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.
Tag Archives: Bear Stearns
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.
New York Attorney General Sues Bear Stearns and JPMorgan Chase
On October 1, New York Attorney General Eric T. Schneiderman filed suit against Bear Stearns & Company, now a unit of JPMorgan Chase, in New York state court in Manhattan. This is the first suit filed by a member of the joint federal and state Residential Mortgage Backed Securities Fraud Working Group, which was formed in January and is co-chaired by Schneiderman. The complaint asserts two claims under New York law: securities fraud under Article 23-A of the General Business Law (the Martin Act) and persistent fraud or illegality under Section 63(12) of the Executive Law. The complaint alleges that Bear Stearns ignored defects in mortgage loans underlying its RMBS, made material misrepresentations to investors about the quality of due diligence, ignored defects identified by due diligence firms, and failed to perform post-purchase quality review. Losses, according to the complaint, total approximately $22.5 billion across more than 100 subprime and Alt-A securitizations which the defendants sponsored and underwrote in 2006 and 2007. Complaint.
Federal Court Orders Bayerische Landesbank RMBS Lawsuits Back to State Court
On July 16, Judge Lewis A. Kaplan of U.S. District Court for the Southern District of New York remanded suits brought by Bayerische Landesbank against Bear Stearns and Merrill Lynch to the Supreme Court of the State of New York, where they were originally filed. The lawsuits allege that Defendants knowingly made misrepresentations in RMBS offering materials concerning the underwriting standards used in connection with the underlying mortgage loans. Defendants sought removal to federal court on the ground that the cases were related to bankruptcy proceedings of the originators of some of the underlying mortgages. Judge Kaplan’s remand order indicated that a further written order may be forthcoming. Order. Notice of Removal.
Sixth Circuit Affirms Dismissal of RMBS Case Against Bear Stearns
On June 20, 2012, the Sixth Circuit affirmed an order by the Western District of Kentucky granting Bear Stearns’s motion to dismiss claims brought against it by Republic Bank & Trust Co. arising out of Republic Bank’s purchase of $52 million in RMBS. The Sixth Circuit’s ruling largely rested on Republic Bank’s failure to plead its claims with the required particularity. Specifically, the court found that allegations that prudent loan underwriting standards had not been followed and that property valuations were inaccurate were too general and not sufficiently tied to the loans backing the particular securities Republic Bank purchased. The court also found that many of the facts that Republic Bank alleged to have been misrepresented were in fact disclosed in the offering documents for the securities. Republic Bank admitted it had not read the offering documents prior to its purchases, conduct the court criticized as in dereliction of Republic Bank’s duty to exercise ordinary diligence. Opinion.
FDIC Brings Two RMBS Lawsuits Against Several Investment Banks and Related Entities
On May 18, 2012, the FDIC, in its capacity as receiver for two failed banks, filed two actions in the Southern District of New York arising out of the banks’ alleged purchase of RMBS. In the first suit, the FDIC asserts claims on behalf of Citizens National Bank and Strategic Capital Bank that arise out of the banks’ investment in ten RMBS certificates worth $140.5 million issued and/or underwritten by the defendants, including Bear Stearns, Citigroup, Credit Suisse, Merrill Lynch, and Deutsche Bank. Complaint. In the second suit, the FDIC asserts claims on behalf of Strategic Capital Bank arising out of the bank’s investment in five RMBS certificates worth $31 million underwritten by JP Morgan, Citigroup, Bank of America, and Deustche Bank. Complaint. In both suits, the FDIC alleged that the defendant banks violated Sections 11 and 15 of the Securities Act of 1933 by making material misstatements and omissions in the certificates’ registration statements regarding, among other things, the loan to value ratios of the mortgages underlying the certificates, the appraisal standards used in connection with the appraisals of the underlying properties, whether the borrowers intended to occupy the properties as their primary residences, and whether the originators complied with their underwriting guidelines when originating the underlying mortgages. The FDIC seeks a combined total of $77 million in damages, plus attorneys’ fees and costs.
Ambac Sues JP Morgan Over Insurance of Bear Stearns RMBS
On March 30, 2012, Ambac Assurance Corp. brought claims against J.P. Morgan Chase, EMC Mortgage, and Bear Stearns in the Supreme Court of the State of New York, alleging fraudulent marketing of RMBS by Bear Stearns. Ambac alleges that Bear Stearns, which was acquired by J.P. Morgan, misrepresented the quality of the underlying mortgage loans when obtaining insurance from Ambac on the RMBS. Ambac, which alleges losses of $200 million, brings claims for fraudulent inducement, breach of contract, and successor liability. Complaint.
Federal Court Dismisses Claims Against Bear Stearns Based on RMBS Credit Ratings
On March 30, 2012, Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York dismissed claims based on credit ratings brought by several retirement and pension funds against Bear Stearns & Co., Inc. and related affiliates in connection with the sale of RMBS pass-through certificates. Plaintiff brought claims under Section 11, 12(a)(2) and 15 of the Securities Act of 1933. The court found that plaintiffs failed to plead that the rating agencies disbelieved their ratings, but granted plaintiffs leave to amend to allege Bear Stearns was aware of the inaccuracy of the credit ratings. The court, however, declined to dismiss claims that Bear Stearns made misrepresentations concerning the quality of the underlying loans in its offering documents. It also rejected Bear Stearns’ argument that plaintiffs lacked standing to sue on tranches they did not purchase. Decision.
Assured GuarantySues Bear Stearns and JPMorgan
On March 15, 2012, Assured Guaranty Corp. filed a complaint in New York state court against Bear Stearns, its affiliate, EMC Mortgage LLC, and its successor, JPMorgan, alleging that Bear Stearns misrepresented the risk of RMBS and fraudulently induced Plaintiff to guarantee those RMBS. The complaint relies on alleged statements of confidential informants, including former employees of Bear Stearns, GreenPoint Mortgage Funding, Inc., and Watterson Prime LLC. Plaintiff alleges that the securities involved in the transactions at issue have experienced losses of more than $75 million, and that Plaintiff has paid unreimbursed claims of more than $43 million. Plaintiff asserts claims for fraudulent inducement, various breaches of contract, and for indemnification, claims payments, costs, and fees. Complaint.