As the ratings agencies manage to navigate one lawsuit accusing them of providing top-notch ratings on risky residential mortgage-backed securities, another action emerges. Two defendants in MBS lawsuits managed to get their cases dismissed, one defendant settled and several face an uphill battle.
Ongoing class actions prompted Moody’s Investors Service to downgrade 30 tranches for $36 million from residential mortgage-backed securities issued by FirstPlus Home Loan Owner Trust, Keystone Owner Trust, Empire Funding Home Loan Owner Trust and Untied National Home Loan Owner Trust. The issuances were securitized in 1998 and 1999 and primarily consist of closed-end, second liens with high loan-to-values.
“The actions are a due to the ongoing legal actions against the trusts in the states of Arkansas and Missouri and due to the related suspension of payments of the principal and interest to the bondholders in the majority of these deals by the trustee (U.S. Bank National Association),” Moody’s said. “At this time, total costs to the trusts associated with paying judgments and legal fees and resulting writedowns are unknown.“
On April 19, California Attorney General Edmund G. Brown Jr. announced a court action against Moody’s seeking information about why the New York-based firm gave its highest ratings to “risky and toxic” MBS. Moody’s reportedly ignored a subpoena issued by the state in September 2009, which Brown called “highly unusual because companies almost always comply without such a drastic step being necessary.”
“Moody’s and other credit rating agencies ignored red flags in the run-up to the collapse in housing prices and gave stellar ratings to shaky securities, which made those investments appear as safe as government-issued Treasury bonds,” Brown said in the statement. “But investors swiftly learned that the ratings were as worthless as the securities themselves.”
A January 2009 lawsuit filed in federal court by retired attorney Ronald Grassi and retired teacher Sally Grassi against Moody’s, Fitch Ratings and Standard & Poor’s Ratings Services was dismissed, Bloomberg reported. But the case can be re-filed with more details within 30 days.
In its interim first-quarter 2010 report, Deutsche Bank AG disclosed that it was named as defendant in a lawsuit filed against a number of financial institutions by the Federal Home Loan Bank of San Francisco. The case was filed in San Francisco Superior Court and focuses on issuers and underwriters of mortgage pass-through certificates that were acquired by the FHLB.
Deutsche additionally disclosed that some of its affiliates, including DBSI, were named in a putative class action pending in U.S. District Court for the Eastern District of New York. That case is also tied to Deutsche’s issuance and underwriting of mortgage-backed securities.
“On April 5, 2010, the court granted in part and denied in part Deutsche Bank’s motion to dismiss this complaint.” the report said. “Each of the civil litigations is otherwise in its early stages.”
The Charles Schwab Corp. reached an agreement to settle all claims in a civil class action lawsuit tied to its Schwab YieldPlus Fund, a May 5 statement said. The agreement also includes a California state law claim not included in an earlier settlement.
YieldPlus was “an ultra-short bond fund” that invested in fixed-income instruments including asset-backed securities, mortgage-backed securities and corporate bonds. Schwab blamed the credit crisis that began in mid-2007 for the investment declines.
Schwab said the settlement includes $35 million to settle California state law claims and $200 million for plaintiffs’ federal claims. By settling now, the San Francisco-based firm can “avoid the distraction and uncertainty of a trial, and the further possibility of a protracted appeals process.”
An appeal in a lawsuit by Greenwich Financial Services Distressed Mortgage Fund 3 LLC against Countrywide Financial Corp. was dismissed by the U.S. Court of Appeals, Second Circuit, according to a copy of the decision that was published by Leagle. A putative class action was originally filed in New York State Supreme Court but subsequently removed to the U.S. District Court for the Southern District of New York.
Greenwich is an investor in Countrywide RMBS. It claims that loan modifications under a massive predatory settlement by the Bank of America Corp. subsidiary should enable the trusts to require Countrywide to repurchase modified loans at a price of the unpaid principal balance plus accrued interest. Such requirements are reportedly outlined in the terms of the pooling and servicing agreements.
A request by Bear, Stearns & Co. Inc. to dismiss a lawsuit filed by Republic Bank & Trust Co. was granted by U.S. District Court Judge Charles R. Simpson III, according to a copy of the decision published by Leagle. Republic filed the lawsuit even though it admitted to not reading the relevant prospectuses prior to its purchases.
The Securities and Exchange Commission filed a complaint against Goldman Sachs & Co. and CDO manager Fabrice Tourre in U.S. District Court for the Southern District of New York on April 16. Goldman allegedly structured and marketed a synthetic CDO that hinged on subprime RMBS performance. But if failed disclose vital information to CDO investors, “in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.”
That hedge fund was Paulson & Co., according to the SEC, while the CDO was ABACUS 2007-AC1.
“Undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio,” the SEC stated. “The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.”
Klayman & Toskes P.A. announced last month an investigation into the sales practices used by Goldman Sachs to market ABACUS 2007-AC1, a synthetic collaterallized-debt obligation. The New York-based law firm cited the SEC’s fraud action against Goldman.
Earlier last month, the SEC announced administrative proceedings against Morgan Keegan & Co., Morgan Asset Management and two employees who are accused of fraudulently overstating the value of securities backed by subprime mortgages. The Memphis, Tenn.-based firm allegedly failed to employ reasonable procedures to internally price the portfolio securities in five funds managed by Morgan Asset. The practices led to inflated prices for net asset values.
“This scheme had two architects — a portfolio manager responsible for lies to investors about the true value of the assets in his funds, and a head of fund accounting who turned a blind eye to the fund’s bogus valuation process,” Robert Khuzami, director of the SEC’s division of enforcement, said in the statement.
A motion to dismiss by Citigroup Mortgage Loan Trust Inc. was granted in a lawsuit filed in U.S. District Court for the Eastern District of New York by the City of Ann Arbor Employees’ Retirement System, based on a copy of the decision published by Leagle. But the plaintiffs were given leave to re-plead.
It was the same situation for Deutsche Alt-A Securities, whose motion to dismiss was granted in the same court for a case filed by the Massachusetts Bricklayers and Masons Funds. But, again, the plaintiffs were given leave to re-plead. That decision was also published by Leagle.
In an MBS lawsuit filed on behalf of three pension funds against Residential Capital LLC, the U.S. District Court for the Southern District of New York dismissed two claims but allowed a claim related to the disregard of underwriting guidelines to proceed.
GREENWICH FINANCIAL SERVICES DISTRESSED MORTGAGE FUND 3 LLC, AND QED LLC, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, Plaintiffs-Appellees, v. COUNTRYWIDE FINANCIAL CORPORATION, COUNTRYWIDE HOME LOANS, INC., AND COUNTRYWIDE HOME LOANS SERVICING LP, Defendants-Appellants.
Case No. 09-3660-cv. (U.S. Court of Appeals, Second Circuit).
REPUBLIC BANK & TRUST COMPANY, Plaintiff, v. BEAR, STEARNS & CO., INC., et al., Defendants.
Civil Action No. 3:09-CV-287-S. (U.S. District Court, W.D. Kentucky, Louisville Division)
CITY OF ANN ARBOR EMPLOYEES’ RETIREMENT SYSTEM, Individually and on behalf of all others similarly situated, Plaintiffs, v. CITIGROUP MORTGAGE LOAN TRUST INC., et al., Defendants.
No. CV 08-1418 (U.S. District Court for the Eastern District of New York).
MASSACHUSETTS BRICKLAYERS AND MASONS FUNDS and THE PIPEFITTERS’ RETIREMENT FUND LOCAL 598, Individually and on behalf of all others similarly situated, Plaintiffs, v. DEUTSCHE ALT-A SECURITIES, et al., Defendants.
Case No. CV 08-3178. (U.S. District Court, E.D. New York.
NEW JERSEY CARPENTERS HEALTH FUND, NEW JERSEY CARPENTERS VACATION FUND And BOILERMAKER BLACKSMITH NATIONAL PENSION TRUST, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs, v. RESIDENTIAL CAPITAL, LLC, RESIDENTIAL FUNDING, LLC, RESIDENTIAL ACCREDITED LOANS, INC., BRUCE J. PARADIS, KENNETH M. DUNCAN, DAVEE L. OLSON, RALPH T. FLEES, LISA R. LUNDSTEN, JAMES G. JONES, DAVID M. BRICKER, JAMES N. YOUNG, RESIDENTIAL FUNDING SECURITIES CORPORATION d/b/a GMAC RFC SECURITIES, GOLDMAN, SACHS & CO., RBS SECURITIES, INC., d/b/a RBS GREENWICH CAPITAL, DEUTSCHE BANK SECURITIES, INC., CITIGROUP GLOBAL MARKETS, INC., CREDIT SUISSE SECURITIES (USA) LLC, BANK OF AMERICA CORPORATION as successor-in-interest to MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., UBS SECURITIES, LLC, JPMORGAN CHASE, INC. as successor-in-interest to BEAR, STEARNS & CO., INC., and MORGAN STANLEY & CO., INC., Defendants.
Case No. 08 CV 8781 (HB). U.S. District Court, S.D. New York.
