Mortgage-backed securities litigation, already a fast-growing sector, has gotten even busier during the past several months.
While several new lawsuits have been filed and some cases have been thrown out of court or settled, in a development ominous to plaintiffs’ attorneys, the New York courts — extremely sophisticated in the ways of securities litigation — have refused to grant class action status in two cases brought by investors seeking to recoup funds lost as a result of MBS investments.
In New Jersey Carpenters Health Fund v. Residential Capital LLC U.S., a New York federal trial ruled Jan. 18 that three union trust funds can’t proceed as a class action lawsuit because there are too many differences in the plaintiffs’ claims.
Another lawsuit has had the same result. In New Jersey Carpenters Vacation Fund, et al. v. The Royal Bank of Scotland Group, Plc, et al., a Manhattan federal trial court judge also denied class action status in an MBS action brought by investors against Royal Bank of Scotland.
Legal specialists say these rulings — among the first on class certification in MBS litigation — could very well influence rulings by other courts. The decisions could mean that investors who claim they lost money when the value of the securities evaporated almost overnight must sue one-by-one, making litigation more time-consuming and much more expensive than in a class action lawsuit.
While one-on-one lawsuits might become the norm when investors sue over MBS, that methodology was rejected by another New York court in an evidentiary ruling.
In MBIA Insurance v. Countrywide Home Loans, Bank of America Corp., which acquired Countrywide in 2008, lost a bid to prevent MBIA Inc. from using statistical sampling to prove allegations that MBIA was fraudulently induced to insure $21 billion in mortgage-backed securities. MBIA’s attorneys had told the court that proceeding loan-by-loan would take 24 underwriters four years of loan review before the case would be ready for trial.
In a 16-page order, a New York state court said that MBIA Insurance can use statistical sampling to prove its case. “Statistical sampling is a widely used method to present evidence from a large population of data,” the court ruled in the Dec. 22 decision.
Several new court filings have also been noted.
In Dexia Holdings and others v. Countrywide Financial Corp. et al, a Countrywide Financial unit was sued on Jan. 24 by MBS investors who alleged fraud in a complaint filed in New York state court. The investors say the hundreds of millions of dollars of Countrywide MBS they purchased from 2005 to 2007 now carry “junk” credit ratings rather than the AAA ratings they once had, resulting in significant losses.
In Bear Stearns Mortgage Funding Trust 2007-AR2 by Wells Fargo Bank N.A. as Trustee v. EMC Mortgage Corp., JPMorgan Chase & Co.’s EMC Mortgage was sued Jan. 18 by the trustee of a mortgage portfolio for refusing to turn over documents sought by the trustee to shed light on the quality of loans bought by the trust.
Wells Fargo & Co. wants access to files for more than 2,000 mortgages in the Bear Stearns Mortgage Funding Trust 2007-AR2, according to the complaint filed in Delaware Chancery Court in Wilmington.
In another case, attorneys want to expand the claims in an already filed lawsuit.
In Ambac Assurance Corp v. EMC, Ambac alleges that JPMorgan — now the owner of Ambac after Bear Stearns — refused to repurchase mortgages. Ambac has asked the court for permission to add a fraud claim. EMC’s lawyers argued in Manhattan federal court on Jan. 14 against letting Ambac file the proposed amended complaint.
But, some cases have seen courts throw out claims or dismiss cases altogether.
In Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities, a Common Pleas judge on Nov. 29 dismissed several claims in a 41-page order, allowing only a fraudulent misrepresentation claim to stand against the three rating agencies, Moody’s, McGraw-Hill and Fitch. The lawsuit names as defendants the three rating agencies as well as various JP Morgan entities — the transactional entities — that created and sold the certificates.
The bank argued it never would have purchased the mortgage-backed certificates had it known of the true risks of nonpayment by homeowners that the underlying mortgages carried. The certificates were given AAA ratings.
The parties filed a stipulation giving the defendants until Jan. 28 to file answers. The lawsuit is one of four filed in that court.
One case has been thrown out of court.
In ABN Amro Bank NV v. MBIA Inc., UBS AG, Bank of America Corp. and more than a dozen other banks have asked New York’s highest court to reverse a lower court ruling that dismissed their lawsuit against MBIA Inc. challenging its restructuring. Plaintiffs claim that the reorganization was a fraudulent conveyance designed to keep MBIA Insurance Corp. from making good on its finance guarantee coverage obligations. The lawsuit was dismissed on Jan. 11.
The banks are noting a vigorous appeal, asserting in the Jan. 20 filing that they are challenging every part of the court’s order and asking for an expedited appeal, claiming that MBIA Insurance’s liquidity is evaporating. The lawsuit is one of two that the banks have filed to challenge the split.
But, in MBIA Insurance Corporation v. GMAC Mortgage, the court refused to throw the case out of court. MBIA Insurance Corp. can proceed with a claim that GMAC Mortgage LLC fraudulently obtained insurance on billions of dollars of MBS by misrepresenting the quality of tens of thousands of home loans, a New York State Supreme Court judge ruled. GMAC denied the allegations in a 27-page answer filed on Jan. 15.
The court denied GMAC’s motion to dismiss the fraud count in a Dec. 14 decision. The judge, however, did dismiss claims against GMAC of negligent misrepresentation and breached of the implied covenant of good faith and fair dealing.
And, one case has settled. JPMorgan Chase Securities agreed in late December to pay $25 million to settle allegations it sold unregistered securities to the state of Florida. The state said $23 million of the JPMorgan settlement will compensate local governments for losses caused when the securities were downgraded or defaulted. The other $2 million will cover Florida’s investigative costs.
In agreeing to the settlement, JPMorgan neither admitted nor denied wrongdoing and said it settled to avoid the cost of litigating the allegations.
A lawsuit was filed Tuesday in New York State court by Allstate Corp. against JPMorgan Chase & Co., the Wall Street Journal reported. JPMorgan allegedly told Allstate that $700 million in RMBS was safe even though borrowers could not afford the loans.
Scott & Scott LLP announced this month that it filed a class action in U.S. District Court for the District of Connecticut on behalf of investors of MBS sponsored by Countrywide Financial Corp. Issuances involved are the 2005, 2006 and 2007 vintages.
“The representations made in the registration statements and prospectus supplements were materially false and misleading because at the time of the certificates offerings, Countrywide’s underwriting standards were not designed to evaluate borrowers’ ability to repay their loans or to accurately assess the value of the mortgaged property underlying the certificates,” Scott & Scott claims.
The U.S. Court of Appeals for the First Circuit on Jan. 20 reversed, in part, a lower court ruling dismissing a case filed by the Plumbers’ Union Local No. 12 Pension Fund against Nomura Asset Acceptance Corp., Robbins Geller Rudman & Dowd LLP announced. The class action filed on behalf of investors in eight MBS transactions that were issued in 2006.
The California Public Employees’ Retirement System — or CalPERS — filed a complaint in U.S. District Court for the Northern District of California against former executives of 34 investments banks including Lehman Brothers Holdings Inc., Citigroup Inc., Bank of New York Mellon and Wells Fargo Securities, Asset International reported. The defendants allegedly hid Lehman’s exposure to subprime loans when they sold around $700 million in bonds.
Case Info:
New Jersey Carpenters Health Fund v. Residential Capital LLC.
No. 1:08-cv-08781, (U.S. District Court, Southern District of New York Manhattan).
New Jersey Carpenters Vacation Fund, et al. v. The Royal Bank of Scotland Group, Plc.
No. 1:2008cv05093, (U.S. District Court, Southern District of New York Manhattan)
MBIA Insurance v. Countrywide Home Loans.
No. 602825-08, (New York State Supreme Court (Manhattan)
Dexia Holdings v. Countrywide Financial Corp.
No. 650185/2011, (New York State Supreme Court Manhattan)
Bear Stearns Mortgage Funding Trust 2007-AR2 by Wells Fargo Bank N.A. as Trustee v. EMC Mortgage Corp.
No. CA6132, Delaware Chancery Court (Wilmington)
Ambac v. EMC Mortgage.
No. 08-cv-9464, (U.S. District Court, Southern District of New York (Manhattan)
Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities.
No. GD-09-016892, filed Oct. 23, 2009 (Court of Common Pleas of Allegheny County)
ABN Amro Bank NV et al v. MBIA Inc et al.
No. 601475/2009 (New York State Supreme Court, New York County).
ABN Amro Bank NV et al v. Dinallo et al.
No. 601846/2009, (New York State Supreme Court, New York County)
MBIA Insurance Corporation v. GMAC Mortgage.
No. 600837/2010, (New York State Supreme Court, Manhattan).
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.
Case No. 08-cv-10446 (U.S. Court of Appeals for the First Circuit).
