Court Enters $806 Million Judgment in FHFA v. Nomura

On May 16, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York entered a judgment requiring Nomura and RBS to buy back, at a total cost of $806 million, seven RMBS certificates sold to Fannie Mae and Freddie Mac from 2005 to 2007.  The judgment stemmed from Judge Cote’s May 11, 2015 Opinion finding Nomura and RBS liable for violations of the Securities Act of 1933, the D.C. Securities Act, and the Virginia Securities Act.  For those certificates for which FHFA prevailed under multiple statutes, FHFA was permitted to, and did, elect the maximum available remedies.  Judge Cote also ordered that FHFA is entitled to post-judgment interest, reasonable attorneys’ fees, and costs.  Judgment.

Citigroup, Goldman, and UBS to Pay $235 Million Settlement in MBS Class Action

On February 13, 2015, the plaintiffs in New Jersey Carpenters Health Fund, et al., v. Residential Capital, LLC, et al., No. 08-cv-8781 (S.D.N.Y.) filed an unopposed motion for certification of the class and to approve a preliminary settlement.  The complaint, originally filed in 2008, included claims for materially false and misleading statements in securities offering documents under the Securities Act of 1933 against Citigroup, Goldman Sachs, and UBS as underwriters for 16 mortgage-backed securities transactions in 2006 and 2007.  The class consists of investors who purchased the certificates, with the majority of the settlement funds set aside for investors who purchased their certificates within ten days after the relevant initial offering.  The proposed $235 million settlement does not include a $100 million settlement with Residential Capital, LLC that had previously been reached in the case.  Motion.

Federal Home Loan Bank of San Francisco Settles RMBS Claims Against Banks

On January 15, 2015, the Federal Home Loan Bank of San Francisco (FHLB) agreed to a $459 million settlement with various banks stemming from the sales of billions of dollars of RMBS.  FHLB originally filed the claims in the Superior Court of California, County of San Francisco in 2010 against Bank of America Corp., Credit Suisse Securities (USA) LLC, Countrywide Financial Inc., Deutsche Bank Securities, Inc. and other banks concerning 229 RMBS transactions.  FHLB alleged causes of action for violation of the Securities Act of 1933 and the California Corporate Securities Act as a result of dealers allegedly concealing information and lying about the quality of RMBS sold to FHLB.  It is unclear which banks are involved in the settlement.

Court Finds FHFA Claims Against Nomura Are Not Time-Barred

On November 18, Judge Denise Cote of the United States District Court for the Southern District of New York granted the Federal Housing Finance Agency’s motion for partial summary judgment on the statute of limitations defense asserted by Nomura and related entities.  FHFA, as conservator for Fannie Mae and Freddie Mac, alleges that Nomura made materially false statements in offering documents for RMBS between 2005 and 2007 in violation of Sections 11 and 12(a)(2) of the Securities Act of 1933.   Judge Cote found that Fannie and Freddie did not have sufficient information by September 2007 to determine whether the offering documents contained misstatements, and that a reasonably diligent investor in their position would not have investigated the offering documents or discovered the misstatements by that date.  As a result, the Court held that FHFA’s claims were not barred by the statute of limitations.  Opinion & Order.

Bank of America and Merrill Lynch Settle RMBS Lawsuit with FDIC

On November 17, Bank of America and Merrill Lynch settled securities claims brought by the FDIC related to RMBS sold to United Western Bank.  The FDIC, as the receiver for United Western Bank, alleged claims under the Securities Act of 1933 and the Colorado Securities Act against Bank of America, Merrill Lynch, Morgan Stanley, and RBS Securities related to $110 million in RMBS. The case against Morgan Stanley and RBS remains pending.  Stipulation.

Court Grants in Part and Denies in Part JPMorgan’s Motion to Dismiss RMBS Action

On October 16, Judge Susan J. Dlott of the United States District Court for the Southern District of Ohio granted in part and denied in part several JPMorgan entities’ motion to dismiss a complaint filed by several Western & Southern Life Insurance entities relating to $202 million in RMBS certificates.  Western & Southern asserted 14 causes of action, including claims for violations of the Ohio Securities Act, the Ohio RICO statute, the federal Securities Act of 1933, and for common law fraud, conspiracy, and tortious interference with contract.  The court dismissed Ohio Securities Act claims as to certain certificates, finding them time barred under Ohio’s five-year statute of repose.  The court declined to dismiss the remaining Ohio Securities Act claims as untimely, holding that when Western & Southern was put on notice of its claims for statute of limitations purposes was a question of fact.  The court also held that Western & Southern adequately alleged falsity and scienter with respect to alleged misstatements concerning underwriting guidelines, appraisals, owner occupancy, credit ratings, and title transfer.  As to the federal Securities Act claims, the court held that they were time barred under the applicable three-year statute of repose and that Western & Southern could not rely on American Pipe tolling to extend the period for filing its claims.  The court dismissed the tortious interference with contract claim on the ground that the claim is not available against a party to the contract at issue.  Finally, the Court held that the Ohio RICO claims were sufficiently pled.  Order.

New Compliance and Disclosure Interpretations

On December 4, the Division of Corporation Finance of the SEC issued new Compliance and Disclosure Interpretations regarding, among other things, Rules 506(d) and (e) of Regulation D under the Securities Act of 1933.  These rules prohibit issuers from conducting private placements that rely on Rule 506 if felons and other “bad actors” participate in the offering.

Section 260 of the Interpretations addresses questions arising under “Rule 506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering.”  Interpretations.

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. 

Second Circuit Affirms Dismissal of Class Action Against S&P Over MBS Ratings

On December 20, 2012, the Second Circuit affirmed a decision by Judge Sidney H. Stein of the Southern District of New York dismissing a putative class action suit alleging that Standard & Poor’s Ratings Services intentionally misled investors about the accuracy of its credit ratings for mortgage-backed securities.  The plaintiff pension fund, acting as a putative class representative of similarly situated shareholders, asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933 against S&P’s parent company, McGraw-Hill Cos. Inc., and two of its corporate officers.  The complaint alleges that defendants made false and misleading statements about the operations of S&P by concealing flaws in its rating methods.  Judge Stein ruled that plaintiff failed to prove the defendants made false statements in financial earnings or acted with knowledge of wrongdoing.  In particular, he found that statements promoting S&P’s independent and objective ratings were “mere commercial puffery” and could not form the basis of a securities fraud claim.  A Second Circuit panel issued a summary order affirming the decision, finding that the factual allegations did not give rise to a strong inference that McGraw-Hill executives misled investors about S&P’s services in order to artificially inflate McGraw-Hill’s stock price.  Order. 

SDNY Allows FHFA’s Claims Against Goldman Sachs and Deutsche Bank to Proceed

In two separate orders issued on November 12, Judge Cote of the Southern District of New York granted in part and denied in part motions to dismiss claims brought by the FHFA against Goldman Sachs & Co. and Deutsche Bank AG.  FHFA’s claims are based on alleged purchases by Fannie Mae and Freddie Mac of residential mortgage-backed securities from these banks.  The court dismissed FHFA’s common-law fraud claims against both banks based on owner-occupancy and LTV ratio allegations for failure to sufficiently allege scienter.  The court rejected the remaining arguments to dismiss other aspects of the claims.  Judge Cote denied Deutsche Bank’s motion as to the FHFA’s pleading of reasonable reliance and held that New York’s Martin Act did not preclude FHFA from raising claims based on other states’ securities laws.  The court also rejected Goldman’s argument that as an underwriter it lacked “ultimate authority” over the contents of certain offering documents.  In both actions, FHFA asserts claims for violations of Sections 11, 12, and 15 of the Securities Act of 1933, for violations of the Virginia and District of Columbia securities laws, and for fraud.  
Goldman Sachs Decision.  Deutsche Bank Decision.