Merrill Lynch

Loreley Financing Initiates CDO Actions Against Deutsche Bank, Bank of America, Countrywide and Merrill Lynch

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On October 5, 2011, Loreley Financing (“Loreley”), a group of special purpose entities based in the Channel Islands, commenced two actions in New York State Supreme Court concerning the sale of CDO’s. In the first action, Loreley filed a complaint against Deutsche Bank in connection with a $440 million investment in six CDOs between 2005 and 2007. Loreley accuses Deutsche Bank of concealing inside knowledge, gathered through its work originating subprime loans and securitizing RMBS, that the loans underlying the CDOs were highly risky and very likely to default. Loreley alleges that Deutsche Bank marketed the CDOs to Loreley while offloading the riskiest RMBS off its own books into the CDOs and contemporaneously advising favored clients to place short bets against the same assets. The complaint alleges common-law claims for fraud, rescission, conspiracy to defraud, aiding and abetting fraud, fraudulent conveyance, and unjust enrichment. Complaint.

The second action, in which Loreley has to date filed only a summons with notice, involves preliminary allegations against Bank of America, Countrywide and Merrill Lynch based on a $92 million investment in two CDOs. Without making any factual allegations, Loreley asserts common-law claims for rescission, fraud, fraudulent inducement, conspiracy to defraud, fraudulent conveyance, aiding and abetting fraud, breach of fiduciary duty, and unjust enrichment. Summons.

AIG Sues Bank Of America Over Alleged Fraud In RMBS

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On August 8, 2011, American International Group sued Bank of America Corp., Countrywide Financial Corp., and Merrill Lynch & Co. in New York state court, claiming that between 2005 and 2007 the defendants fraudulently induced AIG to invest in 350 residential mortgage-backed securities at a cost of $28 billion. AIG claims that the defendants did not engage in prudent underwriting practices, and ignored mischaracterizations made by borrowers about income and employment. The AIG complaint cited a forensic investigation done of the securitizations before the suit was filed, alleging that 40% of loans sampled were improperly evaluated on the risk metrics the defendants included in their offering materials. AIG alleges violations of Sections 11, 12(a)(2), and 15 of the ’33 Act, and state law claims of fraudulent inducement, aiding and abetting fraudulent inducement, negligent misrepresentation, and vicarious and successor liability. AIG seeks $10 billion in compensatory damages, among other remedies. Complaint.

S.D.N.Y. Judge Certifies RMBS Class Action by Institutional Investors Against Merrill Lynch

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On June 15, 2011, District Judge Jed Rakoff of the S.D.N.Y. certified a class of institutional investors in an action against Merrill Lynch & Co. in connection with the purchase of certain RMBS. Plaintiffs bring claims under Sections 11, 12(a)(2), and 15 of the ’33 Act, alleging that the registration statements and prospectus supplements issued in connection with the certificates contained untrue statements of material fact concerning underwriting standards, LTV ratios, appraisals, debt-to-income ratios of applicants, and the credit quality of the loans underlying the certificates. Judge Rakoff issued this two-page order without an accompanying opinion, which will be released at a later date, so the reasoning behind this decision is unpublished. Order. Complaint.

S.D.N.Y. Upholds BofA’s Decision Not to Pursue Claims Against Merrill Lynch D&Os

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On March 29, 2011, Judge Jed S. Rakoff of the Southern District of New York dismissed derivative suits filed by Bank of America Corp. shareholders who sought to pursue claims on behalf of BofA against the officers and directors of its subsidiary, Merrill Lynch & Co., for their part in Merrill’s CDO and RMBS losses. In his decision, Judge Rakoff noted that the allegations described the “kind of risky behavior by high-ranking financiers that helped create the economic crisis” but found that the plaintiffs’ claims were too conclusory to establish that BofA’s Board’s refusal to pursue the claims was made in bad faith. The Board’s letter of refusal stated that it had decided not to sue because the chances of recovery were slim, and doing so would undercut Merrill’s defenses in governmental inquiries and other subprime litigation. Merrill Decision.

Allstate Sues Merrill Lynch and Credit Suisse for Fraud

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On February 28, 2011, Allstate Insurance, represented by Quinn Emanuel, filed complaints against Merrill Lynch and Credit Suisse affiliated entities in New York state court in connection with Allstate’s purchase of RMBS from those entities. The complaints follow similar complaints by Allstate against JP Morgan, Washington Mutual, Bear Stearns, Citigroup, and Deutsche Bank entities. The complaints allege that defendants fraudulently misrepresented the quality of the loans underlying the RMBS they underwrote and sold to plaintiff. Both complaints allege causes of action for common law fraud, fraudulent inducement, and negligent misrepresentation. The complaint against Merrill Lynch also adds claims for violations of Sections 11, 12(a)(2), and 15 of the ’33 Act. Allstate purchased over $167 million in RMBS from Merrill Lynch and over $231 million from Credit Suisse. CS Complaint. Merrill Complaint.

Complaint Against Merrill Lynch for Sale of Mainsail and Victoria Commercial Paper Survives Motion to Dismiss

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On February 18, 2011, Judge Martinez of the U.S. District Court for the Western District of Washington denied Merrill Lynch’s motion to dismiss, holding that plaintiffs had pleaded sufficient facts to state claims under the Washington State Securities Act (“WSSA”) for primary and control person liability and for breach of contract. Plaintiff, King Country, Washington, invested county cash reserves in RMBS and alleges that defendants omitted to disclose significant and foreseeable risks in the underlying mortgage pools. Plaintiff further alleges that defendants knew the credit ratings associated with the securities were not reliable and that they were in fact trying to rid themselves of the same securities they held out as prudent investments. The Court found these allegations sufficient to survive the motion to dismiss. Decision.

New York Appellate Court Dismisses MBIA v. Merrill

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On February 1, 2011, the Appellate Division of the Supreme Court of the State of New York dismissed MBIA Insurance Corp’s claim for breach of contract against Merrill Lynch concerning 11 credit default swap contracts on four CDOs whose collateral consisted largely of RMBS. MBIA alleged that it was induced to provide credit protection on the CDOs based on misrepresentations as to the quality of the CDOs’ collateral, the degree of credit protection on the insured tranches, the credit ratings of the insured tranches, and the default rates for comparable CDOs. MBIA originally brought a variety of claims sounding in fraud, negligent misrepresentation, breach of contract, and a breach of the covenant of good faith and fair dealing, and sought rescission of the CDS contracts and money damages. The trail court dismissed all but the breach of contract claim, which the Appellate Division has now unanimously dismissed on appeal. First Department Decision. New York County Supreme Court Decision.

New York State Common Retirement Fund Settles Securities Suit With Merrill Lynch/Bank of America

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On January 13, 2011, the New York State Common Retirement Fund announced a $4.25 million settlement of a securities suit against Merrill Lynch and two former officers. In the suit, the Fund alleged that Merrill Lynch tried to cover up the extent of its involvement in subprime mortgage-backed securities, thus artificially inflating the value of its stock. The lawsuit had been filed in the United States District Court for the Southern District of New York in July. Press Release.