Securities Regulation Daily Statements about related-party transactions were material misrepresentations
Wednesday, June 21, 2017

Statements about related-party transactions were material misrepresentations

By Rodney F. Tonkovic, J.D.

A district court concluded that a company's assurances about conflicts of interest were material misrepresentations. The action arose out of Ocwen Financial Corporation's transactions with parties in which Ocwen's chairman had a significant stake. Ocwen said that it had policies in place to prevent conflicts of interest when dealing with the related parties and that the chairman would recuse himself from these transactions. Both statements, the court found, were false. The court went on, however, to find that all of the other issues were inappropriate for summary judgment due to genuine disputes about material facts (In re Ocwen Financial Corporation Securities Litigation, June 12, 2017, Dimitrouleas, W.).

Ocwen provides mortgage loan servicing and origination. According to the complaint, Ocwen is required to comply with servicing mandates and regulations imposed by the New York Department of Financial Services ("NYDFS") and other regulators in connection with the National Mortgage Settlement ("NMS") arising out of the mortgage crisis. Compliance with these mandates was the consequence of pre-class period consent orders and settlements and was a pre-condition to Ocwen's continued acquisition of mortgage servicing rights, which were the basis for its projected and actual revenue growth.

Related parties. At issue in this case were alleged misstatements arising out of regulatory scrutiny related to the related parties through which Ocwen provided its servicing functions. The platform through which Ocwen had historically serviced its mortgages was owned by Altisource Portfolio Solutions, S.A., one of several vertically integrated public companies that were also chaired by Ocwen's Chairman, William Erbey.

The consent orders required Ocwen to provide market rates to homeowners for services provided by the third-party vendors and to monitor those services. Ocwen made repeated public statements about its internal controls over related-party transactions indicating that policies to avoid conflicts of interest were in place and that Erbey recused himself from such transactions. In reality, however, there were no written policies regarding related-party transactions, Erbey did not recuse himself, and Altisource charged above-market rates to homeowners.

The motion for partial summary judgment here sought to narrow the issues at trial. The investors claimed that Ocwen made material misrepresentations related to the nature and extent of Ocwen’s policies, procedures, and practices to prevent conflicts of interest between Ocwen and the related companies. This included including misrepresentations that Erbey recused himself from the negotiation and approval of Ocwen’s transactions with the related companies.

Materially misleading. The court found that the statements concerning the related parties were materially misleading as a matter of law. Ocwen didn't dispute the content of its statements, but contended that it had pointed out that there were risks or that the policies could be ineffective. According to the court, it was clear that Ocwen had assured investors of the existence of policies and procedures to avoid conflicts of interest and its attempts to point out risks or potential ineffectiveness did not negate the fact that the assurances were made. Moreover, there was no specific policy, written or otherwise, that required Erbey's recusal from related-party transactions, and Erbey did not recuse himself from several such transactions. These misrepresentations were material, the court said in conclusion, because Erbey's conflicts were well-documented and a source of concern to investors.

Remaining issues. The court went on to find that the remaining issues were inappropriate for summary judgment due to genuine disputes about material facts. First, Erbey said that he would recuse himself from approving related-party transactions, but he did so. These false statements were a departure from the standard of care, the court said, but it was a question of fact whether they were an extreme departure fro the standard of care and whether the danger of misleading investors was obvious. The court also concluded that it was premature to decide whether Ocwen's CEO was liable as a controlling person.

The case is No. 14-81057.

Attorneys: Joseph E. White, III (Saxena White P.A.) for United Union of Roofers, Waterproofers & Allied Workers Local Union No. 8. Jared I. Heller (Kramer Levin Naftalis & Frankel LLP) for Ocwen Financial Corp.

Companies: Ocwen Financial Corp.

MainStory: TopStory FloridaNews FraudManipulation

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