JP Morgan Reaches Agreement in Principle to Settle Dispute Over $17.6B in MBS

On January 8, 2015, plaintiffs in a class action lawsuit against JP Morgan Chase informed the court that the parties had an agreement in principle to settle the case. The suit was initially commenced against Bear Stearns in August of 2008, and alleged that the bank misrepresented the underwriting process and the quality of the underlying loans in connection with $17.6 billion in RMBS. The settlement will be subject to approval by Judge Swain of the United States District Court for the Southern District of New York. Preliminary papers seeking such approval are scheduled to be filed on February 2, 2015.  Endorsed Status Report.

Delaware Chancery Court Revives Repurchase Litigation

On January 12, 2015, Vice Chancellor Laster of the Delaware Chancery Court granted the plaintiff’s motion for reargument and revived the breach of contract claims that the court had previously held to be untimely in Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage Corp. and JPMorgan Chase Bank, N.A.. First, the court concluded that a controlling Delaware Supreme Court decision the parties had not previously identified required application of New York’s six year statute of limitations, rather than Delaware’s three-year limitation period. The lawsuit was commenced within six years of the alleged breach, rendering it timely under New York law. Second, the court alternatively reasoned (in dicta) that even assuming Delaware law applied, the action would be timely due to the contract’s accrual provision, which stated that the repurchase claims would not accrue until the plaintiff’s demands were refused. This constituted a “condition precedent” to the action that tolled accrual under Delaware law, a position New York courts have to date rejected. The Court further concluded that the accrual provision validly extended the statute of limitations as permitted by a recent Delaware statute, which permits parties to extend the period up to 20 years (under New York law, parties are not permitted to extend the limitations period by agreement).  Order.

U.S. Bank Reaches $6 Million Settlement of Claims for Breach of RMBS Trustee Duties

On December 17, the parties in Oklahoma Police Pension and Retirement System v. U.S. Bank, N.A., No. 11-cv-8066 (S.D.N.Y.) asked the court to approve a $6 million settlement of class action claims asserted against U.S. Bank in its capacity as trustee for five RMBS trusts sponsored by Bear Stearns. The class consisted of 1,800 investors who had bought certificates in the trusts. Claims related to nine other trusts had been dismissed earlier in the litigation and were not included in the settlement. The complaint included claims for breach of contract, breach of the covenant of good faith and fair dealing, and violation of the federal Trust Indenture Act.  Motion for ApprovalSettlement Agreement.

Liquidators of Bear Stearns Hedge Funds Accuse Rating Agencies of Fraud

On November 12, the liquidators for two Bear Stearns overseas hedge funds filed their complaint against McGraw Hill, Standard & Poor’s, Moody’s, and Fitch (collectively the rating agencies) in an action in New York Supreme Court alleging that fraudulent ratings led to over $1 billion in losses for the funds’ investors.  According to the complaint, the funds invested in a portfolio of high-grade structured finance products, including CDOs and RMBS, where “at least 90% had the highest rating available,” and therefore depended heavily on ratings in making investment decisions.  The complaint alleges that the rating agencies knew that the ratings assigned to the securities in which the funds invested were false.  Plaintiffs claim that the rating agencies lacked independence from the issuers of the securities and that their ratings were tainted by a desire to maintain market share in a profitable industry.  The funds also allege that the rating agencies used relaxed standards in their initial ratings and subsequently failed to conduct proper ongoing surveillance of rated securities, leading to delays in downgrading ratings for allegedly faulty securities.  The liquidators initially commenced the action in July through New York’s summons with notice procedure.  Complaint.

Settlement Reached With Liquidators of Bear Stearns Hedge Funds

Several Bear Stearns defendants agreed to undisclosed terms with the joint official liquidators of two Bear Stearns hedge funds, resolving the liquidators’ claims for breach of fiduciary duty, breach of contract and negligence.  The terms of the settlement are undisclosed.  The lawsuit arose out of the failure of the Bear Stearns High Grade Structured Credit Strategies and Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage hedge funds that had allegedly invested heavily in Collateralized Debt Obligations (CDOs) and “CDO-squareds” (CDOs comprised of slices of other CDOs).  The liquidators alleged that the defendants failed to provide adequate oversight and risk management to the funds and placed their own interests ahead of those of the funds.  Complaint.  By virtue of the settlement, the lawsuit was dismissed with prejudice on August 16.  Stipulation.

JP Morgan Sued by Investors Over $1.7B in Mortgage-Backed Securities

On August 21, a collection of investors including Phoenix Light SF Limited, Blue Heron Funding II Ltd. and Kleros Preferred Funding V PLC (the Investors) brought suit against a number of JP Morgan and Bear Stearns entities in New York State Supreme Court.  The Investors allege that JP Morgan and Bear Stearns made misrepresentations in the offering documents for 47 RMBS concerning the underwriting guidelines used to originate the mortgage loans backing the RMBS, loan-to-value ratios, owner occupancy rates, the credit ratings assigned to the RMBS and the transfer of title of the underlying mortgage loans.  The Investors allege that the defendants knew their representations were false by virtue of due diligence performed prior to the securitizations and by virtue of their decision to dispose of substantial subprime assets while simultaneously marketing the RMBS to the Investors as sound investments.  The Investors assert causes of action for common law fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and rescission based upon mutual mistake.  Complaint.

New York Appellate Court Dismisses Syncora’s $320M RMBS Suit Against J.P. Morgan

On August 13, the First Department of the Appellate Division of the Supreme Court of New York reversed a trial court decision denying Syncora Guarantee Inc.’s motion for summary judgment in an action against J.P. Morgan Securities LLC.  Syncora’s suit alleged $320 million in losses resulting from its insurance of an RMBS transaction underwritten by Bear Stearns and sponsored by EMC Mortgage, entities that J.P. Morgan acquired in 2008.  In this action, Syncora asserted claims for fraudulent inducement and tortious interference against J.P. Morgan, similar to the claims that it had been denied leave to assert against Bear Sterns in an earlier-filed federal court action.  J.P. Morgan moved for summary judgment and dismissal on the basis of res judicata, but the trial court denied the motion, finding that J.P. Morgan and EMC had no pre-existing substantive legal relationship, and therefore no privity existed between them.  The First Department reversed, finding sufficient privity existed between J.P. Morgan and EMC based on Syncora’s own allegations that the companies acted in concert in the alleged scheme.  Decision.

District of Massachusetts Denies in Part JP Morgan’s Motion to Dismiss RMBS Investor Suit

On February 13, Judge Rya W. Zobel of the District of Massachusetts dismissed in part, but largely sustained, an investor suit brought by Capital Ventures International (CVI) against J.P. Morgan and certain of its subsidiaries in connection with four RMBS offerings underwritten by J.P. Morgan and Bear Stearns.  CVI brought the suit under the Massachusetts Uniform Securities Act (MUSA), claiming that the defendants violated MUSA by making material misstatements in the offering materials.  The court dismissed one of the claims against the RMBS sponsors, finding an insufficient relationship between the sponsors and CVI to support liability under section 410(a)(2) of MUSA.  The court also dismissed one of the claims against the RMBS depositors for lack of control required under 410(b) of MUSA.  The court otherwise denied the motion to dismiss with respect to all other parties and claims, finding (1) that there were sufficient allegations of material misstatements against the RMBS underwriters, including allegations concerning underwriting guidelines, appraisals and LTV/CLTV ratios, owner-occupancy status, and credit ratings, (2) the claims were not time-barred, (3) the depositors could be liable as issuers under SEC Rule 159A, and (4) sufficient allegations of control by the RMBS sponsors over the depositors.  Decision.

National Credit Union Administration Sues Bear Stearns for $3.6 Billion in RMBS

On December 17, 2012, the National Credit Union Administration Board, acting in its capacity as liquidating agent for four failed credit unions, sued several Bear Stearns affiliates in federal court in Kansas in connection with $3.6 billion in RMBS allegedly purchased by the failed credit unions.  The NCUA alleges that the originators of the mortgage loans underlying the RMBS systematically disregarded the underwriting guidelines stated in the offering documents.  It also alleges that the offering documents contain untrue statements of material fact concerning the evaluation of the borrowers’ capacity and likelihood to repay the mortgage loans, reduced documentation programs, loan-to-value ratios, and credit enhancement.  The NCUA asserts 24 separate counts for relief under Sections 11 and 12(a)(2) of the Securities Act of 1933, the California Corporate Securities Law, the Kansas Uniform Securities Act, the Texas Securities Act, and the Illinois Securities Act.  Complaint. 

CIFG Sues JP Morgan Over Two Bear Stearns CDO Portfolios

 On November 26, CIFG sued JP Morgan in Supreme Court for the State of New York for alleged losses stemming from its insurance of credit default swaps on two Bear Stearns RMBS-backed CDOs.  CIFG alleges that instead of being selected and managed by independent collateral managers, the CDO portfolios were actually selected by Bear Stearns in order to unload its own risk.  CIFG alleges it suffered more than $100 million in losses when the two CDOs defaulted.  The complaint’s causes of action are for material misrepresentation in the inducement of an insurance contract and fraud.  Complaint.