Ohio Public Employees Retirement System v. Federal Home Loan Mortgage Corp.
830 F.3d 376
| 6th Cir. | 2016Background
- OPERS (Ohio Public Employees Retirement System) sued Freddie Mac and four senior officers alleging securities fraud for concealing large exposure to nontraditional, high-risk mortgages and deficient underwriting/risk controls during Aug. 1, 2006–Nov. 20, 2007 (class period).
- Complaint alleges Freddie Mac increased purchases of low-quality CI/C2/EA and Alt-A loans, relaxed underwriting, relied on third-party underwriting, and used outdated fraud-detection software, materially understating risk in public disclosures.
- OPERS claims Freddie Mac publicly minimized subprime/Alt-A exposure (e.g., statements like “basically no subprime exposure”; quantitative metrics allegedly understating risk) while internal reports and emails showed awareness that such statements were misleading.
- On Nov. 20, 2007 (end of OPERS’ class period), Freddie Mac disclosed a $2 billion loss and greater-than-reported exposure; its stock fell ~29%, and later losses and conservatorship followed.
- The district court dismissed OPERS’ third amended complaint for failure to plead loss causation; the Sixth Circuit reversed and remanded, holding OPERS sufficiently alleged loss causation under the materialization-of-risk theory.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loss causation can be shown by materialization of the concealed risk (alternative to corrective disclosure) | Materialization-of-risk theory applies: losses resulted when the concealed mortgage-risk materialized (Nov. 20 disclosure) | Sixth Circuit hadn’t adopted materialization-of-risk; loss requires corrective disclosure showing fraud | Court recognized materialization-of-risk as viable and applied it here |
| Whether OPERS pled facts plausibly showing the risk concealed by misstatements caused OPERS’s losses | Alleged concealed high-risk loan accumulation, misleading public metrics, internal warnings, and temporal link between Nov. 20 disclosure and stock drop | Public filings and risk warnings disclosed involvement in nontraditional products, so plaintiffs were on notice; alternative market explanations (financial crisis) | Allegations suffice at pleading stage to connect concealed risks to the Nov. 20 market reaction; dismissal reversed |
| Whether public quantitative disclosures and cautionary language insulated Freddie Mac from liability | OPERS: disclosures were misleading or incomplete (different definitions, omitted Alt-A exposure); cautionary language didn’t neutralize deceptive statements | Freddie Mac: annual/quarterly reports warned about nontraditional products and risks, undermining causation | Court analogized to precedent finding warnings may not cure misleading omissions; culpability not negated at pleading stage |
| Whether the district court properly denied leave to amend | OPERS sought further amendment to cure pleading defects | Freddie Mac opposed amendment as futile | Sixth Circuit reviewed de novo and found dismissal improper; remanded for proceedings (implicit that amendment denial should be revisited consistent with opinion) |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard for plausibility)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (plausibility and discovery expectation)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (loss causation principles)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (consideration of pleadings and documents in securities suits)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (zone-of-risk/materialization-of-risk concept)
- In re Omnicare, Inc. Securities Litigation, 769 F.3d 455 (Sixth Circuit on securities pleading and loss causation)
- Mass. Retirement System v. CVS Caremark Corp., 716 F.3d 229 (defendant’s denial doesn’t defeat loss causation)
- Virginia Bankshares v. Sandberg, 501 U.S. 1083 (mixing truthful and misleading statements does not necessarily neutralize deception)