On September 6, 2012, the United States Court of Appeals for the Second Circuit reversed the dismissal of RMBS claims against Goldman Sachs and related entities based on lack of standing and failure to state a claim. The court addressed a named plaintiff’s standing to assert class claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 based on mortgage-backed securities from offerings or tranches it did not purchase. Reversing the district court’s decision, the Second Circuit held that plaintiffs have standing to represent classes of investors who purchased mortgage-backed securities from different tranches than those purchased by the named plaintiff, or even under different prospectus supplements, as long as the securities were backed by mortgages originated by the same lenders and the claims are based on “similar or identical misrepresentations in the Offering Documents.” The court also held that the plaintiff had adequately pled a decline in the value of the securities, despite the absence of any allegation that the relevant trusts had defaulted on any distribution of principal or interest. Decision.
Goldman Sachs
HSH Nordbank AG Sues Goldman Sachs and Morgan Stanley Over $634 Million in RMBS
Several HSH Nordbank AG affiliates filed two summonses with notice in New York state court on August 24, seeking damages, rescission and/or a declaratory judgment arising out of their purchase of roughly $524 million and $110 million in RMBS certificates from Morgan Stanley and Goldman Sachs, respectively. Other than the details relating to the particular defendants, the two summonses with notice are identical. In particular, in both cases HSH Nordbank alleges that offering materials provided by the Defendants contained material misrepresentations concerning the underwriting standards for the loans underlying the RMBS, the legal validity of the trusts and their entitlement to receive payments on the loans, the loans’ loan-to-value ratios, the percentage of owner-occupied properties, and the credit ratings assigned to the RMBS. Goldman Sachs Summons. Morgan Stanley Summons.
Sealink Brings $587M RMBS Lawsuit Against Goldman Sachs
On August 13, Sealink Funding Ltd. filed a summons with notice against Goldman Sachs & Co. in New York state court over its purchase of nearly $587 million in residential mortgage-backed securities. Sealink alleges that the offering documents for the RMBS included fraudulent misrepresentations and omissions regarding the characteristics of the underlying mortgage loans, the underwriting standards used to issue the mortgage loans, the transfer of those mortgage loans to trusts, and the legal validity of the trusts. Sealink asserts that Goldman Sachs either knew the information in the offerings was wrong or was negligent in not knowing. Sealink 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. Summons with Notice.
Goldman Sachs Discloses SEC Will Not File Action Over RMBS Sales
On August 9, Goldman Sachs disclosed in its 10-Q that the Securities and Exchange Commission has decided not to recommend an enforcement action against Goldman for disclosures connected to $1.3 billion in residential mortgage-backed securities sold to investors in 2006. Goldman had previously disclosed an investigation by the SEC and the February 24, 2012 receipt of a “Wells” Notice in its 2011 10-K. The SEC informed Goldman of the decision not to proceed on August 6, 2012. SEC Filing.
US$693 Million RMBS Case Against Goldman Sachs Settled for US$26.6 Million
On July 31, the Public Employees’ Retirement System of Mississippi moved for approval of a US$26.6 million settlement of an RMBS class action pending before Judge Baer of the Southern District of New York. Plaintiffs asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 against Goldman Sachs arising out of the purchase of US$693 million in RMBS. The complaint alleged that the offering documents contained inaccuracies and omissions, and that Goldman failed to conduct adequate due diligence. In seeking approval of the settlement, plaintiffs argued that they faced litigation risk due to the limited precedent in RMBS class actions at the summary judgment stage and strong affirmative defenses asserted by the defendants. Motion.
New York Court Dismisses RMBS Claims Brought By CIFG against Goldman and M&T Bank
On May 1, 2012, Justice O. Peter Sherwood of the New York State Supreme Court dismissed the majority of claims brought by CIFG Assurance North America, an insurer of RMBS, against M&T Bank and Goldman Sachs, the originator and underwriter respectively of those securities. CIFG asserted causes of action for fraud, breach of contract and accounting and seeks $275 million in damages based on alleged misrepresentations and omissions in RMBS offerings. The court dismissed all claims against M&T for lack of standing, and dismissed the fraud and accounting claims against Goldman Sachs, allowing only the breach of contract claims against Goldman Sachs to remain. Decision.
Second Circuit Affirms Denial of Class Certification in Actions by Pension Funds
On April 30, 2012, the United States Court of Appeals for the Second Circuit affirmed a lower court’s denial of class certification in two putative class action lawsuits brought by New Jersey Carpenters Health Fund and Boilermaker Blacksmith National Pension Trust against Goldman Sachs and the Royal Bank of Scotland, respectively. The pension funds asserted claims under Sections 11, 12, and 15 of the Securities Act of 1933 for purported misrepresentations and omissions in various MBS offerings. In a non-precedential summary order, the Second Circuit held that the court below had used the correct standard in finding that the suits will require individualized inquiries into plaintiffs’ knowledge of the alleged misstatements or omissions and therefore declined to certify the proposed classes as defined. Decision.
Court Denies Goldman Sachs’s Motion to Dismiss in Case Arising out of Abacus CDO
On April 24, 2012, New York State Court Judge Barbara Kapnick denied a motion brought by Goldman Sachs Group Inc. (“Goldman Sachs”) to dismiss an action brought by ACA Financial Guaranty Corp. (“ACA”) arising out of ACA’s provision of financial guaranty insurance wrapping the Abacus 2007-ACI CDO issued by Goldman Sachs. ACA alleged that Goldman Sachs misrepresented material facts about the economic interest of the hedge fund Paulson & Co. Inc. (“Paulson”), an investor in the CDO. According to ACA, Paulson, which participated in the selection of the portfolio of mortgage loans backing the CDO, was represented to be a long investor but in fact took a short position against the deal. Judge Kapnick found ACA’s allegations sufficient to state a claim that Goldman Sachs fraudulently concealed the information about Paulson’s position and thus fraudulently induced ACA to insure the CDO. Order.
Second Circuit Upholds Dismissal of $37 Million CDO Suit Against Goldman Sachs
On April 19, 2012, the United States Court of Appeals for the Second Circuit affirmed a lower court’s dismissal of a lawsuit brought by Landesbank Baden-Wurttemberg (“Landesbank”) lawsuit against Goldman Sachs & Co. (“Goldman Sachs.”) Landesbank asserted claims for fraud, negligent misrepresentation, and unjust enrichment, alleging that Goldman Sachs misstated the quality of the mortgages underlying the collateral that backed a CDO and secretly took a position to profit from the CDO’s failure. In affirming the lower court, the Second Circuit determined that Landesbank failed to allege a specific motive for Goldman to commit fraud and failed to allege the existence of any special relationship between Goldman and Landesbank sufficient to support a negligent misrepresentation claim. Order.
Asset Management Fund Sues Bank of America, Merrill Lynch, Countrywide, and Others for $478 Million
On March 1, 2012, Asset Management Fund filed a summons with notice in New York state court against Bank of America, Merrill Lynch, Countrywide, Credit Suisse, Goldman Sachs, and others. Asset Management Fund alleges that it purchased $239 million in RMBS from defendants, and that the offering documents in connection with the sales of those securities contained material misstatements and omissions. The summons asserts claims for common-law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and breach of contract. Asset Management Fund is seeking approximately $478 million in damages, including punitive damages, and alternatively seeks rescission. Summons.