On May 18, 2011, Judge Jones of the Southern District of New York rejected plaintiff’s request that the Court consider a U.S. Senate report entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse” in deciding defendants’ motion to dismiss. The plaintiff’s complaint alleges that Goldman Sachs committed fraud in connection with the sale of a collateralized debt obligation (“CDO”) with collateral consisting of subprime mortgage-backed securities. Plaintiff asserted that the Senate report contains an extensive discussion of the CDO sale at issue as well as citations to internal Goldman emails that, according to plaintiff, call into question defendants’ assertions on the motion to dismiss. The Court held that the Senate report went beyond what the Court could consider on a motion to dismiss and that plaintiff also failed to provide the Court with any basis for taking judicial notice of the report. Decision. Senate Report.
CDO
S.D.N.Y. Grants in Part and Denies in Part Motion to Dismiss Multiple Actions Against Wachovia
In re Wachovia Equity Sec. Litig., No. 09 Civ. 4473 (S.D.N.Y. Mar. 31, 2011) (Sullivan, J.)
Investors in equity and debt securities of Wachovia brought four related actions against Wachovia and several related entities and individuals, Wachovia’s underwriters and its auditors alleging claims under Section 10(b) of the ’34 Act, and Rule 10b-5 thereunder, and Sections 11, 12(a)(2), and 15 of the ’33 Act. In considering four complaints and seven motions to dismiss, the court granted in part and denied in part the motions. The court found that the Section 10(b) claims, which included allegations of fraudulent concealment of the true value of Wachovia’s CDO holdings, failed for insufficient allegations of scienter. The court also found that: (1) plaintiffs cannot assert claims based on offerings they did not purchase; (2) tolling of the ’33 Act’s one-year statute of limitations was appropriate due to a pending class action; (3) allegations of misstatements of loan-to-value ratios in Wachovia’s mortgage lending portfolio were sufficient; and (4) the Section 11 claim against Wachovia’s auditor survives because a due diligence defense cannot be evaluated on a motion to dismiss. Decision.
S.D.N.Y. Upholds BofA’s Decision Not to Pursue Claims Against Merrill Lynch D&Os
On March 29, 2011, Judge Jed S. Rakoff of the Southern District of New York dismissed derivative suits filed by Bank of America Corp. shareholders who sought to pursue claims on behalf of BofA against the officers and directors of its subsidiary, Merrill Lynch & Co., for their part in Merrill’s CDO and RMBS losses. In his decision, Judge Rakoff noted that the allegations described the “kind of risky behavior by high-ranking financiers that helped create the economic crisis” but found that the plaintiffs’ claims were too conclusory to establish that BofA’s Board’s refusal to pursue the claims was made in bad faith. The Board’s letter of refusal stated that it had decided not to sue because the chances of recovery were slim, and doing so would undercut Merrill’s defenses in governmental inquiries and other subprime litigation. Merrill Decision.
New Mexico State Court Allows Plaintiffs to Continue on Fraud Against Taxpayers Act Claims Involving RMBS
On February 7, 2011, a New Mexico court issued an order in State of New Mexico, ex rel. Foy v. Vanderbilt Capital, allowing plaintiffs to continue to pursue claims under New Mexico’s Fraud Against Taxpayers Act (the “FATA”) against a variety of defendants in connection with New Mexico’s investments in certain CDOs backed by allegedly misrepresented mortgage assets. The court previously held in April 2010 that New Mexico’s FATA claims could not be predicated on acts prior to July 1, 2007 because such retroactive application of the FATA would violate the Ex Post Facto Clauses of both the U.S. Constitution and the New Mexico Constitution. The new order finds that plaintiffs have alleged acts that occurred on or after July 1, 2007 that are sufficient to satisfy the court that the FATA claims remain “viable and relevant.” February 2011 Order. April 2010 Order. Complaint.
Plaintiffs Ask Judge Crotty to Reconsider His Denial of Leave to File Amended Complaint in Barclays RMBS Litigation
On February 4, 2011, plaintiffs in In re Barclays Bank PLC Securities Litigation (S.D.N.Y.) filed a motion asking Judge Crotty to reconsider his January 5, 2011 order which rmbss’ claims against defendants without granting leave to amend. Plaintiffs assert claims under Sections 11, 12(a) and 15 of the Securities Act on behalf of a putative class of investors who acquired Barclays’s preferred securities between 2006 and 2008 pursuant or traceable to registration statements and prospectuses that plaintiffs allege did not properly account for or adequately disclose Barclay’s liabilities and risks related to RMBS and other CDOs. Judge Crotty previously granted the defendants’ motion to dismiss the relevant claims on the grounds that plaintiffs failed to adequately allege that the defendants did not honestly believe their estimates of the RMBS and CDO liabilities or that any of the lead plaintiffs had purchased the relevant securities prior to Barclays’s “adequate disclosure” of the risks in August 2008. In their motion to reconsider, plaintiffs seek leave to amend their consolidated complaint and reinstate certain claims by adding allegations that the defendants did not believe their disclosures on the value of the liabilities and adding two new plaintiffs who allegedly purchased the relevant securities prior to the August 2008 disclosures. Motion and Proposed Amended Complaint. Jan. 5 Decision.
New York Appellate Court Dismisses MBIA v. Merrill
On February 1, 2011, the Appellate Division of the Supreme Court of the State of New York dismissed MBIA Insurance Corp’s claim for breach of contract against Merrill Lynch concerning 11 credit default swap contracts on four CDOs whose collateral consisted largely of RMBS. MBIA alleged that it was induced to provide credit protection on the CDOs based on misrepresentations as to the quality of the CDOs’ collateral, the degree of credit protection on the insured tranches, the credit ratings of the insured tranches, and the default rates for comparable CDOs. MBIA originally brought a variety of claims sounding in fraud, negligent misrepresentation, breach of contract, and a breach of the covenant of good faith and fair dealing, and sought rescission of the CDS contracts and money damages. The trail court dismissed all but the breach of contract claim, which the Appellate Division has now unanimously dismissed on appeal. First Department Decision. New York County Supreme Court Decision.
Order Compelling Deutsche Bank to Produce Documents Previously Provided to NY Attorney General Affirmed
On November 19, 2010, the Appellate Division of the New York Supreme Court, Fourth Department, affirmed an order compelling Deutsche Bank Securities, Inc. to produce to M&T Bank Corp. approximately 1.7 million pages of documents it previously produced to the New York State Attorney General concerning the packaging and sale of RMBS. Deutsche argued that discovery of documents concerning RMBS not underlying the CDOs at issue in the suit with M&T should not be required. The New York appellate court rejected that contention, stating that the discovery rules in New York are “to be interpreted liberally in favor of disclosure.” Decision.