On January 12, 2011, Federal District Judge Harold Baer, Jr. of the Southern District of New York (“SDNY”) dismissed all claims against several rating agencies (Moody’s, Fitch, S&P) in an RMBS securities class action. The putative class consists of all purchasers or acquirers of RMBS registered or traceable to a particular registration statement filed in either 2004 or 2005. Plaintiffs alleged that the rating agencies provided ratings based on insufficient information and faulty assumptions concerning the underlying mortgages and are liable as “underwriters” under Section 11 of the Securities Act. The court rejected this argument, finding that precedent clearly defined an underwriter as a party that serves as a conduit between the issuer and the public, and that the Rating Agencies’ significant role in the ability of Goldman Sachs to market the certificates at issue did not bring them within that definition. The Court also dismissed some, but not all, claims against Goldman Sachs. Decision.
Month: January 2011
SDNY Dismisses Securities Class Action Against The Royal Bank of Scotland Group
On January 11, 2011, Federal District Judge Deborah Batts of the Southern District of New York dismissed several claims in a securities class action against the Royal Bank of Scotland Group (“RBS”). The dismissed putative class claims were brought on behalf of purchasers and acquirers of RBS ordinary shares, which trade outside the U.S., and allege that RBS made false and misleading statements when it failed to adequately disclose that it had accumulated billions of pounds of subprime, Alt-A, and other high-risk RMBS-related assets. The court dismissed the claims, relying on the 2010 Supreme Court decision in Morrison v. National Australia Bank Ltd., which held that U.S. federal securities laws do not apply to purchases of foreign securities outside the U.S. The court declined plaintiffs’ invitation to apply U.S. law to the RBS ordinary shares on the basis that other RBS securities (ADRs) are listed and trade on a U.S. Exchange. Decision.
New York State Common Retirement Fund Settles Securities Suit With Merrill Lynch/Bank of America
On January 13, 2011, the New York State Common Retirement Fund announced a $4.25 million settlement of a securities suit against Merrill Lynch and two former officers. In the suit, the Fund alleged that Merrill Lynch tried to cover up the extent of its involvement in subprime mortgage-backed securities, thus artificially inflating the value of its stock. The lawsuit had been filed in the United States District Court for the Southern District of New York in July. Press Release.
SDNY Denies Class Certification in Two Mortgage-Backed Securities Cases
On January 18, 2011, Federal District Court Judge Harold Baer of the Southern District of New York denied plaintiffs’ motion for class certification in two related RMBS cases. Plaintiffs had sought certification of a class of all purchasers of various RMBS in connection with their claims under Sections 11, 12(a)(2) and 15 of the Securities Act which alleged that the offering documents for the RMBS contained material misrepresentations. Judge Baer concluded that class certification was not justified because individual issues – including differences in the timing of purchases and sophistication among the investors – predominated over common ones. Judge Baer also found that the proposed class consisted of sophisticated investors with sufficient resources and incentives to pursue independent litigation should they choose to do so. Decision.
Proposed CFTC Regulations Under Dodd-Frank Could Jeopardize Swaps with ERISA Plans
The CFTC recently proposed rules under the Dodd-Frank Act that create significant uncertainty for employee benefit plans subject to ERISA, and other “Special Entities” (as defined in Dodd-Frank and explained further in the link below) entering into swap transactions. Employee benefit plans subject to ERISA (and investment vehicles into which such plans invest) regularly engage in swap transactions to hedge against market risks. Swaps also help defined benefit pension plan sponsors reduce volatility and make funding obligations more predictable. Click here to read more.
SEC Adopts Dodd-Frank Implementing Regulations Covering Representations, Warranties and Repurchases and Pool Asset Reviews
On January 20, 2011, at an open meeting of the Securities and Exchange Commission (“SEC”), the SEC adopted final regulations implementing Sections 943 and 945 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Click here to read more.
Rating Agency Developments
On January 18, Moody’s released an update on its methodology for rating money market funds based on comments received to their September 2010 proposal. Moody’s Release.
On January 18, Moody’s released a report outlining several credit concerns that have led to a decline in Moody’s giving the highest ratings to U.S. RMBS resecuritizations. Moody’s Release.
On January 18, Moody’s released its methodology for translating the internal ratings of regulated banks to Moody’s ratings for modeling balance-sheet CLOs. Moody’s Release. Moody’s Methodology.
Note: Free registration is required for Moody’s releases and reports.
Bair Speech on the Mortgage Industry
On January 19, FDIC Chairman Bair spoke at the Summit on Residential Mortgage Servicing for the 21st Century where she discussed, among other things: (i) establishing a fixed formula to govern treatment of first and second mortgages when the servicer owns the second mortgage, (ii) requiring banks to foreclose in their own names instead of allowing MERS to foreclose, (iii) establishing a foreclosure claims commission to be funded by servicers to address homeowner complaints from foreclosures with servicing errors, (iv) establishing incentives for loss mitigation in servicing, and (v) possible features of a definition for “qualified residential mortgages” which are exempt from risk retention requirements under the Dodd-Frank Act. FDIC Release.
SEC Proposed Rule for Security-Based Swap Acknowledgments
On January 14, the SEC proposed Rule 15Fi-1 under the Exchange Act which would require security-based swap dealers and major participants to provide to their counterparties trade acknowledgments with information about a transaction. The rule is being proposed under Title VII of the Dodd-Frank Act. Comments must be submitted within 30 days after publication in the Federal Register. SEC Rule.
FSOC Proposed Rule on Nonbank Financial Company Supervision
On January 18, the Financial Stability Oversight Council proposed a rule describing the criteria to be considered in determining whether a nonbank financial company is subject to supervision by the Board of Governors of the Fed. Under the Dodd-Frank Act, the FSOC is authorized to designate nonbank financial companies for enhanced supervision by the Board of Governors. The proposed rule is based on feedback received in response to an advance notice of proposed rulemaking regarding the designation criteria issued on October 6, 2010. Comments on the proposed rule must be received within 30 days after publication in the Federal Register. Treasury Release. Proposed Rule.