Sealink Funding Limited commenced an action against Citigroup Inc. and its affiliates in New York state court by a summons with notice dated November 7, 2012. Sealink alleges that Citigroup made false and misleading statements in connection with the sale of $513 million in RMBS. It asserts causes of action for common law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and contract claims including rescission, restitution and mutual mistake. Sealink alleges that defendants made material misrepresentations and omissions regarding the underwriting standards used in connection with the underlying mortgage loans, the statistical characteristics of those loans, including loan-to-value and combined-loan-to-value ratios and the percentage of owner-occupied properties, the validity of the assignments of the loans to the trusts, and the entitlement of the trusts to receive interest and principal payments on the loans. Sealink seeks $513 million in damages and additional $513 million in punitive damages. Summons.
Citigroup
German Bank Sues Goldman Sachs and Citigroup for a Total of $210 Million
On September 5, 2012, German bank IKB Deutsche Industriebank AG filed summonses with notice against Goldman Sachs and Citigroup in the Supreme Court of the State of New York, New York County claiming $210 million in losses. In two separate actions, the bank alleges that Goldman Sachs and Citigroup provided offering materials that misrepresented or omitted material information about the originators’ underwriting practices, the transfer of loans to the relevant trusts, and the ability of the trusts to recoup interest and principal on the loans. IKB asserted claims for fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, rescission, restitution, and mutual mistake. Goldman Sachs Complaint. Citigroup Complaint.
Citigroup Settles RMBS Class Action Lawsuit for Nearly $25 Million
On August 27, lead plaintiffs City of Ann Arbor Employees’ Retirement System and Greater Kansas City Laborers Pension Fund submitted an unopposed motion seeking preliminary approval of a settlement of claims against certain Citigroup entities and their officers under Sections 11, 12, and 15 of the Securities Act of 1933. Plaintiffs originally sued in connection with eighteen RMBS securitizations issued by Citigroup, but the court dismissed the claims as to all but two of those securitizations for lack of standing. The settlement resolves the claims relating to those remaining two securitizations. Under the terms of the proposed settlement, $24,975,000 would be distributed among the plaintiff class such that if claims are submitted by all eligible certificate-holders, the average recovery will amount to roughly $13.25 per $1,000 in initial face value of the certificates. The two sides arrived at this settlement following mediation sessions held before retired U.S. District Judge Layn Phillips. Motion.
FDIC Files Five Lawsuits Against Bank Entities Over RMBS
On August 10, the FDIC in its capacity as receiver for Colonial Bank filed five lawsuits – three in Alabama state court, one in New York federal court, and one in California federal court – seeking $741 million in damages from a number of investment banks, including Bank of America Corp., JPMorgan Chase & Co., Citigroup, Inc., and others, for making allegedly false and misleading statements that induced Colonial Bank into buying mortgage-backed securities. The FDIC alleges that the banks made numerous false and misleading statements in the offering documents for the RMBS regarding the credit quality of the mortgage loans underlying the securities. The three Alabama cases each assert two causes of action under the Alabama Securities Act, as well as causes of action under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (Securities Act). The New York and California cases each assert causes of action under Sections 11 and 15 of the Securities Act.
Complaint: Alabama – FDIC v Bank of America, et al.
Complaint: Alabama – FDIC v Citigroup Mortgage Loan Trust, et al.
Complaint: Alabama – FDIC v Countrywide Securities Corp, et al.
Complaint: New York – FDIC v Chase Mortgage Finance Corp., et al.
Complaint: California – FDIC v Countrywide Securities Corp, et al.
Fed Releases Citi and HSBC Mortgage Servicing and Foreclosure Action Plans
On May 24, the Fed released action plans for Citigroup and HSBC to correct alleged deficiencies in residential mortgage loan servicing and foreclosure processing. The Fed also released the engagement letter between Ally and the independent contractor retained to review foreclosures that were processed in 2009 and 2010. Fed Release.
FINRA Fines Citigroup $35 Million for Violation of FINRA and SEC Rules
On May 22, 2012, the Financial Industry Regulatory Authority (“FINRA”) fined Citigroup $35 million for alleged rule violations, including providing investors with inaccurate information in connection with several RMBS offerings. Citigroup consented to the $35 million fine, but neither admitted nor denied FINRA’s findings. FINRA found that between January of 2006 and October of 2007, Citigroup posted inaccurate performance data and static pool information on its website after receiving information indicating that the data was incorrect. The agency further found that the errors in the information were significant enough potentially to have affected prospective investors’ assessments of six subprime and Alt-A RMBS offerings. Additionally, the organization found that Citigroup failed to maintain required books and records and failed to supervise the pricing of certain CDO securities, violating, among other things, SEC Rules 17(a)-3(a)(8) and 17a-4. AWC Letter.
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.
California District Court Grants Partial Summary Judgment in Citigroup’s Suit Against Impac
On May 4, Judge Pfaelzer of the Central District of California granted partial summary judgment to Citigroup establishing that Impac Funding Corp. was liable to Citigroup on two of Citigroup’s three claims against Impac. Citigroup’s suit alleges that Impac Funding misled investors by filing a Pooling and Servicing Agreement (“PSA”) that incorrectly described the payment waterfall for the relevant securitization trust, and which Impaq waited six weeks to correct. Citigroup brought claims pursuant to Sections 18 (material false statement in an Exchange Act filing) and 20(a) (control person liability) of the Securities Exchange Act of 1934, as well as a common law claim for negligent misrepresentation. The court rejected Impac’s argument that the discrepancies between the PSA and the Prospectus Supplement should have raised a red flag for the trader who purchased the securities on Citigroup’s behalf. The court also held that Impac was not entitled to a good faith “safe harbor” defense because Impac knew in 2007 that the PSA was incorrect and, as a general matter, a corporate entity is deemed to have knowledge of its own public statements. Judge Pfaelzer denied Citigroup’s motion for summary judgment on its negligent misrepresentation claim, concluding that Impac did not make the false statements itself but caused its subsidiaries to make them, and that California law does not extend negligent misrepresentation liability where one merely “causes” a misstatement to be made. Decision.
Allstate Suit Against Citigroup Remanded to State Court
On March 13, 2012, Judge Richard J. Sullivan of the Southern District of New York remanded a $200 million RMBS suit against Citigroup to state court. Citigroup asserted federal jurisdiction under the Edge Act, and under the doctrine of “related to” bankruptcy. Judge Sullivan rejected both arguments. With respect to the Edge Act, Judge Sullivan concluded that no jurisdiction existed because the one federally-chartered entity defendant was not a party to the one securitization that contained mortgage loans secured by overseas properties. With respect to the issue of related to bankruptcy jurisdiction, the Court found that defendants could not establish any impact that the outcome of this case could have on the bankruptcy proceedings concerning American Home Mortgage Holdings, Inc. (“AHM”), which had originated some of the loans backing the RMBS, particularly because AHM’s reorganization plan already had been approved and defendants failed to establish that their claim in the AHM bankruptcy is not already fully liquidated. Order.
Second Circuit Grants SEC’s Motion for Stay and Sharply Criticizes District Court’s Rejection of Settlement in Case Against Citigroup
On Thursday, March 15, the United States Court of Appeals for the Second Circuit issued a per curiam stay order strongly criticizing Judge Jed S. Rakoff’s order rejecting a proposed consent judgment between the Securities and Exchange Commission and Citigroup Global Markets Inc. The Second Circuit granted the Commission’s motion for a stay of the district court proceedings in SEC v. Citigroup Global Markets Inc., No. 11 Civ. 7387 (S.D.N.Y.), pending resolution of the appeals. Click here to read more.