Brisk Pace of MBS Litigation

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7 · 26 · 10

Business is bristling for attorneys who handle mortgage-backed securities cases. Parties to the latest round of litigation include defunct mortgage bankers and some venerable investment bankers.

Allegations that Goldman, Sachs & Co. misled investors about subprime RMBS led the New York-based firm to settle with the Securities and Exchange Commission for $550 million, a July 15 news release said. It was “the SEC’s largest-ever penalty paid by a Wall Street firm.” A federal judge had yet to approve the settlement as of the statement date.

The SEC said that Goldman acknowledged that its marketing materials for the securities offered incomplete information. But investment banking behemoth refused to admit or deny the allegations.

“Goldman misstated and omitted key facts regarding a synthetic collateralized-debt obligation it marketed that hinged on the performance of subprime residential mortgage-backed securities,” the SEC said. “Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.”

Last month the SEC announced that charges were filed against Thomas Priore, who allegedly used his company, ICP Asset Management LLC, to defraud four multi-billion-dollar CDOs. ICP collected “tens of millions of dollars” in advisory fees as it caused the CDOs to lose “tens of millions of dollars.”

An amended consolidated class-action complaint was filed earlier this month in U.S. District Court for the Central District of California against Countrywide Financial Corp., former Countrywide executives, Bank of America and 16 MBS underwriters on more than $350 billion in deals, Cohen Milstein Sellers & Toll PLLC announced. The lead plaintiffs are Iowa Public Employees’ Retirement System, Oregon Public Employees’ Retirement System and Orange County Employees’ Retirement System.

“The defendants published false and misleading offering documents, including registration statements, prospectuses, and prospectus supplements,” Cohen Milstein alleges. “Specifically, these documents misrepresented or failed to disclose that underwriting guidelines for the mortgages backing the securities had been systematically disregarded.”

The Oregon Public Employee Retirement Fund lost $29 million on its $200 million investment as a result of Countrywide’s misrepresentation, an announcement from Oregon’s attorney general and treasurer said.

Other defendants in the Countrywide case include Citigroup Global Markets Inc., Goldman Sachs & Co. and J.P. Morgan Securities Inc.

GMAC Mortgage USA Corp. lost its appeal to overturn a trial court’s judgment in favor of Wells Fargo Bank, N.A., according to a copy of the decision published by

Wells Fargo is the Trustee for the Registered Holders of Merrill Lynch Mortgage Investors Trust, Asset-Backed Certificates, Series 2004-WMC4. It filed the lawsuit in August 2006 against People’s Choice claiming that fraudulent substitutions of trustees and forged first- and second-loan reconveyances among other fraudulent documents were recorded in Los Angeles County. GMAC was added as a defendant in August 2008 following People’s Choice’s 2007 bankruptcy.

“GMAC had previously defaulted, and the trial court had agreed that the motion was the proper means of disposing with Wells Fargo’s claims as to all remaining defendants,” the Court of Appeals of California, Second District, Division Two wrote in a summary of the case. “GMAC argues that because it had defaulted, the trial court was without jurisdiction to consider anything other than a default prove-up package or a motion to set aside the default.”

The appeals court concluded, “The judgment is affirmed.”

A motion to dismiss by defendant Citigroup Inc. was granted in part and denied in part this month by the U.S. District Court for the Southern District of New York, an opinion and order published by Leagle said. Citigroup is accused of making materially untrue or misleading statements or omissions in public offering materials on 48 bond issuances for $71 billion between May 2006 and August 2008.

“Defendants failed to disclose Citigroup’s exposure to $66 billion worth of collateralized-debt obligations backed by subprime mortgage assets,” a summary says. ” Instead, Citigroup’s public offering materials indicated that Citigroup had no direct exposure to subprime mortgage-backed CDOs.”

Capital Loan Specialists Inc. lost an appeal to overturn a judgment in favor of U.S. Bank, National Association, as trustee of the structured asset investment loan mortgage pass-through certificate series 2006-3, according to a copy of the decision from Court of Appeals of California, Second District, Division Two, that was published by Capital Loan is required to indemnify U.S. Bank on a fraudulent $495,000 loan.

Charles Schwab Corp. filed a lawsuit on June 29 in Superior Court of California, County of San Francisco, against units of Merrill Lynch & Co., UBS AG and Bear Stearns Cos., published reports indicate. Schwab claims it was deceived about the loan quality and was not told about the loan-to-value ratios or the number of non-owner occupied properties included in the three securities that cost $130 million.

A motion to compel was granted to Ambac Assurance Corp. in its lawsuit filed in U.S. District Court for the Southern District of New York against EMC Mortgage Corp., the decision published by said. The order compels the originator of loans in the securities, American Home Mortgage Investment Corp., to produce and/or permit the inspection of documents on 3,227 loans.

Ambac claims EMC breached various representations and warranties about loan quality as its originations have defaulted at an “extraordinary rate.”

Credit Suisse Group AG seeks a dismissal of a lawsuit filed by Ambac Financial Group Inc. because Ambac is too “sophisticated” to have been fraudulently induced into insuring $175 million in home-equity lines-of-credit, Bloomberg reported. Ambac says it has to pay more than $44 million in claims.

Bloomberg published another story that indicated Cambridge Place Investment Management Inc. filed a lawsuit on July 9 in a Massachusetts state court against Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley. More than $2 billion in RMBS was allegedly sold through deception.

Securities and Exchange Commission, Plaintiff, v. Goldman Sachs & Co. and Fabrice Tourre, Defendants.
Case No. 10 CV 3229, April 15, 2010 (U.S. District Court for the Southern District of New York).

Main State Retirement System, Individually and On Behalf of All Others Similarly Situated, Plaintiffs, vs. Countrywide Financial Corp., et al.
Case No. 2:10-cv-00302-MRP-MAN, Jan. 14, 2010 (U.S. District Court for the Central District of California).

WELLS FARGO BANK, N.A., as Trustee, etc., Plaintiff and Respondent, v. GMAC MORTAGE USA CORPORATION, Defendant and Appellant.
No. B217147, appeals decision on July 23, 2010 (Court of Appeals of California, Second District, Division Two).

Ambac Assurance Corp. v. EMC Mortgage Corp.
Case No. 08-CV-9464 (RMB) (S.D.N.Y.).

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