Rusell Koonin, left, and Adam Schwartz, right.

The defense bar gained an additional quiver in its arsenal against securities fraud claims in August when, for the first time, the Eleventh Circuit, in Carvelli v. Ocwen Financial, formally recognized the "puffery defense" in affirming the dismissal of a securities fraud class action case.

In Carvelli, the lead plaintiff brought a putative federal securities fraud class action against Ocwen claiming investors had detrimentally relied on Ocwen's claims that it would achieve regulatory compliance after serious flaws in Ocwen's mortgage servicing software caused the company to improperly track payments, assess late fees, and initiate thousands of wrongful foreclosures. Ocwen's software failures provoked the ire of 49 state attorneys' general, state regulatory agencies, and the CFPB. As a result, Ocwen was required to pay over $2 billion in a combination of restitution and fines, and was required to subject itself to a monitor.

In public filings subsequent to this regulatory onslaught, Ocwen made certain optimistic assertions that it was making significant progress in correcting its deficiencies. Specifically, Ocwen claimed that it was devoting "substantial resources" to its problems with "improved results," and that it was taking a "leading role'" and making "progress" toward compliance." Ocwen's July 2016 Form 10-Q stated that "we are … intensely focused on improving our operations to enhance borrower efficiencies, both of which we believe will drive stronger financial performance through lower overall costs," and that its "significant investments in servicing operations [and] risk and compliance infrastructure over recent years will position us favorably relatively to our peers." Ocwen also reported in the 10-Q that "as a company we continue to make progress in resolving our legacy issues" and that "this legal spend is now largely behind us" because "the company "remained focused on compliance, risk management, and service excellence." By the end of July 2016, Ocwen's stock rose 7.1%.

Yet despite these optimistic assertions, in early 2017, an Ocwen spinoff revealed the CFPB was weighing a potential enforcement action against it and soon more than 20 states and the North Carolina Office of the Commission of Banks issued a cease-and-desist order that prohibited Ocwen from acquiring new mortgage-servicing rights until it proved that it could effectively manage in mortgage-escrow accounts. The CFPB also filed an action in federal court alleging Ocwen had violated its earlier settlement with the CFPB and the state attorneys general. Ocwen's stock went on a roller-coaster ride during this entire period—predictably the stock price went up when Ocwen issued its multiple positive public statements and down when the regulatory entanglements came to light and continued to orbit around Ocwen.

Plaintiffs alleged in Carvelli that Ocwen made numerous material misrepresentations and omissions, because at the time the company was touting improvements and painting a rosy picture of its future prospects, it remained out of compliance with regulatory settlements and, more importantly, remained unable to remedy that noncompliance.

The court disagreed and held that Ocwen's positive statements regarding its future prospects were unactionable "puffery"—that is, "generalized, vague, nonquantifiable statements of corporate optimism."  The Court explained that the law presumes that certain statements are "just too boosterish to justify [a savvy consumer's] reasonable reliance." The court ran through a litany of advertising tag lines that have made their way into the general conciseness of American consumers: "Think for example, Disneyland's claim to be 'The Happiest Place on Earth.' Or Avis' boast, 'We Just Try Harder.' Or Dunkin Donuts's assertion that 'America runs on Dunkin.' Or (for our teenage readers) Sony's statement that its PlayStation 3 'Only Does Everything.'"

Such statements, the court explained were simply not material—a requirement for any securities fraud claim. Ocwen's proclamations that it was devoting 'substantial resources' to its problems with 'improved results,' as well as its boasts that [Ocwen] was taking a 'leading role' and making 'progress' toward compliance," were prototypical puffery because no reasonable investor would have considered them when deciding to invest in Ocwen.

The fact that plaintiffs alleged that Ocwen did not genuinely or reasonably believe the statements did not save plaintiffs' claims, the court explained because whether "a statement was made in bad faith or without a reasonable basis is irrelevant to the question of whether the statement is nonetheless so airy as to be insignificant."

Consistent with the Supreme Court's recent ruling in Omnicare v. Laborers District Council, the court went on to reject plaintiffs' claims as to other statements, deeming them simply opinions. While the court acknowledged that starting statements with "we believe" or "we expect" does not automatically insulate a company, to avoid dismissal, plaintiffs must make explicit and specific allegations that the speaker of the statements knew them to be false at the time of publication, which plaintiffs did not do. Last, the court also held that other statements made by Ocwen were forward-looking statements protected under the Private Securities Litigation Reform Act.

After Carvelli, investor relations staff and corporate counsel can rest a little easier at the end of quarter knowing that "puff" coming from the c-suite will not necessarily result in liability. On the flip side, Carvelli is also a must-read for members of the plaintiff's bar as it sets forth the framework and context for what Eleventh Circuit believes a reasonable investor would consider in making investment decisions. In so doing, it deftly provided a treatise delving into many securities fraud heightened pleading pitfalls, yet simultaneously put companies, their senior executives and defense counsel on notice for the basis of actionable securities fraud misstatement violations.

Russell Koonin and Adam Schwartz are partners at Homer Bonner, located in Miami. Koonin an Schwartz are both former SEC senior trial counsels, both former Assistant U.S. Attorneys, and are also former law clerks to federal judges. They can be reached at [email protected] and [email protected], respectively.