On November 9, 2011, National Integrity Life Insurance Co. filed a complaint against Countrywide Financial Corporation, former Countrywide executives and Bank of America in the United States District Court for the Southern District of New York, accusing Countrywide of fraud and misstatements in connection with nearly $450 million in RMBS allegedly purchased by the insurer. National Integrity alleges Countrywide abandoned its underwriting standards and misled the insurer about the quality of loans underlying the securities. National Integrity asserts causes of action for common law fraud, civil conspiracy, and violations of the Ohio Securities Act, the Ohio Corrupt Activities Act and federal securities laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) and 20(a) of the Exchange Act of 1934. Complaint.
Securities Act of 1933
Class Certified, but at Reduced Size, in Washington Mutual RMBS Litigation
Judge Pechman of the U.S. District Court for the Western District of Washington issued an order on October 21, 2011 granting Plaintiffs’ motion to certify a class of investors in certain Washington Mutual RMBS on a substantially narrower basis than Plaintiffs had requested. The lawsuit, which brings claims under Section 11 of the Securities Act of 1933, involves 6 offerings that collectively contained 123 separate tranches of certificates. Plaintiffs, who purchased in only 13 of the tranches, sought to certify a class of all investors in any tranche of any of the 6 offerings. The court found that each tranche represents a different security and that Plaintiffs lacked standing to sue as to any tranche in which they had not purchased. Judge Pechman thus both denied class certification and granted judgment on the pleadings in favor of Defendants as to those tranches. As to the remaining 13 tranches in which Plaintiffs had purchased, the court found that class certification was appropriate. Decision.
District Court Judge Narrows Morgan Stanley MBS Suit
On September 15, 2011, Southern District of New York Judge Laura Taylor Swain granted in part Morgan Stanley’s motion to dismiss claims in a putative class action by MBS investors that Morgan Stanley violated Sections 11, 12, and 15 of the Securities Act of 1933. Plaintiffs allege that Morgan Stanley made material misrepresentations regarding its ratings and the appraisals and underwriting standards of the underlying mortgages in the marketing and sale of the MBS. Judge Swain found that Plaintiffs failed to sufficiently allege any facts supporting any misrepresentation regarding the derivation or integrity of the MBS ratings or that Morgan Stanley had a duty to disclose any alleged underlying flaws in the ratings process. Judge Swain found that Plaintiffs’ allegations regarding the appraisals and underwriting standards were sufficient and denied the motion to dismiss with respect to those claims. Decision.
Federal Judge Denies Countrywide’s Motion to Dismiss On Three Offerings in MBS Litigation
On September 13, 2011, Central District of California Judge Mariana Pfaelzer denied Countrywide’s motion to dismiss claims in a putative class action complaint arising out of Countrywide RMBS offerings that Countrywide violated Sections 11, 12, and 15 of the Securities Act of 1933. Countrywide argued that Plaintiffs purchased the MBS for three of the nine contested offerings before Countrywide issued its prospectus supplements, thus making it impossible for Plaintiffs to have relied on the alleged misstatements contained in those prospectus supplements. Judge Pfaelzer found that there were too many unknown facts regarding the circumstances of Plaintiffs’ purchases to dismiss these claims, including the possibility that Plaintiffs reviewed drafts of the prospectus supplements. Decision.
FHFA Sues 17 Banks For More Than $200 Billion In MBS Losses
On September 2, 2011, the Federal Housing Finance Agency (“FHFA”) – the federal agency overseeing Fannie Mae and Freddie Mac – filed suit against 17 major banking institutions in New York and Connecticut courts. The suits claim that the banks misrepresented the quality of the mortgage loans backing securitizations purchased by Fannie Mae and Freddie Mac, and bring claims under Sections 11, 12, and 15 of the Securities Act of 1933. Complaints.
SEC Proposed Amendment for Securities on BATS
On August 8, the SEC proposed an amendment to Rule 146 to designate certain securities on BATS Exchange, Inc. as covered securities for purposes of Section 18 of the Securities Act of 1933, therefore exempting such securities from state law registration requirements. Comments must be submitted within 30 days after publication in the Federal Register. SEC Proposed Rule.
FHFA Sues UBS For Misrepresenting RMBS Risk
On July 27, 2011, Fannie Mae and Freddie Mac’s regulator, the Federal Housing Finance Agency, sued UBS and several of its executives in New York federal court under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The complaint alleges that between September 2005 and August 2007, Fannie Mae and Freddie Mac purchased over $4.5 billion in RMBS from UBS in connection with 16 different securitizations. Plaintiff claims that the RMBS registration statements, which contained loan and origination information, contained materially false statements regarding the quality of the mortgages in the securitizations, and the complaint focuses specifically on alleged borrower fraud and faulty underwriting practices. Complaint.
Investment Company Sues Bank of America Claiming Recently Announced Proposed $8.5 Billion Settlement Proves Fraud
On July 18, 2011, Federated Investment Management Co. and affiliated entities sued Bank of America, Countrywide, affiliated entities, and individual officers and directors in California state court. Plaintiff claims that Bank of America’s recently announced proposed $8.5 billion settlement with various MBS investors and Bank of New York Mellon as Trustee evidences that Countrywide fraudulently concealed the quality of the loans it originated. Specifically, the complaint alleges that Countrywide’s underwriting standards and guidelines failed to meet industry standards and that it misrepresented that fact to investors. While the plaintiffs allege they do not have access to the loan files underlying the securities they purchased, they assert that the disclosure of the proposed settlement and challenges by investors and regulators have uncovered Countrywide’s alleged fraud. Plaintiff brings claims for fraud and negligent misrepresentation, as well as claims under the Securities Act of 1933, the California Corporate Securities Act, and the California Civil Code, and seek both compensatory and/or recessionary damages, as well as punitive damages. Complaint.
SEC Proposed Rules on Registration Exemption for Security-Based Swaps
On June 10, the SEC proposed rules that would provide clearing agencies functioning as central counterparties with exemptions from the registration requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 for the security-based swaps they issue. Comments must be submitted by July 25. Press Release. Proposed Rules.
SDNY Judge Dismisses MBS Suit against Countrywide
On March 16, 2011, Southern District of New York Judge Kevin Castel granted summary judgment to Countrywide Financial Corporation in a suit claiming that Countrywide had issued risky subprime home loans and misled investors about their underwriting guidelines. Judge Castel ruled that the suit was barred by the Securities Act of 1933’s three-year statute of repose because it was commenced more than three years after the filing of the registration statements and prospectus supplements at issue (the relevant date for plaintiffs’ ’33 Act Section 11 claims) and also more than three years after the securities were sold to plaintiffs (the relevant date for Section 12(a)(2)). Judge Castel rejected plaintiffs’ argument that their claims were tolled by the earlier filing of a class action. Decision.