MetLife Sues Morgan Stanley Over $757 Million in RMBS

On April 25, 2012, Metropolitan Life Insurance Co. (“MetLife”) filed suit in New York State Court against Morgan Stanley. MetLife alleges that Morgan Stanley misrepresented the quality of the mortgage loans underlying RMBS certificates that MetLife bought in nine offerings. Specifically MetLife alleges that Morgan Stanley misrepresented that the loans were originated according to underwriting standards described in the offering documents and that the appraisals of the properties underlying the loans had been overstated. MetLife further alleges that Morgan Stanley knew of these misstatements as a result of due diligence it conducted in connection with the offerings. MetLife asserts claims for fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation.  Complaint.

Option One Reaches $28.2 Million Settlement with SEC Over RMBS Misrepresentation Claims

On April 24, 2012, the SEC announced a settlement with Option One Mortgage Corp. (“Option One”), now known as Sand Canyon Corporation, and filed an action in the United States District Court for the Central District of California for the purpose of having the settlement approved by the court. In the complaint, the SEC alleged that Option One had omitted material information from the offering materials for seven RMBS securitizations in early 2007 by failing to tell investors that Option One’s deteriorating financial condition would inhibit its ability to satisfy its loan repurchase obligations in connection with those RMBS. The $28.2 million settlement resolves claims that the SEC asserted under Section 17 of the Securities Act of 1933. Press Release.  Complaint.

Court Denies Goldman Sachs’s Motion to Dismiss in Case Arising out of Abacus CDO

On April 24, 2012, New York State Court Judge Barbara Kapnick denied a motion brought by Goldman Sachs Group Inc. (“Goldman Sachs”) to dismiss an action brought by ACA Financial Guaranty Corp. (“ACA”) arising out of ACA’s provision of financial guaranty insurance wrapping the Abacus 2007-ACI CDO issued by Goldman Sachs. ACA alleged that Goldman Sachs misrepresented material facts about the economic interest of the hedge fund Paulson & Co. Inc. (“Paulson”), an investor in the CDO. According to ACA, Paulson, which participated in the selection of the portfolio of mortgage loans backing the CDO, was represented to be a long investor but in fact took a short position against the deal. Judge Kapnick found ACA’s allegations sufficient to state a claim that Goldman Sachs fraudulently concealed the information about Paulson’s position and thus fraudulently induced ACA to insure the CDO.  Order.

Second Circuit Upholds Dismissal of $37 Million CDO Suit Against Goldman Sachs

On April 19, 2012, the United States Court of Appeals for the Second Circuit affirmed a lower court’s dismissal of a lawsuit brought by Landesbank Baden-Wurttemberg (“Landesbank”) lawsuit against Goldman Sachs & Co. (“Goldman Sachs.”) Landesbank asserted claims for fraud, negligent misrepresentation, and unjust enrichment, alleging that Goldman Sachs misstated the quality of the mortgages underlying the collateral that backed a CDO and secretly took a position to profit from the CDO’s failure. In affirming the lower court, the Second Circuit determined that Landesbank failed to allege a specific motive for Goldman to commit fraud and failed to allege the existence of any special relationship between Goldman and Landesbank sufficient to support a negligent misrepresentation claim.  Order.

Rating Agency Developments

On April 18, Fitch published criteria for partial-credit guarantees in emerging markets. Fitch Report.

On April 18, S&P updated its criteria for the global midstream energy industry. S&P Release.

On April 17, S&P updated its methodology for reviewing originators of residential mortgage collateral in U.S. RMBS. S&P Release.

On April 17, Fitch updated its 17G-7 representations and warranties report. Fitch Report.  Fitch Release.

On April 17, Fitch updated its global aircraft operating lease ABS criteria. Fitch Report.

On April 16, S&P updated its methodology for U.S. cash flow CDOs of bank trust preferred securities. S&P Release.

On April 16, Fitch updated its U.S. auto loan ABS rating criteria. Fitch Report.

On April 16, Fitch updated its global criteria for onshore wind farm debt instruments. Fitch Report.

On April 13, DBRS released its legal criteria for European structured finance transactions. DBRS Report.

On April 13, S&P updated its assumptions for liquidation timelines in the U.S. residential mortgage market. S&P Release.

Bayernische Landesbank Files $810 Million RMBS Suit Against Deutsche Bank

On April 19, 2012, Bayerische Landesbank (“Bayern”), a German bank, filed an $810 million suit against Deutsche Bank and certain of its affiliates in New York County Supreme Court. Bayern alleges Deutsche Bank fraudulently obtained, securitized, marketed, and sold Bayern RMBS while internally disparaging the quality of the loans underlying the RMBS. Bayern allegedly purchase 22 securitizations and claims that Deutsche Bank and the originators violated the represented originator underwriting guidelines, made material misrepresentations in the offering documents as to the quality of the underlying loans, and knew, as a result of their due diligence, that the underlying loans were destined to fail. The complaint includes claims for fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation, and seeks compensatory and/or rescissory damages. Complaint.

Ambac Files $856 Million RMBS Insurance Suit Against Bank of America and Merrill Lynch

On April 16, 2012, bankrupt insurer Ambac Financial Group filed suit against Bank of America as successor to Merrill Lynch, Merrill Lynch, and certain of its affiliates, in New York County Supreme Court. The complaint alleges that Merrill Lynch fraudulently induced Ambac into insuring $856 million in RMBS consisting of low-quality mortgages. Ambac alleges that Merrill Lynch misrepresented the quality of the loans, the underwriting guidelines followed, the due diligence performed, and the disclosures as to the loans, and that Ambac was required to pay out hundreds of millions of dollars in insured claims. The complaint includes claims for fraudulent inducement, breaches of representations and warranties, breach of contract, indemnification, and reimbursement. Complaint.

California Federal Court Partially Dismisses RMBS Claims In Countrywide MDL Action

On April 16, 2012, Judge Mariana R. Pfaelzer of the Central District of California dismissed in part an RMBS action brought by Massachusetts Mutual Life Insurance Co. (“MassMutual”) against Countrywide, JPMorgan, Deutsche Bank, UBS, and various individual defendants. This case, which asserts claims under the Massachusetts Uniform Securities Act (“MUSA”), was transferred to the Countrywide MDL for pre-trial proceedings. In addressing defendants’ initial motions to dismiss on the issues of timeliness, standing and jurisdiction, Judge Pfaelzer found that the court lacked personal jurisdiction over the individual defendants who moved on this ground and dismissed all claims against them with prejudice. Judge Pfaelzer also found that only the Underwriter Defendants could be held liable as a seller under the MUSA, and dismissed the MUSA claims against the other defendants with prejudice. Judge Pfaelzer declined to dismiss the remaining claims based on the statute of limitations. Decision.

Tax Law Update – Proposed Treasury Regulations Implementing the Foreign Account Tax Compliance Act (“FATCA”)

Since FATCA’s enactment in March 2010, the IRS has issued several rounds of guidance and the proposed implementing rules are evolving considerably as the Treasury and the IRS continue to consider comments received from various stakeholders. However, the Proposed Regulations have been much anticipated by taxpayers that may be affected by the FATCA withholding tax regime and they provide a clearer insight into the possible contours of final regulations to be adopted, as well as some welcome relief in certain areas. Click here to read more.

SEC Approves Amendments to FINRA Arbitration Rule

On April 20, pursuant to the Dodd-Frank Act, the SEC approved amendments to FINRA Rule 13201 of the Code of Arbitration Procedure for Industry Disputes (Industry Code). The amendments provide that a dispute arising under a whistleblower statute that prohibits the use of pre-dispute arbitration agreements is not required to be arbitrated under the Industry Code. The amendments to the rule will be effective on Mary 21, 2012. FINRA Regulatory Notice.