Court Dismisses Suit Alleging Fraud by Merrill Lynch in the Sale of RMBS

On October 8, Justice Charles E. Ramos of the New York Supreme Court for the County of New York, Commercial Division entered an order dismissing an amended complaint brought by Phoenix Light SF Limited, Silver Elms CDO PLC, Silver Elms CDO II Limited, and Kleros Preferred Funding V PLC against Merrill Lynch & Co., Inc. The plaintiffs alleged Merrill Lynch committed fraud in its sale of more than $210 million of RMBS. The court held that the fraud allegations were not specific enough to meet New York’s heightened pleading standard for fraud claims and some of the alleged misstatements were not actionable because they postdated the sale. Justice Ramos dismissed the complaint with leave to amend. Decision.

MBIA Allowed to Pursue Fraudulent Inducement Claim Against J.P. Morgan

On September 19, Justice Alan D. Scheinkman of the New York Supreme Court for Westchester County granted in part MBIA’s motion for leave to amend its complaint against J.P. Morgan in an action related to a Bear Stearns RMBS transaction that MBIA insured. In May, the court granted summary judgment in favor of J.P. Morgan on the sole claim of fraud in the original complaint. In that decision, however, the court noted that while MBIA could not demonstrate fraud, there may have been unpleaded causes of action for fraudulent concealment and/or relief available under Section 3105 of the New York Insurance Law. MBIA then sought to file an amended complaint containing those two new claims and an amended fraud claim. As all of these claims were viable at the time of the original complaint, J.P. Morgan argued that the claims were precluded by the doctrine of res judicata based on the court’s summary judgment decision. The court rejected this argument and held that res judicata only applied to the pleaded fraud claim and not to the new claims. As to the substance of MBIA’s amended claims, the court granted leave to file an amended complaint on the fraudulent concealment claim alone, dismissing the previously pleaded fraud claim and MBIA’s Section 3105 claim. Order.

MBS Investor Class Partially Certified Against J.P. Morgan

On September 30, Judge Paul Oetken of the U.S. District Court for the Southern District of New York partially certified a class of MBS investors under Rule 23(b) in Fort Worth Employees’ Retirement Fund v. J.P. Morgan Chase & Company. The plaintiffs allege that J.P. Morgan made misleading statements in the offering documents underlying approximately $10 billion worth of MBS certificates. Judge Oetken certified the class for liability purposes only, but not damages. Judge Oetken held that while plaintiffs had met the necessary elements for liability purposes, they had not come forth with a damages model that was precise enough to permit the court to permit the calculation of damages on a class wide basis. The court’s order did not preclude certification of the class for damages purposes in the future, if plaintiffs develop a model sufficient to demonstrate damages across the class. Order.

Court Reverses Itself and Dismisses RMBS Fraud Complaint Against Several Banks

On September 30, Judge Sam Lindsay of the U.S. District Court for the Northern District of Texas granted a motion to dismiss plaintiff Town North Bank’s amended complaint against UBS, Morgan Stanley, Merrill Lynch, and J.P. Morgan, among others. Town North Bank asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and the Texas Securities Act. In March 2013, Judge Lindsay had denied the defendants’ motion to dismiss but reviewed the briefs anew when the defendants filed a motion for interlocutory appeal. Upon that review, Judge Lindsay sua sponte vacated the March 2013 order and granted the motion to dismiss. In particular, Judge Lindsay found claims related to certain of the alleged misstatements time barred under the applicable statute of repose found in 28 U.S.C. § 1658(b). As to the remaining statements, Judge Lindsay found that Town North Bank had not adequately alleged that the Defendants “made” the statements in light of the U.S. Supreme Court’s recent ruling in Janus Capital Group v. First Derivative Traders. The court also concluded that Town North Bank did not allege scienter with sufficient particularity because the amended complaint lacked factual allegations from which the court could reasonably infer that Defendants were aware of any false statements at the time they were made. Order.

RMBS Trustee Files New Repurchase Action Against Nomura

On September 17, HSBC Bank USA NA, as trustee for an RMBS trust, filed suit in the Supreme Court for the State of New York against Nomura Credit & Capital Inc. over approximately $613 million in RMBS issued in May 2007. The complaint alleges that Nomura failed to repurchase securitized mortgage loans that breached representations and warranties made by Nomura concerning, among other things, the loans’ credit characteristics, origination, and compliance with applicable laws and regulations. The lawsuit seeks Nomura’s repurchase of the allegedly defective loans or equivalent money damages. The complaint follows the dismissal of a prior complaint in federal court that was dismissed for lack of subject matter jurisdiction. Complaint.

RMBS Trustee Files New Repurchase Action Against Nomura

On September 17, HSBC Bank USA NA, as trustee for an RMBS trust, filed suit in the Supreme Court for the State of New York against Nomura Credit & Capital Inc. over approximately $613 million in RMBS issued in May 2007.  The complaint alleges that Nomura failed to repurchase securitized mortgage loans that breached representations and warranties made by Nomura concerning, among other things, the loans’ credit characteristics, origination, and compliance with applicable laws and regulations.  The lawsuit seeks Nomura’s repurchase of the allegedly defective loans or equivalent money damages.  The complaint follows the dismissal of a prior complaint in federal court that was dismissed for lack of subject matter jurisdiction.   Complaint.

HSBC Settles RMBS Claims with FHFA

On September 12, the FHFA and several HSBC affiliates and certain of their current and former officers (collectively, HSBC) announced a US$550 million settlement of claims that the FHFA had brought against HSBC in the Southern District of New York.  FHFA, acting as conservator for Fannie Mae and Freddie Mac, alleged that HSBC made false and misleading statements in offering documents issued in connection with 19 RMBS securitizations.  It brought claims for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as well as the Virginia and Washington, D.C., Securities Acts.  HSBC did not admit liability or wrongdoing.  Settlement Agreement.

Morgan Stanley Settles MBS Class Action with Pension Funds

On September 8, a stipulation and agreement of settlement was filed in relation to an action brought against Morgan Stanley & Co. by a group of pension funds led by Public Employees’ Retirement System of Mississippi and the West Virginia Investment Management Board.  In the putative class suit, the funds alleged that Morgan Stanley misled institutional investors about the mortgage pools underpinning its mortgage-backed securities.  Under the settlement agreement, Morgan Stanley will pay US$95 million to buyers of certain mortgage-backed securities issued in 2006 and 2007 without admitting to liability or wrongdoing.  Stipulation and Agreement.

MBS Claims Against Bank of America Dismissed

On September 9, Judge Mariana Pfaelzer of the U.S. District Court for the Central District of California granted Bank of America’s motion to dismiss claims for fraudulent concealment, negligent misrepresentation, aiding and abetting, mutual mistake and successor liability brought by Deutsche Zentral-Genossenschaftsbank AG (DZ Bank) in a lawsuit over Bank of America’s MBS offerings.  In doing so, Judge Pfaelzer extended her earlier decision in the case, dismissing as time-barred under German and New York law, claims regarding the sale of Countrywide MBS.  The court applied the same analysis to offerings by Bank of America/Merrill Lynch not backed by Countrywide loans.  Claims related to credit ratings remain in the case.  Judge Pfaelzer also declined to suggest to the Judicial Panel of Multidistrict litigation that the Panel remand DZ Bank’s case to state court.  Order

BofA and Countrywide Settle RMBS Lawsuit with National Integrity

On August 28, in light of a settlement reached between the parties, Judge Mariana R. Pfaelzer of the United States District Court for the Central District of California dismissed a lawsuit brought by National Integrity Life Insurance Company against various Bank of America and Countrywide entities in connection with more than US$447 million in RMBS.  The complaint alleged claims under the Securities Act of 1933, the Ohio Securities Act, the Ohio Corrupt Activities Act, and various common law causes of action arising out of alleged misstatements made in the RMBS offering documents.  The amount and terms of the settlement were not disclosed.  Order.