The Garrett Group, a real estate company, was in financial trouble after the recession. It informed its creditor, CVB Financial Corporation that it could not make loan payments. After CVB restructured the Garrett Groupâ€™s loan, Garrett indicated it still could not fulfill its debts to CVB. Despite the Garrett Groupâ€™s statements, CVB represented to the SEC that the Garrett Group were financially solvent and would be able to pay its loans with ease.
In 2010, the SEC filed a subpoena seeking information about CVBâ€™s loan underwriting process. A month after the subpoena, CVB wrote off $34 million in loans to the Garrett Group. CVBâ€™s stock also dropped 22 percent as a result of the subpoena and writing off the loan. A class action was subsequently filed against CVB alleging violations of Section 10(b) and Rule 10b-5 of the Securities and Exchange Act of 1934.
Consider the following statements made by CVB: â€œ[t]he overall credit quality of the loan portfolio is sound;â€ â€œCVBâ€™s credit metrics are superiorâ€ to those of its peers;â€ â€œstrong credit culture and underwriting integrity remain paramount at CVBâ€; and â€œCVBâ€™s culture has limited its exposure to problem credits.â€ Do you think any of the four statements on their faces, could be considered materially misleading under Rule 10b-5? Why or why not? What do you think is necessary for a statement to be considered materially misleading?