On May 18, 2012, the FDIC, in its capacity as receiver for two failed banks, filed two actions in the Southern District of New York arising out of the banks’ alleged purchase of RMBS. In the first suit, the FDIC asserts claims on behalf of Citizens National Bank and Strategic Capital Bank that arise out of the banks’ investment in ten RMBS certificates worth $140.5 million issued and/or underwritten by the defendants, including Bear Stearns, Citigroup, Credit Suisse, Merrill Lynch, and Deutsche Bank. Complaint. In the second suit, the FDIC asserts claims on behalf of Strategic Capital Bank arising out of the bank’s investment in five RMBS certificates worth $31 million underwritten by JP Morgan, Citigroup, Bank of America, and Deustche Bank. Complaint. In both suits, the FDIC alleged that the defendant banks violated Sections 11 and 15 of the Securities Act of 1933 by making material misstatements and omissions in the certificates’ registration statements regarding, among other things, the loan to value ratios of the mortgages underlying the certificates, the appraisal standards used in connection with the appraisals of the underlying properties, whether the borrowers intended to occupy the properties as their primary residences, and whether the originators complied with their underwriting guidelines when originating the underlying mortgages. The FDIC seeks a combined total of $77 million in damages, plus attorneys’ fees and costs.
Securities Act of 1933
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 In a non-precedential summary order, the Second Circuit held that the court below had used the correct standard in finding that the suits will require individualized inquiries into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.
Option One Reaches $28.2 Million Settlement with SEC Over RMBS Misrepresentation Claims
On April 24, 2012, the SEC announced a settlement with Option One Mortgage Corp. (“Option One”), now known as Sand Canyon Corporation, and filed an action in the United States District Court for the Central District of California for the purpose of having the settlement approved by the court. In the complaint, the SEC alleged that Option One had omitted material information from the offering materials for seven RMBS securitizations in early 2007 by failing to tell investors that Option One’s deteriorating financial condition would inhibit its ability to satisfy its loan repurchase obligations in connection with those RMBS. The $28.2 million settlement resolves claims that the SEC asserted under Section 17 of the Securities Act of 1933. Press Release. Complaint.
Federal Court Dismisses Claims Against Bear Stearns Based on RMBS Credit Ratings
On March 30, 2012, Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York dismissed claims based on credit ratings brought by several retirement and pension funds against Bear Stearns & Co., Inc. and related affiliates in connection with the sale of RMBS pass-through certificates. Plaintiff brought claims under Section 11, 12(a)(2) and 15 of the Securities Act of 1933. The court found that plaintiffs failed to plead that the rating agencies disbelieved their ratings, but granted plaintiffs leave to amend to allege Bear Stearns was aware of the inaccuracy of the credit ratings. The court, however, declined to dismiss claims that Bear Stearns made misrepresentations concerning the quality of the underlying loans in its offering documents. It also rejected Bear Stearns’ argument that plaintiffs lacked standing to sue on tranches they did not purchase. Decision.
John Hancock Sues JP Morgan Over RMBS
On January 20, 2012, John Hancock Life Insurance Co. filed a complaint in New York state court against JPMorgan Chase & Co. and several related entities and individuals seeking to recover for losses allegedly incurred on certificates John Hancock purchased in 21 separate RMBS offerings from JPMorgan, Bear Stearns, and Washington Mutual Inc. John Hancock alleges that the defendants made misrepresentations concerning the quality of the mortgage loans underlying the certificates and failed to perform adequate due diligence. The complaint alleges violations of the Securities Act of 1933, common law fraud, negligent misrepresentation, aiding and abetting fraud, and fraudulent inducement, and seeks rescission and damages. Complaint.
Stichting Pensioenfonds Sues WaMu, Bear Stearns For RMBS Losses
On December 7, 2011, Stichting Pensioenfonds, a Dutch pension firm, filed a complaint against JP Morgan Chase & Co., and related entities and individuals, in the Supreme Court of the State of New York. Stichting seeks to recover losses incurred on 26 RMBS certificates purchased from JP Morgan, Bear Stearns & Co., and Washington Mutual Bank. Stichting alleges that the defendants made false or misleading statements regarding the quality of the mortgages underlying the securities. Stichting is pursuing claims based on Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as well as common law claims of negligent misrepresentation, fraud, and aiding and abetting fraud. Complaint.
Federal District Court Signals Intention to Dismiss National Credit Union Authority Suit
On December 19, 2011, Judge George H. Wu of the Central District of California issued a tentative ruling that the National Credit Union Authority has failed to sufficiently allege that defendants, which include RBS, Wachovia and Nomura, systematically disregarded underwriting standards in connection with the offering and sale of RMBS. The complaint includes claims for violations of Sections 11 and 12(1)(2) of the Securities Act of 1933 and Sections 25401 and 25501 of the California Corporations Code. The court explained that the NCUA’s reliance on post-purchase statistics and other public information is “conclusory” and, without additional information, would fail to satisfy the pleading standards. Judge Wu requested additional supplemental briefing and stated that he will review the additional information before making a final decision. Decision.
U.S. Supreme Court Denies Countrywide’s Petition for Certiorari
On December 5, 2011, the United States Supreme Court denied a petition for certiorari in a California state court securities class action case against Countrywide Financial. In that case, plaintiffs allege that Countrywide made false and misleading statements about the quality of loans underlying RMBS. Countrywide argued that the case should be heard in federal court because plaintiffs asserted claims solely under the Securities Act of 1933, and the Securities Litigation Uniform Standards Act of 1998 establishes exclusive federal jurisdiction in certain ’33 Act cases. The California Court of Appeal had decided the case could properly be brought in state court. Order List.
Bank of America Settles MBS Case for $315 Million
On December 5, 2011, lead plaintiff Public Employees’ Retirement System of Mississippi moved in the Southern District of New York for approval of a $315 million settlement with Merrill Lynch. In the class action lawsuit, plaintiff asserted claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, alleging that Merrill Lynch misrepresented the quality of the subprime mortgages underlying 84 different RMBS offerings. The proposed settlement was entered into after discovery had begun and following decisions of Merrill Lynch’s motion to dismiss and Plaintiff’s motion for class certification. Motion.
German Bank Initiates Mortgage-Backed Security Action Against Credit Suisse
On November 10, 2011, IKB Deutsche Industriebank AG sued several Credit Suisse entities in the Supreme Court of New York, bringing claims for common law fraud, aiding and abetting fraud, and negligent misrepresentation, as well as claims under Sections 11, 12 and 15 of the Securities Act of 1933, in connection with nearly $215 million in RMBS allegedly purchased by IKB. To date, IKB has filed only a summons with notice. Without making any factual allegations, IKB seeks rescission and damages. Summons.