Texas Securities Act

Texas District Court Rules on Damages Calculations in FDIC’s RMBS Suit Against Goldman Sachs and Deutsche Bank

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On September 14, 2017, Judge Sam Sparks of the U.S. District Court for the Western District of Texas granted summary judgment in favor of defendants Goldman Sachs & Co. and Deutsche Bank Securities Inc. on certain aspects of the method and rate that will be used to calculate damages in an RMBS suit brought by the Federal Deposit Insurance Corporation. The FDIC alleges that the Defendants violated the Securities Act of 1933 and the Texas Securities Act (“TSA”) by making material misstatements and omissions concerning the mortgages underlying $2.1 billion worth of residential mortgage-back securities.

The Defendants had moved for summary judgment on the method and rate for calculating damages under the TSA’s Article 581-33(D)(3). First, they argued that damages should be calculated using the “declining principal balance method” to account for payments made on the outstanding balance in the interest calculation. The Court agreed, comparing the language of the TSA with that of the Securities Act of 1933, and holding that this method appropriately “compensate[s] a defrauded buyer based on out-of-pocket consideration at any given time,” which aligns with the TSA’s purpose to “return defrauded buyers to the status quo.”

Defendants also requested that the damages interest rate, which was described as the “legal rate” in the contractual provision, should be the “Coupon Rate” specified in the underlying security certificates. Judge Sparks rejected this argument because “legal rate” was not defined in the contract, and held instead that the interest rate should be six percent per year under general provisions of interest in Chapter 302 of the Texas Finance Code, based on how Texas statues and courts had interpreted “legal rate” in other contexts. Summary Judgment Order

Court Reverses Itself and Dismisses RMBS Fraud Complaint Against Several Banks

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On September 30, Judge Sam Lindsay of the U.S. District Court for the Northern District of Texas granted a motion to dismiss plaintiff Town North Bank’s amended complaint against UBS, Morgan Stanley, Merrill Lynch, and J.P. Morgan, among others. Town North Bank asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and the Texas Securities Act. In March 2013, Judge Lindsay had denied the defendants’ motion to dismiss but reviewed the briefs anew when the defendants filed a motion for interlocutory appeal. Upon that review, Judge Lindsay sua sponte vacated the March 2013 order and granted the motion to dismiss. In particular, Judge Lindsay found claims related to certain of the alleged misstatements time barred under the applicable statute of repose found in 28 U.S.C. § 1658(b). As to the remaining statements, Judge Lindsay found that Town North Bank had not adequately alleged that the Defendants “made” the statements in light of the U.S. Supreme Court’s recent ruling in Janus Capital Group v. First Derivative Traders. The court also concluded that Town North Bank did not allege scienter with sufficient particularity because the amended complaint lacked factual allegations from which the court could reasonably infer that Defendants were aware of any false statements at the time they were made. Order.

NCUA Can Bring RMBS Claims Against Goldman Sachs in Federal Court

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On January 28, Judge Denise Cote of the U.S. District Court for the Southern District of New York denied Goldman Sachs’s motion to compel arbitration for RMBS claims brought by the National Credit Union Administration (NCUA). NCUA brought the claims as the liquidating agent of the Southwest Corporate Federal Credit Union. Goldman sought to compel arbitration under an agreement between Southwest and Goldman Sachs from 1992. The court held that NCUA has the power to repudiate contracts of a credit union in liquidation under the terms of its enabling legislation, and exercised that authority here. NCUA’s claims under Sections 11 and 12 of the Securities Act of 1933 and under the Texas Securities Act will proceed in federal district court. Order.

Central District of California Dismisses FDIC’s Federal and State Securities Claims In Connection With RMBS Purchases

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On August 26, Judge Mariana R. Pfaelzer of the U.S. District Court for the Central District Court of California dismissed with prejudice a suit brought by the Federal Deposit Insurance Corporation (FDIC) against Countrywide Securities Corporation, Countrywide Financial Corporation, Bank of America Corporation, Deutsche Bank Securities, Inc. and Goldman, Sachs & Co.  In its amended complaint, the FDIC alleged that the offering documents for eight RMBS certificates that Guaranty Bank purchased between July 2005 and April 2006 contained material misstatements in violation of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Article 581-33 of the Texas Securities Act.  It also brought claims under Section 15 of the 33 Act against Countrywide.  The FDIC was appointed as receiver for Guaranty Bank in August 2009 and filed suit on August 17, 2012.  The court followed its earlier decisions in dismissing the FDIC’s claims as time-barred by the three year statute of repose under the ’33 Act.  The court also held that the extender provision of FIRREA does not toll or pre-empt state statutes of repose, and therefore dismissed the FDIC’s claims under the Texas Securities Act as time-barred.  Decision.

National Credit Union Administration Sues Bear Stearns for $3.6 Billion in RMBS

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On December 17, 2012, the National Credit Union Administration Board, acting in its capacity as liquidating agent for four failed credit unions, sued several Bear Stearns affiliates in federal court in Kansas in connection with $3.6 billion in RMBS allegedly purchased by the failed credit unions.  The NCUA alleges that the originators of the mortgage loans underlying the RMBS systematically disregarded the underwriting guidelines stated in the offering documents.  It also alleges that the offering documents contain untrue statements of material fact concerning the evaluation of the borrowers’ capacity and likelihood to repay the mortgage loans, reduced documentation programs, loan-to-value ratios, and credit enhancement.  The NCUA asserts 24 separate counts for relief under Sections 11 and 12(a)(2) of the Securities Act of 1933, the California Corporate Securities Law, the Kansas Uniform Securities Act, the Texas Securities Act, and the Illinois Securities Act.  Complaint.