Joel Sharenow v. Impac Mortgage Holdings, Inc.

This disposition is not appropriate for publication and is not precedent*
except as provided by Ninth Circuit Rule 36-3.
NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JOEL SHARENOW,
Plaintiff - Appellant,
and
SHELDON PITTLEMAN, on behalf of
himself and all others similarly situated,
Plaintiff,
v.
IMPAC MORTGAGE HOLDINGS, INC.;
JOSEPH R. TOMKINSON; WILLIAM S.
ASHMORE; GRETCHEN D. VERDUGO,
Defendants - Appellees.
No. 09-55533
D.C. No. 8:07-cv-00970-AG-MLG
MEMORANDUM*
Appeal from the United States District Court
for the Central District of California
Andrew J. Guilford, District Judge, Presiding
Argued and Submitted June 7, 2010
Pasadena, California
FILED
JUN 29 2010
MOLLY C. DWYER, CLERK
U .S. C OU R T OF APPE ALS

-- 1 of 6 --

The Honorable David D. Dowd, Jr., Senior United States District**
Judge for the Northern District of Ohio, sitting by designation.
2
Before: D.W. NELSON and GOULD, Circuit Judges, and DOWD, Senior District
Judge.**
Lead Plaintiff Joel Sharenow appeals the district court’s dismissal of his
Third Amended Complaint against Impac Mortgage Holdings, Inc. and two of its
officers alleging securities fraud in violation of sections 10(b) and 20(a) of the
Securities Exchange Act, 15 U.S.C. §§ 78j, 78t, and SEC Rule 10b-5, 17 C.F.R.
§ 240.10b-5. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.
To plead scienter adequately under the Private Securities Litigation Reform
Act, Sharenow must “state with particularity facts giving rise to a strong inference”
that the defendants intentionally or recklessly made false statements. In re Daou
Sys., Inc., 411 F.3d 1006, 1014–15 (9th Cir. 2005). Sharenow alleges that Impac’s
executives committed fraud by representing that Impac’s underwriting guidelines
were strict and that its loans were high-quality, while in fact the executives were
overriding the underwriting guidelines to originate and purchase poor-quality
loans. After reviewing the complaint and the documents incorporated by it,
however, we conclude that Sharenow stated insufficient facts to create a strong

-- 2 of 6 --

The parties agree that we may take judicial notice of the recent mortgage-1
industry downturn under Federal Rule of Evidence 201, but they dispute which, if
any, inferences from the downturn may properly be applied to the scienter analysis.
Plaintiffs urge that actions of Impac were a contributing cause of the downturn,
whereas defendants urge that the downturn gives an explanation for what occurred
that is exculpatory. Because we conclude that Sharenow insufficiently alleges
scienter regardless of the economic downturn, we need not resolve the issue
whether judicial notice should here be taken on the economic downturn or any
causes of it.
3
inference of scienter. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.1
308, 322 (2007) (listing the evidence properly considered in the scienter analysis).
We first consider the allegations individually and conclude that none of
them, standing alone, creates a strong inference of scienter. See Zucco Partners,
LLC v. Digimarc Corp., 552 F.3d 981, 992 (9th Cir. 2009). Sharenow uses the
statements of five former employees to allege scienter. Those employees claim
that Impac’s officers received reports and spreadsheets detailing the poor-quality
loans, and further that the officers themselves approved loans that did not meet the
underwriting guidelines by overriding the underwriters’ recommendations. The
former employees’ allegations, however, consist of general allegations of
mismanagement that omit the necessary details of when or how the underwriting
guidelines were ignored. No specific underwriting guidelines are discussed, and
the alleged violations are not sufficiently tied to the class period. See id. at
996–1000. The closest Sharenow comes to alleging scienter is an allegation that a

-- 3 of 6 --

4
former employee heard that Impac’s President overrode an underwriter’s
recommendation to reject a bulk loan purchase in April or May 2006 and caused
the loan pool to be purchased. There is no allegation that this override necessarily
occurred during the class period and in any event Sharenow provides no specific
information about how the underwriting guidelines were violated. Even crediting
this allegation in full, it is “not so indicative of fraudulent intent that it carries the
weight of the entire . . . complaint.” Metzler Inv. GMBH v. Corinthian Colleges,
Inc., 540 F.3d 1049, 1069 (9th Cir. 2008). The remainder of Sharenow’s scienter
allegations suffer from similar problems. Sharenow claims that Impac experienced
strained relations with its outside auditor in Spring 2005, but the class period ran
from May 10, 2006 to August 6, 2007, and Sharenow offers no reason why alleged
friction with the auditor a year earlier bears on scienter during the relevant time
period. Similarly, Sharenow points to an SEC inquiry into Impac’s operations in
May 2008, but he does not claim that the SEC found anything wrong at Impac. In
sum, Sharenow’s allegations do not describe any underwriting-guideline violations
or tie those violations to the class period with the “great detail” required to give
rise to a strong inference of scienter. See In re Silicon Graphics Inc. Sec. Litig.,
183 F.3d 970, 983–84 (9th Cir. 1999).

-- 4 of 6 --

We note that the allegations of the complaint do not suggest that key2
officers of Impac, defendants herein, personally profited by making stock sales at
high prices after relevant information was fraudulently omitted from their
statements to the investing public. In a case where insider stock sales are high in a
relevant period of alleged nondisclosure, this can weigh heavily in the scienter
analysis. Tellabs, 551 U.S. at 325. Plaintiffs allege, however, that defendants were
motivated more by wanting to keep the company going to get large salaries than by
making sales of their modest stock holdings, so that no negative inference should
be drawn from the absence of insider trading. Plaintiffs’ point on this issue has a
persuasive logic, see id. (holding that an apparent lack of pecuniary motive “is not
fatal” to a securities fraud claim), and we do not draw a negative inference from
the absence of stock sales that benefitted the defendant chief executive officer and
chairman of the board.
5
We next view the complaint as a whole to see whether all of Sharenow’s
allegations, considered together, give rise to a strong inference of scienter, per the
holistic analysis required by Tellabs. South Ferry LP, No. 2 v. Killinger, 542 F.3d
776, 784 (9th Cir. 2008). So viewed, however, the inference that the defendants
intended to deceive investors is still less compelling than a competing inference of
non-fraudulent intent. See Tellabs, 551 U.S. at 314. The decrease in Impac’s loan
production and market share coincided with its public commitment to tighten its
underwriting guidelines. Moreover, there is no evidence that the officers had any
profit motive that might tempt them to mislead investors. See id. at 325. Finally,2
although the core-operations inference is properly considered in the holistic
analysis, South Ferry, 542 F.3d at 784, Sharenow does not persuasively explain
how that inference transforms the former employees’ statements into sufficient

-- 5 of 6 --

6
allegations. At bottom, a non-fraudulent inference—namely that Impac’s efforts to
minimize risk exposure in the mortgage industry came too late to avoid large
losses—is more compelling than an inference that Impac’s officers intended to
defraud investors by falsely claiming to tighten its underwriting guidelines. We
therefore affirm the dismissal of the complaint.
Because Sharenow did not adequately plead a primary violation of section
10(b) of the Securities Act, his section 20(a) claim was properly dismissed. Zucco,
552 F.3d at 990. Finally, the district court did not abuse its discretion in
dismissing the Third Amended Complaint with prejudice on the grounds that
further amendment would have been futile. See Metzler, 540 F.3d at 1072.
AFFIRMED.

-- 6 of 6 --