Month: April 2011

S.D.N.Y. Grants Motion for Reconsideration Under a New Materiality Standard Laid Out by the Second Circuit in Litwin, but Returns the Same Result

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Freidus v. ING Groep N.V., No. 09 Civ. 1049 (S.D.N.Y. Mar. 29, 2011) (Kaplan, J.)

Following the court’s partial grant and partial denial of defendants’ motion to dismiss Section 11, 12, and 15 claims under the ’33 Act, plaintiffs moved for reconsideration of that ruling, arguing that Litwin v. Blackstone Group, L.P., No. 08-cv-03601, 2011 WL 447050 (2d Cir. Feb. 10, 2011) changed the standard of materiality and therefore a different result was warranted in this case. The court had originally dismissed plaintiffs’ claims against ING on the basis that there were no allegations showing that defendants’ disclosures concerning the quality of the Alt-A and RMBS securities at issue were false. The court granted the motion for reconsideration but returned the same result, finding that even under the new standard plaintiffs nonetheless failed to allege facts sufficient to make a plausible claim of a material misstatement. The court also noted that the allegedly misleading statement that ING “considered its subprime [and] Alt-A . . . exposure to be of limited size and of relatively high quality” was an inactionable statement of opinion. Decision.

S.D.N.Y. Dismisses Putative Class Action Brought by Freddie Mac Investors

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Kuriakose v. Fed. Home Loan Mortgage Corp., No. 08 Civ. 7281 (S.D.N.Y. Mar. 30, 2011) (Keenan, J.)

Investors in Freddie Mac brought this putative class action against Freddie Mac and a number of its former officers under Section 10(b) of the ’34 Act, alleging misrepresentations concerning the company’s exposure to risky mortgage products, the sufficiency of its capital, and the accuracy of its financial reporting. Judge Keenan of the Southern District of New York dismissed the complaint with leave to replead, holding that: (1) with respect to trends in the subprime market, Freddie Mac in fact made fairly full disclosures; (2) with respect to statements regarding adequate capitalization, plaintiffs did not adequately plead scienter; and (3) with respect to allegations that Freddie Mac failed to disclose internal control and underwriting issues, plaintiffs failed to plead specific factual allegations. Decision.

S.D.N.Y. Denies Class Certification to Moody’s Investors

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In re Moody’s Corporation Securities Litig., No. 07 civ. 8375 (S.D.N.Y. Mar. 31, 2011) (Daniels, J.)

Investors in stock of the ratings agency Moody’s brought this putative class action pursuant to Sections 10(b) and 20(a) of the ’34 Act, alleging that Moody’s made material misrepresentations and omissions when it assured investors that it was unaffected by any conflicts of interest in its “issuer-pays” rating business model and that it lied about its consideration of loan originator standards in rating mortgage-backed securities. The Court denied plaintiffs’ motion for class certification, finding that individual issues predominated on the issue of reliance. The court found that plaintiffs were not entitled to the fraud-on-the-market presumption of reliance because defendants proved there were no statistically significant stock price movements in response to the relevant alleged misstatements or corrective disclosures. Decision.

S.D.N.Y. Dismisses Putative Class Action Against Novastar, Underwriters, Officers, and Credit Rating Agencies

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N.J. Carpenters Health Fund v. Novastar Mortgage, Inc., No. 08 Civ. 5310 (S.D.N.Y. Mar. 31, 2011) (Batts, J.)

In this putative class action, investors brought claims under Sections 11, 12(a)(2) and 15 of the ’33 Act against the originator, depositor, directors and officers of the depositor, and underwriters of the securities, as well as various credit rating agencies. Judge Deborah Batts of the Southern District of New York granted defendants’ motions to dismiss, finding that plaintiffs failed to plead sufficient facts to support their allegations regarding Novastar’s underwriting practices. The Court also held that plaintiffs’ allegations concerning appraisals, loan-to-value ratios, and certificate ratings were non-actionable statements of opinion. The court granted leave to amend concerning the underwriting guidelines, but dismissed the remaining claims with prejudice. Decision.

Orrick Obtains Dismissal of Ambac’s Fraud Claim Against Credit Suisse

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Ambac Assurance Corp. v. DLJ Mortgage Capital, Inc./ Credit Suisse, No. 600070/2010 (Sup. Ct. N.Y. Apr. 7, 2011) (Kornreich, J.)

Justice Shirley Kornreich of the Supreme Court of the State of New York dismissed Ambac Assurance Corp.’s claim that it was fraudulently induced to insure a Credit Suisse RMBS issuance. Among other things, the Court found that an allegedly fraudulent representation that the loans at issue conformed to underwriting guidelines was not actionable because Ambac had access to all relevant information and failed to investigate, and because Ambac failed to obtain a contractual representation or warranty. Other aspects of the fraud claim were dismissed as duplicative of Ambac’s contract claim, which alleges that certain loans did not meet applicable representations and warranties. Orrick represents Credit Suisse in this matter. Decision.

Dodd-Frank Act: Proposed Rules to Implement Sections 1502-1504 Relating to Conflict Minerals, Mine Safety and Payments by Resource Extraction Issuers

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Among the other notable changes to the U.S. financial regulatory system, the Dodd-Frank Act included three sections of particular importance to petroleum and mining companies registered under the Securities Exchange Act of 1934. These sections deal with “conflict minerals” from the Democratic Republic of the Congo and adjoining countries, the reporting of mine safety matters, and the disclosure of payments to domestic and foreign governments by resource extraction issuers. Click here to read more.

SEC Division of Investment Management Letter to the North American Securities Administrators Association Indicates Possibility of Extension to Private Fund Adviser Registration Deadline Under the Dodd-Frank Act

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On April 8, 2011, the Division of Investment Management of the SEC issued a letter to the North American Securities Administrators Association stating that the Division anticipates that by July 21, 2011 the SEC will complete its rulemaking implementing the provisions of the Dodd-Frank Act requiring the withdrawal of registration of certain “mid-sized advisers” and providing new exemptions for advisers that have relied upon Section 203(b)(3) of the Advisers Act, but expects in connection therewith that the SEC will “consider providing additional time for investment advisers affected . . . to come into compliance” until the first quarter of 2012. Letter.

Rating Agency Developments

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On April 8, Fitch published a report on its treatment of junior corporate debt In Europe. Fitch Release. Fitch Report.

On April 7, Fitch issued its U.S. Federal Family Education Loan Program (FFELP) student loan rating criteria. Fitch Release.

On April 4, Fitch updated its global rating criteria for money market funds. Fitch Release. Fitch Report.

On April 4, Fitch published its EMEA CMBS rating criteria and legal assumptions. Fitch Rating Criteria. Fitch Legal Assumptions.

Note: Free registration is required for Fitch releases and reports.

Fed Proposed Rule to Repeal Reg Q

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On April 6, the Fed issued a proposed rule to repeal Regulation Q, which prohibits the payment of interest on demand deposits by Fed member banks. Section 627 of the Dodd-Frank Act eliminated the statutory authority under which the Fed established Regulation Q. Comments must be submitted within 30 days from the date of publication in the Federal Register.
Fed Release.