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Johnson v. Radian Group

July 16, 2009

JEANETTE JOHNSON, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED
v.
RADIAN GROUP, INC., ET AL.



The opinion of the court was delivered by: McLaughlin, J.

MEMORANDUM

This putative class action is brought pursuant to § 502 of the Employee Retirement Income Security Act ("ERISA") on behalf of participants in the Radian Group, Inc. Savings Incentive Plan ("the Radian Plan" or "the Plan"). The members of the putative class are Plan participants who bought Radian common stock ("Radian stock" or "company stock") between November 6, 2006, and the present and whose individualized retirement accounts held company stock or units in the Radian Common Stock Fund ("the Radian Stock Fund"). The defendants are Radian Group, Inc. ("Radian"), various Radian executives, officers, directors, and/or employees, as well as certain committees of Radian executives, officers, directors, and/or employees.

Radian provides credit protection products and financial services to financial institutions, including mortgage lenders. Credit-Based Asset Servicing and Securitization ("C-BASS"), a corporation in which Radian held a 46% equity interest during the class period, invested in the credit risk of subprime residential mortgages. C-BASS is alleged to have faced a "monumental liquidity crisis" during the class period as a result of declining conditions in the subprime mortgage market.

The plaintiff claims that the defendants breached their fiduciary duties to prudently and loyally manage the Plan by investing Plan assets in Radian stock and by continuing to offer Radian stock as an investment option in light of deteriorating conditions at C-BASS and in the subprime mortgage market in general. The plaintiff also claims that the defendants breached their duty not to mislead Plan participants about the risks associated with Radian stock in light of these conditions. As a result, the plaintiff contends, Radian stock traded at an artificially inflated price during the class period.

In July 2007, Radian publicly announced an impairment of its investment in C-BASS. The resulting decrease in stock price is alleged to have caused the value of Plan participants' vested retirement benefits to decline. In this action, the plaintiff, on behalf of herself and others similarly situated, seeks to obligate the defendants to restore to the Plan the losses that resulted from their alleged fiduciary breaches.

The defendants have moved to dismiss the complaint. Their arguments for dismissal are: (1) that the allegations of the complaint as a whole fail to meet the applicable federal pleading standards; (2) that the complaint does not state a claim of breach of fiduciary duty; and (3) that, at a minimum, the complaint does not state a claim against various defendants who are not properly considered fiduciaries within the meaning of ERISA. The Court will grant the defendants' motion and will dismiss the complaint without prejudice.

I. Facts*fn1

The lead plaintiff in this case is Jeanette Johnson, a participant in the Radian Plan who held company stock in her retirement investment portfolio during the class period. The defendants are Radian, Sanford A. Ibrahim, C. Robert Quint, the Radian Compensation and Benefits Committee (the "Plan Committee"),*fn2 Robert E. Croner, Stephen T. Hopkins, Christine M. Kerly, and John and Jane Does 1-10, who are alleged to be additional Plan fiduciaries.

Radian is a credit enhancement company that offers mortgage insurance and other financial services and products to mortgage lenders and other financial institutions. For the purposes of ERISA, Radian is the "sponsor" of the Plan at issue. Radian is also alleged to have been named as the "Plan Administrator" for at least a portion of the class period.

Compl. ¶¶ 15-18, 76.

At all relevant times, Sanford A. Ibrahim was a member of the Radian Board of Directors and was also the company's CEO.

C. Robert Quint was the Executive Vice President and CFO of Radian. Robert E. Croner was the company's Executive Vice President of Human Resources. Stephen T. Hopkins is alleged to have been a Radian director, a member of the Radian Credit Committee, and Chair of the Plan Committee. Christine M. Kerly, although not identified by position in the complaint, is alleged to have signed the Plan's annual report on the company's Form 5500 filed with the Department of Labor on July 3, 2007. Ibrahim, Quint, Croner, Hopkins, and Kerly are also alleged to have been members of the Plan Committee. Compl. ¶¶ 24, 26, 37, 42-43, 47-48, 50-51.

A. The Radian Plan

The Radian Plan is an "employee pension benefit Plan," as defined by ERISA. The Plan is also an "eligible individual account plan" ("EIAP") within the meaning of ERISA. See 29 U.S.C. § 1107(d)(3).*fn3

Radian adopted the Plan, which became effective on November 1, 1992, for the benefit of its eligible employees and the eligible employees of certain "Participating Companies" in the United States. The Plan is a 401(k) employee benefits plan that provides for elective contributions on the part of the participating employees, as well as employer matching contributions. Participating employees may contribute a certain percentage of their compensation, and the company will match those contributions up to 6% of the participant's eligible compensation. Compl. ¶¶ 59, 61-62, 66.

Under the Plan, the company's matching contributions can be made either in cash or in shares of Radian stock, at the company's election. The Plan also states, however, that matching contributions "shall be invested in Company Stock until such time as the Participant may transfer all or portion of Company Stock to one or more" other investment media. Defs.' Mot. Ex. 4 § 10.5(c). Prior to January 1, 2007, the matching contributions had to remain in company stock until they had vested. See id. § 10.5(d). Since January 1, 2007, however, Plan participants have been free to invest all matching contributions in the investment funds of their choice and are not required to maintain any portion in the Radian stock fund. See Defs.' Mot. Ex. 5 at 8. Specifically, participants were advised in a "Summary of Material Modifications" that:

Effective January 1, 2007, you will have an immediate right to diversify any of your Radian common stock investments (including any pre-existing investments in Radian common stock) by electing to transfer amounts to another investment fund or funds offered under the Plan . . . . Previously, the Plan limited diversification rights on your Radian common stock investments purchased with matching contributions . . . . Participants should be aware that maintenance of a diversified and balanced portfolio of plan investments can be a key step towards ensuring long term retirement security.

Defs.' Mot. Ex. 9 at 2.

With respect to employee elective contributions, Plan participants are offered a range of investment options that includes more than twenty-five different investment funds. See Defs.' Mot. Ex. 6 at 25-26. The Plan does not require participants to invest in Radian stock, but rather, allows Plan participants to maintain individual accounts for which they have a number of investment options, including various investment funds or Radian company stock. In an "Investment Policy Statement" ("IPS") given to Plan participants, participants were warned that company stock is unique among the Plan's other investment options in that it invests solely in the common shares of Radian Group Inc. Investment in a single security poses both company-specific and industry/sector risks for participants. The value of stock can be greatly affected by issues that arise within Radian Group Inc. or within its industry. Therefore, it is much more difficult to anticipate the risk characteristics of this option versus the diversified fund options available under the Plan.

Defs.' Mot. Ex. 2 at 7. In addition, a "Summary Plan Description" ("SPD") given to participants advises them that "investment funds are subject to varying degrees of risk due to market fluctuations." Defs.' Mot. Ex. 6 at 7. The Plan does not guarantee any specific level of benefits:

Contributions to the Radian Group Inc. Stock Fund will be used to purchase shares of the common stock of Radian Group Inc. at prevailing market prices. . . . The Fund is not diversified and its performance depends entirely on the performance of Radian Group Inc. Common Stock. As with other stock, the value of Radian Group Inc. Common Stock will fluctuate and your investment in this Fund will increase or decrease accordingly.

Id. at 27.

Radian is the sponsor of the Plan within the meaning of ERISA. Through December 31, 2006, the Plan also designated Radian as the "Plan Administrator for purposes of ERISA" and for purposes of satisfying mandatory reporting and disclosure requirements respecting the establishment or maintenance of the Plan. Defs.' Mot. Ex. 4 § 9.1.

The Plan also provided for the appointment of a separate "Administrator" who would be an individual or a committee of three or more individuals that would serve until their resignation or dismissal by the company. Id. §§ 9.2-9.3. In 2006, the appointed "Administrator" was the Plan Committee. According to the IPS, the Plan Committee would be comprised of various individuals, including the CEO, COO, Senior Vice President/CFO, Senior Vice President of Human Resources, and Executive Vice President and General Counsel. The Plan Committee was responsible for selecting the investment options offered under the Plan. See Defs.' Mot. Ex. 2 at 2.

As of January 1, 2007, an amendment to the Plan designated Radian's executive head of Human Resources as both "Plan Administrator" and "Administrator." As of January 1, 2007, Robert Croner was Radian's Executive Vice President of Human Resources. See Defs.' Mot. Ex. 5 at 8; Compl. ¶ 42.

B. Radian, C-BASS, and the Subprime Market During the class period, Radian's operations were divided into three business segments: (1) mortgage insurance; (2) financial guaranty; and (3) financial services. Radian's financial services segment consisted mainly of interests held in Sherman Financial Services Group, LLC ("Sherman"), and C-BASS. Sherman purchases and services charged-off and bankruptcy plan consumer assets at discounts from national financial institutions and major retail corporations. Sherman also originates nonprime credit card receivables through a subsidiary. Compl. ¶¶ 76, 81.

C-BASS, on the other hand, is a mortgage investment and servicing company that invests in the credit risk of subprime residential mortgages. During the class period, Radian held a 46% equity interest in C-BASS and had invested approximately $500 million in it. Radian, together with MGIC Investment Corporation ("MGIC"), another provider of private mortgage insurance, owned more than 95% of C-BASS. Id. ¶¶ 83-85, 107.

The CCAC alleges that prior to and during the class period, the mortgage-backed securities securitized by C-BASS were particularly risky because they were backed by subprime loans, which themselves had become so risky that they were not even rated. In addition, the largest proportion of mortgages that had been purchased by C-BASS were located in California and Florida, two locations which the New York Times had reported as accounting for about 21% of all mortgages nationally, and 30% of new foreclosures. Further compounding the riskiness and volatility of C-BASS's assets was the fact that C-BASS did not originate the loans it serviced and securitized, which, according to the plaintiff, increased the risk that these loans were fraudulently originated. C-BASS also retained the most risky interests in the securitizations it created, including, for example, by accepting the first risk of payment default. Id. ¶¶ 86, 90-91, 93-94.

Prior to the class period, interest rates began to rise nationally, which adversely affected subprime borrowers' ability to pay and increased the default risk for subprime mortgage loans. According to the plaintiff, the deterioration of the subprime market led to an actual material increase in mortgage loan defaults, thus significantly impairing the value of C-BASS's subordinated securitized interests. Because C-BASS had been heavily dependent on bank credit lines for its liquidity, the impaired value of C-BASS's subordinated securitized interests, which had served as the collateral for its bank loans, caused "a monumental liquidity crisis" for C-BASS. Id. ¶¶ 105-06.

The plaintiff alleges that, despite the danger to its investment in C-BASS, Radian failed to disclose this danger to the Plan or its participants. This increased the risk of investing in and holding Radian stock in the Plan. Radian also failed to disclose that its investment in C-BASS was materially impaired or that Radian's lenders had started requiring it to put up more collateral because its assets and investments were impaired. Instead, it portrayed Radian's investment in C-BASS as strong. Id. ¶¶ 107-08, 125, 148.

On February 6, 2007, Radian and MGIC announced that they had agreed to merge. As part of the transaction, Radian and MGIC agreed that they would sell their respective interests in C-BASS. In addition, upon completion of the merger, Ibrahim would immediately become President and COO of the merged entity. In 2009, he would become the CEO, and in 2010, he would become Chairman. In addition, Croner would become head of Human Resources at the merged entity. According to the plaintiff, one of the reasons that Radian did not disclose the problems with its investment in C-BASS is that the merger would have been jeopardized if it had disclosed the truth. On May 9, 2007, Radian issued a press release announcing that its shareholders had approved the merger with MGIC. Id. ¶¶ 127, 129-33.

C. Radian's Allegedly Misleading Statements The complaint details a series of statements made by Radian, Ibrahim, and Quint, in various SEC filings and on conference calls with investors. The plaintiff alleges that in these statements, the defendants failed to disclose that Radian's $468 million investment in C-BASS was materially impaired because C-BASS was receiving margin calls and C-BASS's investments were declining in value at a significant rate. She alleges that these statements materially overstated the company's financial results by failing to properly value its investment in C-BASS and by failing to write-down that investment in a timely fashion. She also alleges that Radian misrepresented that, with respect to financial reporting, the company had adequate internal disclosure controls in place. Finally, the plaintiff alleges that Radian's public filings were incorporated by reference into the Plan documents. Through each of these misrepresentations, the defendants "fostered a positive attitude" toward company stock. As a result, Plan participants were not informed about the true risks presented by investing in Radian stock. Id. ¶¶ 215-20.

The class period begins on November 6, 2006, when Radian filed its quarterly Form 10-Q with the SEC. In that report, which was signed by defendants Quint and Ibrahim, the company certified that the report did not contain "any untrue statement of a material fact or omit to state a material fact necessary to make the statements made," and that the statements and information in the report "fairly present in all material respects the financial condition, results of operations and cash flows" of Radian for the relevant time period. According to the plaintiff, these statements were false and misleading because the company had not disclosed that its investment in C-BASS was impaired and because it did not disclose that the company lacked adequate internal controls. Id. ¶¶ 111-16.

On January 24, 2007, Radian filed a Form 8-K with the SEC that included a press release announcing Radian's financial results for the fourth quarter and fiscal year of 2006. For fiscal year 2006, the company reported a net income of $582.2 million and diluted net income of $7.08 per share. Ibrahim commented:

Radian delivered record net income and grew book value by 16.1 percent, despite a challenging operating environment . . . . This performance demonstrates that our strategy to focus on diversification while maintaining a strict risk management culture continues to deliver long-term value. . . . .

Forecasts for interest rate stability, strong employment and improved persistency bode well for the mortgage insurance industry. . . . In this environment, we believe we are well positioned to benefit over the long term from both cyclical and structural opportunities in the mortgage market.

Id. ¶¶ 118-21. Further included in Radian's annual report was the following statement:

As C-BASS participates in the sub-prime mortgage market as an investor in those assets, it has been under pressure in early 2007 as spreads on non-investment grade and non-rated sub-prime mortgage securities have continued to widen, and the industry has experienced increased credit losses. While this impacts short term results, over the long term our involvement in these two companies has delivered a multitude of benefits to Radian, in the areas of earnings, franchise value, and diversified and recurring revenue streams. Additionally, our relationships with [C-BASS] and Sherman provide timely and valuable insights into the consumer credit marketplace . . . .

Id. ¶ 123.

On March 1, 2007, Radian filed its Form 10-K for the 2006 fiscal year. This form stated:

As a holder of credit risk, our results are subject to macroeceonomic conditions and specific events that impact the credit performance of the underlying insured assets. We experienced generally positive results throughout the business for the year ended December 31, 2006, led by strong credit performance and good production despite the challenging business production environment for mortgage insurance and financial guaranty insurance.

For 2006, the financial services segment showed another year of strong earnings and return on investment, which was, in part, a result of the relatively low interest rate and favorable credit environment . . . In addition, both C-BASS and Sherman were positively impacted in the fourth quarter of 2006 . . . and C-BASS recovered most of the hedge losses that had been incurred in prior quarters.

Despite the significant credit spread widening that has occurred in the subprime mortgage market during the first quarter of 2007, which could produce . . . losses for C-BASS during the first quarter, we expect that both C-BASS's and Sherman's results for 2007 will remain fairly consistent with their 2006 results, as both companies stand to benefit from recurring sources of earnings . . . and, while the sub-prime origination business is currently uncertain, C-BASS typically looks for opportunities to purchase mispriced assets in such an environment.

Id. ¶¶ 137-38.

On April 9, 2007, the defendants filed a Form 8-K with the SEC and sent a letter to all Radian shareholders. A copy of a letter from Ibrahim was included. This letter stated:

Our success of 2006 was evident in two important respects: First, in terms of financial performance, we achieved or exceeded all of our key metrics for the year. Second, we continued to focus on and execute against a strategy that emphasizes three important themes: diversification, discipline and risk management - which in turn deliver long-term value to our stockholders.

Id. ¶¶ 146-48.

On April 25, 2007, Radian filed with the SEC a Form 8-K announcing its financial results for the first quarter of 2007, ending March 31, 2007. The company reported net income of $113.5 million and diluted net income per share of $1.42. Ibrahim commented:

Our primary book was not significantly affected by the disruptions in the subprime market in recent months. I believe this is a validation of our long-term approach to risk management in all areas, including sub-prime and Alt A, where we have remained disciplined in diversifying our book of business across geographies, products, clients and origination years.

With regard to C-BASS, the company stated that "In the financial services segment, net income was $10.8 million, down from . . . the same period last year, primarily as a result of an ...


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