U.S. District Judge Gonzalo Curiel ruled Friday that the stockholders failed to state a claim for securities fraud based on “corrective statements,” where false information is revealed by a “disclosure event,” in this case, news reports by The New York Times and the Seeking Alpha website.
Curiel found that corrective statements in news stories cited by the plaintiffs as proof BofI CEO Gregory Garrabrants’ lied to the public do not prove losses, as the news sites simply “repackaged” publicly available information.
He gave the class 21 days to file an amended complaint.
BofI claimed in its motion for judgment that its “corrective disclosures” – and a related whistleblower case filed by former BofI internal auditor Charles Erhart and news coverage by The New York Times and the website Seeking Alpha – did not disclose the falsity of actionable misrepresentations and were duplicative of publicly available information.
At issue is whether the news coverage of alleged misrepresentations by BofI officers regarding its loan underwriting standards and internal controls and compliance infrastructure caused the stock prices to drop and stockholders to suffer economic losses. Curiel found they did not, as the news reports cited by the class reported on information already available to the public and the “market will already have incorporated that information into the stock price.”
Curiel also found that allegations in Erhart’s whistleblower complaint cannot serve as even partial corrective disclosures, because they did not reveal to the public that CEO Garrabrants’ statements about expanding the bank’s compliance team were false.
The New York Times article about Erhart’s lawsuit “simply repeats” Erhart’s allegations “without adding additional information,” and similarly cannot serve as a partial corrective disclosure, Curiel found.
Nor can articles on Seeking Alpha’s website, which discussed BofI’s loan underwriting standards, internal controls and compliance infrastructure, serve as corrective disclosures, as they did not for the first time reveal to the public the alleged falsity of Garrabrants’ statements that BofI had not sacrificed credit quality to increase loan origination.
The articles cited by Seeking Alpha relied entirely on publicly available records and repackaged existing public information, Curiel wrote.
He found that the stockholders “mistake quantity for quality” in citing the Seeking Alpha articles: “the Seeking Alpha authors’ prolificacy does not make an otherwise inadequate series of corrective disclosures sufficient.”
“Because the Seeking Alpha articles do little more than aggregate publicly available information, the SAC [second amended complaint] fails to identify with particularity a corrective disclosure of the falsity of Garrabrants’ statements regarding BofI’s loan underwriting standards.”
He added: “To show reliance, Plaintiff invokes the efficiency of the market by asking the Court to presume that when Plaintiff purchased BofI stock, the market had digested all publicly available relevant information and incorporated that information into its pricing. But to show loss causation, Plaintiff asks the Court to disregard that presumption.”
Should the class choose to amend, Curiel concluded: “the Court reminds Plaintiff that there is little correlation between a complaint’s length and the sufficiency of its allegations. While the pleading standards applicable to Plaintiff’s claims may be heightened, that fact does not abrogate Rule 8’s requirement that a complaint be short and plain. To the contrary, even under heightened pleading standards ‘[i]t is the duty and responsibility, especially of experienced counsel, to state th[e] essentials in short, plain and non-redundant allegations.’”