On March 23, the FHFA authorized Fannie Mae and Freddie Mac to enter into additional dollar roll transactions, to support additional liquidity to investors of agency mortgage-backed securities. Release.
Mortgage-Backed Securities
Judge Scheindlin Denies Motion to Dismiss NCUA Claims
On July 20, 2015, Judge Scheindlin of United States District Court for the Southern District of New York denied HSBC Bank USA, NA’s (“HSBC”) motion to dismiss claims brought by the National Credit Union Administration (“NCUA”) related to the administration of mortgage-backed securities worth $2 billion. NCUA alleges that HSBC failed to perform its duties as the indentured trustee for 37 RMBS trusts. Judge Scheindlin rejected HSBC’s argument that NCUA lacked standing to bring the suit because most of the debt had been resecuritized, and held that NCUA has standing to pursue the claims against HSBC derivatively because the current trustee of the resecuritized loans tacitly consented to the action by remaining neutral. Opinion and Order.
JPMorgan Settles RMBS Class Action
On July 17, 2015, lead plaintiffs filed a stipulation and agreement settling a 2009 class action lawsuit against JPMorgan Chase & Co. (“JPMorgan”) alleging that the bank had misrepresented the quality of loans underlying $10 billion worth of mortgage-backed securities it sold. Without admitting any wrongdoing JPMorgan agreed to pay plaintiffs $388 million, subject to court approval. Stipulation and Agreement of Settlement.
Citigroup, Goldman, and UBS to Pay $235 Million Settlement in MBS Class Action
On February 13, 2015, the plaintiffs in New Jersey Carpenters Health Fund, et al., v. Residential Capital, LLC, et al., No. 08-cv-8781 (S.D.N.Y.) filed an unopposed motion for certification of the class and to approve a preliminary settlement. The complaint, originally filed in 2008, included claims for materially false and misleading statements in securities offering documents under the Securities Act of 1933 against Citigroup, Goldman Sachs, and UBS as underwriters for 16 mortgage-backed securities transactions in 2006 and 2007. The class consists of investors who purchased the certificates, with the majority of the settlement funds set aside for investors who purchased their certificates within ten days after the relevant initial offering. The proposed $235 million settlement does not include a $100 million settlement with Residential Capital, LLC that had previously been reached in the case. Motion.
Investor Group Sues UBS for Mortgage-Backed Securities Losses
On November 2, 2011, Capital Ventures, an investor group, sued UBS in Massachusetts federal court, claiming that UBS Securities misled it into purchasing securities backed by faulty mortgage loans by misrepresenting the quality of those loans in the offering materials. Capital Ventures alleges it purchased more than $109 million worth of mortgage-backed securities from UBS over six separate transactions and that a significant portion of that value has been lost as the mortgages underlying the securities have defaulted. Capital Ventures alleges claims under the Massachusetts Uniform Securities Act. Complaint.
Foreign Pension Fund Sues Deutsche Bank Over Mortgage-Backed Securities
On September 7, 2011, Stichting Pensioenfonds ABP, a pension fund based in the Netherlands, sued Deutsche Bank and certain of its officers in New York state court, alleging the bank committed fraud by misrepresenting the quality of the loans underlying its mortgage-backed securities. In support of its claims that Deutsche Bank knew about the poor quality of the loans and the loan originators’ noncompliance with underwriting guidelines, the fund cites the Financial Crisis Inquiry Commission and the Levin Report for the proposition that Deutsche Bank entered into credit default swaps to short the securities. The complaint seeks monetary damages and rescission based on claims for common law fraud, aiding and abetting, and negligent misrepresentation. Complaint.
National Credit Union Administration Sues RBS Securities Inc. Over RMBS Sales
On July 18, 2011, the National Credit Union Administration (“NCUA”) filed a lawsuit against RBS Securities Inc. (“RBS”) in United States District Court for the Central District of California. NCUA alleges that RBS misled Western Corporate Federal Credit Union (“WesCorp”) about the safety of mortgage-backed securities. The lawsuit alleges violations of Sections 11 and 12(a)(2) of the ’33 Act as well as the California Corporate Securities Law. NCUA alleges RBS made untrue statements of material fact regarding borrowers’ likelihood to repay the mortgage loans, reduced documentation programs, loan-to-value ratios, and credit enhancement. NCUA previously filed similar lawsuits against JP Morgan and Royal Bank of Scotland. NCUA Complaint vs. RBS.
S.D.N.Y. Judge Preserves Plaintiffs’ Section 11 Claims Against Residential Capital
On April 28, 2011, Judge Harold Baer, District Judge in the Southern District of New York, granted in part and denied in part the defendants’ motion to dismiss in New Jersey Carpenters Health Fund, et al. v. Residential Capital, LLC et al. Plaintiffs are institutional investors who purchased mortgage-backed securities from Residential Capital LLC and its underwriters in 2006 and 2007. The complaint alleges that defendants violated Sections 11, 12(a)(2), and 15 of the ’33 Act by making misstatements about the value of the securities in the offering documents. The Court denied defendants’ motion to dismiss the section 11 claims, finding that the loss in value when the securities dropped from investment grade to junk status was a cognizable loss, even if the purchaser continues to hold the securities. The Court, however, granted defendants’ motion to dismiss the section 12(a)(2) claims because it found that, while the plaintiffs alleged the securities purchased and the date of purchase, they failed to allege that they directly purchased the securities from the defendants. The Court also granted defendants’ motion to dismiss the section 15 claims against the underwriters, holding that the complaint’s allegations that the underwriter defendants were “controlling persons” were conclusory. The Court further found that the claims were timely, and that the defendants had not shown that a reasonably diligent purchaser would have discovered the high delinquency rates when purchasing the securities. Decision.
U.S. Bancorp Sued Over Management of Securities Lending Trust
On March 15, 2011, Woodmen of the World Life Insurance Society, a participant in a securities lending trust formed by U.S. Bancorp, filed a complaint against U.S. Bancorp, and several affiliated individuals and entities, in Delaware Chancery Court. Defendants allegedly were responsible for the investment and oversight of the cash the trust received as collateral from persons borrowing securities placed into the trust by the plaintiff. The complaint alleges, inter alia, that the defendants wrongfully invested the cash collateral in commercial paper issued by SIVs that were backed by mortgage-backed securities, and then hid information from plaintiff about the risks of the investments they had made with the cash collateral. The complaint also alleges that, through a variety of actions, the defendants placed the financial interests of U.S. Bancorp and its affiliates over the interests of the plaintiff. The Complaint asserts claims for breach of fiduciary duty and aiding and abetting breaches of fiduciary duty and seeks money damages in an unspecified amount. Redacted Complaint.
Judge Certifies Class in Lawsuit Against Dynex Capital for Over $630 Million in Mortgage-Backed Securities
On March 7, 2011, Judge Harold Baer, Jr. of the U.S. District Court for the Southern District of New York certified a class of plaintiffs bringing claims under Section 10(b) and 20(a) of the Exchange Act against Dynex Capital, Inc. on the basis that Dynex Capital allegedly made material misstatements and omissions regarding underwriting standards, market conditions, loss reserves, and delinquencies in connection with the sale of bonds that are MBS collateralized by pools of mobile home loans. Judge Baer certified the class to include all purchasers of two MBS, even though the lead plaintiff purchased from only one tranche of one MBS. Unlike several other federal district judges, Judge Baer certified the class for purchasers of both MBS even though individual plaintiffs who purchased other tranches have different repayment rights and damages. Judge Baer also rejected Dynex Capital’s argument that the element of reliance was not sufficiently pled on the basis that the fraud-on-the-market doctrine does not apply because the market for the bonds at issue was inefficient. In finding that an efficient market existed, the court noted that trading volume of these MBS securities was sufficient , market makers for these securities existed, and there was sufficient price reaction to the disclosure of material information concerning these securities. Decision.