On May 18, 2011, the California Court of Appeal, Second Appellate District, reversed an earlier Superior Court decision to dismiss the securities class action suit against Countrywide Financial Corp. and other defendants allegedly involved in the sale of RMBS between 2005 and 2007. Although the complaint alleges only claims under the federal Securities Act of 1933, the state court found that the state court has concurrent jurisdiction over the securities class action because the RMBS at issue are not “covered securities” under SLUSA. Decision.
Countrywide
Countrywide Moves to Centralize 12 Securities Actions
On May 24, 2011, Countrywide Financial Corporation and related entities moved the Judicial Panel on Multidistrict Litigation for an order centralizing twelve actions that allege that Countrywide made material misstatements and omissions to investors in connection with equity, debt, and mortgage-backed securities for consolidated or coordinated proceedings before Judge Mariana Pfaelzer of the Central District of California. In its motion, Countrywide asserts that the actions share common factual allegations, making them appropriate for centralization. Countrywide further argues that the twelve actions should be centralized before Judge Pfaelzer because she is “intimately familiar” with the factual and legal issues presented in these litigations from presiding over nine Countrywide-related actions for the past three years. Notice. Memo.
Plaintiffs Firm Announces “Investigation” Into Various Banks Regarding FHA Mortgage Insurance
On May 4, 2011, the law firm Keller Rohrback, which currently represents the Federal Home Loan Banks of Seattle and Chicago in various RMBS cases, announced an investigation into a number of banks and mortgage lenders for violations stemming for those banks’ status as Direct Endorsement Lenders for the Federal Housing Administration (“FHA”). According to the announcement, each of the banks, including JPMorgan Chase, Bank of America, Bear Stearns Residential Mortgage, Washington Mutual, Citigroup, Countrywide, and HSBC, received insurance from FHA for the mortgages it originated. The investigation focuses on the banks’ mortgage lending practices, which Keller Rohrback asserts were lax and riskier than FHA’s standards allowed. Specifically, the law firm intends to review the banks’ due diligence standards, evaluations of borrower income, and property appraisals. The U.S. Department of Justice earlier this week commenced an action in the Southern District of New York against Deutsche Bank alleging similar practices. Release.
Bank of America and Countrywide Sued By Purchasers of $619 Million in RMBS
On April 27, 2011, a group of insurers owned by Western & Southern Financial Group filed a lawsuit in the United States District Court for the Southern District of Ohio against Countrywide, various former Countrywide officers, and Bank of America, as successor to Countrywide, in connection with the sale of RMBS between 2005 and 2007. The plaintiffs allege that the Countrywide defendants were responsible for misrepresentations and omissions in offering materials, pursuant to which plaintiffs purchased approximately $619 million in RMBS. Plaintiffs allege misrepresentation and omissions regarding Countrywide’s underwriting guidelines, owner-occupancy status, appraisals, and exceptions to low-documentation loan procedures. Plaintiffs assert federal law claims for violations of Sections 11, 12(a)(2), and 15 of the ’33 Act, and Sections 10(b) and 20(a) of the ’34 Act. They also assert state law claims for negligent misrepresentation, fraud, aiding and abetting fraud, and various violations of the Ohio Securities Act. Complaint.
Federal Judge Grants Motion to Dismiss Claims Against Bank of America as Successor to Countrywide
On April 20, 2011, Judge Mariana Pfaelzer of the U.S. District Court for the Central District of California granted Bank of America’s motion to dismiss the claims against it in a putative class action complaint that sought to hold Bank of America liable for Countrywide’s alleged misstatements and omissions regarding Countrywide’s loan origination practices. Plaintiffs argued that Bank of America can be held liable as a successor to Countrywide’s liability because the asset transfer between Bank of America and its subsidiary Countrywide constituted a de facto merger. Judge Pfaelzer disagreed; in applying Delaware law, Judge Pfaelzer noted that “Delaware courts use the doctrine of de facto merger sparingly” and declined to apply the doctrine here. Notably, Judge Pfaelzer’s decision runs contrary to an April 2010 decision by New York Supreme Court Justice Eileen Bransten which held, under New York law, that the asset transfer did constitute a de facto merger and that Bank of America could be liable as a successor to Countrywide. Pfaelzer Decision. Bransten Decision.
Assured Guaranty Announces Settlement with Bank of America on Reps and Warranties Action Involving 29 RMBS Deals
On April 15, 2011, Bank of America and Assured Guaranty Ltd. (“Assured”) announced that they had reached a settlement regarding the Bank’s liabilities with respect to 29 RMBS transactions insured by Assured Guaranty, including liabilities relating to Assured’s allegations of breaches of representations and warranties and historical loan servicing issues. Assured reports that Bank of America and its Countrywide subsidiaries agreed to pay Assured $1.1 billion and entered into a reinsurance arrangement that will reimburse Assured for 80% of all paid losses on the 21 of the 29 offerings that were first lien RMBS transactions until aggregate collateral losses in those transactions exceed $6.6 billion. The 29 RMBS offerings in the settlement cover all securitizations insured by Assured that were sponsored by Bank of America and Countrywide and certain additional securitizations backed by specific concentrations of Countrywide-originated loans. Assured 8k. Bank of America Release.
Putative Investor Class Action Brought in S.D.N.Y. Against Bank of America Alleging False Statements Relating to Bank of America’s RMBS Exposure
Anchorage Police & Fire Retirement System v. Bank of America Corp., No. 11-2216 (S.D.N.Y. Mar. 30, 2011)
An Alaska retirement fund filed a putative class action complaint against Bank of America and certain of its directors and officers in the Southern District of New York. Plaintiff bring claims under Sections 10(b) and 20(a) of the ’34 Act, alleging that defendants concealed material information and made false and misleading statements relating to Bank of America’s exposure to several forms of risk, including Bank of America’s (1) exposure to faulty mortgages originated by Countrywide; (2) exposure to mortgages upon which it could not legally foreclose; (3) exposure to systemic mortgage servicing problems; and (4) “dollar rolling” practice, through which the company allegedly artificially reduced reported leverage ratios while taking on more risk than it disclosed to the market and federal regulators. Complaint.
New RMBS Investor Action Filed Against Countrywide Defendants Over $48 Million in RMBS
American Fidelity Assurance Co. v. Countrywide Financial Corp., No. 11-361 (W.D. Okla. Apr. 1, 2011)
Institutional investor American Fidelity Assurance Company (“AFAC”) filed a complaint against Countrywide Financial, certain of its affliates, Bank of America, and variousformer executives of Countrywide, alleging that defendants sold AFAC approximately $48 million in RMBS pursuant to registration statements and prospectuses that contained untrue statements and omissions of material facts. AFAC asserts claims under Sections 11, 12(a)(2), and 15 of the ’33 Act and Sections 10(b) and 20(a) of the ’34 Act, in addition to claims for common law fraud and negligent misrepresentation. AFAC alleges that Countrywide systematically ignored its underwriting standards in order to increase its market share of mortgage products, and mislead plaintiff into believing it was buying highly rated and safe RMBS. Complaint.
SDNY Judge Dismisses MBS Suit against Countrywide
On March 16, 2011, Southern District of New York Judge Kevin Castel granted summary judgment to Countrywide Financial Corporation in a suit claiming that Countrywide had issued risky subprime home loans and misled investors about their underwriting guidelines. Judge Castel ruled that the suit was barred by the Securities Act of 1933’s three-year statute of repose because it was commenced more than three years after the filing of the registration statements and prospectus supplements at issue (the relevant date for plaintiffs’ ’33 Act Section 11 claims) and also more than three years after the securities were sold to plaintiffs (the relevant date for Section 12(a)(2)). Judge Castel rejected plaintiffs’ argument that their claims were tolled by the earlier filing of a class action. Decision.
New Countrywide Stockholder Suit
On March 10, 2011, several Countrywide stockholders filed a complaint against Countrywide Financial Corp., several of its former senior executives, and Countrywide’s independent auditor in the US District Court for the Central District of California. Plaintiffs, who previously opted out of a similar class action, allege that Defendants misled investors concerning the risks and quality of Countrywide’s loan portfolio, the sufficiency of its underwriting guidelines and internal controls, and Countrywide’s financial condition, all of which inflated Countrywide’s stock price and caused plaintiffs to suffer a loss. They assert claims against all defendants for violations of Sections 10(b) and 18 of the Exchange Act, SEC Rule 10b-5, and common law fraud. They also assert claims for violations of Section 20(a) of the Exchange Act against the individual defendants and for negligent misrepresentation against Countrywide and the individual defendants. Complaint.