On November 15, JPMorgan Chase & Co. agreed to pay 21 institutional investors $4.5 billion to settle all representation and warranty claims, as well as servicing claims, in respect of all RMBS securitizations issued by JPMorgan and Bear Stearns between 2005 and 2008. In addition, JPMorgan agreed to implement servicing changes to mortgage loans in the trusts. The settlement does not resolve claims against Washington Mutual Inc. Press Release.
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.
On November 6, Wells Fargo & Co. disclosed in a regulatory filing with the Securities and Exchange Commission that it settled claims by the Federal Housing Finance Agency (acting as conservator to Fannie Mae and Freddie Mac) against it for approximately $335 million. Wells Fargo noted that Fannie Mae and Freddie Mac had opted out of a class settlement approved in 2011 in a suit alleging misstatements in the offering documents for the RMBS securitizations. 10Q Excerpt.
On November 7, Royal Bank of Scotland PLC (RBS) entered into a consent decree with the Securities and Exchange Commission (SEC) agreeing to pay $153.8 million in settlement of allegations concerning RBS’s disclosures in connection with an RMBS offering. In a Complaint filed simultaneously with the consent decree, the SEC alleged that RBS made misstatements and omissions in offering documents for the April, 2007 Soundview Home Loan Trust 2007-OPT1 (the Trust) securitization to investors. In particular, the SEC alleged that RBS misrepresented that the loan originator (Option One Mortgage Company) generally complied with its underwriting guidelines. RBS neither admitted nor denied the allegations. RBS’s settlement consists of three component parts: disgorgement of $80.4 million, prejudgment interest of $25.2 million and a civil penalty of $48.2 million. Complaint. Consent Decree.
On November 6, Moody’s released its U.S. RMBS surveillance methodology. Moody’s Report.
On November 6, Moody’s released its approach to rating RMBS using the ‘MILAN‘ (Moody’s Individual Loan Analysis) framework. Moody’s Report.
On November 6, DBRS released its criteria for rating Canadian credit card securitizations. DBRS Report.
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On September 30, a Minnesota federal judge granted in part and denied in part WMC’s and EquiFirst’s motions to dismiss three suits brought by U.S. Bank, as Trustee for an RMBS trust, alleging that WMC and EquiFirst breached representations and warranties in the purchase agreements relevant to each securitization. As to U.S. Bank’s breach of contract claims, Judge John R. Tunheim concluded that the contracts’ sole remedy provisions barred claims for monetary damages and limited the Trustee to specific performance of the contractual repurchase provision. The court also granted the motions to dismiss with respect to the Trustee’s claims for contractual indemnification and declaratory relief. However, Judge Tunheim denied the motion to dismiss the Trustee’s claim that the defendants were liable as a result of their failure to notify the Trustee of breaches when the defendants discovered them. The court also permitted the Trustee’s claim for damages based on gross negligence to proceed. Finally, in the same order the court granted, in part, WMC’s motion for summary judgment in a fourth related action. Opinion.
On September 27, Judge Louis L. Stanton of the Southern District of New York denied a motion by JPMorgan, Citigroup and several other banks to dismiss a lawsuit filed by the FDIC, as receiver for Colonial Bank, involving $388 million in RMBS. Judge Stanton rejected the defendants’ arguments that the claims were barred by the statute of limitations, finding that publicly available information about troubles in the mortgage industry in 2007 did not put the plaintiff on notice of facts constituting an alleged violation of federal securities laws in connection with the specific transactions at issue. Judge Stanton also held that the FDIC’s allegations of misstatements in the offering documents were sufficiently detailed to survive the pleading stage. The court concluded that it was premature to rule on whether a defendant may be liable under Section 11 of the Securities Act of 1933 when it did not underwrite the particular tranche of a securitization that the plaintiff purchased. Opinion.
On September 17, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal, as time-barred, of a class action brought by RMBS certificateholders against UBS over losses related to the RMBS. Filing suit in February 2010, the Plaintiffs alleged that UBS made misrepresentations in the RMBS offering documents concerning the mortgage loan originators’ compliance with their underwriting guidelines, the appraisal practices used in appraising the underlying properties and the loan-to-value ratios of the mortgage loans. Plaintiffs asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act. The Third Circuit held that Plaintiffs’ claims were time barred by the one-year statute of limitations provided by Section 13 of the Securities Act. Under the “discovery rule,” which the court held applies to Section 13, the statute begins to run on the date that a plaintiff did in fact discover, or reasonably should have discovered, the facts constituting the alleged violation. The court concluded that a reasonably diligent plaintiff would have begun investigating claims in connection with its certificates by September 2008, when a class of plaintiffs, including the lead plaintiff here, filed a separate suit against UBS (among others) making allegations similar to those in this case. The court further concluded that a reasonably diligent investigation conducted at that time would have led to knowledge of the claims asserted more than one year before the lawsuit was filed. Decision.