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From Securities Regulation Daily, February 11, 2016

Company had no duty to disclose agency investigations

By Rodney F. Tonkovic, J.D.

A complaint alleging that a bank holding company omitted material information from its public disclosures has been dismissed. The investor bringing this action asserted that the company, while disclosing generally that it was subject to investigations, did not reveal that it was being investigated during the relevant period. The court found that the investor failed to meet his burden of pleading an actionable omission or that there was any duty to disclose (Lubbers v. Flagstar Bancorp, Inc., February 10, 2016, Friedman, B.).

An investor brought this action against Flagstar Bancorp., Inc. and its CEO and CFO alleging that Flagstar failed to disclose that it was under investigation by the Consumer Financial

Protection Bureau. According to the complaint, after the mortgage industry collapsed in 2008, Flagstar began to "cut corners" and violate various consumer protection laws. In 2011, as mortgage originations continued to decline, Flagstar was forced to cut costs in order to meet the Federal Reserve's stress tests. One way that Flagstar cut costs was by reducing personnel in its technology systems, and this led to a backlog in processing loan modification and loss mitigation applications, resulting in Fannie Mae threatening to terminate Flagstar’s servicing rights on loans owned or guaranteed by Fannie Mae.

Eventually, the CFPB initiated an investigation into Flagstar's mortgage practices. In 2014, Flagstar disclosed that it was discussing a settlement with the CFPB for its alleged violations of federal consumer financial laws, and a consent order was filed in September 2014 finding violations of the Consumer Financial Protection Act. The complaint asserted that Flagstar's public disclosures prior to 2014 were misleading because they failed to disclose both the CFPB investigation and the threat of termination by Freddie Mae as well as the violations that led to those events.

No actionable omissions. The investor asserted that a statement in Flagstar's SEC filings that investigations into its practices occurred "from time to time" gave the false impression that such investigations were routine. According to the investor, it was Flagstar's violations of the consumer protection laws that spurred the CFPB's investigation. For its part, Flagstar said that it adequately disclosed its involvement with "ongoing investigations . . . relating to mortgage origination or mortgage servicing practices."

The court agreed with Flagstar, remarking that the investor was engaging in "semantic quibbling" in his argument regarding the phrase "from time to time." This disclosure, the court said, was broad enough to put investors on notice of the possibility that Flagstar was under investigation by an agency like the CFPB. The language at issue adequately disclosed that: Flagstar was subject to agency investigations; there were ongoing investigations; and that Flagstar was cooperating with the agencies. The same analysis applied to similar statements about the possibility of future investigations or changes in the applicable laws: exposure to future investigations did not mean that Flagstar was not currently subject to investigations.

Next, the investor contended that Flagstar misleadingly gave the impression that its workforce reductions were done for the sake of business efficiency, when, in reality, that were due to the company's failure to comply with consumer protection regulations. Flagstar countered that it accurately reported the reductions and that it was not required to "editorialize" on why the reductions occurred. The court said that requiring Flagstar to disclose all underlying circumstances for its cost reductions would impose a general duty of unlimited disclosure.

Finally, the investor claimed that an SEC filing disclosing Flagstar's sale of a portion of its mortgage servicing rights portfolio failed to disclose that the sale was prompted by Fannie Mae's threats. The court stated that omissions only need to be disclosed when needed to make a previous statement not misleading, and no reasonable investor would have interpreted Flagstar's statement as suggesting that the sale absolved it of any liability for its violations of the Consumer Financial Protection Act. Again, to hold otherwise would be to impose a duty of unlimited disclosure, the court concluded. Flagstar's motion to dismiss was accordingly granted.

The case is No. 14-cv-13459.

Attorneys: Patrick E. Cafferty (Cafferty Clobes Meriwether & Sprengel LLP) for Justin G. Lubbers. Jeffrey Alan Crapko (Miller, Canfield, Paddock and Stone, P.L.C.) for Flagstar Bancorp, Inc.

Companies: Flagstar Bancorp, Inc.

MainStory: TopStory FraudManipulation MichiganNews

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