FHFA Wins Summary Judgment That It Did Not Have Actual Knowledge of RMBS Misrepresentations

On July 30, Judge Denise Cote of the United States District Court for the Southern District of New York granted the motion for partial summary judgment brought by FHFA, as conservator for Fannie Mae and Freddie Mac.  FHFA initiated securities fraud cases against a number of banks alleging false statements made in the offering documents for RMBS purchased by the GSEs between 2005 and 2007.  FHFA’s action remains pending against HSBC, Goldman Sachs, RBS Securities and others.  In its motion for summary judgment, FHFA sought a ruling that no reasonable jury could find that the GSEs knew the banks’ statements were false.  The defendants argued seven categories of circumstantial evidence illustrated the GSEs’ awareness of the information that they now allege was concealed.  These included the GSEs’ knowledge about loan originators, participation in the subprime and Alt-A markets, knowledge of risk associated with reduced documentation programs, and anti-predatory lending reviews.  The court held that these categories were not enough to prove that the GSEs had actual knowledge that any representation was false, as required by Sections 11 and 12(a)(2) and the Blue Sky Laws.  The court therefore granted summary judgment for FHFA on that issue.  Decision.

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.

EMC Obtains Partial Dismissal of Repurchase Action

On May 29, Justice Eileen Bransten of the New York County Supreme Court denied in part and granted in part defendants’ motion to dismiss a loan repurchase lawsuit brought at the direction of certain certificate holders of four RMBS.  The complaint alleged that EMC Mortgage breached certain representations and warranties concerning loans in the trusts and also sought to hold certain JPMorgan entities vicariously liable for EMC’s alleged breaches.  Justice Bransten dismissed without prejudice the claims against the JPMorgan entities for failure to properly plead successor liability or parent liability.  As to EMC, the Court rejected EMC’s argument that the claims were limited to certain loans identified in timely repurchase demands, holding that the content of the specific repurchase demands at issue sufficiently and timely notified EMC of its alleged obligation to repurchase all allegedly breaching loans in the trusts.  Justice Bransten also relied on Plaintiff’s allegation that EMC discovered allegedly breaching loans during its pre-closing due diligence to hold that Plaintiff’s claims as to all allegedly breaching loans in the transaction were timely.  Justice Bransten refused to dismiss plaintiff’s unjust enrichment claims, which were based upon allegations that EMC withheld settlement funds received from loan originators that properly belonged to the Trust, holding that the PSA’s sole remedy clause does not preclude these claims.  Finally, Justice Bransten dismissed claims for consequential and rescissory damages as barred by the sole remedy provision, and dismissed plaintiff’s reimbursement claim because the PSA did not unmistakably provide for attorney’s fees in first-party actions.  Order.

UBS Motion to Dismiss RMBS Suit Granted in Part

On June 10, Judge Denise Cote of the U.S. District Court for the Southern District of New York granted in part and denied in part UBS’s motion to dismiss a lawsuit filed against it by the National Credit Union Administration, as liquidating agent for Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union.  The credit unions each owned certain RMBS issued by UBS.  Following her ruling in an earlier case NCUA brought against Morgan Stanley, Judge Cote dismissed NCUA’s federal Securities Act claims as time barred.  Judge Cote denied UBS’s motion to dismiss NCUA’s claims under Illinois and Texas Blue Sky Laws, holding that NCUA had satisfied the liberal pleading standard by making the requisite “originator-specific allegations” to support its claims that UBS made material misrepresentations regarding whether the originators had complied with underwriting guidelines.  Order.

UBS Settles RMBS Lawsuit

On April 21, Union Central Life Insurance Co., Ameritas Life Insurance Corp. and Acacia Life Insurance Company, on the one hand, and UBS AG, UBS Securities LLC and Mortgage Asset Securitization Transactions, Inc., (collectively, UBS), on the other, filed a motion in the United States District Court for the Southern District of New York seeking voluntary dismissal based on the fact that they had reached a settlement.  The settled action related to alleged misstatements by UBS relating to RMBS sold to the three insurance company plaintiffs.  The settlement agreement was reached on March 5, 2014, and the parties now seek, in addition to voluntary dismissal, a bar order relating to UBS.  The terms of the settlement were not disclosed.  Motion.

New York Court Permits Aiding and Abetting Claims Against UBS Parent Company to Proceed

On April 17, Justice Marcy Friedman of the Supreme Court of the State of New York dismissed most claims in a suit against UBS AG and its subsidiaries arising out of RMBS purchases by plaintiff Deutsche Zentral-Genossenschaftsbank AG (DZ Bank).  Following her prior decisions, Justice Friedman allowed fraud claims to proceed but dismissed plaintiff’s claims for fraudulent concealment, negligent misrepresentation, rescission based on mutual mistake, and punitive damages.  The court allowed claims alleging aiding and abetting by parent companies UBS and UBS Americas Inc. to proceed based on allegations that the defendants shared high-level personnel.  Decision.    

New Jersey Federal Judge Partially Dismisses Claims Against RMBS Trustee

On April 23, Judge William J. Martini of the U.S. District Court for the District of New Jersey granted in part U.S. Bank’s motion to dismiss investor VNB Realty, Inc.’s claims against the bank as trustee of two RMBS trusts.  VNB alleges that U.S. Bank knew of wrongdoing in the trusts, including robo-signing and flawed underwriting practices by loan originators, but did not notify investors due to a conflict of interest.  The court dismissed claims alleging breach of the duty of loyalty and breach of fiduciary duty as intrinsically part of VNB’s negligence claim.  The court also dismissed plaintiff’s breach of contract claim and its related claim for breach of the implied covenant of good faith and fair dealing for failure to identify any specific duty that was allegedly breached.  The court denied, however, the Trustee’s motion to dismiss the entire complaint based on the “no-action” clauses in the applicable Pooling and Servicing Agreements, based on its conclusion that demand would be futile because the plaintiff effectively would have been asking the Trustee to sue itself.  The court also permitted claims alleging negligence and violations of the Trust Indenture Act to proceed.  Decision.

Rating Agency Developments

On March 25, Moody’s released its approach to rating RMBS using the MILAN framework.  Moody’s Report.

On March 25, Moody’s released its approach to assessing incremental risk posed by ability to repay rules in US RMBSMoody’s Report.

On March 24, DBRS released its modified methodology for rating European Structured Finance transactions.  DBRS Report.

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New York Appellate Court Denies Motion for Reargument of ACE Ruling

On March 20, the Appellate Division, First Department denied an RMBS trustee’s motion for reargument of or, alternatively, leave to appeal to the Court of Appeals (New York’s highest court) from the First Department’s December 19, 2013 Decision and Order dismissing the trustee’s mortgage loan repurchase action against DB Structured Products as time barred.  As described in the January 6 edition of the Week in Review, the First Department’s order held that repurchase claims arising from alleged breaches of representations and warranties concerning mortgage loans accrue when the representations and warranties allegedly were breached, and not on the later date when a defendant refuses to repurchase a loan.  The trustee’s complaint was untimely because it was not filed within six years of the alleged breach and did not relate back to an earlier complaint filed by certificate holders that lacked standing to sue.  The trustee now has thirty days to seek leave directly from the Court of Appeals to appeal to that court.  Order.

Rating Agency Developments

On March 6, Moody’s released its updated methodology for rating CDOs backed by structured finance assetsMoody’s Report.

On March 5, Fitch released its criteria for granular corporate balance-sheet securitizations (SME CLOs).  Fitch Report.

On March 3, DBRS released its U.S. RMBS securities model and rating methodology.  DBRS Report.

On March 3, DBRS released its methodology for rating U.S. private student loan securitizationsDBRS Report.

On March 3, DBRS released its methodology for rating U.S. federal family education loan program (FFELP) securitizations.  DBRS Report.

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