On October 16, Justice Eileen Bransten of the Supreme Court for the State of New York dismissed a suit by FSA Asset Management LLC (FSAM) and Dexia SA/NV (with two related entities, Dexia) alleging fraud by Morgan Stanley in connection with the sale of $626 million in RMBS. FSAM originally purchased the RMBS from Morgan Stanley in 2006 and 2007, but in 2009, assigned the securities to Dexia in a put option transaction. Plaintiffs alleged that Morgan Stanley misrepresented the underwriting standards and collateral attributes of the mortgage loans underlying the securities and brought claims for fraud, aiding and abetting fraud and fraudulent inducement. Justice Bransten held that Dexia lacked standing to bring the claims because the put option transaction assigned only ownership and contractual rights in respect of the RMBS, not claims sounding in tort. The court further held that FSAM had not suffered damages because it had received full face value for the securities from Dexia. Decision.
Dexia
District Court Vacates Dismissal, Remands RMBS Suit Against J.P. Morgan to State Court
On May 17, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York vacated his earlier “bottom line” summary judgment decision dismissing Dexia NV/SA’s (Dexia) suit against J.P. Morgan Chase Bank (J.P. Morgan) and its various affiliates. Dexia alleged fraud, negligent misrepresentation and successor liability claims related to the sale of $774 million in residential mortgage-backed securities. J.P. Morgan had removed the action from state court claiming federal jurisdiction primarily under the Edge Act as well as under the Court’s bankruptcy jurisdiction. The Edge Act, a statute enacted in 1919, provides for federal jurisdiction if two conditions are met: (i) an international banking and financial corporation organized under the laws of the United States (an Edge Act corporation) must be a party and (ii) the lawsuit must involve an offshore banking transaction. Although the Court initially denied plaintiffs’ motion to remand based on the Edge Act, Judge Rakoff vacated that decision based on a recent Second Circuit decision requiring the offshore banking transaction to be engaged in by the Edge Act corporation. Because J.P. Morgan did not originate the securitized loans or otherwise engage in the foreign banking transactions, the court concluded the Edge Act did not apply, and it could not exercise jurisdiction. Opinion.
District Court Grants J.P. Morgan’s Motion for Summary Judgment Against Dexia in RMBS Suit
On April 2, Judge Jed Rakoff of the United States District Court for the Southern District of New York largely granted J.P. Morgan’s motion for summary judgment in RMBS litigation brought against it by Dexia, a Belgian bank, and FSA Asset Management. In a two-page order, the district court dismissed with prejudice all of Dexia’s claims against the defendants, but permitted FSA’s claims as to five RMBS certificates to proceed. The court indicated that it would issue a written opinion explaining the reasons for these rulings in due course. Order.
S.D.N.Y Denies Motion to Dismiss RMBS Claims Against JPMorgan Chase
On February 26, Judge Jed S. Rakoff of the federal district court for the Southern District of New York issued a memorandum explaining the reasoning for his September 2012 order denying JP Morgan’s motion to dismiss a lawsuit against it in connection with the sale of $1.6 billion in RMBS. The suit, brought by FSA Asset Management and Dexia, alleges claims under New York law for fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and successor liability. Plaintiffs claimed that JPMorgan and affiliated entities made fraudulent misrepresentations concerning the riskiness of the securitizations at issue and the underlying loans. The court found that plaintiffs: (a) pleaded the elements of their fraud and fraudulent inducement claims with sufficient detail, (b) provided enough facts to sustain a claim for aiding and abetting fraud, based on allegations that Bear Stearns Co. and JPMorgan Chase & Co. directed the purported fraudulent activity of subsidiary companies and received profits in return, and (c) stated claims for negligent representation based on allegations that the defendants induced the plaintiffs into a relationship of trust, convinced them to forego their own diligence and provided them with deceptive information. Decision.
Dexia Sues Merrill Lynch Over $527 Million in RMBS
On March 29, 2012, Dexia filed suit against Merrill Lynch & Co. and related entities in the Supreme Court of the State of New York in connection with $527 million in RMBS it allegedly purchased in fifteen offerings in 2006 and 2007. Dexia alleges that Merrill Lynch made misrepresentations about and ignored the deficiencies in the underwriting standards and appraisal practices used by the originators of the loans underlying the RMBS, as well as that the credit ratings were inflated due to false information allegedly provided to the ratings agencies by Merrill. The causes of action alleged are fraud, aiding and abetting fraud, and negligent misrepresentation. Dexia, which is represented by the same counsel who represent LBW in its suit against Countrywide, seeks unspecified money damages and rescission. Complaint.
Dexia SA Cites Deutsche Bank’s Internal MBS Descriptions In Suit Over $1 Billion in RMBS Purchases
On July 13, 2011, Dexia SA filed a lawsuit in New York State Supreme Court against Deutsche Bank AG and several of its affiliates in connection with its purchase of more than $1 billion in RMBS between 2005 and 2007 from the Deutsche Bank defendants. Dexia asserts state law claims for fraud, fraudulent inducement, aiding and abetting fraud and negligent misrepresentation. The complaint alleges that the defendants made false or misleading statements to prospective investors touting the quality of the RMBS, the underlying loans and the defendants’ due diligence process while, at the same time, defendants’ internal documents disparaged the RMBS and the defendants took positions in CDOs and credit default swaps that were effectively betting against the performance of similar RMBS. Dexia Complaint vs. Deutsche Bank.