Jacksonville Police & Fire Pf v. Cvb Financial Corp, 2016 U.S. App. LEXIS 1657

Background

CVB Financial was the primary lender to the Garrett Group, a commercial real estate borrower that fell into distress during the 2008–2010 recession; CVB restructured and extended additional loans to Garrett in 2008–2009.
Garrett informed CVB in early January 2010 that it was delinquent, might file for bankruptcy, and needed loan modifications; Garrett thereafter remained delinquent.
CVB filed SEC reports (Nov. 2009 10-Q; Mar. 4, 2010 10-K; May 10, 2010 10-Q) stating it had "no basis for serious doubts" about borrowers’ ability to repay; Garrett loans were not listed as troubled.
On July 26, 2010 CVB received an SEC subpoena seeking info about loan underwriting and loss reserves; CVB disclosed the subpoena on Aug. 9, 2010 and its stock fell ~22% the next day.
On Sept. 9, 2010 CVB disclosed it charged off $34 million of Garrett loans and classified $48 million as non‑performing; that disclosure produced only a modest further market reaction.
Plaintiffs (Jacksonville Pension Fund) sued under Section 10(b)/Rule 10b‑5 alleging materially false/misleading SEC filings and loss causation; the district court dismissed the SAC. Ninth Circuit affirmed in part, reversed in part, and remanded.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether CVB's public boasts about underwriting and credit quality were actionable	Boasts masked known credit problems and were materially false	Statements were puffery/immaterial corporate optimism	Dismissed — court treated these general statements as nonactionable puffery
Whether certain GAAP/accounting assertions pleaded scienter	Misstated reserves and accounting practices reflect deliberate or reckless conduct	Alleged accounting errors alone do not show scienter without specific facts	Dismissed — plaintiff failed to plead the particularized facts showing knowing or reckless accounting misconduct
Whether Nov. 2009 10‑Q "no serious doubts" statement was false	Earlier 2008/2009 troubles and restructurings showed CVB had reason to doubt Garrett’s repayment	Garrett was current through much of 2009; the earlier restructuring did not prove contemporaneous doubts	Dismissed — allegations insufficient to show the Nov. 2009 statement was false or made with scienter
Whether Mar. 4, 2010 10‑K and May 10, 2010 10‑Q "no serious doubts" statements were false and caused investor losses	CVB learned in Jan. 2010 that Garrett was delinquent and considering bankruptcy, so the later filings omitted material adverse facts; the Aug. 2010 SEC subpoena and the Sept. 2010 charge‑offs together constitute corrective disclosures that caused the Aug. price drop	Disclosure of an investigation alone cannot be a corrective disclosure; causal link to misstatements is lacking	Reversed in part and remanded — court held plaintiff adequately pleaded falsity, scienter, and loss causation for the Mar. and May 2010 "no serious doubts" statements because the SEC subpoena disclosure, viewed together with the later charge‑offs, plausibly corrected the market and proximately caused the earlier price collapse

Key Cases Cited

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standards for pleading scienter and evaluating inferences)
Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (PSLRA/Rule 9(b) pleading requirements for securities fraud)
Loos v. Immersion Corp., 762 F.3d 880 (announcement of an investigation alone generally not a corrective disclosure; question left open about investigation + later disclosure)
Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (loss causation/proximate cause requirement in securities fraud)
Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (elements of Rule 10b‑5 claim and loss causation discussion)
Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (use and evaluation of confidential witness allegations for scienter)
Public Employees’ Retirement System of Mississippi v. Amedisys, Inc., 769 F.3d 313 (investigations and partial disclosures can be considered in loss‑causation analysis)
In re Cutera Sec. Litig., 610 F.3d 1103 (distinguishing puffery from actionable statements)