In Lubbers v. Flagstar Bancorp, Inc., No. 14-cv-13459, 2016 BL 36824 (E.D. Mich. Feb. 10, 2016), the United States District Court for the Eastern District of Michigan, Southern Division, granted Flagstar Bankcorp. Inc. (“Flagstar”), and two of its officers, Alessandro DiNello and Paul Borja’s (collectively, the “Defendants”) motion to dismiss. The court found that Plaintiff failed to meet his burden in pleading Flagstar’s public disclosures contained an actual, material omission.
According to the allegations, after the collapse of the mortgage industry, Flagstar, a holding company for non-party Flagstar Bank, experienced a backlog in processing loan modification and loss mitigation applications. In September 2011, Fannie Mae allegedly threatened to terminate Flagstar’s servicing rights on loans owned or guaranteed by Fannie Mae. In December of 2013, Flagstar purportedly sold a portion of its mortgage servicing rights (“MSRs”) portfolio to Matrix Financial Services Corporation (“Matrix Financial”). In August of 2014, Flagstar filed a Form 8-K with the Securities and Exchange Commission (“SEC”) disclosing its discussions with the Consumer Financial Protection Bureau (“CFPB”) regarding a potential settlement relating to alleged violations of various federal consumer financial laws. Flagstar’s rating was downgraded, and within two days, the stock price fell by $1.16.
The Plaintiff brought this class action against the Defendants on behalf of all purchasers of Flagstar common stock from October 22, 2013, to August 26, 2014 (the “Class Period”). The Plaintiff alleged Flagstaff omitted material information and made misleading statements in its public disclosures in August of 2014 in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder. Further, the Plaintiff asserted the Defendants, as controlling persons of Flagstar, were liable for Flagstar's violations under Section 20(a) of the Securities Act.
For non-disclosure liability under the Exchange Act to attach, a defendant must violate an affirmative duty to disclose, which can arise from a prior false, inaccurate, incomplete, or misleading statement of material fact in light of the undisclosed information. Materiality depends on the significance a reasonable investor would place on the withheld or misrepresented information. Courts look to the context of the statements to determine whether an omission renders prior statements misleading.
The court found “no reasonable investor could have read Flagstar’s disclosure as negating the possibility of a CFPB investigation or settlement.” The court further held the fact that such investigations were not disclosed during the class period combined with the language of Defendants’ disclosure was not misleading. Specifically, the court found Defendants' public disclosure statements “from time to time” and “we may face a greater number or wider scope of investigations,” to be nothing more than “semantic quibbling” such that the Plaintiff’s claims regarding misleading disclosures could not rest on these statements. In fact, the court concluded the Defendants’ phrases were broad enough to “encompass the possibility” of a CFPB investigation for not complying with consumer protection laws, even if the phrases somehow conveyed to investors that the Fannie Mae investigations were routine.
The court also held Flagstar was under no obligation to disclose Fannie Mae’s threats to terminate its right to loan servicing. In so holding, the court found no material relationship between the threats and either Flagstar’s disclosure regarding ongoing investigations or its generic statement informing investors that consumer protection laws and regulations were ever changing. In addition, the court held a “boilerplate statement” Flagstar made regarding fines and penalties was too generic to be misleading and, furthermore, had no relationship to the disclosure itself. Furthermore, the court held that to require disclosure of Fannie Mae’s alleged threats would impose a general duty, not required under law, of unlimited disclosure whenever any financial data is released.
The court held Defendant’s statements made to sell a portion of its MSRs portfolio to Matrix Financial was not misleading, therefore no more needed to be disclosed. Although the Plaintiff argued investors would read the statements as suggesting the sale absolved Flagstar of liability for the previous violations of the CFPB, the court held it was not misleading because no reasonable investor would conclude such. Therefore, and because the statement was not misleading, the court found no further disclosures were necessary, noting that omissions need only be disclosed when necessary to make a previous statement misleading.
Accordingly, the court granted the Defendants’ motion to dismiss Plaintiff’s amended complaint.
The primary material for this case can be found on the DU Corporate Governance Website.