys. v. Altisource Asset Mgmt. Corp., No. 1:15-cv-00004, slip op. (D.V.I. Apr. 6, 2017), ECF No. 74. Plaintiffs alleged that AAMC—a provider of asset management and corporate governance advising services related to mortgage servicing—made material misstatements in SEC filings and other disclosures relating to services it provided to the mortgage servicing company Ocwen Financial Corporation (“Ocwen”) and certain related companies. The Court held that plaintiffs’ allegations were insufficient to demonstrate that the alleged misstatements were false or misleading, and further that plaintiffs failed to show that their claimed losses were caused by the alleged misstatements at issue.
Plaintiffs alleged that AAMC knew of, but failed to disclose, certain information disclosed by Ocwen, by Ocwen-related companies, and in announcements of state regulatory disciplinary action against Ocwen. Plaintiffs contended that, because AAMC’s success was dependent on Ocwen’s success, AAMC’s failure to disclose what it knew about Ocwen’s mortgage servicing capabilities and regulatory risks rendered AAMC’s disclosures false and misleading. The Court rejected this argument, noting that AAMC disclosed that its success was dependent on Ocwen and Ocwen-related companies, and that plaintiffs had not alleged that the disclosures by and about Ocwen and Ocwen-related companies rendered AAMC’s disclosures false and misleading. The Court also rejected plaintiffs’ argument that AAMC failed to disclose material facts regarding conflicts of interest among Ocwen-related companies. The Court explained that plaintiffs could not rely merely on statements from regulatory actions asserting potential conflicts among Ocwen-related companies, without identifying any improper transaction in which AAMC itself was involved.
The Court further held that plaintiffs failed to plead loss causation. While plaintiffs’ complaint identified the price of AAMC’s stock after certain disclosures and alleged that plaintiffs had previously bought stock at artificially high prices, the Court emphasized that plaintiffs failed to allege facts demonstrating a causal connection between defendants’ alleged misstatements and the decline in AAMC’s stock price.
This decision is useful in highlighting plaintiffs’ burden in establishing, through non-conclusory factual allegations, that alleged misstatements or omissions are in fact misleading or false, and that a causal connection exists between plaintiffs’ alleged loss and the statements or omissions at issue.