On March 15, the FDIC approved a Notice of Proposed Rulemaking to clarify application of the orderly liquidation authority mandated by the Dodd-Frank Act. The NPR: (i) builds on the interim rule of January 18, which clarified certain issues under the OLA; (ii) establishes a framework for the priority payment of creditors and for the procedures for filing a claim with a receiver and, if dissatisfied, pursuing a claim in court; (iii) clarifies how compensation will be recouped from senior executives and directors who are substantially responsible for the failure of the firm; and (iv) clarifies the meaning of “financial company”. Comments must be submitted within 60 days after publication in the Federal Register. FDIC Release. FDIC Proposed Rule.
Month: March 2011
Judge Dismisses Two Class Action Suits Against Schwab as Improperly Based on State Law
On March 2, 2011, Judge Lucy Koh of the U.S. District Court for the Northern District of California dismissed all claims made by lead plaintiff Northstar Financial Advisors against Schwab Investments, its Trustees and its Investment Advisor. Northstar brought a class action lawsuit alleging that the defendants deviated from their investment strategy by investing in non-U.S. agency collateralized mortgage obligations and by concentrating greater than 25% of its investments in U.S. agency and non-agency MBS. Judge Koh found that Northstar’s claims should have been brought under federal, rather than state, law. Federal law applies under the Securities Litigation Uniform Standards Act (“SLUSA”) because Northstar represents a putative class of over 50 people and alleges misrepresentations made in connection with the purchase or sale of shares of Schwab’s fund. Judge Koh specifically noted that the complaint need not allege scienter, reliance, or loss causation in order for SLUSA preclusion to apply, and even where the state law claims do not require a misrepresentation, if the allegations themselves assert misrepresentations as the basis for those claims, federal law should apply.
Judge Koh also made a similar ruling on March 8, 2011 in a factually related case, brought by a class against Schwab Investments for the same investments and alleged misstatements. Northstar Decision. Smit Decision.
Judge Certifies Class in Lawsuit Against Dynex Capital for Over $630 Million in Mortgage-Backed Securities
On March 7, 2011, Judge Harold Baer, Jr. of the U.S. District Court for the Southern District of New York certified a class of plaintiffs bringing claims under Section 10(b) and 20(a) of the Exchange Act against Dynex Capital, Inc. on the basis that Dynex Capital allegedly made material misstatements and omissions regarding underwriting standards, market conditions, loss reserves, and delinquencies in connection with the sale of bonds that are MBS collateralized by pools of mobile home loans. Judge Baer certified the class to include all purchasers of two MBS, even though the lead plaintiff purchased from only one tranche of one MBS. Unlike several other federal district judges, Judge Baer certified the class for purchasers of both MBS even though individual plaintiffs who purchased other tranches have different repayment rights and damages. Judge Baer also rejected Dynex Capital’s argument that the element of reliance was not sufficiently pled on the basis that the fraud-on-the-market doctrine does not apply because the market for the bonds at issue was inefficient. In finding that an efficient market existed, the court noted that trading volume of these MBS securities was sufficient , market makers for these securities existed, and there was sufficient price reaction to the disclosure of material information concerning these securities. Decision.
Rating Agency Developments
On March 10, Moody’s revised its money market fund rating methodology and symbols. Moody’s Release.
On March 10, Fitch updated its criteria on U.S. commercial mortgage Re-REMICs. Fitch Report.
On March 8, Fitch updated its rating methodology for securities backed by Dutch residential mortgage loans. Fitch Release. Fitch Report.
On March 8, DBRS released its methodology for Canadian structured finance flow-through ratings. DBRS Release.
On March 7, DBRS released its methodology for commercial mortgage servicer evaluations. DBRS Release.
Note: Free registration is required for Fitch and Moody’s releases and reports.
FDIC to Discuss Orderly Liquidation Authority
On March 15, the FDIC will hold an open meeting to discuss the notice of proposed rulemaking regarding priorities and claims process under the Orderly Liquidation Authority provisions of the Dodd-Frank Act. Webcast.
Regulators Seek Comments on Financial Market Infrastructures Report
On March 10, the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commission (IOSCO) released for comment a report on the Principles for Financial Market Infrastructures. The consultative report contains updated and new proposed international principles for systemically important payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories. Comments must be submitted by July 29. SEC Release.
New Hampshire Court Upholds MERS’ Authority to Transfer Mortgage Interests
On February 14, 2011, the New Hampshire Superior Court upheld the authority of the Mortgage Electronic Registration Systems (“MERS”) to assign its interest in a mortgage. Plaintiffs sought injunctive relief to prevent servicer Aurora Loan Services LLC (“Aurora”) from proceeding with a foreclosure sale of Plaintiffs’ residence, arguing that MERS, as nominee, lacked the authority to assign its interest in the mortgage to Aurora, thereby invalidating Aurora’s ability to foreclose or collect on the mortgage. In denying Plaintiffs’ request for injunctive relief, the Superior Court rejected the plaintiffs’ argument that the use of MERS as nominee in and of itself was either “fraudulent or wrong.” Looking to the mortgage instrument signed by the plaintiffs, the Superior Court then found that the plaintiffs had explicitly granted MERS the authority to assign its interest, and held that MERS’ assignment to Aurora was valid. Decision.
Allstate Sues Merrill Lynch and Credit Suisse for Fraud
On February 28, 2011, Allstate Insurance, represented by Quinn Emanuel, filed complaints against Merrill Lynch and Credit Suisse affiliated entities in New York state court in connection with Allstate’s purchase of RMBS from those entities. The complaints follow similar complaints by Allstate against JP Morgan, Washington Mutual, Bear Stearns, Citigroup, and Deutsche Bank entities. The complaints allege that defendants fraudulently misrepresented the quality of the loans underlying the RMBS they underwrote and sold to plaintiff. Both complaints allege causes of action for common law fraud, fraudulent inducement, and negligent misrepresentation. The complaint against Merrill Lynch also adds claims for violations of Sections 11, 12(a)(2), and 15 of the ’33 Act. Allstate purchased over $167 million in RMBS from Merrill Lynch and over $231 million from Credit Suisse. CS Complaint. Merrill Complaint.
Rating Agency Developments
On March 2, Moody’s released its global structured finance operational risk guidelines. Moody’s Methodology.
On March 2, Moody’s released its methodology for rating securities backed by utility cost recovery charges, which are established by special legislation and financing orders issued by utility regulatory bodies. Moody’s Methodology.
On March 1, Fitch updated its criteria report outlining its methodology for analyzing ratings for transaction-specific support facilities provided to ABCP conduits. Fitch Release.
On February 28, Fitch released updated criteria report for analyzing U.S. Public Finance variable-rate demand obligations issued with external liquidity support. Fitch Release.
Note: Free registration is required for Fitch and Moody’s releases and reports.
House Financial Services Committee Hearing on Housing Finance
On March 1, Treasury Secretary Geithner testified before the House Committee on Financial Services on the Obama Administration’s report on reforming the housing finance market. Treasury Release. Geithner Testimony.