Abs/Rmbs Litigation:: 2010 in Review

February 2011
ABS/RMBS LitigAtion:
2010 in Review
In 2010, the courts made over 60 significant decisions in litigation about asset-backed securities, especially residential mortgage-backed securities. These came in three main areas: securities-law claims against issuers and sellers of such securities; claims by monoline insurers to put back loans in trusts that issued bonds that they had guaranteed (or wrapped); and claims by investors against credit rating agencies that bestowed their highest ratings on securities that soon plummeted in value. Investors and the monolines fared well in the first two areas. Even applying the stringent Twombly-Iqbal pleading standard, over a dozen federal courts were virtually unanimous in sustaining all or at least substantial parts of complaints that issuers and sellers of RMBS made untrue or misleading statements in the sale of those securities. The exception was the decision of the Court of Appeals for the Fifth Circuit in Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, an outlier that virtually no other court has been willing to follow. The monolines advanced in the day-to-day, hand-tohand combat that the banks have promised investors, winning an important ruling that they can use sampling, rather than evidence about every loan, to prove their putback cases. Investors did not persuade the courts, however, that rating agencies are underwriters under the securities laws, leaving investors to pursue only more difficult common law claims. In this essay, we summarize these and other significant decisions in ABS/RMBS litigation over the last year. We hope that this summary will be useful to the growing community of participants in and observers of this important area of law.
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February 2011
tABLe of contentS
SecuRitieS cLAiMS Allegedly Untrue or Misleading Statements Disclaimers and Warnings Sole Remedy Defense cLAiMS By MonoLine inSuReRS cLAiMS AgAinSt RAting AgencieS First Amendment Defense and Non-Actionable Opinion Claims under Section 11 of the Securities Act of 1933 contRoL PeRSon And SucceSSoR LiABiLity Control Persons Bank of America and Countrywide PRoceduRAL iSSueS Class Action Standing Statute of Limitations Choice of Law No Action Clauses Sampling WhAt to exPect in 2011 Page Page Page Page 01 01 06 09
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table of contents
February 2011
SecuRitieS cLAiMS
SecuRitieS cLAiMS Allegedly Untrue or Misleading Statements Disclaimers and Warnings Sole Remedy Defense cLAiMS By MonoLine inSuReRS cLAiMS AgAinSt RAting AgencieS First Amendment Defense and Non-Actionable Opinion Claims under Section 11 of the Securities Act of 1933 contRoL PeRSon And SucceSSoR LiABiLity Control Persons Bank of America and Countrywide PRoceduRAL iSSueS Class Action Standing Statute of Limitations Choice of Law No Action Clauses Sampling WhAt to exPect in 2011
Allegedly Untrue or Misleading Statements

In strict-liability cases under the Securities Act of 1933, the courts considered three main categories of allegedly untrue or misleading statements in the offering documents for RMBS: disregard of underwriting standards, incorrect appraisals and loan-to-value ratios, and misleading ratings. The courts were unanimous in upholding claims based on the first; mixed in their judgments of the second; and almost unanimous in rejecting claims that ratings were based on outdated methods or that the credit rating agencies had conflicts of interest. disregard of underwriting standards. On this point, 2010 began in September 2009 with the anomalous decision of the federal court in the District of Massachusetts in Plumbers Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp. and ended in January 2011 with the reversal of that decision on this point by the Court of Appeals for the First Circuit. As the district court summarized the complaint, the plaintiffs alleged that the registration statements falsely stated that the originators underwriting standards were intended to insure that prospective borrowers were creditworthy [when in fact those standards] were never intended to filter out potentially risky borrowers. Rather, plaintiffs argue that the banks were hellbent on originating as many loans as possible with an eye to short-term profit without any regard to the ability of the borrowers to repay. Noting that the registration statements warned that the underwriting standards of the originators were less stringent than those of Fannie Mae and Freddie Mac and that the limited documentation programs of the originators may not require verification of income, employment, or assets, the district court concluded: Plaintiffs argument that they were not on notice of the originators soft underwriting practices begs credulity. The next month, October 2009, the federal court in the Southern District of New York decided the opposite, reaching a conclusion that a dozen courts similarly would reach in 2010 and, with the reversal of the decision in Plumbers v. Nomura in January 2011, would become unanimous. In In re Dynex Capital, a case about the securitization of manufactured-housing loans, the court ruled that statements about underwriting standards of originators are misleading to the extent that they claim that some standards were followed when in fact such requirements were regularly or routinely disregarded. In February
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2010, in a more widely publicized decision, In re Lehman Brothers Securities and ERISA Litigation, another judge of the same court upheld allegations that statements about underwriting standards were misleading if originators systematically disregarded or essentially abandoned those standards. The court rejected the defense that the offering documents disclosed that originators had the discretion to make loans under exceptions to their stated standards; making loans under disclosed exceptions, the court held, is not the same as systematically failing to follow or essentially abandoning the standards, including the standards for making exceptions. The court also rejected the defense that SEC Regulation AB requires issuers and sellers of securities to disclose only what they know about an originators underwriting standards. The court held that, under the 1933 Act, the knowledge of issuers and sellers is immaterial; they are strictly liable for any untrue or misleading statement. The principle decided in Dynex and Lehman Brothers that statements about underwriting standards are misleading if the originator systematically disregarded or essentially abandoned those standards was then followed in 11 decisions of district courts and, in January 2011, by the First Circuit in its reversal of Plumbers v. Nomura. Those decisions were Tsereteli v. Residential Asset Securitization Trust 2008-A8, New Jersey Carpenters Vacation Fund v. Royal Bank of Scotland Group, PLC, New Jersey Carpenters Health Fund v. DLJ Mortgage Capital, Inc., New Jersey Carpenters Health Fund v. Residential Capital, LLC, all in the Southern District of New York; In re Wells Fargo Mortgage-Backed Certificates Litigation in the Northern District of California; Public Employees Retirement System v. Merrill Lynch & Co., In re IndyMac Mortgage-Backed Securities Litigation, both in the Southern District of New York; Boilermakers National Annuity Trust Fund v. WaMu Mortgage PassThrough Certificates, in the Western District of Washington; City of Ann Arbor Employees Retirement System v. Citigroup Mortgage Loan Trust, Inc. and Massachusetts Bricklayers & Masons Funds v. Deutsche Alt-A Securities, in the Eastern District of New York; Public Employees Retirement System v. Goldman Sachs Group, Inc. in the Southern District of New York (January 2011). incorrect appraisals and loan-to-value ratios. The offering documents in RMBS transactions state the loan-to-value ratio of the mortgage loans in the collateral pool. The denominator in that ratio the value of the mortgaged property is often based on an appraisal done when the mortgage loan was originated. Moreover, many offering documents state that such appraisals were conducted in compliance with the Uniform Standards of Professional Appraisal Practice. Many plaintiffs in securities cases allege either that the
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appraisals used to compute the LTVs were too high (and therefore the LTVs too low) or that the appraisals were not done in compliance with USPAP or both.
Courts have found two weaknesses in these allegations. The first is that the evidence for the allegations is too general and the link between that evidence and the actual loans in the collateral pools of the securities involved in the case is correspondingly too weak. The district court in Plumbers v. Nomura was the first to dismiss allegations for this reason. There the evidence that appraisals were inflated was the congressional testimony of the Chair of the Appraisal Institute (a trade group of appraisers) (for which testimony the plaintiffs gave no date) and a survey of appraisers conducted well after the securities offerings involved in the case. The court dismissed those allegations, concluding that they offer nothing that suggests the testimony had any bearing on the two Trusts at issue. That questionable appraisal practices were a common problem in the industry as a whole, without more, tells nothing about the Trusts underlying loans. The First Circuit affirmed this ruling, holding that [o]n this basis, virtually every investor in mortgage-backed securities could subject a multiplicity of defendants to the most unrestrained of fishing expeditions. The courts in Tsereteli, In re IndyMac, Boilermakers v. WaMu, and Footbridge Limited Trust v. Countrywide Home Loans, Inc. (Southern District of New York) reached similar conclusions. Only in In re Wells Fargo did the court sustain such allegations. The second weakness that courts have found in allegations about inflated appraisals and understated LTVs is that appraised values are opinions, and an opinion is not actionable under the securities laws unless the giver of the opinion did not actually hold the opinion. This theory got its start in Tsereteli. Even though neither side raised or briefed the issue, the court raised it on its own. The sum total of its analysis was: [N]either an appraisal nor a judgment that a propertys value supports a particular loan amount is a statement of fact. Each is instead a subjective opinion based on the particular methods and assumptions the appraiser uses. A subjective opinion is actionable under the Securities Act only if the amended complaint alleges that the speaker did not truly have the opinion at the time it was made public. The amended complaint is devoid of any such allegation. (Emphasis added.) For the italicized sentence, the court cited the decision of the Supreme Court in Virginia Bankshares, Inc. v. Sandberg (1991) and two lower-court decisions that relied on it, Shields v. CityTrust Bancorp in the Second Circuit (1994) and
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In re Global Crossing, Ltd. Securities Litigation in the Southern District of New York (2003). Those decisions indeed held that an opinion is actionable if the speaker did not truly hold the opinion, but none of them held that an opinion is actionable only under those circumstances. Thus, those three decisions would support the italicized sentence if the word only were deleted, but then the sentence would not support the result in Tsereteli. Such is the danger of courts deciding questions without the benefit of the adversarial process. Another judge followed Tsereteli without analysis in New Jersey Carpenters v. DLJ, and the judge who decided Tsereteli followed it in In re IndyMac. The court in In re Wells Fargo sustained allegations about appraisals and LTVs and thus did not follow Tsereteli, and the courts in Boilermakers v. WaMu and Footbridge v. Countrywide rejected those allegations on the grounds that they were too general, without reaching the question whether appraisals are non-actionable opinions. Thus, only two judges (not including the panel of the First Circuit that decided Plumbers v. Nomura) have actually endorsed the theory that appraisals are opinions that are not actionable under the securities laws without an allegation that they were not sincerely held. Misleading ratings. Many plaintiffs allege that it was misleading to disclose the triple-A ratings of most residential mortgage-backed securities without also disclosing that the rating agencies used outdated models in arriving at those ratings, or lowered their rating criteria to generate more business, or had conflicts of interest with the investment banks that sponsored RMBS deals and paid for the ratings. Federal courts have all but unanimously rejected these allegations. The first dismissal of these allegations came in Plumbers v. Nomura. The complaint quoted statements by employees of the rating agencies, made after the subprime market collapsed in mid-2007, that they had lowered their rating standards on RMBS. The court wrote that [n]one of the purported comments made by S&P and Moodys employees in the wake of the collapse of the sub-prime mortgage market (in 2007) support the inference that the ratings were compromised as of the dates (in 2005 and 2006) when the registration statements and prospectus supplements became effective. The court also noted that plaintiffs were duly cautioned that [t]he security ratings assigned to the Offering Certificates should be evaluated independently from similar ratings on other types of securities. A security rating is not a recommendation to buy, sell or hold securities. Neither reason is persuasive, and when the First Circuit affirmed this aspect of Plumbers v. Nomura, it did so on other grounds.
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The Southern District of New York considered similar allegations in Lehman Brothers. There the plaintiffs alleged that the amount of credit enhancement for the certificates was inadequate because the rating agencies used obsolete methods to calculate it. The court held that the sufficiency of credit enhancement was an opinion, not a statement of fact, which would not be actionable unless plaintiffs alleged that the rating agencies did not actually hold that opinion. (The judge in Lehman Brothers also wrote Tsereteli.) The plaintiffs also alleged that the offering documents did not disclose the conflicts of interest that the rating agencies had with Lehman Brothers, which paid them to rate RMBS certificates. The court dismissed these allegations because conflicts of interest between investment banks and rating agencies had been public knowledge for years. The Southern District of New York reached the same conclusions in Tsereteli, New Jersey Carpenters v. RBS, New Jersey Carpenters v. DLJ, New Jersey Carpenters v. ResCap, and In re IndyMac, as did the Western District of Washington in Boilermakers v. WaMu. Only in In re Wells Fargo did the Northern District of California sustain such allegations on the basis of statements by executives of the rating agencies that they were aware when the ratings were issued that their methods were outdated. When the First Circuit affirmed the holding of Plumbers v. Nomura about ratings, it did so primarily because ratings are opinions. It wrote: An opinion may still be misleading if it does not represent the actual belief of the person expressing the opinion, lacks any basis or knowingly omits undisclosed facts tending seriously to undermine the accuracy of the statement. This formulation is considerably broader than the statement in Tsereteli that opinions are actionable only if the speaker did not actually holder the opinion. Moreover, the First Circuit wrote, there is liability without fault even for those who merely report the statements or opinions of others.
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Disclaimers and Warnings

Over the last year, two issues have dominated the discussion in courts about whether statements of risk or disclosures in prospectus supplements are sufficient to absolve defendants of liability for untrue or misleading statements or omissions. The first issue is whether a plaintiff can sufficiently allege that its reliance on statements made by the defendants in the prospectus supplement was reasonable, given the cautionary language and risk disclosures made to it. The second is whether a plaintiff can adequately allege economic loss or a decline in the value of its security where no secondary market exists in which it can measure the current value of its holding and where it was warned of the potential for lack of future liquidity at the time of the offering. Adequacy of warnings. Three recent cases are instructive in determining the legal effect of disclaimers asserted by defendants as a shield from liability for untrue or misleading statements or omissions. All three courts agreed that plaintiffs can overcome cautionary language if the language did not expressly warn or did not directly relate to the risk that brought about plaintiffs loss. In addition, these courts, and others, agree that where disclosures or cautionary language fails to make clear the magnitude of the risk at issue or the extent to which it may materialize, those disclosures or warnings are inadequate to shield defendants from liability for the statements to which they relate. In New Jersey Carpenters v. DLJ, in the Southern District of New York, the plaintiff filed various securities fraud claims on the ground that the offering documents on which it had relied contained numerous materially misleading statements and omissions regarding the administration of loan approval oversight and control guidelines, the impaired quality of the underlying home equity collateral, and the inflation of investment ratings. The defendants argued that they supplied ample cautionary language and risk disclosures in the offering documents so that any reasonable investor would have considered itself sufficiently warned of the potential risks associated with the investment. The defendants contended that their disclosures and warnings absolved them of liability under the bespeaks caution doctrine, which holds that alleged misrepresentations in a stock offering are immaterial as a matter of law if it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering.
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The court, however, noted that bespeaks caution applies only to forward-looking statements, and thus cannot immunize [d]efendants from liability where the harm [has] already occurred. In addition, the court pointed out that in light of the flagrant violations of underwriting guidelines alleged in the complaint, the disclosures made by the defendants failed to convey the severity of the investment risk a risk already present at the time of the offering. The court concluded that the disclosures failed to make clear the magnitude of the risk being assumed by the investor, and therefore, failed to adequately apprise the investor of the attendant risks associated with investment. Similarly, in New Jersey Carpenters v. RBS, the Southern District of New York considered whether plaintiffs sufficiently alleged that defendants had omitted and mis-stated material information regarding the systemic disregard of underwriting guidelines, inadequate credit enhancements based on an outdated credit rating model, and conflicts of interest involving the ratings agencies. The defendants argued that plaintiffs claims regarding abandonment of underwriting guidelines could not be actionable because the disclosures defendants made were only to the best of their knowledge. The court disagreed and held that not only were the disclosures inadequate to warn an investor that mortgage originators may abandon even the most minimal of underwriting standards but that the disclosures could themselves constitute material misstatements. The court stated that risks associated with the underwriting guidelines were not otherwise adequately disclosed in the Offering Documents or suffused with cautionary language to bespeak caution... Disclosures that described lenient, but nonetheless existing guidelines about risky loan collateral, would not lead a reasonable investor to conclude that the mortgage originators could entirely disregard or ignore those loan guidelines. Plaintiffs also argued that the offering documents were misleading by touting credit enhancements that were inadequate in light of the high rate of defaults and delinquencies in the loan pools, and for failing to disclose that the model used by the ratings agencies to assign ratings to the securities was outdated. The court determined that these disclosures were adequate. The court held that [t]he Offering Documents disclosed the risks of relying on credit ratings, the potential inadequacy of credit enhancement, and that a lack of historical data made future predictions about value inherently difficult, and that these disclosures adequately warned the investor of exactly the risk[s] the plaintiffs claim [were] not disclosed.
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Other courts considering this issue have reached the same result. Thus, there appears to be a trend in recent RMBS litigation that defendants generally do not escape liability by enshrouding themselves in the warm cocoon of general disclaimers, disclosures, and warnings about attendant risks. Lack of secondary market. A disclaimer often made to the purchaser of an RMBS security is that the underwriter, seller, or sponsor makes no representation or promise that there is or will be a market for the security being offered. The disclaimer typically warns the investor that in the event no such market develops, a holder of the security may be unable to determine the value of it at any particular time and may be forced to hold the security indefinitely because of its lack of liquidity. Courts recently have held that such disclaimers defeat an investors claim that the absence of a secondary market has either caused the value of its security to decline or prevented the investor from being able to estimate the value of its security for the purposes of calculating its damages or quantifying its economic loss. In NECA-IBEW Health & Welfare Fund v. Goldman, Sachs & Co., the Southern District of New York held that the investors in those cases had been sufficiently warned in the offering materials related to those investments of the possibility that their investments may suffer from a lack of liquidity. Not all courts have so harshly dismissed plaintiffs claims of loss or injury where the fair market value of the security at issue cannot be assessed because of the lack of a secondary market. In Boilermakers v. WaMu, defendants there, too, urged dismissal on the ground that the plaintiffs failed to allege an economic loss because they were unable to assess the fair market value of their holdings at the time the lawsuit commenced. The Washington district court decided that [p]laintiffs allegations of loss give rise to the inference that the value of the security is much less than the purchase price. The mere fact that [p]laintiffs may have difficulty substantiating the exact nature of their loss in an illiquid market does not necessitate dismissal.
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Sole Remedy Defense

Two thousand ten started out on a low note for investors when, on January 11, the Fifth Circuit affirmed the decision of the Northern District of Texas in Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC. The Northern District dismissed the complaint in its entirety based on the repurchase provisions in the PSA. The Lone Star plaintiffs alleged that contrary to Barclays representations, the [mortgage pool for two trusts] had a substantial number of delinquent loans and the misrepresentations [that there were no delinquent loans in the two trusts] constituted fraud. The Fifth Circuit held that since the PSAs stated that Barclays would repurchase any loans that were delinquent and that under the PSA, repurchase of delinquent loans was the sole remedy available to plaintiffs, Barclays did not represent that [the mortgage pools] were absolutely free from delinquent loans and [c]onsequently, Barclays made no actionable misrepresentations. Defendants have tried to convince courts to apply the Lone Star holding to almost all alleged misrepresentations, but they have been unsuccessful: Courts interpreting Lone Star have limited its holding solely to representations about delinquent loans. In City of Ann Arbor Employees Retirement System v. Citigroup Mortgage Loan Trust, Inc., the Eastern District of New York distinguished Lone Star because the plaintiffs in City of Ann Arbor alleged widespread misrepresentations regarding the nature of the underwriting practices described in the offering documents rather than that a limited number of loans were delinquent. The Eastern District of New York followed Ann Arbor in Massachusetts Bricklayers & Mason Funds v. Deutsche Alt-A Securities. Similarly, in Boilermakers v. WaMu, the Western District of Washington held that unlike the scenario in Lone Star, Plaintiffs allegations are not simply based on a representation about the absence of delinquent loans. In fact, the only case that applied Lone Stars sole remedy holding, Footbridge v. Countrywide, applied it only to allegations about delinquent loans and not to other alleged misstatements.
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cLAiMS By MonoLine inSuReRS

A distinct category of lawsuits filed in the wake of the mortgage-backed securities market meltdown is that brought by monoline insurance companies to recover claims payments. Since mid-2009, courts have issued significant decisions in seven cases brought by monoline insurers. Six of the opinions MBIA v. Countrywide, Financial Guaranty v. Countrywide, MBIA v. Residential Funding, MBIA v. GMAC, MBIA v. Credit Suisse, and Financial Guaranty v. Countrywide decided motions to dismiss. The remaining case, Ambac v. EMC, decided a motion to amend the complaint. The insurers filed these lawsuits after paying hundreds of millions of dollars in claims because of a sharp increase in mortgage loan delinquencies and defaults, which the insurers alleged was the result of false and fraudulent loan origination practices and mortgage loan data. Monoline insurers entered into agreements with mortgage loan originators to provide financial guarantee insurance covering payments due to securities holders. If the trust that issued a particular security was unable to make payments to the holders of that security, the monoline insurer would make those payments to the trust which would, in turn, make the required payments to the securities holders. The mortgage loan originators made numerous representations, warranties, and disclosures about the mortgages underlying each securitization. The disclosures described, for example, the underwriting guidelines that mortgage originators were to follow and stated that those guidelines, in fact, had been followed with respect to the loans in the mortgage pools. The loan originators also provided insurers with loan tapes and schedules that contained data about each mortgage, such as the loan-to-value ratio, the borrowers debt-to-income ratio, FICO credit score, and intention to occupy the purchased property. In addition, the transaction documents typically included provisions requiring loan originators to indemnify the insurers for breaches of representations and warranties and to repurchase or substitute particular mortgage loans found to be materially defective. The monoline insurers primarily assert contract-based claims or common law tort claims. Typically, the defendants are loan originators and their affiliates. Sometimes, other participants in the securitization process (for example, underwriters) are also sued. contract claims. The insurers in all seven cases assert claims for breach of contract based on allegedly false representations, warranties, and other contract provisions. Some plaintiffs, such as those in MBIA v. Residential Funding,
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Ambac v. EMC, and MBIA v. Credit Suisse, also allege that defendants breached their agreements by failing to repurchase or replace particular defective mortgage loans as they were obligated to do under the contracts. Finally, plaintiffs in six of the seven cases (all but Ambac v. EMC) allege that defendants breached the duty of good faith and fair dealing, a provision typically implied in all contracts under state law. In all six cases where defendants moved to dismiss claims, not one loan originator sought dismissal of any breach of contract claims asserted against it. In three cases, defendants other than loan originators did seek dismissal of breach of contract claims. In MBIA v. Credit Suisse, the sponsor, DLJ Mortgage Capital, sought dismissal of the breach of contract claims against it on the ground that MBIAs allegations lacked specificity because, as the Supreme Court of New York (New Yorks triallevel court) put it, MBIA did not identify thousands of loan-level breaches. The court rejected DLJs argument, noting that such specificity was not required at the pleading stage and that, further, MBIAs claim was based on the pervasive and systemic nature of the breaches. In MBIA v. Countrywide, Countrywide Financial Corp., the parent of the loan originator, and Countrywide Securities Corp., the underwriter of the securitizations, moved to dismiss the breach of contract claims on the ground that they were not signatories to the contracts. The Supreme Court of New York agreed and dismissed those claims. The defendants in all six cases moved to dismiss claims alleging breach of the implied duty of good faith and fair dealing. All defendants made the same argument: these claims were duplicative of the plaintiffs other breach of contract claims and therefore should be dismissed. The Supreme Court of New York, in MBIA v. GMAC and Financial Guaranty v. Countrywide, agreed. In contrast, the Supreme Court of New York in MBIA v. Countrywide and the Central District of California in Financial Guaranty v. Countrywide did not dismiss the claims for breach of the implied duty of good faith. In MBIA v. Countrywide, the court allowed the claim to stand but only to the limited extent that it asserts that corrective action [by Countrywide] ... would have preserved MBIAs benefits under the bargain, but that Countrywide Home deliberately refused to take such action. In Financial Guaranty v. Countrywide, the court, without discussion, rejected Countrywides argument that the claim for breach of the duty of good faith was duplicative.
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tort claims. In every monoline case discussed here, the principal tort claim is for fraud and/or fraudulent inducement. In the six motions to dismiss, the defendants argued that the fraud-based claims were duplicative of the contract-based claims and/or that it was unreasonable for the insurers to rely on the defendants representations when deciding whether to insure the bonds. For the most part, the courts rejected both arguments. In MBIA v. Countrywide, the court explained that a fraud-based claim is duplicative of a contract-based claim only where a plaintiff alleges that the defendant had no intention of complying with its obligations under the contract, but not where the plaintiff alleges that the misrepresentations were made to induce the plaintiff to enter into the contract. Because MBIA alleged that Countrywides misrepresentations were meant to induce MBIA to issue the insurance policies, its claim for fraud was not duplicative. Defendants in MBIA v. Countrywide also argued that, as a sophisticated party, the insurer could not have reasonably relied on the defendants representations relating to the mortgage loans. The court rejected that argument. The court acknowledged that sophisticated parties do, in fact, have a legal duty to investigate the risks they are assuming and to review data provided, but questioned how much information regarding the securitizations MBIA could access. Because of its skepticism about the level of information available to MBIA, the court concluded that [e]ven assuming MBIA conducted a full inquiry under the circumstances in relation to the bidding process, it is not conclusive that MBIA could have discovered the alleged fraud. In contrast, the court in Financial Guaranty v. Countrywide an outlier in several respects reached the opposite conclusion about the insurers reliance on the defendants representations, calling any allegation of reasonable reliance implausible on its face. The court stated that [n]o reasonable insurer would rely upon generalized representations about quality underwriting and that, assuming the accuracy of plaintiffs allegation that over 55% of the loans breached Countrywides representations, the only plausible inference is that United Guaranty failed to conduct any audit before closing the transactions. A similar conclusion was reached by the Supreme Court of New York in MBIA v. Residential Funding.
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cLAiMS AgAinSt RAting AgencieS

In view of the importance of the rating agencies to the securitization process, and in particular, the flagrant inaccuracy of their ratings of structured finance securities, it is hardly surprising that plaintiffs continue their efforts to hold the agencies responsible for plaintiffs losses. Plaintiffs have had some success limiting slightly the scope of First Amendment protection for ratings and reports issued by the agencies. Plaintiffs have had no luck in holding the agencies strictly liable as underwriters under Section 11 of the Securities Act of 1933.
First Amendment Defense and Non-Actionable Opinion

It remains well established that rating agencies generally enjoy heightened First Amendment protection. In particular, a rating agency cannot be found liable for its ratings or reports that are a matter of public concern unless the agency acted with actual malice (i.e., knowledge that the rating or report was false or with reckless disregard for whether it was true or false). Ratings and reports that are publicly disseminated are matters of public concern. However, in Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., the Southern District of New York held that ratings and reports disseminated to a select group of investors are not of public concern, and therefore, not entitled to exalted First Amendment protection. A California Superior Court reached a similar conclusion in California Public Employees Retirement System v. Moodys Corp. Closely related to the First Amendment defense are the limits of state or federal law that frequently are imposed on liability for statements of opinion. The First Circuit in Plumbers Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp. formulated these limits as follows. An opinion may still be misleading if it does not represent the actual belief of the person expressing the opinion, lacks any basis or knowingly omits undisclosed facts tending seriously to undermine the accuracy of the statement. The rating agencies have had considerable success in convincing the courts that their ratings and reports are statements of opinion.
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Claims Under Section 11 of the Securities Act of 1933

In an attempt to circumvent the heightened state of mind requirements that frequently apply to claims against rating agencies, plaintiffs have alleged that the agencies are strictly liable under Section 11 of the Securities Act of 1933. These efforts have been unavailing. Section 11 enumerates the categories of persons and entities that may be held liable under the statute. One category is underwriters. In attempting to plead that the agencies are underwriters, plaintiffs have made allegations relating to the agencies extensive involvement in multiple steps necessary to the distribution of the securities, such as participating in structuring the securities, assigning credit ratings, and participating in drafting the prospectus supplements. The courts have found these allegations insufficient, however, principally because they do not assert that the agencies undertook activities (such as marketing the securities to the public, assisting in road shows or purchasing the securities for resale) related to the distribution or sale of the securities. Courts reached this conclusion in In re Wells Fargo, a case from the Northern District of California, New Jersey Carpenters v. RBS, and Public Employees Retirement System of Mississippi v. Merrill Lynch & Co. Inc., both from the Southern District of New York.
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contRoL PeRSon And SucceSSoR LiABiLity
Control Persons
State and federal securities laws not only allow investors to sue the parties that actually committed the securities violation but also persons who have the power to directly or indirectly control the primary violator. Control person liability can attach only if a primary claim can be made against the allegedly controlled entity. Individual officers and directors and parent corporations are frequent targets of control person allegations. For example, in Public Employees Retirement System of Mississippi v. Merrill Lynch & Co. Inc., investors sued Merrill Lynch Mortgage Investors, Inc., the issuer of the certificates, for securities act violations. In addition, the investors alleged control person liability against individual officers and directors of Merrill Lynch Mortgage Investors, Inc., as well as the corporate parent, Merrill Lynch & Co. The Southern District of New York dismissed the claims against the individuals because the investors had alleged only that the individuals had been officers or directors of Merrill Lynch Mortgage Investors, Inc. during the relevant times. Thus, the court concluded that the investors failed to demonstrate any meaningful culpable conduct by the alleged controlling persons and noted that the mere recitation of the elements of control person liability was insufficient to state a claim. The court also initially dismissed the investors control person claims against the parent company, Merrill Lynch & Co., because the allegations described the corporate affiliation between the parent and subsidiary, Merrill Lynch Mortgage Investors, Inc., which does not alone demonstrate control. The court instructed the investors to augment their allegations with facts suggesting the existence of greater control than that inherent in a typical parent-subsidiary relationship. Similar results were reached in Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass Through Certificates, Series AR1, from the Western District of Washington. In Public Employees Retirement System of Mississippi, the investors amended their complaint to add new allegations about Merrill Lynch & Co., showing that: (i) Merrill Lynch & Co. created Merrill Lynch Mortgage Investors, Inc. for the sole purpose of issuing the securities; (ii) revenue from Merrill Lynch Mortgage Investors, Inc.s securitizations inured exclusively to Merrill Lynch & Co.s benefit; (iii) statements in Merrill Lynch & Co.s SEC filings showed
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comprehensive involvement with the Merrill Lynch Mortgage Investors, Inc.s operations; (iv) Merrill Lynch & Co. directly participated in the issuance of the certificates, including prominently featuring Merrill Lynch & Co. on the front page of each prospectus and prospectus supplement; and (v) Merrill Lynch & Co.s managing partner and director and senior counsel signed the relevant registration statements. Defendants argued that these allegations were simply part and parcel of any parent-subsidiary relationship. The court disagreed, stating that the amended allegations showed a closer than typical connection between Merrill Lynch & Co. and Merrill Lynch Mortgage Investors, Inc.
February 2011
Will Bank Of America Pay For The Things That Countrywide Did?
With its extensive record of improper lending practices, it is not surprising that investors have sued Countrywide for securities violations. In addition, many investors are looking to another possible source of recovery for Countrywides misconduct, its parent Bank of America. In a series of complex transactions Bank of America acquired Countrywide in 2008. Bank of Americas CEO told investors on November 16, 2010, that at the end of the day, well pay for the things that Countrywide did. Usually, however, a parent company is not responsible for the liabilities of its subsidiaries. Therefore, investors must rely on doctrines of successor liability to hold Bank of America responsible for Countrywides obligations. Several plaintiffs have tried unsuccessfully to sue Bank of America as the successor to Countrywides liabilities. To call these attempts modest would be an overstatement. In each case, the plaintiffs pleadings were patently inadequate, devoting only a few conclusory statements to the issue. These cases include Ralston v. Mortgage Investors Group, Inc. and Pantoja v. Countrywide Home Loans, Inc., both from the Northern District of California, and Infante v. Bank of America Corp., from the Southern District of Florida. In contrast, in MBIA v. Countrywide Home Loans, Inc., MBIA amended its complaint to charge Bank of America with successor liability for the obligations of Countrywide. Specifically, MBIA relied on the doctrine of de facto merger. In an ordinary asset sale, the buyer receives the assets but not the liabilities of the seller. By contrast, in a merger, all assets and all liabilities go to the surviving entity. MBIA alleged that Bank of America used a series of asset sales to achieve what in fact was a merger (a combination of Countrywide and Bank of America business operations). Bank of America moved to dismiss the de facto merger allegations, arguing that the corporate identities of Bank of America and Countrywide should be respected. The Supreme Court of New York rejected this argument and denied the motion to dismiss. The court found that MBIAs allegations describing (i) the all-stock nature of the Countrywide acquisition, (ii) the rebranding of Countrywide operations, (iii) the redirection of Countrywide customers to the Bank of America website, (iv) Bank of Americas assumption of Countrywides operating debt, and (v) Bank of Americas own statement from an SEC filing that it had removed all of the assets and operations from Countrywide were sufficient to plead de facto merger. At this juncture, it is difficult to predict the likelihood of success of these claims on the merits.
February 2011
PRoceduRAL iSSueS
Class Action Standing

In 2010, standing continued to be a significant hurdle to plaintiffs in class action litigation. The issue often arose in individual suits as well. Generally, standing has been addressed in the context of motions to dismiss, not motions to certify a class. In several class actions where motions to dismiss were pending, plaintiffs urged that the issue be deferred until the court ruled on class certification. In 2010, this argument appears to have been rejected by every court to consider it. For example, in Lehman Brothers, a putative class action, defendants had filed a motion to dismiss plaintiffs claims based in part on lack of standing. Plaintiffs argued that the issue should be deferred until the class certification stage. The Southern District of New York refused, noting that standing is a threshold issue that cannot be deferred or dispensed with by styling a suit as a class action. The court dismissed the bulk of plaintiffs claims for lack of standing. Standing generally has been an issue in one of two ways: whether plaintiff has made sufficient allegations to demonstrate that the constitutional requirements for standing have been satisfied, and whether the statutory standing required to assert claims under Sections 11 and 12 of the Securities Act of 1933 has been pleaded sufficiently. constitutional standing. The issue of constitutional standing has arisen because plaintiffs have sought to assert claims based upon offerings of securities in which plaintiffs have not invested. For the most part, courts have held that plaintiffs asserting these claims did not and could not satisfy the actual injury requirement of constitutional standing because plaintiffs could not allege that they suffered a loss as a result of purchasing the particular securities being offered. In City of Ann Arbor Employees Retirement System v. Citigroup Mortgage Loan Trust Inc., plaintiffs had invested in securities issued by only two of sixteen trusts on which they based their claims. The Eastern District of New York dismissed for lack of standing all claims arising out of the fourteen trusts in which plaintiffs had not invested. Similar results were reached in Plumbers v. Nomura, from the District of Massachusetts, and in New Jersey Carpenters v. DLJ, New Jersey v. Residential Capital, and Public Employees Retirement System of Mississippi v. Merrill Lynch & Co., all from the Southern District of New York.
Procedural issues 18
February 2011
Some plaintiffs attempted to avoid this fate by arguing that the various securities subject to suit were issued pursuant to common offering documents (in particular, so-called shelf registration statements). In 2010, most courts rejected this argument for one or both of two reasons. First, plaintiffs claims, as alleged, were not based upon misstatements or omissions found in the common documentation but instead were based on misstatements or omissions contained in the supplemental documents (such as a prospectus supplement) disseminated for each particular offering. Second, even if the alleged misrepresentations and omissions were found in the common documentation, plaintiffs still did not demonstrate standing with respect to offerings of securities in which plaintiffs had not invested, because they still could not allege that they had purchased the particular securities issued pursuant to that particular offering. Similar results were reached in Maine State Retirement System v. Countrywide Financial Corp., from the Central District of California, and New Jersey Carpenters v. RBS, from the Southern District of New York. Statutory standing. The statutory standing required for claims based on Section 11 of the Securities Act of 1933 is little different in substance from the dictates of constitutional standing. Under Section 11, to have standing, a plaintiff must have purchased a security actually issued in the offering for which plaintiff claims there was an untrue or otherwise misleading registration statement. The courts have held that this form of standing is not present with respect to offerings of securities in which plaintiffs have not invested. Cases include In re Wells Fargo (Northern District of California), In re IndyMac, King County, Washington v. IKB Deutsche Industriebank AG (Southern District of New York), and Boilermakers v. WaMu (Western District of Washington). As with constitutional standing, plaintiffs have attempted to escape dismissal on this basis through reliance on the common shelf registration statement based on which all offerings were made. But plaintiffs again have been thwarted by the supplemental documents disseminated for each particular offering, which in the context of Section 11 are deemed to be new registration statements. A plaintiff can bring a claim under Section 12 only if it can allege that it purchased the security at issue from a statutory seller. A statutory seller is one who, in an initial pubic offering, either transferred title to the purchaser or successfully solicited the purchaser for financial gain. For example, in Tsereteli v. Residential Asset Securities Trust 2006-A8, the Southern District of New York found that the plaintiff sufficiently alleged that the underwriter was a
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February 2011
statutory seller by asserting that the certificates were sold pursuant to the Offering Documents and at a time when the underwriter was the only entity that could have sold the certificates.
Plaintiffs have been tripped up by this requirement in two ways. First, with respect to securities they have not purchased, they self-evidently cannot allege that they bought from a statutory seller. Second, unless plaintiffs can show that they purchased the security directly from a statutory seller, there is no claim. intervention to establish standing. In an attempt to cure the standing problem, parties have sought to intervene to assert claims based on securities in which they had invested and the original plaintiffs had not. Whether a motion to intervene will be granted depends in large measure on whether the statute of limitations already has expired with respect to the claims the intervenors propose to assert. For example, in In re Wells Fargo, the Northern District of California dismissed the intervenors claims because the statute of limitations had expired before the new parties intervened.
February 2011
Statute of Limitations
This past year has seen important changes in how courts approach the application of the statute of limitations. The ultimate result of these changes is yet to be determined. the Supreme courts decision in Merck. The United States Supreme Courts decision in Merck & Co., Inc. v. Reynolds, decided this past April, could mark the end of defendant-friendly interpretations of the statute of limitations. Merck involved claims by a group of investors that Merck & Co. knowingly misrepresented the risk of heart attacks accompanying the use of Mercks pain killer, Vioxx, which lead to economic losses once the risks became apparent. Merck investors sued under Section 10 of the Securities Exchange Act of 1934. Under that statute, a plaintiff must bring a claim no later than two years after the discovery of the facts constituting the violation or five years after such violation, whichever is earlier. Merck argued that the statute of limitations began to run upon inquiry notice, that is, the point at which a plaintiff possesses a quantum of information sufficiently suggestive of wrongdoing that he should conduct further inquiry. Many courts previously had agreed with this interpretation, making their determination of inquiry notice dependent upon the storm warnings present, that is, circumstances that suggested the existence of a claim. These storm warnings included public information such as news articles, financial reports, ratings downgrades, and other information available to the reasonably diligent investor. With the decision in Merck, the Supreme Court rejected this interpretation. The court held that the statute of limitations begins to run only when the plaintiff actually discovers the facts constituting the violation, or when a hypothetical reasonably diligent plaintiff would have discovered them. Elaborating, the Court in Merck found that the point where the facts would lead a reasonably diligent plaintiff to investigate further ... is not necessarily the point at which the plaintiff would have already discovered facts ... constituting the violation. Thus inquiry notice is not enough. After Merck, the statute of limitations does not begin when inquiry reasonably could have begun, but instead when inquiry reasonably could have found evidence of an actual violation. impact of Merck. It is not yet clear how significantly the decision in Merck will alter the limitations landscape. Before Merck, courts disagreed as to
February 2011
what constitutes enough information to trigger the running of the statue of limitations. This likely will remain a critical inquiry, although, as described above, the focus of that inquiry well may change.
Certain trends likely will remain. For example, courts often are hesitant to decide the limitations issue at the beginning of litigation, because it is necessarily fact dependent. Thus, a decision on the statute of limitations is often inappropriate on a motion to dismiss, which examines only whether the complaint makes legally sufficient allegations. For example, the Southern District of New York, in New Jersey Carpenters v. RBS, noted that the issue of limitations is rarely appropriate for resolution on a motion to dismiss, although it can be done where the facts needed for determination ... can be gleaned from the complaint and papers ... integral to the complaint. In a case decided after Merck, Public Employees Retirement Systems of Mississippi v. Merrill Lynch, the Southern District of New York found that substantial evidence regarding general problems with mortgage-backed securities, including news reports, government investigations, public hearings and civil complaints, were insufficient to trigger the statute of limitations. The information did not refer to the defendant, Merrill Lynch, or to the bonds that were the subject of the claims, and thus did not provide the facts necessary to show the violations alleged in the complaint. The court noted that Merck supports its holding, stating that under the Supreme Courts decision, even if a plaintiff had inquiry notice sufficient to warrant beginning to investigate, a plaintiff would not be barred by the statute of limitations unless a reasonably diligent plaintiff similarly situated would have actually discovered facts showing the violations alleged in the plaintiffs complaint. The court stated that ratings downgrades on the specific bonds were not sufficient to start the statute of limitations, because the ratings did not go below investment grade until less than one year before the filing of the complaint. The court also noted that even when the bonds were rated below investment grade, the rating downgrades were not based upon the discovery of a fraud, but only on a perceived increase in risk. The Northern District of California drew a similar conclusion in In re Wells Fargo. In In re National Century Financial Enterprises, Inc., Investment Litigation, the Southern District of Ohio also applied Merck, deciding a motion for summary judgment in favor of plaintiffs. Applying the Supreme Courts decision to a
February 2011
state blue-sky claim, the court held that generalized, anonymous allegations do not trigger the limitations period because they would only encourage worried investors who hear market rumors to file premature suit.
Further, as the court explained, even though plaintiffs were sophisticated investors, they were still outside parties without access to vital internal information regarding the defendants alleged fraud [g]iven [defendants] closeness to the situation and awareness of other warning signs, it is not contradictory for the [plaintiffs] to argue that the anonymous allegations should have prompted the defendants to investigate the fraud. The court confirmed that it was reasonable for plaintiffs to rely on the rating agencys affirmations of the credit worthiness of securities, especially in light of the fact that after the anonymous allegations came out, the defendants reassured investors as to the quality of the securities. Not all courts post-Merck, however, have been faithful to the Supreme Courts decision. In In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, the Southern District of New York used the inquiry notice standard rejected by Merck, stating that a plaintiff need not know all the details of the conduct or know about the entire fraud being perpetrated to be on inquiry notice, but instead merely must be aware of the general fraudulent scheme. Far from finding that the information triggering inquiry notice must be related to the fraudulent behavior with respect to the specific securities at issue, the court found that the statute of limitations may be triggered even by small ratings downgrades. The court also noted that plaintiffs were on inquiry notice because of monthly reports received from defendants showing a rise in the proportion of mortgage loans in the subject pool that were more than sixty days delinquent. Even though none of the reports or articles cited by the court spoke to the culpability of the defendant Morgan Stanley in the fraud allegedly perpetrated upon the plaintiffs, the court found that plaintiffs claims were not timely. claims brought after the statute of limitations has technically run. In both class actions and individual cases, the past year has seen developments in attempts by plaintiffs to toll the statute of limitations using both common law and statutory methods. tolling under American Pipe. In the class action context, plaintiffs have had the benefit of tolling under American Pipe & Construction Co. v. Utah. In that case, the Supreme Court held that the commencement of a class action
February 2011
suspends (or tolls) the running of the applicable statute of limitations as to all asserted members of the class. In Crown, Cork & Seal v. Parker, the Supreme Court extended this protection to the individual claims of any person who could have been a member of the class, not just those who already had asserted their interests. Standing and American Pipe. A number of decisions have addressed whether a claim may be tolled under American Pipe where the original named plaintiffs did not have standing to sue on the securities upon which subsequent plaintiffs or intervenors wished to sue. In general, the courts have not permitted tolling in such situations. The issue is discussed more fully in Class Action Standing above. Relating back claims. There is another way in which plaintiffs may bring claims against parties after the statute of limitations has run. Under Federal Rule of Civil Procedure 15, an amended complaint may relate back to the filing date of the original complaint for purposes of the statute of limitations. Investors have had mixed results using the relating back rule to cure statute of limitation problems in class actions. For example, in New Jersey Carpenters v. RBS, the Southern District of New York allowed a consolidated amended complaint to relate back to the filing date of the original complaint, noting that an amended pleading will relate back if adequate notice of the matters raised in the amended pleadings has been given to the opposing party by the allegations in the original complaint. The court found that relating the amended complaint back to the filing date of the original complaint was appropriate because even though the amended complaint included trusts not mentioned in the original complaint, the claims asserted were based upon the same core factual allegations of the original complaint. A similar attempt, however, was unsuccessful. In In re Morgan Stanley, two class actions, one from West Virginia and one from Mississippi, were consolidated into a single action. The plaintiffs from the West Virginia action argued that their claims should relate back to the date of the filing of the original, preconsolidation Mississippi complaint. Although noting that both complaints arguably arise out of the same conduct, transaction or occurrence, the Southern District of New York held that defendants did not have sufficient notice of the West Virginia claims, even though the claims of both parties were based upon securities derived from the same shelf registration statement.
February 2011
Choice of Law
The Martin Act, the New York blue-sky law, can only be enforced by the New York State Attorney General; there is no private right of action. Because most securities are created and sold out of New York, defendants argue that the limited enforcement provision of the Martin Act prohibits claims under New York common law and conflicts with the laws of other states that have private rights of action and thus that those other states laws do not apply. In 2010, courts rejected these arguments. In Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., the First Department of the New York Supreme Court, Appellate Division, rejected J.P. Morgans argument that the Martin Act preempted Assureds claims for breach of fiduciary duty and gross negligence. The First Department noted that New York Federal District Courts have taken the position that the Martin Act preempts long-standing common-law causes of action but described this position as erroneous. The court held that the Martin Act does not preempt otherwise validly pleaded causes of action including the two claims brought by Assured. In so holding, the court was persuaded by the amicus brief of the New York Attorney General, which argued that common-law causes of action were not preempted by the Act because the Martin Act was intended to supplement rather than supplant existing causes of action and that statutory actions by the Attorney General and private common-law actions both further the same goal, namely, combating fraud and deception in securities transactions. Assured Guaranty is a helpful decision for New York based plaintiffs who have no statutory private right of action. If those plaintiffs can validly plead a common-law cause of action, they will likely be permitted to proceed without the threat of preemption. (Of course, it is an open question how the federal courts will apply Assured Guaranty.) In California Public Employees Retirement System v. Moodys Corp., the California Superior Court held that the Martin Act did not prevent the plaintiff from suing under the California Corporate Securities Act because there was not a true conflict. The state of New York cannot pass laws that govern who may avail themselves of California laws in California courts. Conversely, California may not pass laws directing that New Yorks Attorney General not bring charges in New York courts .... Therefore, New York has no legitimate interest in applying its law to the case.
Procedural issues 25
February 2011
The court also stated that even if there had been a true conflict, Californias interests predominated in the action. The court recognized that applying New York law would have severely impaired Californias interest in allowing its citizens access to the courts. CalPERS will be useful for plaintiffs suing on securities that were created or sold out of New York. It rejects outright the argument that because the securities originated in New York, the (unfavorable) law of New York must govern security claims.
February 2011
No Action Clauses
In Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corporation1, the Supreme Court of New York held that no-action clauses of PSAs barred the plaintiffs class action suit on many Countrywide trusts. Greenwich Financial sought a declaration that, under the terms of the PSAs, Countrywide was obligated to repurchase any loans that it modified under its settlement of predatory lending suits brought by State Attorneys General. Plaintiffs argued that the no-action clause did not apply for two reasons. First, because the suit was for a declaratory judgment in a class action, and therefore applied equally to all certificateholders, plaintiffs argued that the suit did not fall within the scope of the no-action clause, which was to prevent some certificateholders from getting priority over other certificateholders. Second, plaintiffs argued that, as drafted, the no-action clause applied only to suits for a breach of the PSA by the Servicer, not to suits for breaches by the Seller. Thus, it could not apply to a breach of the Sellers obligation to repurchase loans that it modified. Relying on the language in the PSA that the no-action clause barred any suit, action or proceeding, the court held that the plaintiffs arguments were unconvincing and dismissed the case. Greenwich Financial Services will make it more difficult for plaintiffs to sue for breaches of PSAs if they do not abide by the terms of the no-action clause. The industry-standard no-action clause requires a certificateholder who wants to sue to gather 25% of the certificateholders, offer the trustee a reasonable indemnity, and wait 60 days for the trustee to commence a lawsuit.
Grais & Ellsworth LLP represented the plaintiffs in Greenwich Financial Services.
February 2011
Sampling
As RMBS cases survive motions to dismiss, courts will have to decide how plaintiffs will be able to prove their claims at trial. At the end of December, a New York trial court, in MBIA v. Countrywide, approved MBIAs proposal to sample 400 loans in each of 15 securitizations to show that Countrywide must repurchase loans in the securitizations. The court held that sampling of the loans in a mortgage pool was a valid way to prove fraud or breaches of representations and warranties in the pool as a whole. Under New York law, scientific evidence, such as sampling, must be generally accepted to be admissible. The court held that MBIA had met this burden. The case is noteworthy because under the PSA, in order to put back a particular loan, MBIA will have to show that that loan breached the representations and warranties. In holding that MBIA can use a sample of 400 loans to prove that the other loans in the pool breached the representations and warranties, the court made MBIAs burden much lighter. The cost of proving both putback and securities claims will be much lower if other courts follow the MBIA decision.
February 2011
WhAt to exPect in 2011

Two thousand eleven will see more new cases filed and more decisions on preliminary motions. Courts will start adjudicating discovery disputes and motions for summary judgment. At the end of December 2010 and in January 2011 several new cases were filed by individual plaintiffs. These cases, such as Allstate Insurance Co. v. Countrywide Financial Corp., filed on December 28 in New York state court, Dexia Holding, Inc. v. Countrywide Financial Corp., filed on January 24 in New York state court, and State Treasurer of Michigan v. Countrywide Financial Corp., filed on January 26 in the Central District of California, will face motions to dismiss in 2011. Many of these recently filed cases allege claims that have not been alleged before, such as common law fraud. If courts decide that the fraud allegations can survive a motion to dismiss, more plaintiffs might bring suit on those claims in 2011. For non-class actions that were filed in late 2009 and 2010, courts will continue to decide motions to dismiss. These actions by individual plaintiffs generally bring claims under state law. How state courts apply the decisions of federal courts in federal securities class actions to individual actions based on state law will be interesting. In 2011, the class actions that have survived motions to dismiss will face motions for class certification. One such motion was already decided in January 2011. In New Jersey Carpenters v. Residential Capital, the Southern District of New York denied a motion for class certification because there were significant differences in the knowledge of putative class members so that individual, rather than class, issues predominated. The court also held that class adjudication was not superior to individual adjudication. Plaintiffs in other class actions will face similar arguments from defendants and will have to argue that their suits meet the class action requirements in the Federal Rules of Civil Procedure. Discovery will start in cases that have survived motions to dismiss. The next major hurdle for those cases will be motions for summary judgment. Courts will likely not decide those motions until 2012. However at least one court has set an aggressive schedule for discovery and motions for summary judgment. In Public Employees Retirement System of Mississippi v. Merrill Lynch & Co., the Southern District of New York set a deadline to complete discovery in
What to exPect in 2011 Page 29
February 2011
September 2011 and to complete argument on motions for summary judgment in October. It is likely that those deadlines will change, but the PERS schedule shows that at least one court is willing to push RMBS cases forward quickly.
Finally, at least two appellate courts will address cases on appeal. The California Court of Appeal will likely rule on Luther v. Countrywide Financial Corp., which presented an arcane issue of federal preemption. The Ninth Circuit will likely decide whether to uphold the decision on the motion to dismiss in In re Wells Fargo. To discuss any of these decisions further, please contact any of our partners: david J. grais Kathryn c. ellsworth Mark B. holton owen L. cyrulnik 212.755.3550 212.755.3590 212.755.5693 212.755.5690 dgrais@graisellsworth.com kellsworth@graisellsworth.com mholton@graisellsworth.com ocyrulnik@graisellsworth.com
What to exPect in 2011 Page 30
February 2011
iMPoRtAnt deciSionS in 2010 ReLAted to ABS/RMBS

Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 269 F.R.D. 252 (S.D.N.Y. 2010). Ambac Assurance Corp. v. EMC Mortgage Corp., No. 08 Civ. 9464 (S.D.N.Y. Dec. 16, 2010). Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., No. 603755/08, 2010 WL 4721590 (N.Y. Sup. Ct. Nov. 23, 2010). Bankers Insurance Co. v. DLJ Mortgage Capital, Inc., No. 09 CV 0419, 2010 WL 4867533 (M.D. Fla. Oct. 8, 2010). Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass Through Certificates, No. C-09-00037, 2010 WL 3815796 (W.D. Wash. Sept. 28, 2010). California Public Employees Retirement System v. Moodys Corp., No. CGC-09-490241 (Cal. Super. Ct. Jun. 6, 2010). Cambridge Place Investment Management, Inc. v. Morgan Stanley & Co., No. 10-11376-NMG (D. Mass. Dec. 28, 2010). Cambridge Place Investment Management, Inc. v. Morgan Stanley & Co., No 10-11376-NMG (D. Mass. Dec. 28, 2010). City of Ann Arbor Employees Retirement System v. Citigroup Mortgage Loan Trust Inc., 703 F. Supp. 2d 253 (E.D.N.Y. 2010). City of Ann Arbor Employees Retirement System v. Citigroup Mortgage Loan Trust Inc., No. CV-08-1418 (E.D.N.Y. Dec. 23, 2010). Epirus Capital Management LLC v. Citigroup, Inc., No. 09-Civ-2594, 2010 WL 1779348 (S.D.N.Y. Mar. 29, 2010). Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities, LLC, No. GD09-016892 (C.P. Allegheny, Nov. 29, 2010). Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities, Inc., No. 10-3039, 2010 WL 5394742 (N.D. Cal. Dec. 20, 2010). Federal Home Loan Bank of Seattle v. Deutsche Bank Securities, Inc., No. C10-0140, 2010 WL 3512503 (W.D. Wash. Sept. 1, 2010). Financial Guaranty Insurance Co. v. Countrywide Home Loans, Inc., No. 650736/09 (N.Y. Sup. Ct. Jun. 21, 2010).
February 2011
Footbridge Ltd. Trust v. Countrywide Home Loans, Inc., No. 09 Civ 4050, 2010 WL 3790810 (S.D.N.Y. Sept. 28, 2010). Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corp., 603 F.3d 23 (2d Cir. 2010). Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corp., No. 650474/08 (N.Y. Sup. Ct. Oct. 13, 2010). In re Dynex Capital, Inc. Securities Litigation, No. 05-cv-1897, 2009 WL 3380621 (S.D.N.Y. Oct. 19, 2009). In re Indymac Mortgage-Backed Securities Litigation, 718 F. Supp. 2d 495 (S.D.N.Y. 2010). In re Lehman Bros. Securities & ERISA Litigation, 681 F. Supp. 2d 495 (S.D.N.Y. 2010). In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, No. 09 Civ. 2137, 2010 WL 3239430 (S.D.N.Y. Aug. 17, 2010). In re National Century Financial Enterprises, Inc., Investment Litigation, No. 03-md-1565, 2010 WL 5174585 (S.D. Ohio Dec. 13, 2010). In re Wells Fargo Mortgage-Backed Certificates Litigation, No. 09-cv-01376, 2010 WL 4117477 (N.D. Cal. Oct. 19, 2010). In re Wells Fargo Mortgage-Backed Certificates Litigation, 712 F. Supp. 2d 958 (N.D. Cal. 2010). In re Wells Fargo Mortgage-Backed Certificates Litigation, No. 09-cv-01376, 2010 WL 5422554 (N.D. Cal. Dec. 27, 2010). King County v. IKB Deutsche Industriebank AG, No. 09-cv-8387, 2010 WL 4366191 (S.D.N.Y. Oct. 29, 2010). King County v. IKB Deutsche Industriebank AG, No. 09-cv-8387, 2010 WL 2010943 (S.D.N.Y. May 18, 2010). King County v. IKB Deutsche Industriebank AG, 708 F. Supp. 2d 334 (S.D.N.Y. 2010). Lone Star Fund V (U.S), L.P. v. Barclays Bank PLC, 594 F.3d 383 (5th Cir. 2010). Luther v. Countrywide Financial Corp., No. BC380698 (Cal. Super. Ct. Jan. 6, 2010).
February 2011
M&T Bank Corp. v. Gemstone CDO VII, Ltd., 78 A.D.3d 1664 (N.Y. Sup. Ct. 2010). Maine State Retirement System v. Countrywide Financial Corp., No. 10-cv-00302, 2010 WL 4452571 (C.D. Cal. Nov. 4, 2010). Massachusetts Bricklayers & Masons Fund v. Deutsche Alt-A Securities, No. 08-cv-3178, 2010 WL 1370962 (E.D.N.Y. 2010). Massachusetts Bricklayers & Masons Fund v. Deutsche Alt-A Securities, No. 08-cv-3178 (E.D.N.Y. Dec. 23, 2010). MBIA Insurance Corp. v. Countrywide Home Loans, Inc., No. 602825/08, 2010 WL 5186702 (N.Y. Sup. Ct. Dec. 12, 2010). MBIA Insurance Corp. v. Credit Suisse Securities, No. 603751/09 (N.Y. Sup. Ct. Jul. 30, 2010). MBIA Insurance Corp. v. GMAC Mortgage LLC, 914 N.Y.S.2d 604 (N.Y. Sup. Ct. 2010). MBIA Insurance Corp. v. Residential Funding Co., No. 603552/08 (N.Y. Sup. Ct. Nov. 8, 2010). MBIA Insurance Corp. v. Residential Funding Co., No. 603552/08, 2009 WL 5178337 (N.Y. Sup. Ct. Dec. 12, 2010). MBIA Insurance Corp. v. Royal Bank of Canada, No.12238/09, 2010 WL 3294302 (N.Y. Sup. Ct. Aug. 8, 2010). Merck & Co., Inc. v. Reynolds, 95 U.S. 733 (2010). NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., No. 08-cv-10783, 2010 WL 4739979 (S.D.N.Y. Nov. 17, 2010). NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., No. 08-cv-10783, 2010 WL 4054149 (S.D.N.Y. Oct. 15, 2010). New Jersey Carpenters Health Fund v. DLJ Mortgage Capital, Inc., No. 08-cv-5653, 2010 WL 1473288 (S.D.N.Y. Mar. 29, 2010). New Jersey Carpenters Health Fund v. DLJ Mortgage Capital, Inc., No. 08-cv-5653 (S.D.N.Y. Dec. 15, 2010). New Jersey Carpenters Health Fund v. Residential Capital, LLC, No. 08-cv-8781, 2010 WL 1257528 (S.D.N.Y. Mar. 31, 2010).
February 2011
New Jersey Carpenters Health Fund v. Residential Capital, LLC, No. 08-cv-8781, 2010 WL 5222127 (S.D.N.Y. Dec. 22, 2010). New Jersey Carpenters Vacation Fund v. Royal Bank of Scotland Group, PLC, No. 08-cv-5093, 2010 WL 1172694 (S.D.N.Y. Mar. 26, 2010). Oddo Asset Management v. Barclays Bank PLC, No.109547/08 (N.Y. Sup. Ct. Apr. 26, 2010). Plumbers Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 658 F. Supp. 2d 299 (D. Mass. 2009). Plumbers Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2011 WL 183971 (1st Cir. Jan. 20, 2011). Public Employees Retirement System of Mississippi v. Goldman Sachs Group, Inc., No. 09-cv-1110, 2011 WL 135821 (S.D.N.Y. Jan. 12, 2011). Public Employees Retirement System of Mississippi v. Merrill Lynch & Co. Inc., No. 08-cv-10841, 2010 WL 2175875 (S.D.N.Y. Jun. 15, 2010). Public Employees Retirement System of Mississippi v. Merrill Lynch & Co. Inc., No. 08-cv-10841, 2010 WL 4903619 (S.D.N.Y. Dec. 1, 2010). Ralston v. Mortgage Investors Group, Inc., No. C 08-536, 2010 WL 1136317 (N.D. Cal. Mar. 22, 2010). Republic Bank & Trust Co. v. Bear, Stearns & Co., 707 F. Supp. 2d 702 (W.D. Ky. 2010). Sterling Federal Bank, F.S.B. v. DLJ Mortgage Capital, Inc., No. 09 C 6904, 2010 WL 3324705 (N.D. Ill. Aug. 8, 2010). Stichting Pensioenfonds ABP v. Countrywide Financial Corp., No. 10-CV-07275 (C.D. Cal. Dec. 29, 2010). Tsereteli v. Residential Asset Securitization Trust 2008-A8, 692 F. Supp. 2d 387 (S.D.N.Y. 2010). Tsereteli v. Residential Asset Securitization Trust 2008-A8, 697 F. Supp. 2d 546 (S.D.N.Y. 2010). Wells Fargo Bank, N.A. v. Bank of America, N.A., No. 10-cv-1825, 2010 WL 5287538 (N.D. Tex. Dec. 23, 2010).

Abs/Rmbs Litigation:: 2010 in Review

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Abs/Rmbs Litigation:: 2010 in Review

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February 2011

Allegedly Untrue or Misleading Statements

securities claiMs Page 01

securities claiMs Page 02

securities claiMs Page 03

securities claiMs Page 04

securities claiMs Page 05

Disclaimers and Warnings

securities claiMs Page 06

securities claiMs Page 07

securities claiMs Page 08

Sole Remedy Defense

securities claiMs Page 09

cLAiMS By MonoLine inSuReRS

claiMs by Monoline insurers Page 10

claiMs by Monoline insurers Page 11

claiMs by Monoline insurers Page 12

cLAiMS AgAinSt RAting AgencieS

First Amendment Defense and Non-Actionable Opinion

claiMs against rating agencies Page 13

Claims Under Section 11 of the Securities Act of 1933

claiMs against rating agencies Page 14

contRoL PeRSon And SucceSSoR LiABiLity

control Person and successor liability Page 15

control Person and successor liability Page 16

control Person and successor liability Page 17

Class Action Standing

Procedural issues Page 19

Procedural issues Page 20

Procedural issues Page 21

Procedural issues Page 22

Procedural issues Page 23

Procedural issues Page 24

Procedural issues Page 26

Procedural issues Page 27

Procedural issues Page 28

WhAt to exPect in 2011

What to exPect in 2011 Page 29

What to exPect in 2011 Page 30

iMPoRtAnt deciSionS in 2010 ReLAted to ABS/RMBS

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