LOS ANGELES [August 24, 2009] -. Morrison & Foerster LLP secured a win for former officers and directors of Downey Financial Corp. ("Downey") in a securities fraud case brought against them by Waterford Township General Employees Retirement System ("Waterford"). Judge John F. Walter of the Los Angeles Federal Court dismissed with prejudice the claims that the defendants had misrepresented the financial condition of Downey prior to its closing by the FDIC.
In May 2008, Waterford filed a class action complaint on behalf of all Downey purchasers of securities between October 16, 2006 and March 14, 2008, claiming that each of the individual defendants had misrepresented the company's reported financial statements, the quality of its loan portfolio, and the adequacy of its loan loss reserves. The Court dismissed the First Amended Consolidated Complaint with leave to amend, and in April 2009, Waterford filed a Second Amended Consolidated Complaint.
On August 21, 2009, Judge Walter found "a total absence of factual allegations that would permit a strong inference" that any of the individual defendants knew that their representations were false or misleading. The Court also held that Waterford had failed to show that the losses sustained by Downey's shareholders were caused by any of the alleged misstatements or omissions. As the Court opinion reflected, among the largest shareholder losses resulting from the bank closing were those incurred by defendants themselves. Citing the Ninth Circuit's recognition that Congress had raised "the pleading standards to eliminate abusive securities litigation," the Court again dismissed the lawsuit with prejudice.
Melvin Goldman, Morrison & Foerster senior partner and lead counsel in this case, said, "We are pleased that the Court looked beyond the mere fact of the significant drop in Downey's stock value and the subsequent takeover by federal regulators, and held that Waterford had failed to establish that Downey's losses resulted from any cause other than the unprecedented downturn in the housing and mortgage markets."
Mr. Goldman was assisted in this case by partner Dan Marmalefsky, as well as associates James Oliva and Saro Balian of Morrison & Foerster.