On May 15, 2013, a three-judge panel of the Second Circuit Court of Appeals affirmed a district court’s decision to dismiss Liberty Mutual Insurance Co.’s lawsuit against Goldman Sachs concerning Fannie Mae’s exposure to toxic loans. Liberty sued Goldman for its conduct as lead underwriter of certain stock offerings made by Fannie Mae in September and December 2007, transactions which allegedly resulted in Liberty’s loss of $62.5 million. According to the complaint, Goldman drafted and disseminated offering documents falsely representing that Fannie Mae’s capital exceeded statutory and regulatory requirements, and failed to disclose that Fannie Mae had inadequate write-downs and loss reserves for its exposure to approximately $700 billion in risky subprime and Alt-A mortgages. Liberty alleged violations of Rule 10b-5 of the Securities Exchange Act of 1934, the Massachusetts and Washington securities acts, and the Massachusetts and Washington unfair and deceptive trade practices statutes, as well as common law fraud and negligent misrepresentation. The district court concluded that all seven of Liberty’s claims failed because, inter alia, Liberty had not alleged an actionable misstatement or omission. The Second Circuit agreed, concluding that the representations regarding Fannie Mae’s core capital necessarily incorporated imperfect business judgments and predictions about the future, which later proved mistaken. The Second Circuit could not conclude that the representations amounted to fraud. The case is Liberty Mutual Insurance Co., et al. v. Goldman Sachs & Co., case number 12-3859, in the U.S. Court of Appeals for the Second Circuit. Read the Second Circuit’s summary order here.
First Department Dismisses ACA Lawsuit Against Goldman Sachs Regarding Abacus CDO
Posted in ACA Financial Guaranty Corp., Bond Insurers, Goldman Sachs, Investment Banks/Deal SponsorsOn May 14, 2013, New York’s Appellate Division, First Department reversed a lower court’s order and dismissed bond insurer ACA Financial Guaranty Corp.’s lawsuit against Goldman Sachs in connection with the Abacus 2007-AC1 collateralized debt obligation (CDO). ACA filed its complaint in January 2011, alleging that Goldman Sachs fraudulently induced ACA into insuring the Abacus CDO by misrepresenting hedge fund Paulson & Co.’s economic interest in the transaction, including Paulson’s role in the portfolio selection process and Paulson’s short position against the CDO. In denying Goldman’s motion to dismiss the fraud claims, Justice Barbara R. Kapnick found that ACA’s complaint contained a “‘rational basis’ to infer that Goldman Sachs intentionally misled ACA from its silence in the face of ACA’s manifest detrimental reliance on its mistaken belief that Paulson was on the same of the transaction as it was.” In reversing Justice Kapnick, the First Department found that Goldman’s purported misrepresentation was contradicted by the deal’s offering documents, and that ACA’s amended complaint failed to establish justifiable reliance as a matter of law in light of ACA’s acknowledgment that, in entering into the deal, it was not relying on any representations other than in the offering documents. Furthermore, the court found that Paulson’s intentions with regards to the investment were not peculiarly within Goldman’s knowledge, and ACA, although in direct contact with Paulson, failed to ask the hedge fund what position it intended to take in the investment. The case is ACA Financial Guaranty Corp. v. Goldman Sachs & Co., case number 650027/2011, in the Appellate Division of the Supreme Court of the State of New York, First Judicial Department. Read the First Department’s decision here.
Court Allows RMBS Putback Action To Proceed Against Deutsche Bank
Posted in Deutsche Bank AG, HSBC Bank USA, Investment Banks/Deal Sponsors, TrusteesOn May 13, 2013, a New York state court denied Deutsche Bank’s motion to dismiss a putback lawsuit in connection with allegedly defective residential mortgage-backed securities (RMBS). Investors sued DB Structured Products (DBSP), an affiliate of Deutsche Bank AG, on March 28, 2012, alleging that DBSP, as originator of the loans underlying the RMBS at issue, misrepresented the risk characteristics of the loan portfolio backing the RMBS. HSBC Bank USA, as trustee, was later substituted as the plaintiff. DBSP moved to dismiss the action on the basis that plaintiff’s single claim, for breach of contract, was subject to a six-year statute of limitations that began when the Pooling and Servicing Agreement (PSA) was executed on March 1, 2006. The trustee argued that its claims did not accrue until DBSP breached its obligations to repurchase loans that did not conform to representations and warranties made regarding their characteristics and quality. In denying DBSP’s motion to dismiss, Justice Shirley Werner Kornreich found that “[t]he statute of limitations began to run when DBPS improperly rejected the Trustee’s repurchase demand. Ergo, the breach is the failure to comply with the demand.” The case is Ace Securities Corp. v. DB Structured Products Inc., 650980/2012, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
Court Dismisses RMBS Putback Action Against Nomura
Posted in HSBC Bank USA, Investment Banks/Deal Sponsors, Nomura Credit and Capital Inc., TrusteesOn May 10, 2013, a New York state court dismissed a putback lawsuit against Nomura Credit & Capital (Nomura) in connection with allegedly defective residential mortgage-backed securities (RMBS). Two hedge funds – Zambezi C2 LLC and Zambezi C4 LLC – commenced the lawsuit on December 20, 2011, alleging that Nomura misrepresented the risk characteristics of the loan portfolio backing the RMBS. In August 2012, counsel for plaintiffs filed an amended complaint substituting the trustee, HSBC Bank USA, National Assocation, as plaintiff. In granting Nomura’s motion to dismiss, Justice Peter O. Sherwood found that the 6-year statute of limitations for breach of contract actions had expired by August 2012, which the court deemed to be the controlling date in the case. The court further found that plaintiff’s cause of action accrued no later than the closing date of the transaction, although the court did not reach a decision on whether the alleged misrepresentations were made for statute of limitations purposes as of the date of the transaction’s operative agreements or as of the transaction’s closing date. The case is Nomura Asset Acceptance Corp. Alternative Loan Trust v. Nomura Credit & Capital Inc., case number 653541/2011, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
Judge Rakoff Allows Justice Department To Proceed with FIRREA Claims Against Bank of America
Posted in Bank of America, Countrywide, Department of Justice, Fannie Mae, Freddie Mac, Investment Banks/Deal Sponsors, Mortgage Originators, Regulators/Government EntitiesOn May 8, 2013, a federal court in New York allowed the U.S. Department of Justice to proceed with its action against Bank of America in connection with the packaging and sale of mortgage-backed securities (MBS) to Fannie Mae and Freddie Mac. Federal prosecutors in New York filed a civil fraud lawsuit against Bank of America, as successor to mortgage lender Countrywide, in October 2012, alleging that Countrywide implemented – and Bank of America inherited and continued to operate – a home loan program known as the “Hustle,” which effectively eliminated the underwriting review of mortgage loans that Countrywide originated and that Fannie and Freddie later guaranteed. U.S. District Judge Jed S. Rakoff allowed the Justice Department to proceed with its claims brought under the Financial Institutional Reforms, Recovery, and Enforcement Act (FIRREA), but he granted the banks’ motion to dismiss claims brought under the False Claims Act. In his order, Judge Rakoff wrote that he would issue the reasons for his decision in a forthcoming opinion. The case is United States v. Bank of America Corp., et al., U.S. District Court, Southern District of New York, No. 12-cv-1422. Read the court’s order here.
First Department Revives CIFG Fraud Claims Against Goldman Sachs
Posted in Bond Insurers, CIFG Assurance North America Inc., Goldman Sachs, Investment Banks/Deal Sponsors, M&T Bank, Mortgage OriginatorsOn May 7, 2013, New York’s Appellate Division, First Department revived fraud claims that bond insurer CIFG Assurance (CIFG) filed against Goldman Sachs in connection with approximately $275 million in residential mortgage-backed securities (RMBS) that CIFG insured. CIFG sued Goldman in August 2011, accusing the bank of fraudulently inducing CIFG to insure the RMBS by misrepresenting the underwriting standards and quality of the loans underlying the RMBS. In May 2012, the trial court dismissed CIFG’s fraudulent inducement claims, finding that CIFG was a sophisticated party that should have done more due diligence before insuring the bonds. In reversing the trial court and ruling that the fraudulent inducement claims should not have been dismissed, the First Department concluded that CIFG’s use of an outside consultant to analyze the characteristics of the underlying loans raised sufficient questions of fact as to whether CIFG reasonably relied on Goldman’s representations. The First Department also revived CIFG’s fraud claim against M&T Bank, one of several originators that sold the loans to Goldman. The case is CIFG Assurance North America, Inc., v. Goldman Sachs & Co., et al., New York State Supreme Court, New York County, No. 652286/2011. Read the First Department’s decision here.
Court Allows AIG $10.5 Billion RMBS Lawsuit Against Bank of America, Countrywide To Proceed
Posted in AIG, Bank of America, Federal Reserve Bank of New York, Institutional Investors, Investment Banks/Deal Sponsors, Maiden Lane II, Regulators/Government EntitiesOn May 6, 2013, a federal court in California allowed American International Group, Inc. (AIG) to proceed in its $10.5 billion lawsuit against Bank of America and Countrywide in connection with residential mortgage-backed securities (RMBS) that AIG purchased from Countrywide. AIG filed its complaint in August 2011 in New York state court, alleging that, between 2005 and 2007, the defendants ignored underwriting standards when they sold AIG billions of dollars in RMBS backed by residential mortgages that were issued to subprime borrowers. The case was removed to the Southern District of New York and then transferred to U.S. District Judge Mariana Pfaelzer of the Central District of California, who presides over all Countrywide-related litigation in federal court. In partially denying defendants’ motion to dismiss, Judge Pfaelzer held that AIG’s fraudulent inducement claims were adequately pleaded, except for causes of action based on misstatements of owner-occupancy data and oral misstatements. The court also dismissed AIG’s negligent misrepresentation claims. The court further ruled that AIG has standing, for now, to bring claims for RMBS it sold to Maiden Lane II, a vehicle created by the Federal Reserve Bank of New York to buy troubled RMBS from AIG. Bank of America had argued that AIG lost its right to sue for fraud when AIG sold the RMBS to Maiden Lane II. The case is American International Group, Inc., et al. v. Bank of America Corp., et al., 11-cv-10549, U.S. District Court, Central District of California (Los Angeles). Read the court’s order here.
UBS To Pay Assured Guaranty $358 Million To Settle RMBS Claims
Posted in Assured Guaranty Municipal Corp., Bond Insurers, Investment Banks/Deal Sponsors, UBSOn May 6, 2013, bond insurer Assured Guaranty (Assured) announced that it had reached a settlement with UBS resolving Assured’s claims related to specified residential mortgage-backed securities (RMBS) transactions that were issued, underwritten or sponsored by UBS and insured by Assured under financial guaranty insurance policies. According to Assured’s announcement, Assured will receive an initial cash payment of $358 million under the settlement. Additionally, UBS will reimburse Assured for a portion of all future losses on certain transactions under a collateralized loss-sharing reinsurance agreement to be put in place by the third quarter of 2013. The case is captioned Assured Guaranty Municipal Corp. v. UBS Real Estate Securities Inc., 12-cv-01579, U.S. District Court, Southern District of New York (Manhattan). Read Assured’s statement here. Read the stipulation of voluntary dismissal the parties filed with the court here.
MBIA, Bank of America Settle RMBS Claims
Posted in Bank of America, Bond Insurers, Countrywide, Investment Banks/Deal Sponsors, MBIA, Mortgage OriginatorsOn May 6, 2013, Bank of America and bond insurer MBIA Inc. announced that they had reached a comprehensive settlement agreement to resolve all outstanding representations and warranties claims and all other claims between the parties. MBIA first sued Countrywide in 2008, alleging fraud and breach of contract related to the securitization of home loans originated by Countrywide, which Bank of America later acquired.As part of the settlement, Bank of America will pay MBIA approximately $1.6 billion in cash and remit to MBIA all of the outstanding MBIA 5.70% Senior Notes due 2034 that Bank of America acquired through a tender offer in December 2012. In addition, Bank of America will terminate all of its outstanding credit default swap (CDS) protection agreements purchased from MBIA on commercial mortgage-backed securities (CMBS), as well as terminate certain other trades in order to close out positions between the companies. MBIA will issue to Bank of America warrants to purchase 9.94 million shares of MBIA common stock, or approximately 4.9% of its currently outstanding shares, at an exercise price of $9.59 per share. The warrants may be exercised at any time prior to May 2018. Also, Bank of America will provide a senior secured $500 million credit facility to MBIA Insurance Corp. The settlement requires certain approvals of the New York State Department of Financial Services. The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court, New York County (Manhattan). Read Bank of America’s announcement here. Read MBIA’s announcement here.
Court Remands to New Jersey State Court Prudential RMBS Action Against Barclays
Posted in Barclays, Institutional Investors, Investment Banks/Deal Sponsors, PrudentialOn May 6, 2013, a federal court in New Jersey adopted a magistrate judge’s recommendation to remand to New Jersey state court a $200 million lawsuit that Prudential Insurance Co. of America (Prudential) and related entities filed against Barclays Bank PLC and others for alleged misrepresentations in the sale of residential mortgage-backed securities (RMBS) between 2005 and 2007. Plaintiffs filed the action in New Jersey Superior Court in August 2012, asserting claims for fraud, negligent misrepresentation, and violations of the state civil RICO statute. Defendants removed the action to federal court, arguing that there was federal jurisdiction because (1) the case was related to pending bankruptcy proceedings, and (2) there was diversity of citizenship. Plaintiffs moved to remand. The magistrate judge found that the action is a “purely state law case between non-bankrupt parties [that] has no business in federal court.” In adopting the magistrate judge’s recommendation, U.S. District Judge William J. Martini wrote that he agreed in all respects with Magistrate Judge Falk’s reasoning. The case is The Prudential Insurance Co. of America et al. v. Barclays Bank PLC, case number 12-cv-05854, in the U.S. District Court for the District of New Jersey. Read the court’s order here.