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In re Radian Securities Litigation

April 30, 2010


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


This document relates to: All Actions


Lead plaintiffs Iron Workers Local No. 25 Pension Fund and City of Ann Arbor Employees' Retirement System brought suit against the defendants, Radian Group, Inc. ("Radian"), Sanford A. Ibhrahim, C. Robert Quint, and Mark A. Casale on behalf of purchasers of Radian securities between January 23, 2007, and August 7, 2007. They allege that the defendants made materially false and misleading statements regarding Radian's investment in Credit Based Asset Servicing and Securitization L.L.C. ("C-BASS"), and that this deception caused Radian's shares to decline in value when Radian revealed that its investment was materially impaired. The plaintiffs bring suit under § 10(b) and § 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated by the Securities and Exchange Commission.

On June 2, 2008, the defendants moved to dismiss the consolidated class action complaint ("CCAC"). The Court granted their motion on April 9, 2009, holding that the plaintiffs failed to carry their burden of demonstrating a strong inference of scienter. In re Radian Securities Litigation, 612 F. Supp. 2d 594 (E.D. Pa. 2009). The plaintiffs then filed a consolidated amended class action complaint ("CACAC"),*fn1 which the defendants move to dismiss. Because the Court finds that the plaintiffs have once again failed to demonstrate a strong inference of scienter, the Court will grant the defendants' motion and dismiss this case with prejudice.

I. The Court's Earlier Decision*fn2

Radian is a credit enhancement company that offers mortgage insurance and other financial services and products to financial institutions, including mortgage lenders.*fn3 Sanford A. Ibrahim, at all relevant times, was Radian's CEO, and a member of Radian's Board of Directors. Mark A. Casale served as President of Radian Guaranty, Inc., a Radian subsidiary, and was a member of C-BASS's Board of Managers. C. Robert Quint was Radian's CFO and Executive Vice President. CCAC ¶¶ 2, 13.*fn4

During the class period, Radian engaged in three business segments: (1) mortgage insurance, (2) financial guaranty, and (3) financial services. In 2006, the financial services segment represented 28% of Radian's net income, and 11% of its equity. This segment consisted mainly of interests held in Sherman Financial Services Group, LLC ("Sherman"), and C-BASS. Id. ¶¶ 44, 48.

C-BASS is a mortgage investment and servicing company that specializes in subprime residential mortgage assets and mortgage-backed securities. It was a joint venture between Radian and MGIC Investment Corporation ("MGIC"), another provider of private mortgage insurance. Both Radian and MGIC held a 46% equity interest in C-BASS.*fn5 Radian and MGIC announced on February 6, 2007, that they intended to merge, and as part of the merger, they agreed to sell half of their combined interest in C-BASS. Id. ¶¶ 4, 49, 51, 121.

The plaintiffs alleged in their CCAC that the subprime mortgage crisis, coupled by C-BASS's business model, impaired the value of Radian's investment in C-BASS. Before the class period, interest rates began to rise nationally, which adversely affected subprime borrowers' ability to make their loan payments and increased the default risk of subprime mortgages. C-BASS suffered because of the increase in payment defaults, investor rejections, and mortgage delinquency rates. Its business model exacerbated the problems because C-BASS did not originate the loans it serviced and securitized, and it accepted the first risk of nonpayment. Within the first six months of 2007, C-BASS received and paid $290 million in margin calls that allegedly left it on the brink of insolvency. Id. ¶¶ 52, 56-58, 61-78, 93, 99, 149.

The plaintiffs alleged that despite C-BASS's troubles, Radian issued positive statements about C-BASS up until it announced that its investment in C-BASS was impaired, and these statements were false and misleading. The statements related to Radian's fourth quarter and fiscal year results of 2006, and its first and second quarter results for 2007. The plaintiffs also alleged that Radian's financial statements were not in conformity with Generally Accepted Accounting Principles ("GAAP"). Id. ¶¶ 101-46.

On July 30, 2007, Radian issued a press release announcing that the value of its investment in C-BASS had been materially impaired. On July 31, 2007, C-BASS issued a press release that it met $290 million in lender margin calls during the first six months of 2007, and an additional $260 million in margin calls during the first 25 days of July. MGIC issued a press release on August 7, 2007, that in light of C-BASS's impairment, and despite Radian's disagreement, MGIC was not required to complete the pending merger with Radian.*fn6 The plaintiffs alleged that as a direct result of these disclosures, Radian common stock fell by 69% from its class period high. Id. ¶¶ 147-52, 170.

The plaintiffs pointed to certain confidential witness statements and a close business relationship between Radian and C-BASS to claim that Radian knew of the problems at C-BASS. A former C-BASS employee stated that Radian had a systematic process to monitor defaults. One former Radian Guaranty employee said that in 2006, Radian witnessed a higher rate of loan delinquencies and that Radian was hesitant to insure such loans. Another former Radian Guaranty employee recalled that defaults and foreclosures began to rise in 2005-2006, resulting in an increase in claims filed against Radian. Id. ¶¶ 79-93.

With respect to the alleged close business relationship between Radian and C-BASS, the plaintiffs referred to: (1) a letter from Ibrahim to Radian's shareholders in the Company's 2005 Annual Report, which stated that "Radian maintains an active involvement in strategic activities at both C-BASS and Sherman Financial"; (2) another statement in the 2005 letter, noting that Casale sits on the boards of C-BASS and Sherman Financial; (3) a statement by Ibrahim in the Company's 2006 Annual Report that Radian's "relationships with C-BASS and Sherman . . . provide timely and valuable insights into the consumer-credit marketplace"; and (4) a statement on the website of Litton Loan Servicing, LP ("Litton"), C-BASS's wholly owned subsidiary that serviced all of its loans, that Litton aims to "ensur[e] the interests of C-BASS, Litton, Litton's customers, and . . . investors are aligned." Id. ¶¶ 94-97.

The plaintiffs alleged that the defendants had a motive to delay in recognizing the C-BASS impairment because doing so would jeopardize the merger between Radian and MGIC. They claim that because part of the merger required MGIC and Radian to sell half of their combined interest in C-BASS, the sale of C-BASS would increase the value of MGIC and Radian shares; C-BASS's debt would not be included in the combined entity's balance sheet.

Id. ¶¶ 4, 121, 164.

The plaintiffs also claimed that the defendants had the motive to commit fraud in order to allow the defendants and "other insiders" to sell off approximately $10.2 million of their personal holdings in Radian. According to the CCAC, throughout the class period, the defendants sold 161,804 shares of their Radian stock. Defendant Ibrahim is alleged to have sold 1,095 shares on February 14, 2007, and 5,040 shares on May 14, 2007, representing a total of $384,162 in stock sales. Defendant Quint is alleged to have sold 129,000 shares of Radian stock on February 8, 2007, representing a sale of $8,105,070. Id. ¶ 162-63. The CCAC did not suggest any sales on the part of Defendant Casale. It did claim sales on the part of individuals named "John Calamari" and "Roy Kasmar," but it did not further identify these individuals. CCAC ¶¶ 162-63.

The Court granted the defendants' motion to dismiss and found that the plaintiffs failed to demonstrate a strong inference of scienter. The Court examined the defendants' motive and opportunity to commit fraud,*fn7 and it found that the motives alleged, consummating the merger with MGIC and alleged insider trading, were insufficient to establish a strong inference of scienter. With respect to the merger, the Court held that such a motive was one found to be commonly possessed by most corporate directors. It further held that the plaintiffs failed to allege any concrete and personal benefit to the individual defendants stemming from the merger, as required by the Private Securities Litigation Reform Act ("PSLRA"). In re Radian, 612 F. Supp. 2d at 608-10.

With respect to the insider trading allegations, the Court found that the plaintiffs' allegations failed to demonstrate sales that were "unusual in scope or timing" to support an inference of scienter. First, the plaintiffs failed to allege any insider trading facts as to Defendant Casale, and public filings demonstrated that Casale more than tripled his investment in Radian stock over the course of the class period. Second, Defendant Ibrahim's stock sales were minimal, representing less than 1% and approximately 2.7% of his total shares; the stocks were a portion of his overall compensation; and one sale was meant to cover tax liabilities. Third, although Defendant Quint sold 68% of his stock holdings, the plaintiffs failed to allege any facts as to how this sale was unusual. Further, the defendants offered a more compelling, nonculpable reason for Quint's sale: Quint was to lose his position upon the merger between Radian and MGIC, and he sold his stock because of his impending departure. Fourth, considering the stock sales collectively, the defendants retained a combined 88.6% of their securities during the class period, undermining a strong inference of scienter. Id. at 610-13.

The Court also found that alleged stock sales by the two non-defendants did not add to a strong inference of scienter because the CCAC lacked any allegations to put the stock sales in context. For example, the CCAC did not identify the non-defendants or their roles at Radian, nor did it identify their prior trading practices or compare their sales to their overall compensation. Id. at 610 n.14.

The Court next determined whether the plaintiffs' allegations that the defendants failed to take an earlier impairment charge on their C-BASS investment demonstrated conscious misbehavior or recklessness to support a strong inference of scienter. The Court found the plaintiffs' allegations lacking.

First, the Court evaluated the plaintiffs' claim that Radian violated GAAP for failing to reported an impairment charge by March 31, 2007, and that this constituted conscious misbehavior or recklessness. The Court found that the CCAC and public record countered the plaintiffs' bald assertion that C-BASS was on the brink of insolvency in March; C-BASS continued to meet $290 million in lender margin calls during the first six months of 2007 and $260 million in margin calls during the first twenty-four days of July. The Court also found that even if an impairment occurred prior to Radian's announcement, the plaintiffs failed to allege facts that this act constituted an extreme departure from the range of reasonable business treatments permitted under GAAP: Radian's auditor, Deloitte, did not dispute Radian's decision to write down its investment when it did; MGIC also reported an impairment as a third-quarter event; and the CCAC failed to allege with particularity when the write-down should have occurred. Id. at 613-16.

Second, the Court determined that the plaintiffs failed to sufficiently allege that the defendants knew or must have known that their statements or omissions presented a danger of misleading buyers or sellers. To the extent that the plaintiffs relied on the defendants' positions as corporate officers, ...

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