On May 25, 2012, Residential Capital LLC (“ResCap”) filed a complaint in United States Bankruptcy Court for the Southern District of New York seeking declaratory and injunctive relief to extend the automatic stay over 27 MBS lawsuits against it, its affiliates, and its executives while it undergoes bankruptcy restructuring. ResCap alleges that all of the lawsuits against its non-debtor affiliates are inextricably connected to the debtor affiliates, and that such lawsuits will drain the debtors’ estates by forcing those entities to undergo extensive discovery and face significant indemnification claims by their directors and officers. ResCap also alleges that by allowing the lawsuits to proceed, ResCap will face significant risk of collateral estoppels and evidentiary prejudice. Complaint.
Southern District of New York
FDIC Brings Two RMBS Lawsuits Against Several Investment Banks and Related Entities
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.
Manhattan Federal Judge Denies UBS’s Motion to Dismiss FHFA Suit
On May 4, the Honorable Denise Cote of the Southern District of New York denied UBS Americas Inc.’s (“UBS”) motion to dismiss the Federal Housing Finance Agency’s (“FHFA”) complaint against it for violations of the Securities Act. FHFA alleges that UBS fraudulently induced Fannie Mae and Freddie Mac into purchasing $6.4 billion worth of mortgage-backed securities from 22 different securitizations by misrepresenting the quality of the mortgage loans and that the mortgage loans complied with the applicable underwriting guidelines. Judge Cote held that the complaint was timely and not barred by the Securities Act’s Statute of Repose, as well as that FHFA had standing to bring the action. The Court also held that the complaint stated a claim under the Securities Act because FHFA had alleged actionable misrepresentations in the offering documents concerning LTV ratios, owner-occupancy status and compliance with underwriting guidelines. Judge Cote did, however, dismiss FHFA’s claims for negligent misrepresentation, concluding that because both parties were sophisticated, no special relationship existed that would support such a claim. Decision.
Allstate RMBS Lawsuit to Stay in Federal Court
On March 27, 2012, Judge Deborah A. Batts of the Southern District of New York denied Allstate Insurance Co.’s motion to remand its lawsuit against JPMorgan Chase Bank NA to state court. The lawsuit arises out of alleged misrepresentations and omissions by JPMorgan regarding the riskiness and credit quality of over $700 million in RMBS sold to Allstate. Judge Batts found federal subject matter jurisdiction based on the FDIC’s presence as a third-party defendant. Order.
New York and Delaware Attorneys General Permitted to Intervene in Bank of America Settlement Approval Proceeding
On November 18, 2011, U.S. District Judge William H. Pauley III of the Southern District of New York granted the requests of the attorneys general of New York and Delaware to intervene in the proceeding seeking approval of an $8.5 billion settlement between Bank of America Corp. and the Bank of New York Mellon, as trustee for several trusts that issued Countrywide Financial Corp. RMBS certificates. The Court found that the intervention of the state AGs would protect the interests of absent investors. In the same order, the Court denied requests to intervene brought by four individual homeowners who are obligors on mortgages owned by one or more of the trusts covered by the proposed settlement agreement. The Court found that the homeowners lacked a direct financial interest in the outcome of the case and could not establish any potential prejudice they might suffer by not being permitted to participate in the settlement approval proceeding. Order.
SDNY Judge Rejects Proposed SEC-Citigroup Settlement
On November 28, 2011, U.S. District Judge Jed S. Rakoff of the Southern District of New York refused to approve a proposed settlement between the SEC and Citigroup Inc. in connection with Citigroup’s alleged shorting of RMBS that it marketed and sold to the public on the grounds that the settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest.” The settlement involved the payment of a total of $285 million by Citigroup, as well as the imposition of certain injunctive measures against Citigroup. In rejecting the settlement, Judge Rakoff stringently criticized the SEC’s policy – “hallowed by history, but not by reason” – of allowing settling defendants to neither admit nor deny wrongdoing because it “deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.” He stressed that the exercise of judicial power and authority that does not rest on facts cannot serve the public interest because it “is worse than mindless, it is inherently dangerous.” Judge Rakoff consolidated the action with a related matter filed by the SEC against a Citigroup employee and directed the parties to be ready to try the case beginning on July 16, 2012. Order.
Citigroup and SEC Defend Proposed Settlement
On November 7, 2011, Citigroup Global Markets Inc. and the Securities and Exchange Commission filed separate memorandums in support of their proposed settlement agreement in the United Stated District Court for the Southern District of New York. Citigroup and the SEC agreed to a settlement over allegations of wrongdoing by Citigroup’s mortgage-backed securities group wherein Citigroup agreed to pay $285 million in exchange for a “no admit, no deny” settlement. Judge Jed S. Rakoff ordered both parties to defend the proposed settlement after questioning the SEC’s decision to accept a non-admission of wrongdoing despite “alleg[ing] a serious securities fraud.” Citigroup defended the settlement in part by arguing that the public interest is better served by allowing sophisticated parties to compromise complicated matters in a manner that avoids wasteful litigation and exposing both parties to extreme results. It also argued that current market conditions penalize corporate stock prices simply because of a company’s involvement in litigation with a regulatory agency, and that a “no admit, no deny” result was necessary to minimize potential collateral consequences in the civil class actions and other litigations pending against Citigroup related to mortgage-backed securities and subprime mortgages. The SEC defended the settlement by stating that the outcome allowed for a quick resolution to the case while still “clearly conveying” that the alleged conduct by Citigroup occurred. Citigroup Submission. SEC Submission.
Insurance Company Files Mortgage-Backed Security Action Against Countrywide, Bank of America
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.
Government Sues Allied Home Mortgage For Fraud Under the False Claims Act
On November 1, 2011, the United States filed suit in the Southern District of New York against Allied Home Mortgage, a mortgage lending company, for allegedly defrauding the government into insuring its now-defaulted loans. The complaint alleges that Allied and CEO Jim Hodge violated the False Claims Act (“FCA”) by making misrepresentations to the Department of Housing and Urban Development to ensure the company could continue originating mortgages insured by the Federal Housing Administration (“FHA”). The complaint alleges that Allied submitted loans to the FHA originated out of “shadow branches” it did not disclose to the government and then illegally routed those mortgages through HUD-certified mortgage branches to avoid detection by the government. The government also contends that Allied failed to implement sufficient quality control measures to ensure underwriting standards were being met. The government seeks a permanent injunction and treble damages. Complaint.
AIG RMBS Dispute Against Bank of America Stays in Federal Court Under the Edge Act
On October 20, 2011, Judge Jones of the U.S. District Court for the Southern District of New York found that the Edge Act conferred federal jurisdiction over a lawsuit brought by AIG against Bank of America and related entities arising out of certain AIG RMBS investments. The Edge Act confers federal jurisdiction over, among other things, any case in which a national bank is a party arising out of transactions involving banking in a U.S. dependency or insular possession. Defendants relied on the presence in certain RMBS collateral pools of mortgage loans that were secured by properties located in overseas locations, such as Puerto Rico, Guam, and the U.S. Virgin Islands. Noting that 4 of the 349 RMBS at issue were backed by mortgages in U.S. territories, Judge Jones found that jurisdiction was proper even if the territorial transactions involve only a small portion of the total transactions at issue. Decision.