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.
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.
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.
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.
On September 6, 2012, the United States Court of Appeals for the Second Circuit reversed the dismissal of RMBS claims against Goldman Sachs and related entities based on lack of standing and failure to state a claim. The court addressed a named plaintiff’s standing to assert class claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 based on mortgage-backed securities from offerings or tranches it did not purchase. Reversing the district court’s decision, the Second Circuit held that plaintiffs have standing to represent classes of investors who purchased mortgage-backed securities from different tranches than those purchased by the named plaintiff, or even under different prospectus supplements, as long as the securities were backed by mortgages originated by the same lenders and the claims are based on “similar or identical misrepresentations in the Offering Documents.” The court also held that the plaintiff had adequately pled a decline in the value of the securities, despite the absence of any allegation that the relevant trusts had defaulted on any distribution of principal or interest. Decision.
On August 17, the FDIC, in its capacity as receiver for Texas-based Guaranty Bank, filed three actions in Texas state court arising out of the bank’s alleged investments in 36 RMBS certificates totaling $5.4 billion in face value. In all three suits, the FDIC alleges that the defendant banks violated the Texas Securities Act and the Securities Act of 1933 by making material misrepresentations and omissions in offering documents. The FDIC seeks a combined total of at least $2.1 billion, plus attorneys’ fees and costs.
On July 31, the Public Employees’ Retirement System of Mississippi moved for approval of a US$26.6 million settlement of an RMBS class action pending before Judge Baer of the Southern District of New York. Plaintiffs asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 against Goldman Sachs arising out of the purchase of US$693 million in RMBS. The complaint alleged that the offering documents contained inaccuracies and omissions, and that Goldman failed to conduct adequate due diligence. In seeking approval of the settlement, plaintiffs argued that they faced litigation risk due to the limited precedent in RMBS class actions at the summary judgment stage and strong affirmative defenses asserted by the defendants. Motion.
The SEC, on July 6, and the CFTC, on July 10, approved rules and interpretations for key definitions of certain derivatives products. The SEC rules and interpretations further define the terms “swap” and “security-based swap” and whether a particular instrument is a “swap” regulated by the CFTC or a “security-based swap” regulated by the SEC. The action also addresses “mixed swaps,” which are regulated by both agencies, and “security-based swap agreements,” which are regulated by the CFTC but over which the SEC has antifraud and other authority. The rules will be effective 60 days after publication in the Federal Register. However, solely for the purposes of certain interim relief granted and exemptions adopted under the Securities Act of 1933, the Securities and Exchange Act of 1934, and the Trust Indenture Act of 1939, the compliance date for the final rules further defining the term “security-based swap” will be 180 days after the publication in the Federal Register. SEC Release.CFTC Meeting Notice.
On May 23, 2012, Judge Mariana R. Pfaelzer of the Central District of California dismissed with prejudice the majority of claims brought by AIG in a suit against Bank of America and Countrywide over the sale of RMBS certificates. Judge Pfaelzer held that because AIG purchased the securities at issue more than three years before filing suit, its federal securities claims were time-barred under the three-year statute of repose for claims under the Securities Act of 1933. Judge Pfaelzer determined that a majority of AIG’s common law claims, including negligent misrepresentation and fraud, were also time-barred under the relevant states’ statutes of limitation. The court found that certain additional common law claims were part of a tolling agreement that tolled claims between January 13, 2011 and August 5, 2011, and were thus timely. Order.
On May 22, 2012, Blue Heron Funding Ltd., Phoenix Light SF Limited, Silver Elms CDO PLC, and Kleros Preferred Funding V PLC filed a summons with notice in the New York State Court against six investment banks and their related entities over $1.8 billion in RMBS certificates originally issued between 2005 and 2007. The plaintiffs, which are incorporated in either the Cayman Islands or Ireland, alleged that the offering materials issued by the defendant banks in connection with their respective RMBS offerings contained material misstatements and omissions regarding the underwriting and appraisal standards used in connection with the underlying mortgage loans, the statistical characteristics of those loans, and the credit ratings of the securities. The plaintiffs assert claims under Sections 11, 12 and 15 of the Securities Act of 1933 and seek to recover a combined total of $1.8 billion, plus legal fees, interest, and punitive damages. Summons.
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