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Carvelli v. Ocwen Financial Corp.

United States District Court, S.D. Florida

April 27, 2018

KAREN A. CARVELLI, Individually and On Behalf of All Others Similarly Situated, Plaintiffs,



         THIS MATTER is before the Court on Defendants' Motion to Dismiss, DE 72, Lead Plaintiff's Corrected Response in Opposition to Defendants' Motion to Dismiss, DE 81, and Defendants' Reply in Support of their Motion to Dismiss, DE 83. The Court heard argument on April 16, 2018. For the reasons set forth below, Defendants' Motion to Dismiss is GRANTED.

         The case is DISMISSED WITH PREJUDICE.

         I. BACKGROUND

         On August 28, 2017, Lead Plaintiff University of Puerto Rico Retirement System (“UPR”) filed its Amended Consolidated Securities Class Action Complaint (the “Complaint”) against Defendants Ocwen Financial Corporation (“Ocwen”), Ronald M. Faris and Michael R. Bourque, Jr. (Faris and Bourque, collectively, the “Individual Defendants, ” and together with Ocwen, the “Defendants”). DE 67. UPR brought this action on behalf of itself and a putative class of others who acquired Ocwen common stock between January 13, 2015 and April 20, 2017 (the “Class Period”). UPR's two-count complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

         Ocwen is incorporated in Florida and maintains its principal executive offices in West Palm Beach, Florida. Id. ¶ 17. Throughout the Class Period, Mr. Faris served as Chief Executive Officer, President of Ocwen, and as a Director on the Board of Directors of Ocwen, id. ¶ 18; Mr. Bourque served as the Chief Financial Officer, id. ¶ 19.

         Ocwen is a diversified financial services company founded in 1988. Id. ¶ 3. During the Class Period, Ocwen's core business involved servicing mortgages. Id. ¶¶ 21-22. At all times relevant to the Complaint, Ocwen used a mortgage servicing software platform furnished by Altisource Portfolio Solutions, S.A. (“Altisource”) called REALServicing. Prior to the Class Period, Ocwen entered into Consent Orders with certain of its regulators regarding its mortgage servicing business. Id. ¶ 247(a). Ocwen signed (i) a consent judgment with the Consumer Financial Protection Bureau (“CFPB”) and forty-nine attorneys general in December 2013, id. ¶¶ 28, 30; (ii) a consent order with the New York Department of Financial Services in December 2014, id. ¶¶ 31-33; and (iii) a consent order with the California Department of Business Oversight in January 2015, id. ¶ 34. Prior to the Class Period, Ocwen disclosed these regulatory settlements to the market. Id. ¶¶ 27-38, 247(a).

         The Complaint alleges that Defendants failed to fix operational and technological deficiencies with REALServicing, and instead made materially false and misleading statements and omissions, that its mortgage servicing misconduct was a thing of the past. Specifically, the Complaint alleges that Defendants' misrepresentations and omissions concerned: (i) Ocwen's purported progress in and commitment to complying with the Regulator Settlements, e.g., id. ¶¶ 100, 179, 147, 153, 161, 167, 186, 222, 224, 242; (ii) the efficacy and remediation of REALServicing, e.g., id. ¶¶ 177, 184, 212; (iii) Ocwen's supposed commitment to borrowers, e.g., id. ¶¶ 168, 220; (iv) the efficacy of the Company's internal controls, e.g., id. ¶¶ 131, 158- 59; and (v) the Company's failure to make the required disclosure obligations under GAAP FAS 5/ASC 40 and SEC Rule Item 303, id. ¶¶ 132-41. For example, Defendants stated that Ocwen was “committed to correcting any deficiencies, remediating any borrower harm, and improving our compliance management systems and customer service, ” id. ¶ 151, and that Ocwen “invested heavily in compliance and risk management” and that those “operations are now mature and delivering improved controls and results.” id. ¶ 242.

         The Complaint alleges that these statements were materially false and misleading because, throughout the Class Period, just like prior to the Class Period, REALServicing was fraught with deficiencies that Defendants did not remediate. These deficiencies made REALServicing incapable of functioning as an adequate system of record, caused Ocwen to remain out of compliance with the Regulator Settlements, and led to violations of federal and state mortgage servicing laws. Id. ¶¶ 44-81.

         The Complaint alleges that the truth concerning the deficient and unremediated state of REALServicing and Ocwen's non-compliance with the Regulator Settlements began to be revealed in February 2016 with the issuance of Ocwen's 2015 10-K. Id. ¶¶ 96-97. According to the Complaint, from February 2017 until the end of the Class Period, investors suffered a string of bad news about the full scope of the facts and risks that Defendants had concealed finally emerged. Id. ¶¶ 106-20. Altisource revealed that it had received a Notice and Opportunity to Respond and Advise (“NORA”) letter from the CFPB related to violations of federal law concerning its relationship to Ocwen and Ocwen's use of REALServicing. Id. ¶¶ 106-08. Then, Ocwen revealed that its remediation costs were higher than expected and that it had taken a reserve charge in connection with the CFPB enforcement action. Id. ¶¶ 109-11. Finally, on the last day of the Class Period, the Office of the Attorney General for the State of Florida and the Office of Financial Regulation for the State of Florida filed a complaint against Ocwen and its related entities for their continued violation of federal and state laws in connection with Ocwen's mortgage servicing misconduct. That same day Ocwen also revealed that the Multi-State Mortgage Committee, state regulators from more than twenty states, had issued cease-and-desist orders to Ocwen's subsidiaries in connection with the Company's gross mishandling of escrow accounts, based on an investigation that was a “culmination of several years of examinations and monitoring” and that prohibited Ocwen from acquiring Mortgage Servicing Rights (“MSRs”) until Ocwen could demonstrate it had remediated its escrow-related deficiencies. Id. ¶¶ 112-20.

         The Complaint alleges that as a result of Defendants' fraud, the price of Ocwen common stock fell from a Class Period high of $11.61 per share to $2.49 per share - a decline of nearly 80%. Id. ¶ 120.

         Lead Plaintiff filed its Complaint on August 28, 2018, DE 67, alleging one count for violations of Section 10(b) of the Exchange Act and Rule 10b-5 and one count for violations of Section 20(a) of the Exchange Act. Defendants moved to dismiss, arguing that the Complaint does not sufficiently allege that Defendants made material misrepresentations or omissions and that Plaintiff did not properly plead loss causation. DE 72.[1]


         A securities fraud claim under Section 10(b) must satisfy six elements: (1) a material misrepresentation or omission; (2) made with scienter; (3) a connection with the purchase or sale of a security; (4) reliance on the misstatement or omission; (5) economic loss; and (6) a causal connection between the material misrepresentation or omission and the loss, an element commonly called “loss causation.” Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1236-37 (11th Cir. 2008); see also 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5.

         To state a “control person” claim under Section 20(a), a plaintiff must allege that: (1) Ocwen committed a primary violation of the securities laws; (2) the Individual Defendants had power to control the general business affairs of Ocwen; and (3) the Individual Defendants “had the requisite power to directly or indirectly control or influence the specific corporate policy which resulted in primary liability.” Theoharous v. Fong, 256 F.3d 1219, 1227 (11th Cir. 2001) (citation omitted). If a plaintiff fails to plead adequately a violation of Section 10(b) and Rule 10b-5, a claim under Section 20(a) necessarily fails as well. See Garfield v. NDC Health Corp., 466 F.3d 1255, 1261 (11th Cir. 2006). See generally In re KLX, Inc. Sec. Litig., 232 F.Supp.3d 1269, 1274 (S.D. Fla. 2017).

         Defendants moved to dismiss the Complaint based on Federal Rules of Civil Procedure 12(b)(6) and 9(b), and the Private Securities ...

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