RMBS

New York Extends Common Interest Privilege Protection to Non-Litigation Communications

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Ordinarily, when a communication between an attorney and her client is disclosed to a third party, that communication loses its privileged status.  The common interest privilege operates as an exception to that rule that allows the privilege to extend to communications with certain third parties.  For the common interest doctrine to apply, the communication must be in furtherance of a legal interest that is shared by the client and the third party.  Historically, New York courts additionally required that the communication relate to legal advice regarding pending or prospective litigation.  On December 4, 2014, in a landmark decision, a New York appellate court did away with this additional requirement.

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Second Circuit Blunts Impact of American Pipe Tolling; Plaintiffs Must Bring ’33 Act Claims Before the Three Year Statute of Repose Expires

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The Second Circuit last week ruled on a key aspect of the timing of securities suits. Under the Supreme Court’s decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), plaintiffs are often able to revive claims by relying on earlier-filed class actions to toll the statute of limitations. RMBS plaintiffs have recently turned to American Pipe when their putative class actions are dismissed for lack of standing. 

In In re IndyMac Mortgage-Backed Securities Litigation, lead plaintiffs lacked standing to bring certain claims, which were dismissed by the district court. Other members of the asserted class—who had not been named as plaintiffs—sought to intervene in the action in order to bring those dismissed claims. Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York denied the investors’ motions to intervene. READ MORE →

Where There’s Smoke, There’s FIRREA

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Few can ignite a legal firestorm like U.S. District Judge Jed Rakoff of the Southern District of New York. Last week, in a mortgage fraud suit against Bank of America and Countrywide, Judge Rakoff refused to dismiss a novel claim for civil penalties under the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”). The ruling will surely encourage civil prosecutors to make wider use of FIRREA, which provides a generous ten-year statute of limitations and low burden of proof, in pursuing financial fraud cases.

FIRREA was enacted in response to the Savings and Loan debacle of the 1980s, as well as the fraud scandals that emerged during that era. The statute includes a clause imposing a civil penalty for mail and wire fraud and other violations “affecting a federally insured financial institution.” Until recently the civil penalty provision has been ignored by prosecutors, leaving courts without occasion to decide what exactly the statute means by “affecting” a financial institution. READ MORE →

Task Force Targets Bear Stearns; Other Banks in the Crosshairs

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After being formed to great fanfare in January 2012, the Residential Mortgage-Backed Securities Working Group, part of President Obama’s Financial Fraud Enforcement Task Force, stayed largely silent for eight months. No longer. With its October 1 filing of what could be a $87 billion lawsuit against Bear Stearns successor J.P, Morgan—as well as not-so-subtle hints of more lawsuits to come—the RMBS Working Group made its presence felt with a bang, not a whimper.

The lawsuit is unique among RMBS cases in that it does not focus on alleged misrepresentations or omissions made in connection with individual RMBS deals. Instead, the RMBS Working Group, acting through co-chair Eric Schneiderman, New York’s Attorney General, is taking on Bear Stearns’ entire RMBS business over a multi-year period. The complaint focuses on alleged defects in Bear Stearns’ due diligence process, accusing Bear Stearns of disregarding due diligence results showing the allegedly poor quality of the loans underlying its securitizations and of ignoring its own employees’ requests to correct perceived deficiencies in its due diligence process. The complaint also charges Bear Stearns with failing to comply with its stated post-closing obligations, including by not taking adequate steps to ensure that loan originators repurchased problematic loans from the RMBS trusts. Bear Stearns allegedly arranged side deals with the originators for confidential cash payments at a fraction of the contractual repurchase price, thus securing recovery for itself without passing it on to investors. The suit seeks a variety of remedies, including “restitution of all funds obtained from investors”—potentially all of the $87 billion in RMBS allegedly sold by Bear Stearns during the relevant period.
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SDNY Construes ‘Material and Adverse Effect’

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In numerous pending lawsuits in New York federal and state courts, monoline insurers are suing Wall Street banks for alleged breaches of representations and warranties about the quality and characteristics of residential loans in RMBS pools. At stake in these suits is the ultimate responsibility for billions of dollars in losses suffered by RMBS certificate holders insured by the monolines. In most of these deals, the applicable MLPA, PSA and insurance contracts provide that the securitization’s sponsor must repurchase a loan if a breach of a representation or warranty “materially and adversely affects” the interests of the insurer in the loan. The fighting issue is whether this provision requires an insurer to prove that the alleged breaches of representations and warranties proximately caused the loan to become delinquent or default. Now, for the first time, a New York federal court has squarely addressed this critical question. READ MORE →

Monoline Insurer Hoist with its Own Petard

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A common claim alleged by monoline insurers is that RMBS sponsors fraudulently induced them to provide the insurance by misrepresenting the quality of loans and underwriting.  As the story invariably goes, the insurer only discovered that it was defrauded after its vendor reviewed a sample of several hundred loan files, and was shocked to find that most loans, usually alleged to be somewhere between 75% to 95% of the sample, breached representations and warranties.  On May 4, a New York court turned these types of post-loss file reviews against the insurer in CIFG Assur. N.A., Inc. v. Goldman Sachs & Co., Index No. 652286/2011 (N.Y. Sup. Ct.).  Here, the court found that the very same file sampling and review easily could have been done – and legally should have been done – in the insurers’ due diligence.  The insurer’s failure to conduct adequate due diligence when it issued its policy required dismissal of its fraud claim for lack of reasonable reliance. READ MORE →