Securities Act

HFSC Approves Bill to Repeal Section 939G of Dodd-Frank Act

On July 20, the House Financial Services Committee approved H.R. 1539, the “Asset-Backed Market Stabilization Act of 2011”, to repeal Section 939G of the Dodd-Frank Act. The repeal of Section 939G would reinstate Rule 436(g) of the Securities Act under which NRSROs are excluded from being treated as experts subject to expert liability when credit ratings are included in registration statements under the Securities Act. HFSC Release. HFSC Act.

Second Circuit Reverses Lower Court’s Grant of Dismissal in a Securities Case Against the Blackstone Group

On February 10, 2011, the Second Circuit Court of Appeals vacated ad remanded the dismissal of an action against the Blackstone Group that alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act in connection with Blackstone’s Registration Statement and Prospectus filed as part of its IPO. Plaintiffs had alleged that Blackstone violated the Securities Act when it failed to disclose the likely impact on its real estate investment private equity businesses from the decline in the residential mortgage market and certain other publicly-disclosed events concerning two of its equity investments. In reinstating the claims, the Second Circuit emphasized that public knowledge of the events did not excuse Blackstone from making disclosures about them because Item 303 of Regulation S-K requires issuers to disclose how such events might be reasonably expected to materially affect an issuer’s business. The Second Circuit also emphasized that materiality had to be assessed qualitatively, and that a material impact on one segment of Blackstone’s operations could require disclosure even if quantitatively immaterial to Blackstone as a whole. Appeal.

SEC Files Complaint for Securities Fraud Against Former IndyMac Bank CFO

On February 11, 2011, the SEC filed a complaint in the Central District of California against IndyMac’s former Chief Financial Officer, S. Blair Abernathy, alleging violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act in connection with six IndyMac RMBS offerings in 2007 and several other public securities filings in 2008 on behalf of IndyMac Bancorp, Inc. The complaint alleges that, in 2007, Abernathy received monthly reports indicating that 12%-18% of IndyMac Bank’s loans contained misrepresentations, but that he failed to take reasonable steps to ensure that IndyMac’s RMBS offering documents included adequate disclosures in light of that information. It also alleges that Abernathy was negligent in failing to adequately disclose to investors the deteriorating financial condition of IndyMac Bancorp once he became its CFO in 2008. Complaint.

CalPERS Sues Former Lehman Officers, Directors, and Underwriters for Misstatements and Omissions Related to Subprime and Alt-A Lending

On February 7, 2011, the California Public Employees’ Retirement System (“CalPERS”) filed suit in the Northern District of California against 12 former executive officers and directors of Lehman Brothers Holdings Inc. (“Lehman”) and Lehman’s underwriters, asserting claims under sections 10(b) and 20(a) of the Exchange Act and sections 11, 12(a) and 15 of the Securities Act for losses suffered in its June 2007 through September 2008 investments in Lehman common stock and bonds. The complaint alleges that during that period Lehman did not conduct proper due diligence when it securitized subprime and Alt-A loans and that Lehman failed to adequately disclose risks associated with subprime and Alt-A mortgages. CalPERS also alleges that Lehman failed to adequately disclose risks relating to increased leverage in its investments and that it manipulated its balance sheet by removing debt on a quarterly basis through the use of “Repo 105” transactions. Complaint.

RMBS Complaint Filed Against Countrywide in New York State Court

On January 24, 2011, a group of institutional investors represented by Bernstein Litowitz, including Dexia Holdings Inc., TIAA-CREF Life Insurance Co., and New York Life Insurance Co., filed a case in New York State Court accusing Countrywide Financial Corp. (now an affiliate of Bank of America) and several executives of selling RMBS backed by materially false statements and omissions made knowingly or recklessly. Plaintiffs seek compensatory and/or rescissionary damages for fraud and negligent misrepresentation, statutory damages under the Securities Act, and punitive damages for common-law fraud. Complaint

SEC Proposes Rule Amendments for Market Access

On December 22, the SEC proposed amendments to Rule 163 of the Securities Act that would allow “well-known seasoned issuers” to authorize an underwriter or dealer to communicate with potential investors about securities offerings prior to filing registration statements. Under the current rule, only the issuer can communicate directly with potential investors before a registration statement is filed for an offering. Comments to the amendments must be received by January 27.  SEC Release.  SEC Proposed Amendments.