federal Securities Act of 1933

Morgan Stanley Settles RMBS Charges with SEC

On July 24, the SEC announced that it had charged three Morgan Stanley entities with misleading investors with regard to two RMBS securitizations that the firms underwrote, sponsored and issued and that the firm agreed to settle the charges.  In the cease and desist order memorializing the settlement, the SEC alleged that Morgan Stanley misrepresented the current and historical delinquency status of the mortgage loans underlying the securitizations.  The SEC alleged that these misrepresentations violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  Morgan Stanley agreed to settle the charges without admitting or denying wrongdoing.  As part of the settlement, Morgan Stanley agreed to cease and desist further violations of §§ 17(a)(2)-(3) and to pay US$275 million in disgorgement, prejudgment interest and penalties, which will be placed in a Sarbanes-Oxley Fair Fund for distribution to investors.  Press Release.  Order.

California Appellate Court Reinstates Class Action On Behalf of RMBS Purchasers

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.

Motion to Dismiss MBS Action Granted in Part

On November 30, 2010, Judge Jed Rakoff of the United States District Court for the Southern District of New York granted ABN AMRO’s and J.P. Morgan’s motions to dismiss claims under Section 11 of the Federal Securities Act of 1933. Although the Court had sustained Section 11 claims against other underwriters on other RMBS in the same litigation, the Court noted that the plaintiffs had not alleged a materially false or misleading statement by ABN AMRO or J.P. Morgan. It stated that their offering “differed materially from the others at issue in that no loan originator contributed more than 20% of the loans” to the offering pool, and, accordingly, no disclosures regarding the underwriting practices of any loan originator were required or included in the offering documents. Decision.