Facts

Velocity Financial is a real estate finance company that issues, manages, and securitizes loans to borrowers nationwide. The company focuses on loaning to small commercial and residential properties. As a solution for borrowers who did not qualify for Velocity's 30-year, long-term loan, the company began offering short-term, interest only loans. Velocity had in place an underwriting process that helped the company avoid loaning to high-risk borrowers, while still maximizing profits. However, after Velocity began offering short-term, interest only loans, the percentage of nonperforming loans (loans that are 90 or more days past due, in bankruptcy or foreclosure) became higher than other lenders. Velocity shareholders filed a putative class action against Velocity financial, certain of its officers and directors, its private equity sponsor and controlling shareholder Snow Phipps Group, and the underwriters of its initial public offering (IPO) under the Securities Act.

PLAINTIFFS' CONTENTIONS: Plaintiffs contended that defendants made a misrepresentation or omission of material fact in its registration statement by failing to disclose the impact of the coronavirus pandemic on the company's business and real estate market; mischaracterizing the risk of its underwriting practices; and failing to inform investors about its rising portfolio of nonperforming loans. Plaintiffs also contended that defendants failed to meet their disclosure obligations under SEC regulations.

DEFENDANTS' CONTENTIONS: Defendants denied all contentions. Defendants contended that statements made about the real estate market during the coronavirus were not misrepresentations because they were nonactionable puffery; defendants could not have foreseen the effect of the pandemic at the time of the IPO; and the statements contained adequate disclosures about the possibility of economic disasters. Defendants also contended that the statements highlighting defendants' underwriting process were not actionable because they were mere puffery, and that defendants could not be held liable because they reported that their underwriting practice included higher-risk loans.

Result

Motion to dismiss granted. The court held that a securities claim could not be based on optimistic market projections that failed to predict a global pandemic; defendants' statements regarding defendant's underwriting practice were nonactionable statements of corporate optimism; and plaintiff did not plausibly allege that defendants hid expected increases in nonperforming loans. The court further held that plaintiff did not allege that defendants would or could have known the extent of the coronavirus pandemic, and defendants sufficiently disclosed information about nonperforming loans.

Other Information

This is the first decision on a motion to dismiss in a securities class action involving allegations related to COVID-19.