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.

Court Certifies RMBS Investor Class in IndyMac RMBS Suit

On August 17, Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York certified a class of investors in an action brought by lead plaintiffs Wyoming State Treasurer and Wyoming Retirement System against several financial institutions in connection with RMBS issued by IndyMac.  Judge Kaplan found that while the prospective class members’ claims differ in some respects, the central issue for all class members is whether IndyMac made material misrepresentations in its offering documents.  Judge Kaplan rejected the defendants’ argument that individual issues regarding investor knowledge, reliance, and notice warranted the denial of class certification.  However, the court dismissed claims in connection with one RMBS certificate because Wyoming Retirement System did not acquire the certificate in an initial offering.  The class claims are alleged to arise under Sections 11, 12(a)(2), and 15 of the Securities Act. Decision.

Court Limits Assured Guaranty’s Claims Against UBS

On August 15, Judge Harold Baer, Jr. of the federal district court for the Southern District of New York granted in part and denied in part UBS’s motion to dismiss claims asserted by Assured Guaranty Municipal Corporation in connection with three RMBS securitizations insured by Assured Guaranty.  Judge Baer held that Assured Guaranty did not have the contractual right to bring claims for breach of the relevant Pooling and Servicing Agreements’ repurchase remedies and that its claims for a declaration that UBS had failed to comply with its repurchase obligations should be dismissed as duplicative of its claim for breach of those obligations.  The court permitted Assured Guaranty to proceed, however, with other contract claims including its claim for breach of certain representations and warranties in the PSAs, concluding that the PSAs’ “no-action clauses” do not apply to Assured Guaranty as insurer and that a contractual “sole remedy” provision “may not apply to Assured,” a factual issue to be determined at a later stage of the case.  Decision.

Syncora Permitted to Prove its Breach Claims Without Showing That Alleged Breaches Caused Loans to Default

On June 19, 2012, Judge Paul Crotty of the Southern District of New York granted in part Syncora Guarantee Inc.’s motion for partial summary judgment concerning the showing necessary to prove its claims for breach against EMC Mortgage Corporation. Syncora’s claims arise out of allegedly false representations and warranties concerning the quality of loans underlying $666 million in RMBS that Syncora insured. Without addressing the merits of Syncora’s claims, Judge Crotty ruled that Syncora does not need to prove that the alleged breaches caused any of the alleged defaults that occurred in the loans underlying the RMBS in order to prevail on its claim. Instead, proof that there had been a material breach would be sufficient to entitle Syncora to invoke its repurchase remedy under the parties’ agreement. Similarly, Judge Crotty ruled that Syncora could prove materiality by demonstrating that the breach increased Syncora’s risk of loss, and also ruled that Syncora did not need to prove that the breach caused a loan to default in order to prove materiality. The court held that inaccurate and incomplete information impacts an insurer’s decision whether to issue a policy and at what price and thus adversely affects the insurer’s interest as a matter of law. The court also denied Syncora’s request for a ruling that the court has the power in equity to award relief equivalent to rescission, which the court found would have required factual determinations for which there is no support in the record at this time. Order.

ResCap Seeks Automatic Bankruptcy Stay of 27 MBS Suits

On May 25, 2012, Residential Capital LLC (“ResCap”) filed a complaint in United States Bankruptcy Court for the Southern District of New York seeking declaratory and injunctive relief to extend the automatic stay over 27 MBS lawsuits against it, its affiliates, and its executives while it undergoes bankruptcy restructuring. ResCap alleges that all of the lawsuits against its non-debtor affiliates are inextricably connected to the debtor affiliates, and that such lawsuits will drain the debtors’ estates by forcing those entities to undergo extensive discovery and face significant indemnification claims by their directors and officers. ResCap also alleges that by allowing the lawsuits to proceed, ResCap will face significant risk of collateral estoppels and evidentiary prejudice. Complaint.

FDIC Brings Two RMBS Lawsuits Against Several Investment Banks and Related Entities

On May 18, 2012, the FDIC, in its capacity as receiver for two failed banks, filed two actions in the Southern District of New York arising out of the banks’ alleged purchase of RMBS. In the first suit, the FDIC asserts claims on behalf of Citizens National Bank and Strategic Capital Bank that arise out of the banks’ investment in ten RMBS certificates worth $140.5 million issued and/or underwritten by the defendants, including Bear Stearns, Citigroup, Credit Suisse, Merrill Lynch, and Deutsche Bank. Complaint.  In the second suit, the FDIC asserts claims on behalf of Strategic Capital Bank arising out of the bank’s investment in five RMBS certificates worth $31 million underwritten by JP Morgan, Citigroup, Bank of America, and Deustche Bank. Complaint.  In both suits, the FDIC alleged that the defendant banks violated Sections 11 and 15 of the Securities Act of 1933 by making material misstatements and omissions in the certificates’ registration statements regarding, among other things, the loan to value ratios of the mortgages underlying the certificates, the appraisal standards used in connection with the appraisals of the underlying properties, whether the borrowers intended to occupy the properties as their primary residences, and whether the originators complied with their underwriting guidelines when originating the underlying mortgages. The FDIC seeks a combined total of $77 million in damages, plus attorneys’ fees and costs.

Manhattan Federal Judge Denies UBS’s Motion to Dismiss FHFA Suit

On May 4, the Honorable Denise Cote of the Southern District of New York denied UBS Americas Inc.’s (“UBS”) motion to dismiss the Federal Housing Finance Agency’s (“FHFA”) complaint against it for violations of the Securities Act. FHFA alleges that UBS fraudulently induced Fannie Mae and Freddie Mac into purchasing $6.4 billion worth of mortgage-backed securities from 22 different securitizations by misrepresenting the quality of the mortgage loans and that the mortgage loans complied with the applicable underwriting guidelines. Judge Cote held that the complaint was timely and not barred by the Securities Act’s Statute of Repose, as well as that FHFA had standing to bring the action. The Court also held that the complaint stated a claim under the Securities Act because FHFA had alleged actionable misrepresentations in the offering documents concerning LTV ratios, owner-occupancy status and compliance with underwriting guidelines. Judge Cote did, however, dismiss FHFA’s claims for negligent misrepresentation, concluding that because both parties were sophisticated, no special relationship existed that would support such a claim. Decision.

Allstate RMBS Lawsuit to Stay in Federal Court

On March 27, 2012, Judge Deborah A. Batts of the Southern District of New York denied Allstate Insurance Co.’s motion to remand its lawsuit against JPMorgan Chase Bank NA to state court. The lawsuit arises out of alleged misrepresentations and omissions by JPMorgan regarding the riskiness and credit quality of over $700 million in RMBS sold to Allstate. Judge Batts found federal subject matter jurisdiction based on the FDIC’s presence as a third-party defendant.  Order.

New York and Delaware Attorneys General Permitted to Intervene in Bank of America Settlement Approval Proceeding

On November 18, 2011, U.S. District Judge William H. Pauley III of the Southern District of New York granted the requests of the attorneys general of New York and Delaware to intervene in the proceeding seeking approval of an $8.5 billion settlement between Bank of America Corp. and the Bank of New York Mellon, as trustee for several trusts that issued Countrywide Financial Corp. RMBS certificates. The Court found that the intervention of the state AGs would protect the interests of absent investors. In the same order, the Court denied requests to intervene brought by four individual homeowners who are obligors on mortgages owned by one or more of the trusts covered by the proposed settlement agreement. The Court found that the homeowners lacked a direct financial interest in the outcome of the case and could not establish any potential prejudice they might suffer by not being permitted to participate in the settlement approval proceeding. Order.

SDNY Judge Rejects Proposed SEC-Citigroup Settlement

On November 28, 2011, U.S. District Judge Jed S. Rakoff of the Southern District of New York refused to approve a proposed settlement between the SEC and Citigroup Inc. in connection with Citigroup’s alleged shorting of RMBS that it marketed and sold to the public on the grounds that the settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest.” The settlement involved the payment of a total of $285 million by Citigroup, as well as the imposition of certain injunctive measures against Citigroup. In rejecting the settlement, Judge Rakoff stringently criticized the SEC’s policy – “hallowed by history, but not by reason” – of allowing settling defendants to neither admit nor deny wrongdoing because it “deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.” He stressed that the exercise of judicial power and authority that does not rest on facts cannot serve the public interest because it “is worse than mindless, it is inherently dangerous.” Judge Rakoff consolidated the action with a related matter filed by the SEC against a Citigroup employee and directed the parties to be ready to try the case beginning on July 16, 2012. Order.