Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 1 of 17 Page ID #:1193
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 1 of 17 Page ID #:1193
`
`JS-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20—cv—06780-RGK-PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et aI
`
`Present: The Honorable R. GARY KLAUSNER, UNITED STATES DISTRICT JUDGE
`
`Joseph Remigio
`
`Deputy Clerk
`
`Not Reported
`
`Court Reporter / Recorder
`
`N/A
`
`Tape No.
`
`Attorneys Present for Plaintiff:
`
`Attorneys Present for Defendants:
`
`Not Present
`
`Not Present
`
`Proceedings:
`
`(1N CHAMBERS) Order Re: Defendants’ Motion to Dismiss First
`Amended Complaint [DE 45]
`
`I.
`
`INTRODUCTION
`
`On November 11, 2020, Edward Berg filed a first amended complaint (“FAC”) against Velocity
`Financial, Inc., Christopher D. Farrar, Mark R. Szczepaniak, Christopher Oltrnann, Alan Mantel, Ian
`Snow, John Pless, Brandon Kiss, Ogden Phipps, Daniel Ballen, John Pitstick, Joy Schaefer, Snow
`Phipps Group, LLC, Wells Fargo Securities, LLC, Citigroup Global Markets Inc., JMP Securities LLC,
`and Raymond James & Associates, Inc. (collectively, “Defendants”). The Complaint is a putative
`securities class action. It alleges violations of: (1) Section 11 of the Securities Act of 1933 against all
`Defendants; and (2) Section 15 of the Securities Act of 1933 against Velocity, the individual defendants,
`and Snow Phipps.
`
`Now before the Court is Defendants’ Motion to Dismiss. For the following reasons, the Court
`GRANTS Defendants’ Motion.
`
`H.
`
`FACTUAL BACKGROUND
`
`The FAC alleges the following:
`
`Velocity 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. The
`company’s primary product is a 30-year amortizing loan with a three—year fixed rate to finance long-
`term real estate investments.
`
`CV-90 (06/04)
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`CIVIL LIINUTES - GENERAL
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`Page 1 of 17
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`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 2 of 17 Page ID #:1194
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 2 of 17 Page ID #:1194
`
`JS-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20—cv—06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et a!
`
`In 2017, as a solution for borrowers who did not qualify for Velocity’s 30-year, long-term loan,
`the company also began originating short-term, interest-only loans. Even though these short-term loans
`presented greater risk, Velocity assured investors that its “disciplined” underwriting process allow the
`company to avoid loaning to troublesome borrowers, while still maximizing profits.
`
`As many large businesses do, Velocity went public. Afier more than a year and several
`amendments, Velocity filed its Registration Statement on Form 8—1 with the SEC on January 6, 2020.
`The SEC declared the Registration Statement effective on January 16, 2020. And on January 17, 2020,
`Velocity filed its final Prospectus with the SEC.
`
`But various statements in Velocity’s offering materials were false or materially misleading. First,
`Defendants extoled the virtues of its underwriting practice through its use of “disciplined due diligence”
`and propriety data. (FAC 1] 28). Although Velocity asserted that its underwriting practices would
`position the company for “sustainable, long—term growth” and offer the company key “competitive
`advantages,” in reality, Velocity had begun issuing loans to high-risk borrowers. (FAC 1| 37). This
`caused its percentage of nonperforming loans—loans that are 90 or more days past due, in bankruptcy,
`or in foreclosure—to be higher than other lenders. It was therefore misleading for Defendants to tout
`Velocity’s underwriting practice, but not disclose that “those same practices were allowing riskier loans
`than the Company had historically issued to be made, resulting in a higher, and growing percentage of
`non-performing loans in Velocity’s portfolio.” G’AC 1] 38).
`
`Second, it was misleading for Defendant to laud the overall grth of its loan portfolio, but not
`disclose that the growth was fueled by riskier short-term interest loans—and that a significant portion of
`the portfolio had become nonperforming. Finally, the offering materials misleadingly touted the
`favorable market conditions that Velocity could seize upon, even though the coronavirus was set to
`disrupt the entire real estate market.
`
`III.
`
`JUDICIAL STANDARD
`
`A.
`
`Rule 1219116)
`
`To survive a motion under Rule 12(b)(6), a complaint must contain “sufficient factual matter,
`accepted as true, to ‘state a claim to relief that is plausible on its face.”’ Ashcroft v. Iqbal, 556 US. 662,
`678 (2009) (quoting Bell At]. C017). v. Twomb/y, 550 US. 544, 570 (2007)). A claim is facially plausible
`if the plaintiff alleges enough facts to permit a reasonable inference that the defendant is liable for the
`alleged misconduct. Id. A plaintiff need not provide “detailed factual allegations” but must provide more
`
`CV-90 (06/04)
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`CIVIL LIINUTES - GENERAL
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`Page 2 of 17
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`

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`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 3 of 17 Page ID #:1195
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 3 of 17 Page ID #:1195
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20—cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et aI
`
`than mere legal conclusions. Twomb/y, 550 US. at 555. “Threadbare recitals of the elements of a cause
`of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 US. at 678.
`
`When ruling on a Rule 12(b)(6) motion, the Court must “accept all factual allegations in the
`complaint as true.” Tellabs, Inc. v. Makor Issues & Rts., Ltd, 551 US. 308, 322 (2007). The Court must
`also “construe the pleadings in the light most favorable to the nonmoving party.” Davis v. HSBC Bank
`Nev., N.A., 691 F.3d 1152, 1159 (9th Cir. 2012). The Court, however, is “not bound to accept as true a
`legal conclusion couched as a factual allegation.” Twombly, 550 US. at 555.
`
`IV.
`
`DISCUSSION
`
`A.
`
`Judicial Notice
`
`When ruling on a 12(b)(6) motion to dismiss 3 § 10(b) action, “courts must consider the
`complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule
`12(b)(6) motions to dismiss, in particular, [1] documents incorporated into the complaint by reference,
`and [2] matters of which a court may take judicial notice.” Tellabs, 551 US. at 322.
`
`Defendants request that the Court consider certain documents referenced in Plaintiffs’ FAC
`under the incorporation by reference doctrine and take judicial notice of certain publicly available
`documents. Among these documents are (1) Velocity’s Form S-1 Registration Statement, which was
`filed with the SEC on January 6, 2020 GSCF No. 45—1); Form 10-K filed on April 7, 2020 GSCF No. 45—
`9); and Investor Conference Call Transcript on May 13, 2020 (ECF No. 45-11). Plaintiffs did not oppose
`Defendants’ request for judicial notice.
`
`“A court may take judicial notice of ‘matters of public record.’” Lee v. City ofLos Angeles, 250
`F.3d 668, 689 (9th Cir. 2016) (internal citation omitted). Documents on file in federal or state courts are
`considered undisputed matters of public record. Harris v. Cnty. ofOrange, 682 F.3d 1126, 1132 (9th
`Cir. 2012) (internal citations omitted). Federal courts routinely take judicial notice of press releases,
`news articles, and SEC filings in securities complaints. See, e.g., Wietsclmer v. Monterey Pasta Co., 294
`F. Supp. 2d 1102, 1108—09 (ND. Cal. 2003) (judicially noticing SEC filings and press releases);
`Brodsky v. Yahoo], Inc., 630 F. Supp. 2d 1104, 1111 (ND. Cal. 2009) (judicially noticing press releases
`and news articles). Thus, Velocity’s Form S-1 Registration Statement, filed with the SEC on January 6,
`2020 (ECF No. 45-1); Form 10-K filed on April 7, 2020 (ECF No. 45-9); and Investor Conference Call
`Transcript on May 13, 2020 GSCF No. 45-11) are subject to judicial notice.
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
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`Page 3 of 17
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`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 4 of 17 Page ID #:1196
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 4 of 17 Page ID #:1196
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20—cv—06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et a!
`
`B.
`
`Plaintiff’s Claim for Securities Fraud Under Section 11
`
`Plaintiff brings his first claim for violating Section 11 of the Securities Act of 1933 against all
`Defendants.
`
`Section 11 creates a private right of action for any purchaser of a security if any part of the
`registration statement, “when such part became effective, contained an untrue statement of material fact
`or omitted to state a material fact required to be stated therein or necessary to make the statements
`therein not misleading .
`.
`. .” In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1403 (9th Cir. 1996) (quoting 15
`U.S.C. § 77k(a)). To prove liability, a plaintiff must show “(1) that the registration statement contained
`an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it
`would have misled a reasonable investor about the nature of his or her investment.” In re Stac, 89 F.3d
`at 1403—04. Any claim under Section 11 “must demonstrate that the omitted information existed at the
`time the registration statement became effective.” Rubke v. Capitol Bankcorp, Ltd, 551 F.3d 1156, 1164
`(9th Cir. 2009). “No scienter is required for liability under § 11; defendants will be liable for innocent or
`negligent material misstatements or omissions.” In re Stac, 89 F.3d at 1404.
`
`And uner other securities causes of action, Section 11 claims need only satisfy the ordinary
`notice pleading standards of Rule 8(a). In re Daou Svs., 411 F.3d 1006, 1027 (9th Cir. 2005). But when
`the allegations are “grounded in frau ” or “sound in fraud,” they must satisfy the particularity
`requirement of Rule 9(b). Id (quoting Vess v. Ciba—Geigv Corp. USA, 317 F.3d 1097, 1103—04 (9th Cir.
`2003)).
`
`Plaintiff bases his Section 11 claim on three alleged misrepresentations: (1) that Velocity
`mischaracterized the risks of its underwriting practices; (2) the Statement failed to inform investors
`about Velocity’s rising portfolio of nonperfonning loans; and (3) the Statement distorted the real estate
`market’s conditions and Velocity’s ability to capitalize on it. Plaintiffs affirm that none of their
`allegations are grounded in fraud, meaning Rule 8(a)’s pleading requirement applies, not Rule 9(b)’s
`heightened standard. (FAC 1111 76, 83). The Court addresses each of these misrepresentations in turn.
`
`I.
`
`Underwriting Practices
`
`Plaintiff alleges that statements highlighting Velocity’s underwriting prowess were misleading
`because, in reality, Defendants had loosened its so-called “disciplined” practice to allow a growing
`portion of Defendants’ loan portfolio to include short-term loans to high-risk borrowers. (Id. 11 38). This
`left the company susceptible to economic downturns. Plaintiff identifies the following statement as
`misleading:
`
`CV-90 (06/04)
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`CIVIL LIINUTES - GENERAL
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`Page 4 of 17
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`

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`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 5 of 17 Page ID #:1197
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 5 of 17 Page ID #:1197
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20-cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et a!
`
`Our underwriting approach focuses on generating attractive returns while
`minimizing credit losses and is enhanced by automation through the extensive use
`ofcustomized systems to power automation and drive our use of data analytics. We
`apply the same disciplined due diligence and underwriting process to all loans we
`review, regardless of whether they are originated or acquired. Our asset-driven
`underwriting philosophy encompasses property level due diligence, including lease
`and rent reviews, local market liquidity and trend assessment and a rigorous
`valuation process. In addition, we perform individual borrower diligence, including
`credit review, evaluation of experience and asset verification. We believe our
`extensive access to proprietary data gives us a differentiated perspective and
`underwriting ability.
`
`(FAC 11 37).
`
`Defendants offer two arguments in retort. First, the statements are not actionable because they
`are mere “puffery.” Second, Defendants cannot be liable because they reported that their underwriting
`practice included these higher-risk loans.
`
`0.
`
`These statements constitute nonactionable ‘rufletfv ”
`‘
`‘vague statements of
`The Ninth Circuit has held that statements of mere corporate puffery
`
`optimism like ‘good,’ ‘well-regarded,’ or other feel good monikers”
`are not actionable because
`investors “know how to devalue the optimism of corporate executives.” Police Ret. Sys. ofSt. Louis v.
`Intuitive Surgical, Inc, 759 F.3d 1051, 1060 (9th Cir. 2014) (quoting In re Cutera Sec. Litig., 610 F.3d
`1103, 1111 (9th Cir. 2010)).
`
`Plaintiff argues that the statements are not “puffery” because they concern the crux of Velocity’s
`business. (Opp’n at 9, ECF No. 50). Plaintiff’s interpretation of this rule would seemingly insulate any
`statement about Velocity’s underwriting practice from being considered puffery. The Court disagrees
`with such a broad interpretation.
`
`Caselaw shows that even statements about a corporation’s core business may be nonactionable
`puffery. For example, in Lloyd v. CVB Fin. Corp, 811 F.3d 1200, 1206—07 (9th Cir. 2016), a loan
`company—like Velocity—boasted about the “overall credit quality of the loan portfolio,” and that the
`“strong credit culture” and “integrity” of its underwriting practice allowed it to “limit its exposure to
`problem credits.” The Ninth Circuit determined that these statements could not constitute actionable
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
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`Page 5 of 17
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`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 6 of 17 Page ID #:1198
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 6 of 17 Page ID #:1198
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20-cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et aI
`
`representations. Id. Likewise, in ECA, Local 134 IBEWJoint Pension Tr. ofChicago v. JP Morgan
`Chase Co., 553 F.3d 187, 205—06 (2d Cir. 2009), a company’s statements asserting the “highly
`disciplined” nature of its risk management processes could not support securities violations. Finally, in
`In re Restoration Robotics, Inc. Sec. Litig., 417 F. Supp. 3d 1242, 1249—50 (N.D. Cal. 2019), a
`technology company that had touted the efficacy of its marketing campaign by emphasizing its
`“comprehensive clinical training, practice-based marketing support, as well as patient leads,” which
`would increase the company’s prospects for revenue, were also considered nonactionable. Id. at 1257.
`But see In re New Century, 588 F. Supp. 2d 1206, 1226 (C.D. Cal. 2008) (“repeated assurances of strong
`credit quality and strict underwriting practices” were not mere puffery when those statements were set
`against detailed allegations that the company had “utterly failed to meet those standards”).
`
`The statement Plaintiff identifies in the offering materials are nonactionable puffery. The
`statements extolling Velocity’s application of “disciplined due diligence” to its underwriting practice are
`like the company in ECA describing its risk management practice as “highly disciplined.” In ECA, those
`descriptions were deemed puffery. And while Plaintiff makes much ado about how Velocity described
`its underwriting practices as focused on “minimizing credit losses,” that is no different from the
`company in Lloyd stating that its underwriting practice allowed it to “limit its exposure to problem
`credits.” Lastly, the statements describing the use of its automated systems and data analytics are like the
`nonactionable statements of “comprehensive clinical support,” and “practice-based marketing suppo ”
`in Restoration Robotics.
`
`Because Plaintiffs’ identified statements about Defendants’ underwriting practice is corporate
`puffery, they cannot support a Section 11 claim.
`
`2.
`
`Defendants ’ Rising Portfolio of Nongefiorming Loans
`
`The Court now turns to the allegation that Defendants irnpermissibly created a “rosy picture” of
`Velocity’s financial health by excluding information about its increasing rate of nonperforming loans
`from its offering materials.
`
`Plaintiff bases this claim on several fronts. First, Defendants omitted the fact that the rate of non-
`
`performing loans had “approximately doubled year over year and was accelerating at the time of the
`IPO.” OTAC 1] 42). Second, Defendants underrepresented the true percentage of non—performing loans by
`claiming that they constituted 5.96% of the total loans, when they in fact made up 6.41% of the total
`loan portfolio. (Id. 11 43). Third, Defendants failed to reveal the true extent of loans that were fewer than
`90 days past due. (Id. 1[ 45). Finally, Defendants failed to report that their rapid loan origination growth
`was driven mostly by origination of short—term, interest-only loans. (Id. 1] 47).
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
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`Page 6 of 17
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`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 7 of 17 Page ID #:1199
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 7 of 17 Page ID #:1199
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL MINUTES - GENERAL
`
`Case No.
`
`2:20—cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et al
`
`a.
`
`Nonpetforming loan rate accelerating at the time ofthe [PG
`
`The Court begins with Plaintiff” s first allegation—that Defendants hid that Velocity’s rate of
`nonperforming loans had “doubled” and was “accelerating” at the time of the IPO. Plaintiff relies on two
`chalts in his FAC.
`
`Actual Total Non-Performing Loans as Percent of Portfolio
`
`
`
`0.38%
`
`5 IS"
`
`I 919‘
`
`‘01.
`
`101’
`
`mm
`
`.019
`
`ION
`
`)0!)
`
`1!»
`
`m I
`
`n
`
`in
`
`I“
`
`M
`
`N 2
`
`‘ M
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
`
`Page 7 of 17
`
`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 8 of 17 Page ID #:1200
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 8 of 17 Page ID #:1200
`
`JS—6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL MINUTES - GENERAL
`
`Case No.
`
`2:20-cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et 01
`
`Actual Percentage of Non-Performing Loans Hold to: Invostmen Total
`
`14.“
`
`
`
`IPO
`
`!!I
`
`I
`
`I
`
`I
`
`..
`
`l
`
`m
`
`(PAC 1] 42).
`
`There are two issues with this allegation. First, Plaintiffs own chart shows an upward trend in
`nonperforming loans. And Defendants also included that information in its 8-]. See below:
`September 50.
`December .51,
`2019
`2017
`(S In thousands)
`S 1.295.567
`4.136
`
`Portfolio Statistics”)
`
`Total loans(2)
`Loan count
`
`2018
`
`S
`
`1.928.208
`6.039
`
`S 1.63 l .326
`5.171
`
`2016
`
`S 1.038.033
`3.243
`
`Average loan balance(3)
`Weighted average loan-lo-value(4)
`Weighted average coupon($)
`Notlperfomnng loans (UPB)(6)
`Nonperfomnng loans (% of total)
`
`S
`
`S
`
`319
`65 .4" o
`8.71%
`l 18.106
`6.13%
`
`S
`
`S
`
`315
`63 .8° 0
`8.56%
`95.385
`5.85%
`
`S
`
`5
`
`313
`644° 0
`8.33%
`74.943
`5.78%
`
`S
`
`5
`
`320
`645° 0
`8.23%
`42.498
`4.09%
`
`(S-l at 24). The chart verifies the upward trajectory of the nonperforming loans by percentage—4.09%
`in 2016 to 6.13% in September 30, 2019—but also in total dollar value—$42,498 million to $118,106
`million.
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
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`Page 8 of 17
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`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 9 of 17 Page ID #:1201
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 9 of 17 Page ID #:1201
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20-cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et a!
`
`Second, as Defendants point out, the “doubling” Plaintiff references stems from a comparison
`between the first (“1Q20”) and second (“2Q20”) quarter of 2020—the completion of both quarters
`occurred after the IPO. Because Section 11 liability only attaches for misrepresenting information that
`was available when the offering materials became effective, the data from 1Q20 and 2Q20 should be
`disregarded. Instead, the comparison that should be made from Plaintiff’s chart is between 2Q19 and
`4Ql9.1 In re Stac, 89 F.3d at 1403—04 (“Section 11 creates a private remedy for any purchase of a
`security if any part of the registration statement, when such part became eflective, contained an untrue
`statement of a material fact .
`.
`. .”) (own emphasis added). From the chart, the total percentage change
`from 2Q19 to 4Q19 does not double; it just slightly increases from 6.41% to 6.88%.
`
`For these reasons, Plaintiff has not alleged that Defendants hid the fact that nonperforming loans
`had “doubled” or was “accelerating” in the offering materials.
`
`b.
`
`Misrepresenting the true percentage oftotal nonperforming loans
`
`Next, the Court turns to the allegation that Defendants misrepresented the percentage of total
`nonperforming loans as 5.96%, when it was really 6.41%. Defendants argue that the cited numbers
`cannot support a Section 11 claim because they do not appear in the final offering materials. The Court
`agrees with Defendants.
`
`Plaintiffs obtained their numbers from Velocity’s pre-effective 8-] draft and its 10—Q for 2Q20,
`which was filed three months after the IPO. aVIot. Dismiss at 10—11 n.7). Neither of which was part of
`the registration statement when it became efl'ective. In re Stac, 89 F.3d at 1403—04. Thus, there is no
`cause of action for information that relies on information from an 8—] draft and post-IPO data.
`
`c.
`
`Rising delinquencies rate that were not yet 90 days old
`
`Now the Court turns to Plaintifi" s allegation that Defendants “failed to disclose the true extent of
`loans held that were delinquent but fewer than 90 days past due.” (PAC 1[ 45). Plaintiff theorizes that
`since Velocity considers loans “nonperforming” afler payments have been delinquent for 90 days, and
`Defendants would later reveal a higher rate of nonperforming loans in its 10-K in April, it must have
`
`1 The Court notes relying on data from 4Q19 may not have been feasible at the effective date because
`the quarter would have only ended two weeks before, and Defendants would have needed time to audit
`the data before including it in any public materials.
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
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`Page 9 of 17
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`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 10 of 17 Page ID #:1202
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 10 of 17 Page ID #:1202
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL MINUTES - GENERAL
`
`Case No.
`
`2:20—cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et al
`
`known—at the time of the IPO—of rising delinquencies rates of loans that were less than 90 days past
`due. Plaintiff spotlights this Chan:
`
`I“
`
`I“
`
`. 30-59 days pm due
`I 60-89 days past due
`‘— <90 dew pest due nonpefiomlng/nonecevuel
`
`LHI loans <90 Days Past Due
`
`A. Presented In
`Registration Stetement
`
`Not Binds“ to
`Investors
`
`in
`
`In
`
`1“
`
`fl
`
`6'
`
`l%
`
`N 0‘
`
`W16
`
`"11
`
`Wu
`
`3019
`
`£019
`
`10E
`
`)0»
`
`As a starting point, any upward “trend” firom 1Q2020 and 2Q20 is irrelevant because that
`information would have been unavailable to Defendants at the time of the IPO. And from Plaintiff s own
`
`chart and Defendants S-l, Defendants broke down the rate of delinquent loans in detail from 30-59, 60-
`89, and 90+ days past due up until September 2019. See below:
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
`
`Page 10 of 17
`
`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 11 of 17 Page ID #:1203
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 11 of 17 Page ID #:1203
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES — GENERAL
`
`Case No.
`
`2:20-cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et a!
`
`Credit Quality — Loans Heldfar Investment
`
`The following table provides delinquency infunnation on our held for inx'extnient loan portfolio as ot‘llie dates indicated
`
`(S In thoumuds)
`
`December 31. 2016
`Den-mm 31. 2017
`Decca-bun. 2018
`September so. 2019
`
`l'PB
`°.
`l'PB
`['PB
`"«o
`[TB
`“0
`'-o
`0)
`6’
`m
`
`Cutter"
`
`
`
`Totalnommfonnnig Imus
`Total loans hold {or investment
`
`5 1% S‘i/o
`
`S
`
`1.3‘
`
`87 ‘9’.
`
`S Hill-Iii
`
`
`10I.96l
`f 8
`91.094
`5.9
`‘Sjlé
`5.‘
`42.521
`4 1
`
`
`1.756.711
`100.09%
`1.551.866
`100.0%
`1.289.739
`100.09%
`1.037.857
`100.09.
`S
`S
`S
`S
`
`I“:
`
`E?
`
`h h hue:
`
`Loans that are 90* (hrs past due. in bankniptcy. or in foreclosure are not accruing interest and are considered nonmrtbnuing loans Nonmrfomling
`loans were $102 0 1111111011. or 5.800 of our held for 111\’e>11118111 loan portfolio as of September 30. 2019. compared to $91.1 million. or 5.9% as of
`December 31. 2018. $73.3 million. or 5 700 as ofDeccnibcr 31. 2017. and $123 million. or 4, 1% ofth loan portfolio as ochccrubcr 31. 2016. We believe
`the significant equity cushion at origination and the active management of loans will continue to minimize credit losses on the resolution of defaulted loans
`and disposition of REO properties.
`
`(8-1 at 71) (own highlighting added). Defendants also included “Estimates for the Year Ended
`December 31, 2019” in their 8—1, which included the estimated rate of nonperforming loans as between
`“6.50% and 6.90%.”2 (8-1 at 20).
`
`Thus, Plaintiffs primary gripe, is that Defendants omitted the same granular breakdown of 30—
`59, 60-89 days, and 90+ days data for 4Q19 that it had included for previous quarters. Plaintiff,
`however, has not alleged that Defendants would have been able to verify this more particular
`information within the time frame between the end of the quarter, December 31, 2019, and the final
`filing date of the 8—1, January 6, 2020—which was only 6 days. Even if Plaintiff had alleged so, the
`omission of the more specific data is was not misleading since Defendants still provided an estimate for
`the overall delinquency rate, and any “adverse” trend in delinquency rates can be seen in the previous
`quarters. (See lO-K at 473).
`
`Finally, Plaintiff suggests that a May 13, 2020 conference, call with Velocity executives
`establishes that Defendants knew about the increased nonperfonning loan growth at the time of the IPO:
`
`On the next slide, talking about our loan portfolio performance and here you can
`see here's the non-performing. So the lower left, you see, our non-performing did
`
`2 After verifying its data, Velocity’s estimate proved correct. The rate of nonperfonning loans turned out
`to be 6.88%. (10—K at 473).
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
`
`Page 11 of 17
`
`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 12 of 17 Page ID #:1204
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 12 of 17 Page ID #:1204
`
`JS-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20-cv-06780-RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et a!
`
`go from 6.88% to 8.17%, So non—performing did rachet it 11p in 01. And as Chris
`had mentioned earlier in his overview, part of that was expected.
`
`Yes, we had mentioned again on the road show and all that, a lot of our portfolio is
`very new portfolio, our originations have really grown over say the last three years.
`So as that portfolio seasons, we expect certain amount of non-performing growth
`as the portfolio seasons. So some of that portfolio, non-performing growth, you
`would expect and then again another part of it is due to the COVID starting to hit
`in 01.
`
`(Investor Call Transcript at 6). The call suggests that some nonperforming loan growth was expected in
`the first quarter of 2020. That would have been apparent from the disclosed material about the previous
`quarters. The total nonperforming rate had increased from 4.1% in December 2016, to 5.7% in 2017, to
`5.9% in 2018, and to 5.8% by September 2019. Defendants estimated that the final nonperforming
`percentage to be between “6.50% and 6.90%” for the fourth quarter of 2019. (S-l at 20, 71).
`
`Still, Plaintiff contends that the transcript reveals that Defendants knew about the “staggering”
`rate of nonperforming loans, which stood at 9.9% at the end of 2020, at the time of the IPO. Plaintiff
`bases this allegation on Velocity’s acknowledgement that some grth of growth of nonperforming
`loans was “expected” because of “ordinary portfolio seasoning,” WAC 11 65). Yet the transcript’s next
`line states that the part of the increase is due to coronavirus pandemic, not from the predicted seasoning
`of portfolio growth.
`
`Taken together, there is no plausible inference that Defendants anticipated the rate of
`nonperforming loans to have increased to the extent that it did prior to the IPO. Instead, the transcript
`supports the inference while some growth of nonperforming loans was expected, there was also an
`unexpected increase due to the coronavirus pandemic.
`
`(1.
`
`Velocity ’3 increased use ofshort-term, interest-flee loans
`
`Next, Plaintiff alleges that Defendants did not divulge that its overall loan portfolio growth was
`mainly driven by Velocity’s increased use of short-term, interest-free loans to high—risk borrowers. As
`evidence, Plaintiff points to an April 2020 press release discussing Velocity’s 4Q19 results which stated,
`“[l]oan origination volume growth was primarily driven by a 103 percent year-over-year grth in
`short-term loans.” GAC 1] 47).
`
`CV-90 (06/04)
`
`CIVIL LIINUTES - GENERAL
`
`Page 12 of 17
`
`

`

`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 13 of 17 Page ID #:1205
`Case 2:20-cv-06780-RGK-PLA Document 53 Filed 01/25/21 Page 13 of 17 Page ID #:1205
`
`18-6
`
`UNITED STATES DISTRICT COURT
`
`CENTRAL DISTRICT OF CALIFORNIA
`
`CIVIL NIINUTES - GENERAL
`
`Case No.
`
`2:20—cv—06780—RGK—PLA
`
`Date
`
`January 25, 2021
`
`Title
`
`Edward A. Berg v. Velocity Financial, Inc. et aI
`
`But Defendants did reveal its increased use of short-term loans. In fact, the top of Page 34 of the
`8-] states, “A significant portion of our loan portfolio is in theform ofinvestor real estate loans
`which are subject to increased risks.” (S-l at 34) (emphasis in original). Further down, Defendants
`explain that the company had “began originating short-term, interest—only loans” in March 2017. They
`also include a chart noting this change (describing the short-term loans as those “held for sale”) (own
`emphasis added):
`
`Consolidated Statements of Financial Condition
`Data
`
`September 30,
`2019
`
`2018
`
`December 3].
`2017
`(in thousands)
`
`2016
`
`Assets
`
`Cash and cash equivalents
`Restricted cash
`Loans held for investment. net
`Loans held for investment. at fair value
`
`_
`
`5
`
`8.849
`3.152
`1.775.935
`2.936
`
`S
`
`[5.008
`1.669
`1.567.408
`3.463
`
`5
`
`15.422
`305
`1.9.99.0“
`4.632
`
`3
`
`49.9'8
`1.76.6
`1.039.401
`7.278
`
`_- - - -
`
`(8-1 at 24). Plaintiff does not dispute that Defendants disclosed this information. Instead, he argues that
`the disclosures were inadequate because the chart and accompanying narrative explaining the increase
`used of short-term loans appear pages apart. (Opp ’n at 7).
`
`Although the overall determination of the adequacy of a disclosure should generally left to the
`trier of fact, if reasonable minds could not disagree whether the challenged statements were misleading,
`then a court may dismiss the claims on a motion to dismiss. In re Immune Response Sec. Litig., 375 F.
`Supp. 2d 983, 1039 (SD. Cal. 2005). Defendants here disclosed the information in narrative form and
`with data. Taken together, they reflect the information stated in the April 2020 press release—that these
`short-term loans were riskier and that they were becoming an increasing part of Velocity’s overall
`portfolio. Since reasonable minds could not disagree that the Velocity had not only begun, but increased,
`its use of short-term, interest-free loans, there is no basis for a Section 11 claim.
`
`Plaintiff also contends that the disclosure was misleading because they describe hypothetical
`risks, rather than realized risks. Not so. A title-portion of the disclosure states, “[l]oans on properties in
`transition will involve a greater ris