Morgan Stanley Settles RMBS Charges with SEC

On July 24, the SEC announced that it had charged three Morgan Stanley entities with misleading investors with regard to two RMBS securitizations that the firms underwrote, sponsored and issued and that the firm agreed to settle the charges.  In the cease and desist order memorializing the settlement, the SEC alleged that Morgan Stanley misrepresented the current and historical delinquency status of the mortgage loans underlying the securitizations.  The SEC alleged that these misrepresentations violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  Morgan Stanley agreed to settle the charges without admitting or denying wrongdoing.  As part of the settlement, Morgan Stanley agreed to cease and desist further violations of §§ 17(a)(2)-(3) and to pay US$275 million in disgorgement, prejudgment interest and penalties, which will be placed in a Sarbanes-Oxley Fair Fund for distribution to investors.  Press Release.  Order.

New Plaintiffs’ Claims Dismissed From Morgan Stanley MBS Class Action

On May 27, Judge Laura Taylor Swain of the Southern District of New York granted Morgan Stanley’s motion for reconsideration and dismissed as time-barred claims brought by certain named plaintiffs (the New Plaintiffs) first added to the case more than a year after it was originally filed.  The New Plaintiffs, several banks and pension funds, asserted claims under Sections 11, 12 and 15 of the Securities Act of 1933 but did so after the expiration of the three-year statute of repose applicable to such claims.  In September 2011, Judge Swain originally held that the claims were nonetheless timely under the American Pipe tolling doctrine, which holds that the statute of limitations for an absent class member’s individual claim is tolled during the pendency of a putative class action.  In 2013, however, the Second Circuit in In re IndyMac Mortgage-Backed Securities Litigation, 721 F.3d 95 (2d Cir. 2013), held that American Pipe tolling applies to statutes of limitations, but does not apply to statutes of repose.  (As discussed in the March 17, 2014, Week in Review, the Supreme Court granted a petition for a writ of certiorari in the IndyMac case to resolve the applicability of American Pipe to statutes of repose; the case remains pending).  Upon reconsideration in light of the Second Circuit’s IndyMac decision, Judge Swain held that the New Plaintiffs’ claims were barred by the applicable statute of repose.  She rejected the New Plaintiffs’ attempt to rely on relation back under Rule 15 or joinder under Rule 17(a), finding those rules equally inapplicable to avoid statutes of repose as American Pipe tolling.  Order.

Suit Against Morgan Stanley Dismissed for Lack of Standing

On April 17, Justice Eileen Bransten of the Supreme Court of the State of New York dismissed all claims in a suit brought by investment vehicle Sealink Funding Ltd. in connection with RMBS purchased from Morgan Stanley.  Sealink acquired the certificates at issue from Sachsen LP Europe Plc and brought claims for fraud, fraudulent inducement, and aiding and abetting fraud.  Sealink alleges misstatements by Morgan Stanley regarding the due diligence and underwriting performed on the mortgages underlying the securities, misstatements of loan-to-value and debt-to-income ratios and misstatements concerning the risks of RMBS generally.  The court held that under governing English law, Sachsen’s tort claims could only be transferred to Sealink by explicit reference in the agreements transferring the securities.  Finding no such transfer provision, the court dismissed Sealink’s claims.  Decision.

Judge Dismisses Federal Securities Claims from NCUA Action Against Morgan Stanley

On January 22, Judge Denise Cote of the U.S. District Court for the Southern District of New York trimmed claims from a lawsuit brought by the National Credit Union Administration Board, as liquidating agent for various federal credit unions, alleging that two Morgan Stanley entities made material misrepresentations in the offering documents for $400 million in RMBS.  Partially granting Morgan Stanley’s motion to dismiss, the court held that NCUA’s federal securities claims were time-barred under the three-year statute of repose imposed by the Securities Act of 1933.  In reaching this conclusion, the court found that NCUA did not become conservator for the credit unions until after the statute of repose had run, and therefore could not avail itself of a provision of the Federal Credit Union Act that extends the limitations period for actions brought by the NCUA.  Despite its dismissal of NCUA’s federal securities claims, the court ruled that securities claims against Morgan Stanley brought under Illinois and Texas blue sky laws both were timely and adequately pled.  Decision.

Morgan Stanley Wins Dismissal of Dexia’s Fraud Suit Over $626 Million in RMBS

On October 16, Justice Eileen Bransten of the Supreme Court for the State of New York dismissed a suit by FSA Asset Management LLC (FSAM) and Dexia SA/NV (with two related entities, Dexia) alleging fraud by Morgan Stanley in connection with the sale of $626 million in RMBS.  FSAM originally purchased the RMBS from Morgan Stanley in 2006 and 2007, but in 2009, assigned the securities to Dexia in a put option transaction.  Plaintiffs alleged that Morgan Stanley misrepresented the underwriting standards and collateral attributes of the mortgage loans underlying the securities and brought claims for fraud, aiding and abetting fraud and fraudulent inducement.  Justice Bransten held that Dexia lacked standing to bring the claims because the put option transaction assigned only ownership and contractual rights in respect of the RMBS, not claims sounding in tort.  The court further held that FSAM had not suffered damages because it had received full face value for the securities from Dexia.  Decision.

Morgan Stanley’s Motion to Dismiss $757 Million RMBS Suit Denied in Part

On July 13, Justice Eileen Bransten of the New York Supreme Court denied Morgan Stanley’s motion to dismiss MetLife’s common law fraud and fraudulent inducement claims.  MetLife alleges that Morgan Stanley knowingly misrepresented the quality of over $757 million RMBS that it underwrote or sponsored.  The court held that MetLife sufficiently alleged reasonable reliance, a material misrepresentation, scienter and loss causation.  However, Justice Bransten granted the motion to dismiss as to claims brought by the Connecticut subsidiary of MetLife, finding the claims barred by Connecticut’s three-year statute of repose for fraud claims. Decision.

Court Grants in Part Motions to Dismiss Allstate RMBS Lawsuits

On March 15, Judge Eileen Bransten of the Supreme Court of the State of New York granted in part and denied in part motions to dismiss brought by Merrill Lynch, Deutsche Bank and Morgan Stanley entities (together Defendants) in respective lawsuits brought against them by certain Allstate entities related to Allstate’s purchases of RMBS.  The court dismissed Allstate’s negligent misrepresentation claim against all Defendants, concluding that Allstate had not alleged either that Defendants had the required specialized knowledge or that Defendants had a special or privity-like relationship with Allstate.  The court also dismissed all claims as to two of the Deutsche Bank certificates and federal securities claims against Merrill Lynch as untimely, but rejected Defendants’ arguments that other claims were untimely.  The court denied Defendants’ motions to dismiss as to Allstate’s fraud claims.  The court also concluded that Defendants can face liability for distributing statements they allegedly knew to be false, even if the statements were originally made by third parties, such as originators or rating agencies.  Deutsche Bank Order; Merrill Order; Morgan Stanley Order.

DZ Bank Files Lawsuit Against Morgan Stanley Over $694M in RMBS

 On November 21, Deutsche Zentral-Genossenschaftsbank AG (DZ Bank) filed a summons with notice in Supreme Court for the State of New York against Morgan Stanley in connection with the German bank’s alleged purchase of $694 million in RMBS.  DZ Bank alleges that the offering materials for the RMBS contained material misrepresentations and omissions regarding the characteristics of the mortgage loans underlying the securities and the underwriting standards used to issue the mortgage loans.  DZ Bank raises common-law fraud, aiding and abetting fraud, negligent misrepresentation, breach of contract, and declaratory judgment  claims.  It seeks over $694 million in damages or rescission. Summons with Notice.

IKB Files Suit Against Morgan Stanley Over $147M in RMBS

 On November 16, German lender IKB Deutsche Industriebank AG sued Morgan Stanley and related entities in the Supreme Court for the State of New York for $147 million in connection with the sale of RMBS.  IKB alleges Morgan Stanley issued offering documents that contained material misrepresentations and omissions regarding the underwriting standards and credit characteristics of the loans underlying the securities, the legal validity of the trusts and the transfer of loans to the trust, and the credit ratings of the securities.  IKB brings causes of action against Morgan Stanley for common-law fraud, fraudulent inducement, fraudulent concealment, negligent misrepresentations, aiding and abetting fraud, declaratory judgment, and contract claims, including rescission, restitution and mutual mistake.  Summons with Notice.

Israel’s Largest Bank Sues Morgan Stanley for $281 Million

On August 29, 2012, Bank Hapoalim B.M. filed a summons with notice for a case against Morgan Stanley and related entities in the Supreme Court of New York for allegedly making knowing misrepresentations and omissions in offering materials concerning the loans pooled into $140 million worth of RMBS issued between September 2006 and June 2007 in eight RMBS securitizations.  The causes of action are for fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation, declaratory judgment, breach of contract, rescissory damages, and violations of the Securities Act of 1933.  Summons with Notice.