St. Clair Shores General Employees’ Retirement System v. Lender Processing Services: If at First You Don't Succeed…

In City of St. Clair Shores Gen. Emp. Ret. Sys. v. Lender Processing Serv., Inc., 3:10-CV-1073-J-32JBT, 2012 WL 1080953 (M.D. Fla. Mar. 30, 2012), the court granted Defendants' motion to dismiss, while also allowing Plaintiff leave to file another amended complaint.

According to the complaint, Defendant Lender Processing Services ("LPS") provides mortgage processing and settlement services and default and technology solutions to mortgage lenders; Defendant Lee A. Kennedy is an officer and chairman of LPS's board; and Defendants Jeffrey S. Carbiener, Francis K. Chan, and Michelle M. Kersch are officers of LPS (collectively, "Defendants"). Plaintiff City of St. Clair Shores General Employees' Retirement System, a municipal pension fund, and other possible class members, purchased or acquired LPS shares between August 2008 and October 2010. Plaintiff claimed that during that period, Defendants inflated LPS's revenue through the use of fraudulent business practices. Plaintiff alleged that as a direct result of this fraud, LPS shareholders lost millions of dollars.

In order to state a claim under section 10(b) and Rule 10b–5, a plaintiff must allege a material misrepresentation or omission, scienter, a connection with the purchase or sale of a security, reliance, economic loss, and loss causation. To avoid dismissal, a Rule 10b–5 claim must satisfy the fraud pleading requirements under Federal Rule of Civil Procedure Rule 9(b), as well as the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”). The PSLRA requires plaintiffs to "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." Furthermore, the plaintiff must state with particularity the facts that demonstrate the defendant acted with scienter.

Defendants alleged that Plaintiff failed to plead the following: "(1) that the individual defendants ‘made’ any of the alleged misstatements; (2) that any of the alleged misstatements were materially false or misleading; (3) loss causation; and (4) a strong inference of scienter."

Defendants sought dismissal of the claims under the Supreme Court's decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, asserting that the individual defendants had not “made” the alleged misstatements.  The court, however, found that the allegations were sufficient to find that at least three defendants had “ultimate authority” over their statements.  This included statements made by the defendants in the press, statements made as agents for the company, and the execution by some of the defendants of the certification required for SEC fillings. 

The court also agreed that Plaintiff had sufficiently alleged the materiality of the misstatements.  This was the case "[e]ven if Defendants' statements were literally accurate, as argued by Defendants”.  Similarly, the allegations were sufficient to plead causation.  The court noted that

"loss causation is not subject to a heightened pleading requirement" and that "to sufficiently plead loss causation, a plaintiff must allege a disclosure or revelation of truth about a defendant's prior misstatement or omission that is in some way connected with a stock price drop.” Here, the court deemed that Plaintiff's Complaint establishes a connection between Defendant's misstatement and the drop in stock price and was therefore not subject to dismissal on a causation basis.

The court did find, however, that Plaintiff had not adequately allege  scienter. "Rule 9(b) does not allow a complaint to merely lump multiple defendants together, but requires plaintiffs to differentiate their allegations when suing more than one defendant and inform each defendant separately of the allegations surrounding his alleged participation in the fraud." Accordingly, the court dismissed Plaintiff's complaint without prejudice, but allowed Plaintiff to file a second amended complaint that would comply with the requirements of Rule 9(b).

The primary materials for this case may be found on the DU Corporate Governance website.

David Rodman