Second Circuit Rejects Edge Act Jurisdiction in AIG RMBS Case

On April 19, the Second Circuit ruled that a lawsuit brought by American International Group (AIG) against several Bank of America entities involving alleged fraud in connection with $28 billion in RMBS had been improperly removed from state to federal court.  Judge Barbara Jones of the United States District Court for the Southern District of New York had denied AIG’s motion to remand the case to New York state court, finding removal proper under the Edge Act, a statute enacted in 1919 that provides for federal jurisdiction if two conditions are met:  (1) an international banking and financial corporation organized under the laws of the United States (an Edge Act corporation) must be a party; and (2) the lawsuit must involve an offshore banking transaction.  The district court found that these conditions had been met because one defendant – Bank of America, N.A. (BANA) – was an Edge Act corporation and because 27 of the 1.7 million residential mortgage loans underlying the RMBS at issue were secured by properties outside of the United States.  The Second Circuit vacated and remanded the district court’s decision for further proceedings, allowing defendants to press their other ground for removal – “related to” bankruptcy jurisdiction – that was not addressed in this interlocutory appeal.  It held that the Edge Act only provided jurisdiction where the Edge Act corporation has engaged in the relevant offshore banking transaction.  Because BANA did not originate the 27 international mortgage loans, the Second Circuit found that the Edge Act’s requirements were not satisfied, and that federal jurisdiction under the Edge Act therefore did not exist.  Opinion.

The FSA Fines Prudential £30m over its Failed $35.5bn Bid for AIA

The fine has been levied for Prudential’s failure to inform the FSA that it was seeking to acquire the Asian arm of AIG at an appropriate time, in breach of FSA Principles and UKLA Listing Principles.  Prudential should have notified the FSA of its intentions at the earliest opportunity, so that the regulator could decide whether to approve or reject the deal on regulatory grounds.  But according to an FSA news release, Prudential failed to reveal its intentions to the FSA even when quizzed on its plans for expansion in Asia.  The delay in notification, which finally came after a press leak, meant that the FSA was forced to rush its analysis of the proposed deal.

In addition to the fine, the FSA also censured Prudential CEO Tidjane Thiam, although it stopped short of finding any lack of fitness or propriety on his part.

Court Dismisses in Part AIG’s Claims Against Bank of America and Countrywide

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.

AIG RMBS Dispute Against Bank of America Stays in Federal Court Under the Edge Act

On October 20, 2011, Judge Jones of the U.S. District Court for the Southern District of New York found that the Edge Act conferred federal jurisdiction over a lawsuit brought by AIG against Bank of America and related entities arising out of certain AIG RMBS investments. The Edge Act confers federal jurisdiction over, among other things, any case in which a national bank is a party arising out of transactions involving banking in a U.S. dependency or insular possession. Defendants relied on the presence in certain RMBS collateral pools of mortgage loans that were secured by properties located in overseas locations, such as Puerto Rico, Guam, and the U.S. Virgin Islands. Noting that 4 of the 349 RMBS at issue were backed by mortgages in U.S. territories, Judge Jones found that jurisdiction was proper even if the territorial transactions involve only a small portion of the total transactions at issue. Decision.

Institutional Investors Question AIG’s Motion to Intervene in Proposed BofA Settlement

On August 15, 2011, the institutional investors that negotiated the proposed $8.5 billion settlement with Bank of America regarding representations and warranties claims against Countrywide Financial Corp. filed a response to AIG’s motion to intervene and oppose the settlement. The institutional investors did not object to AIG’s intervention, but urged the court to carefully scrutinize AIG’s objection, pointing to AIG’s failure to disclose a simultaneously filed individual securities lawsuit against BofA as evidence that AIG is improperly attempting to advance its own interests ahead of those of other certificate holders. Investors’ Response.

AIG Sues Bank Of America Over Alleged Fraud In RMBS

On August 8, 2011, American International Group sued Bank of America Corp., Countrywide Financial Corp., and Merrill Lynch & Co. in New York state court, claiming that between 2005 and 2007 the defendants fraudulently induced AIG to invest in 350 residential mortgage-backed securities at a cost of $28 billion. AIG claims that the defendants did not engage in prudent underwriting practices, and ignored mischaracterizations made by borrowers about income and employment. The AIG complaint cited a forensic investigation done of the securitizations before the suit was filed, alleging that 40% of loans sampled were improperly evaluated on the risk metrics the defendants included in their offering materials. AIG alleges violations of Sections 11, 12(a)(2), and 15 of the ’33 Act, and state law claims of fraudulent inducement, aiding and abetting fraudulent inducement, negligent misrepresentation, and vicarious and successor liability. AIG seeks $10 billion in compensatory damages, among other remedies. Complaint.