CLASS ACTION COMPLAINT GLANCY PRONGAY & MURRAY LLP Lionel Z. Glancy Robert V. Prongay 1925 Century Park East, Suite 2100 Los Angeles, CA 90067 Telephone: (310) 201-9150 Facsimile: (310) 201-9160 LAW OFFICES OF HOWARD G. SMITH Howard G. Smith 3070 Bristol Pike, Suite 112 Bensalem, PA 19020 Telephone: (215) 638-4847 Facsimile: (215) 638-4867 Attorneys for Plaintiff UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK PLAINTIFF, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. Navient Corporation, John F. Remondi, and Somsak Chivavibul, Defendants. Case No. DRAFT CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS JURY TRIAL DEMANDED
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CLASS ACTION COMPLAINT
GLANCY PRONGAY & MURRAY LLP
Lionel Z. Glancy
Robert V. Prongay
1925 Century Park East, Suite 2100
Los Angeles, CA 90067
Telephone: (310) 201-9150
Facsimile: (310) 201-9160
LAW OFFICES OF HOWARD G. SMITH
Howard G. Smith
3070 Bristol Pike, Suite 112
Bensalem, PA 19020
Telephone: (215) 638-4847
Facsimile: (215) 638-4867
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
PLAINTIFF, Individually and on Behalf of
All Others Similarly Situated,
Plaintiff,
v.
Navient Corporation, John F. Remondi, and
Somsak Chivavibul,
Defendants.
Case No. DRAFT
CLASS ACTION COMPLAINT FOR
VIOLATIONS OF THE FEDERAL
SECURITIES LAWS
JURY TRIAL DEMANDED
CLASS ACTION COMPLAINT
1
Plaintiff (“Plaintiff”), by and through his attorneys, alleges the following upon
information and belief, except as to those allegations concerning Plaintiff, which are alleged
upon personal knowledge. Plaintiff’s information and belief is based upon, among other things,
his counsel’s investigation, which includes without limitation: (a) review and analysis of
regulatory filings made by Navient Corporation (“Navient” or the “Company”), with the United
States (“U.S.”) Securities and Exchange Commission (“SEC”); (b) review and analysis of press
releases and media reports issued by and disseminated by Navient; and (c) review of other
publicly available information concerning Navient.
NATURE OF THE ACTION AND OVERVIEW
1. This is a class action on behalf of purchasers of Navient securities between July
16, 2014 and July 13, 2015, inclusive (the “Class Period”), seeking to pursue remedies under the
Securities Exchange Act of 1934 (the “Exchange Act”).
2. Navient provides financial products and services in the United States. The
company operates in four segments: federal family education loan program (“FFELP”) loans
Loans, Private Education Loans, Business Services, and Other. It provides federal family
education loan program loans and servicing for FFELP loan portfolio; and servicing and asset
recovery services for loans on behalf of guarantors of FFELP loans, guaranty agencies, higher
education institutions, the United States Department of Education, and other federal clients, as
well as states, courts, and municipalities.
3. On July 13, 2015 the Company announced a substantial cut to its prior financial
guidance for the remainder of its 2015 annual financial performance. According to the
Company, Navient removed from its 2015 financial guidance additional private loan acquisitions
and reduced its forecast for net interest income as a result of increased cost of funds.
CLASS ACTION COMPLAINT
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Additionally, Jack Remondi, Navient CEO further stated, “the changes to our guidance reflect
marketplace conditions for private loan portfolio purchases and cost of funds, as well as a
conservative assessment of default trends for a small and declining segment of our private
education loan portfolio.”
4. On this news, shares of Navient declined $1.94 per share, 10.57%, to close on
July 14, 2015, at $16.42 per share, on unusually heavy volume.
5. Throughout the Class Period, Defendants made false and/or misleading
statements, as well as failed to disclose material adverse facts about the Company’s business,
operations, and prospects. Specifically, Defendants made false and/or misleading statements
and/or failed to disclose: (1) that the Company and its subsidiaries were misleading distressed
borrowers regarding rates; (2) that the Company and its subsidiaries were engaged in improper
debt-collection practices; (3) that, as a result, the U.S. Department of Education could terminate
its relationship with the Company and its subsidiaries; (4) that there was a trend of borrowers re-
entering repayment after returning to school during the recession; (5) that, as a result the
Company was experiencing a decrease in the quality of the Company’s private education loan
portfolio; and (6) that, as a result of the foregoing, Defendants’ statements about the Company’s
financial results, business, operations, and prospects were false and misleading and/or lacked a
reasonable basis.
6. As a result of Defendants’ wrongful acts and omissions, and the precipitous
decline in the market value of the Company’s securities, Plaintiff and other Class members have
suffered significant losses and damages.
JURISDICTION AND VENUE
CLASS ACTION COMPLAINT
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7. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange
Act (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17
C.F.R. § 240.10b-5).
8. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §1331 and Section 27 of the Exchange Act (15 U.S.C. §78aa).
9. Venue is proper in this Judicial District pursuant to 28 U.S.C. §1391(b) and
Section 27 of the Exchange Act (15 U.S.C. §78aa(c)). Substantial acts in furtherance of the
alleged fraud or the effects of the fraud have occurred in this Judicial District. Many of the acts
charged herein, including the preparation and dissemination of materially false and/or misleading
information, occurred in substantial part in this Judicial District.
10. In connection with the acts, transactions, and conduct alleged herein, Defendants
directly and indirectly used the means and instrumentalities of interstate commerce, including the
United States mail, interstate telephone communications, and the facilities of a national securities
exchange.
PARTIES
11. Plaintiff, as set forth in the accompanying certification, incorporated by reference
herein, purchased Navient common stock during the Class Period, and suffered damages as a
result of the federal securities law violations and false and/or misleading statements and/or
material omissions alleged herein.
12. Defendant Navient is a Delaware corporation with its principal executive offices
located at 123 Justison Street, Wilmington, Delaware 19801.
13. Defendant John F. Remondi (“Remondi”) was, at all relevant times, Chief
Executive Officer (“CEO”) of Navient.
CLASS ACTION COMPLAINT
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14. Defendant Somsak Chivavibul (“Chivavibul”) was, at all relevant times,
Executive Vice President and Chief Financial Officer (“CFO”) of Navient.
15. Defendants Remondi and Chivavibul are collectively referred to hereinafter as the
“Individual Defendants.” The Individual Defendants, because of their positions with the
Company, possessed the power and authority to control the contents of Navient’s reports to the
SEC, press releases and presentations to securities analysts, money and portfolio managers and
institutional investors, i.e., the market. Each defendant was provided with copies of the
Company’s reports and press releases alleged herein to be misleading prior to, or shortly after,
their issuance and had the ability and opportunity to prevent their issuance or cause them to be
corrected. Because of their positions and access to material non-public information available to
them, each of these defendants knew that the adverse facts specified herein had not been
disclosed to, and were being concealed from, the public, and that the positive representations
which were being made were then materially false and/or misleading. The Individual
Defendants are liable for the false statements pleaded herein, as those statements were each
“group-published” information, the result of the collective actions of the Individual Defendants.
SUBSTANTIVE ALLEGATIONS
Background
16. Navient provides financial products and services in the United States. The
company operates in four segments: federal family education loan program (“FFELP”) loans
Loans, Private Education Loans, Business Services, and Other. It provides federal family
education loan program loans and servicing for FFELP loan portfolio; and servicing and asset
recovery services for loans on behalf of guarantors of FFELP loans, guaranty agencies, higher
CLASS ACTION COMPLAINT
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education institutions, the United States Department of Education, and other federal clients, as
well as states, courts, and municipalities.
Materially False and Misleading
Statements Issued During the Class Period
17. The Class Period begins on July 16, 2014. On this day, Navient issued a press
release entitled, “Navient Reports Second-Quarter 2014 Financial Results.” Therein, the
Company, in relevant part, stated:
Navient (Nasdaq:NAVI) today released second-quarter 2014 financial results, its
first since the successful launch as an independent publicly traded company
earlier this quarter. The company's results show a continued improvement in
student loan portfolio credit quality with 90-plus day delinquencies on its federal
and private loan portfolio declining to the lowest levels since 2008. During the
quarter, the company received an extension of its loan servicing contract from the
U.S. Department of Education.
"Navient's first earnings release demonstrates that strong financial performance
and industry-leading customer success go hand in hand," said Jack Remondi,
president and CEO, Navient. "Our approach to loan servicing continues to help
more customers successfully manage their student loan payments and avoid the
consequences of default, as reflected in the improving credit quality of the loans
we service. As the leader in default prevention, we assisted 667,000 borrowers to
pay off their student loans in full over the past year. Looking ahead, Navient is
well positioned to grow as more institutions turn to us for loan servicing and asset
recovery solutions that focus on customer success and compliance."
For the second-quarter 2014, GAAP net income was $307 million ($0.71 diluted
earnings per share), compared with $543 million ($1.20 diluted earnings per
share) for the year-ago quarter.
Core earnings for the quarter were $241 million ($0.56 diluted earnings per
share), compared with $447 million ($1.00 diluted earnings per share) for the
year-ago quarter. When compared to GAAP results, core earnings exclude the
impact of: (1) the financial results of the consumer banking business for historical
periods prior to the April 30, 2014 spin-off as well as restructuring and
reorganization expenses incurred in connection with the spin-off; (2) unrealized,
mark-to-market gains/losses on derivatives; and (3) goodwill and acquired
intangible asset amortization and impairment.
Last year, management undertook a series of actions to improve shareholder
value, including the sale of residual interests in several FFELP securitization
CLASS ACTION COMPLAINT
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trusts, the divestiture of two subsidiaries, debt repurchases, and the strategic
separation of Navient from SLM Corporation, which was completed on April 30,
2014. Adjusting for these transactions, second quarter 2014 core earnings
increased $0.04 per share compared to the year-ago quarter, primarily due to
increased servicing and asset recovery revenue and lower provisions for loan
losses. The table below summarizes the impact of these items on core earnings:
***
Navient reports core earnings because management makes its financial decisions
based on such measures. The changes in GAAP net income are impacted by the
same core earnings items discussed above, as well as changes in net income
attributable to (1) the financial results attributable to the operations of the
consumer banking business prior to the spin-off on April 30, 2014 and related
restructuring and reorganization expense incurred in connection with the spin-off,
(2) unrealized, mark-to-market gains/losses on derivatives and (3) goodwill and
acquired intangible asset amortization and impairment. These items are
recognized in GAAP but have not been included in core earnings results. Second-
quarter 2014 GAAP results included gains of $150 million from derivative
accounting treatment that are excluded from core earnings results, compared with
gains of $143 million in the year-ago period. See "Differences between Core
Earnings and GAAP" for a complete reconciliation between GAAP net income
and core earnings.
On April 30, 2014, the spin-off of Navient from SLM Corporation was completed
and Navient is now an independent, publicly-traded company. Due to the relative
significance of Navient to SLM Corporation prior to the spin-off, for financial
reporting purposes, Navient is treated as the "accounting spinnor" and therefore is
the "accounting successor" to SLM Corporation as constituted prior to the spin-
off, notwithstanding the legal form of the spin-off. Since Navient is the
accounting successor to SLM Corporation, the historical financial statements of
SLM Corporation prior to the distribution on April 30, 2014 are the historical
financial statements of Navient. As a result, the GAAP financial results reported
in this earnings release include the historical financial results of SLM Corporation
prior to the spin-off on April 30, 2014 (i.e., such consolidated results include both
the loan management, servicing and asset recovery business (Navient) and the
consumer banking business (SLM Corporation)) and reflect the deemed
distribution of the consumer banking business to SLM Corporation's stockholders
on April 30, 2014. See "Presentation of Information" and "Spin-Off of Navient"
for further information.
Federally Guaranteed Student Loans (FFELP)
In the FFELP Loans segment, Navient acquires and finances FFELP loans.
CLASS ACTION COMPLAINT
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Core earnings for the segment were $72 million in second-quarter 2014,
compared with the year-ago quarter's $238 million. The decrease is primarily due
to the $257 million gain from the sale of residual interests in FFELP loan
securitization trusts completed in the year-ago quarter, as well as a reduction in
net interest income due to the decrease in FFELP loans outstanding.
The company acquired $1.3 billion of FFELP loans in the first six months of
2014. At June 30, 2014, Navient held $100 billion of FFELP loans compared with
$107 billion at June 30, 2013.
Private Education Loans
In the private education loans segment, Navient acquires, finances and services
private education loans.
Quarterly core earnings were $86 million compared with $61 million in the year-
ago quarter. The increase is primarily the result of a $44 million decrease in the
provision for private education loan losses.
Core earnings second-quarter 2014 private education loan portfolio results vs.
second-quarter 2013 are as follows:
● Delinquencies of 90 days or more of 3.2 percent of loans in repayment,
down from 4.0 percent.
● Total delinquencies of 7.1 percent of loans in repayment, down from 8.4
percent.
● Annualized charge-off rate of 2.5 percent of average loans in repayment,
down from 3.0 percent.
● Student loan spread of 4.10 percent, unchanged from the year-ago quarter.
● Provision for private education loan losses of $145 million, down from
$189 million.
● The portfolio balance, net of loan loss allowance, was $30.3 billion, down
from $31.8 billion.
Business Services
Navient's business services segment includes fees primarily from servicing and
asset recovery activities.
Business services core earnings were $130 million in second-quarter 2014,
compared with $168 million in the year-ago quarter. The decrease is primarily
due to the $38 million after-tax gain recognized on the sale of a subsidiary in the
year-ago quarter.
On June 13, 2014, the U.S. Department of Education extended its servicing
contract with Navient to service Direct Student Loan Program federal loans for
CLASS ACTION COMPLAINT
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five more years. Navient services approximately 5.8 million accounts under this
contract.
Operating Expenses
Second-quarter 2014 core earnings operating expenses were $195 million,
compared with $185 million in the year-ago quarter. The increase was primarily
due to increased third-party servicing and asset recovery activities that grew
revenue by $38 million.
Funding and Liquidity
During the second-quarter 2014, Navient issued $747 million in FFELP asset-
backed securities (ABS).
In June 2014, Navient closed a $1.0 billion private education loan asset-backed
commercial paper facility. The facility, which matures in June 2015, will be
available for private education loan refinancing and acquisitions.
18. On August 1, 2014, Navient filed its Quarterly Report with the SEC on Form 10-
Q for the 2014 fiscal second quarter. The Company’s Form 10-Q was signed by Defendant
Chivavibul and reaffirmed the Company’s statements previously announced on July 16, 2014.
The Form 10-Q also contained required Sarbanes-Oxley certifications, signed by Defendants
Remondi and Chivavibul, who each certified:
1. I have reviewed this Quarterly Report on Form 10-Q of Navient
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
CLASS ACTION COMPLAINT
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4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
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the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant’s internal control over financial
reporting.
19. On October 15, 2014, Navient issued a press release entitled, “Navient Reports
Third-Quarter 2014 Financial Results.” Therein, the Company, in relevant part, stated: