Mass Mutual Sues RBS Over $235 Million in RMBS Under Massachusetts’ Blue Sky Laws

On February 24, 2011, Massachusetts Mutual filed a complaint in the United State District Court for the District of Massachusetts against RBS Financial Products, a number of its affiliates (many of them also former Greenwich Capital entities), and certain former Greenwich Capital officers. The complaint alleges that defendants misrepresented the quality of the loans underlying $235 million worth of RMBS underwritten and sold by the corporate defendants to Mass Mutual. Plaintiff claims that defendants’ representations regarding underwriting standards, loan-to-value ratios, and rates of owner occupancy were materially false. The complaint seeks rescission and/or damages against the corporate defendants as primary violators of the Massachusetts Uniform Securities Act, and seeks to hold the officer defendants jointly and severally liable as controlling persons of the primary violators. Complaint.

New Mexico State Court Allows Plaintiffs to Continue on Fraud Against Taxpayers Act Claims Involving RMBS

On February 7, 2011, a New Mexico court issued an order in State of New Mexico, ex rel. Foy v. Vanderbilt Capital, allowing plaintiffs to continue to pursue claims under New Mexico’s Fraud Against Taxpayers Act (the “FATA”) against a variety of defendants in connection with New Mexico’s investments in certain CDOs backed by allegedly misrepresented mortgage assets. The court previously held in April 2010 that New Mexico’s FATA claims could not be predicated on acts prior to July 1, 2007 because such retroactive application of the FATA would violate the Ex Post Facto Clauses of both the U.S. Constitution and the New Mexico Constitution. The new order finds that plaintiffs have alleged acts that occurred on or after July 1, 2007 that are sufficient to satisfy the court that the FATA claims remain “viable and relevant.” February 2011 Order. April 2010 Order. Complaint.

Third Circuit Finds Discounted Cash Flow Valuation of Contested Portfolio “Commercially Reasonable”

On February 16, 2011, the Third Circuit affirmed a Delaware bankruptcy court’s order determining the value of mortgage loans in the context of a 2006 repurchase agreement. Buyer Calyon argued that the mortgage loan portfolio sold to it by American Home Mortgage had a market price of only $670 million, as compared to its $1.15 billion contractual repurchase price, and that American Home Mortgage was required to pay Calyon the $480 million difference under a repo agreement. American Home Mortgage on the other hand contended that the portfolio was worth more than the $1.15 billion purchase price. In a case of first impression, the Third Circuit agreed with the bankruptcy court that American Home Mortgage’s discounted cash flow valuation was a “commercially reasonable determinant of value” as required under the Bankruptcy Code and that consequently there were no damages. Decision.

Complaint Against Merrill Lynch for Sale of Mainsail and Victoria Commercial Paper Survives Motion to Dismiss

On February 18, 2011, Judge Martinez of the U.S. District Court for the Western District of Washington denied Merrill Lynch’s motion to dismiss, holding that plaintiffs had pleaded sufficient facts to state claims under the Washington State Securities Act (“WSSA”) for primary and control person liability and for breach of contract. Plaintiff, King Country, Washington, invested county cash reserves in RMBS and alleges that defendants omitted to disclose significant and foreseeable risks in the underlying mortgage pools. Plaintiff further alleges that defendants knew the credit ratings associated with the securities were not reliable and that they were in fact trying to rid themselves of the same securities they held out as prudent investments. The Court found these allegations sufficient to survive the motion to dismiss. Decision.

Federal Court Remands Charles Schwab RMBS Action to State Court

On February 23, 2011, the United States District Court for the Northern District of California remanded to state court an action by Charles Schwab Corporation against 27 defendants concerning alleged misrepresentations in connection with 37 different RMBS purchases across 36 different securitizations. Two defendants had argued that the federal court had jurisdiction over the case because the action “relates to bankruptcy” due to the fact that 262 of the underlying loans were originated by a bankrupt entity who would owe the defendants an indemnity for any misrepresentations on those loans. Without answering whether the indemnity claims at issue were enough to trigger “related to” jurisdiction, the court relied on its equitable power to return the case to state court because any connection to the bankruptcy case was “very, very remote.” Among other things, the court noted that the 262 loans constituted only 5.5% in one of the 36 securitizations at issue, and that the plaintiffs were not asserting any misrepresentations in connection with those particular loans. Order.

Allstate Sues JP Morgan, Washington Mutual, Bear Stearns, Citigroup, and Deutsche Bank for Fraud

On February 18, 2011, Allstate Insurance filed complaints against Citigroup- and Deutsche Bank-affiliated entities in New York state court. Two days earlier, Allstate filed a similar complaint in the same court against a number of JP Morgan, Washington Mutual, and Bear Stearns entities. The three complaints each allege that defendants fraudulently misrepresented the quality of the loans underlying the RMBS they underwrote and sold to plaintiff. Allstate brings causes of action for negligent misrepresentation and common law fraud in all three actions and for violations of Sections 11 and 12(a)(2) of the ’33 Act against JP Morgan and Citigroup but not Deutsche Bank. Allstate purchased over $200 million in RMBS from Citigroup, over $185 million from Deutsche Bank, and over $750 million from JP Morgan. Complaint Against Citigroup. Complaint Against Deutsche Bank.

Investor Group Sues Countrywide to Enforce Contractual Buy-Back Provision

On February 23, 2011, a group of holders of RMBS certificates represented by Plaintiffs’ lawyer David Grais filed a breach of contract claim against Countrywide Home Loans (now part of Bank of America) in New York State court, alleging that they were defrauded into purchasing over $1 billion in RMBS. The plaintiffs, who allege that they collectively own more than 25% of the voting rights in the issuer, sue derivatively on behalf of the Trustee, the Bank of New York Mellon, which is named as a nominal defendant. Plaintiffs ask the court to enforce a buyback provision in the Pooling and Servicing agreement or alternatively to award damages. Complaint.

Derivatives Month in Review – Dodd-Frank Implementation Update

The current issue of Derivatives Month in Review is devoted exclusively to the progress of the implementation of Title VII of the Dodd-Frank Act. In particular, the issue focuses on certain concerns being expressed in the market over rules proposed by regulators in connection with the implementation of the Dodd-Frank Act. Click here to read more.

On February 24, Moody’s updated its approach to rating U.S. resecuritized RMBS. Moody’s Report.

On February 24, Fitch updated its criteria for single- and multi-name credit-linked notes. Fitch Release. Fitch Report.

On February 24, Moody’s updated its methodology for analyzing set-off risk in Italian structured finance and covered bond transactions. Moody’s Release. Moody’s Report.

On February 23, Fitch updated its “Country-Specific Treatment of Recovery Ratings” corporate finance criteria report. Fitch Release. Fitch Report.

On February 23, Fitch issued criteria on global solar power projects. Fitch Release. Fitch Report.

On February 18, Fitch updated its U.S. commercial mortgage servicer ratings criteria. Fitch Release. Fitch Report.

On February 17, S&P requested comments on its proposal to extend the application of its structured finance counterparty methodology to corporate and government ratings. Comments must be submitted by March 3. S&P Release.

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