City of Cambridge Retirement v. Altisource Asset Management Co
908 F.3d 872
| 3rd Cir. | 2018Background
- Altisource Asset Management Corp. (AAMC) was a small asset-manager spun off from Ocwen-related entities; its sole client was RESI, which relied on Ocwen for mortgage servicing and paid AAMC a management fee.
- During 2013–2014 Ocwen faced extensive regulatory scrutiny (CFPB, NY DFS, HUD) and consent orders identifying servicing failures and conflicts of interest involving William Erbey, the common chairman and largest shareholder of the affiliated companies.
- Plaintiffs (former shareholders) sued AAMC under §10(b)/Rule 10b-5, alleging AAMC made false/misleading statements from April 19, 2013–Jan 12, 2015 that inflated AAMC stock: (1) overstating Ocwen’s benefit/competitive advantage to AAMC/RESI, and (2) falsely representing that Erbey recused himself from related‑party transactions.
- The district court dismissed for failure to state a claim and denied leave to amend as futile; plaintiffs appealed.
- The Third Circuit reviewed de novo whether the proposed second amended complaint met Rule 12(b)(6), Rule 9(b), and the PSLRA’s heightened particularity/scienter pleading standards.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Falsity of statements about Ocwen as a benefit/competitive advantage | AAMC knew Ocwen’s servicing platform was flawed and thus its statements misled investors about Ocwen’s value to RESI/AAMC | AAMC’s disclosures merely described reliance on Ocwen’s servicing capacity and risks if Ocwen failed; plaintiffs allege no facts showing Ocwen could not perform | Statements not plausibly false or misleading in context; plaintiffs failed to plead actionable omission |
| Falsity of recusal-policy statements (Erbey) | AAMC’s disclosures that Erbey recused from related-party deals were false because he routinely failed to recuse | AAMC contends plaintiffs offer only speculation and no specific AAMC transactions showing improper participation | Allegations speculative; no specific transaction identified; fails PSLRA particularity requirement |
| Scienter (strong inference of fraudulent intent) | Plaintiffs infer intent from Erbey’s conduct at affiliated companies and regulatory findings | Defendant argues no particularized facts linking AAMC statements to fraudulent intent | Court did not reach merits because falsity not plausibly pleaded; scienter insufficiently pled in any event |
| Loss causation | Plaintiffs say corrective disclosures about Ocwen and related conflicts caused stock decline | Defendant says disclosures did not correct any false AAMC statements and plaintiffs fail to tie decline to actionable misrepresentations | Court held plaintiffs failed at the falsity pleading stage and thus loss causation analysis unnecessary |
Key Cases Cited
- Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (maker of statement is person with ultimate authority over it)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (elements of Rule 10b-5 claim include reliance and loss causation)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standard for pleading strong inference of scienter)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for pleadings)
- In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (PSLRA particularity and futility/remand guidance)
- Cal. Pub. Emps. Ret. Sys. v. Chubb Corp., 394 F.3d 126 (discussing proof elements in securities fraud suits)
- In re Advanta Corp. Sec. Litig., 180 F.3d 525 (statements of optimism are nonactionable puffery)