Investors May Fix Fraud Suit Against Lender's Former Executives

A federal judge in California has given shareholders of Fremont General Corp. another chance to plead a securities fraud case against former executives of the bankrupt subprime mortgage lender.

"Even taking all the factual allegations in the [complaint] as true, they are less likely to support an inference of securities fraud than they are to support an inference of profoundly misguided corporate mismanagement," U.S. District Judge Florence-Marie Cooper of the Central District of California said in dismissing the class-action suit.

Santa Monica, Calif.-based Fremont filed for bankruptcy in 2008.

Judge Cooper dismissed an earlier version of the complaint last year for failure to meet federal pleading standards.

However, she is allowing the lead plaintiff, the New York State Teachers' Retirement System, to try again.

NYSTRS is seeking compensation for a class of investors who bought Fremont's allegedly overpriced common stock between October 2005 and March 2007.

The suit alleges Fremont's former senior officers, including CEO Louis Rampino, COO Wayne Bailey and CFO Patrick Lamb, violated the anti-fraud provisions of federal securities law by hiding the lender's true financial picture from shareholders.

The defendants have said in court filings that they never hid Fremont's financial condition and disclosed in regulatory filings that the company was a subprime lender.

Judge Cooper criticized the complaint as a "puzzle pleading," meaning it required her to assemble a case of fraud from scattered allegations.

The judge nevertheless found that the complaint, even if properly organized, failed to plead enough facts to establish that the defendants' public statements about Fremont's financial prospects were false when made.

Specifically, she said the complaint did not show that the defendants had access to any internal company information that conflicted with their statements.

The plaintiff fund has until Oct. 26 to file an amended complaint.

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