In two separate orders, Judge Cote of the Southern District of New York granted in part and denied in part motions to dismiss claims brought by the FHFA arising out of Fannie Mae’s and Freddie Mac’s alleged purchase of (1) $33 billion of RMBS from several JPMorgan, Bear Stearns, and Washington Mutual entities and (2) $24.9 million of RMBS from several Merrill Lynch entities.  Both actions are among the seventeen brought by the FHFA asserting claims under Sections 11, 12, and 15 of the Securities Act of 1933 and certain state securities laws, and both are also among the six actions that include claims of common law fraud.  

On November 5, in the JPMorgan case, the Court granted certain of the underwriter defendants’ motions to dismiss the state securities law claims as time-barred and inadequately pled.  The Court found that the FHFA’s allegations concerning departures from underwriting guidelines – which were based upon an alleged “forensic review” of loan files, allegations concerning investigations by private entities and government actors, confidential witness allegations, and the rise in defaults in the underlying loans – were sufficient to state a claim, including as to the element of scienter.  With respect to the FHFA’s allegations concerning alleged owner-occupancy and loan-to-value ratio misstatements, the Court reached different results depending on whether the security at issue involved JPMorgan, Bear Stearns, or Washington Mutual.  As to JPMorgan certificates, the FHFA relied solely on the disparity between the ratios as reported in the offering documents and the purported ratios resulting from the FHFA’s analysis, which the Court concluded could not, on their own, establish scienter.  As to the Washington Mutual certificates, the Court found that the FHFA pled adequate additional facts to establish scienter as to the loan-to-value ratios, but not as to owner-occupancy.  As to the Bear Stearns certificates, the Court found sufficient allegations of scienter as to all alleged misrepresentations.  Addressing the defendants’ remaining arguments, the Court found that the FHFA adequately pled justifiable reliance and loss causation, that the FHFA’s claims were not time-barred, and the JPMorgan was an appropriate successor-defendant to Washington Mutual.   JPMorgan Order.

On November 8, in the Merrill Lynch case, the Court likewise granted defendants’ motions to dismiss as to the fraud claims based on alleged owner-occupancy and loan-to-value ratio misstatements for failure to adequately allege scienter.  The Court denied all remaining aspects of the motion to dismiss.  In particular, the Court permitted the FHFA to pursue claims against an individual defendant whose signature appeared on an initial shelf registration but not on the amended registration statement filed 18 days later and that was operative when the securities were issued.  The Court also found that the FHFA was not required to plead reliance to state its claims under the Washington, D.C. securities statute and the the FHFA could pursue its demands for rescission and punitive damages.  Merrill Lynch Order.