On April 21, 2014, Union Central Life Insurance Co. and UBS AG filed a joint motion disclosing, and seeking the court’s approval for, a proposed settlement to end a dispute concerning the sale of residential mortgage-backed securities (RMBS) that UBS sold to the insurer. Union Central and affiliates Ameritas Life Insurance Corp. and Acacia Life Insurance Co. sued UBS and other financial service companies and executives in 2011, alleging that the defendants misrepresented the quality of the loans underlying the RMBS that they sold to the insurers. The proposed settlement covers all RMBS that UBS issued, sponsored or underwrote and sold to Union Central between Jan. 1, 2004, and Dec. 31, 2008. The parties did not disclose the amount UBS will pay Union Central and other plaintiffs. The case is Union Central Life Insurance Co., et al. vs. Ally Financial, Inc., et al., case no. 11-cv-2890 (GBS), in the U.S. District Court for the Southern District of New York. Read the parties’ joint memorandum of law in support of their joint motion here.
On April 16, 2014, Bank of America and Financial Guaranty Insurance Company (FGIC) announced that they had reached a comprehensive settlement concerning nine second-lien residential mortgage-backed securitizations sponsored by Countrywide Home Loans, Inc., for which FGIC provided financial guaranty insurance. Financial Guaranty sued Countrywide and its successor, Bank of America, in New York state court in 2009, alleging that Countrywide had fraudulently induced the insurer into covering Countrywide RMBS transactions by misrepresenting the quality of the assets underlying the securities. Under the terms of the settlement, FGIC received a settlement payment of $584 million in cash, and all outstanding litigation between FGIC and Bank of America, as well as outstanding and potential claims by FGIC related to alleged representations and warranties breaches and other claims involving such securitizations, were resolved. In addition, The Bank of New York Mellon (Trustee), as trustee or indenture trustee for such securitizations, has agreed on the terms of separate settlement agreements for each of such securitizations, pursuant to which the Trustee will receive specified cash settlement payments, and outstanding and potential claims by the Trustee related to alleged representations and warranties breaches and other claims involving such securitizations will be resolved. The Trustee has received payments totaling about $307 million under the seven completed trust settlements and will receive about an additional $48 million if two remaining trust settlements are completed. The case is Financial Guaranty Insurance Co. v. Countrywide Home Loans Inc., case number 650736/2009, in the Supreme Court of the State of New York, County of New York.
On April 8, 2014, Allstate Insurance Company and Merrill Lynch & Co. filed a stipulation of discontinuance in New York state court, ending Allstate’s lawsuit concerning $167 million in residential mortgage-backed securities (RMBS) that Allstate purchased. Allstate filed the lawsuit in March 2011, alleging that Merrill Lynch had misrepresented the quality of the loans underlying the securities. According to Allstate’s complaint, most of the certificates it bought had started with AAA ratings, but 97% were below investment grade by the time of the complaint. The lawsuit alleged federal securities law violations and fraudulent inducement, among other claims. The stipulation of discontinuance did not disclose a settlement amount. The case is Allstate Insurance Co., et al. v. Merrill Lynch & Co., et al., index number 650559/2011, in the Supreme Court of the State of New York, County of New York. Read the stipulation of discontinuance here.
On April 7, 2014, a New York state court dismissed a lawsuit against UBS concerning a collateralized debt obligation (CDO) known as NS Repack. Insurers Financial Structures Ltd. and Arrowood Indemnity Company sued UBS in 2008, alleging that UBS induced the insurers into covering the $94 million CDO by entering into an oral contract to limit defaults in the CDO’s underlying assets. In granting UBS’s motion for summary judgment and dismissing the action, Justice Saliann Scarpulla found that UBS had made a prima facie showing that the parties did not form an oral contract and plaintiffs had not put forth sufficient evidence to demonstrate that any factual issue existed that would preclude summary judgment for UBS. The case is Financial Structures Ltd., et al. v. UBS AG, et al., case number 601159/2008, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
On March 27, 2014, a federal court in New York ruled that a pension fund could proceed with a class action against Goldman Sachs in connection with the sale of $1.8 million in residential mortgage-backed securities (RMBS). The Police and Fire Retirement System of the City of Detroit (PFRS) sued Goldman for violations of Sections 11 and 15 of the Securities Act of 1933, alleging that Goldman had made false and misleading statements in the 2007 offering documents for GSR Mortgage Loan Trust 2007-4F (the Trust). In mid-2009, credit agencies allegedly downgraded the certificates issued by the Trust to junk status. U.S. District Judge Miriam Goldman Cedarbaum dismissed – twice – PFRS’s complaint with leave to amend, on the basis that PFRS had failed to allege that defendants’ alleged misrepresentations caused injury to PFRS. Subsequent to those dismissals, however, the Second Circuit issued an opinion in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., which Judge Cedarbaum noted “significantly changed the landscape of the pleading standards for loss causation.” In NECA-IBEW – also a case involving GSR Mortgage Loan Trust 2007-4F and over which Judge Cedarbaum presided – the Second Circuit broadened the definition of standing by holding that the lead plaintiff had class standing to assert the claims of purchasers of certificates backed by mortgages originated by the same lenders that originated the mortgages backing plaintiff’s certificates, because such claims implicated “the same set of concerns” as plaintiff’s claims. Relying on NECA-IBEW, Judge Cedarbaum found that PFRS had alleged a plausible injury and that PFRS’s loss allegations were more detailed than NECA’s and “pass[ed] muster under the governing case law.” Judge Cedarbaum did, however, dismiss PFRS’s claim that the offering documents misled investors as to rating agency opinions, finding that PFRS had not sufficiently alleged that the agencies knew that the ratings were false when they issued them. The case is The Police and Fire Retirement System of the City of Detroit v. Goldman Sachs & Co., et al., case number 10-cv-04429, in the U.S. District Court for the Southern District of New York. Read the court’s opinion here.
On March 26, 2014, the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, announced that it had reached a settlement in residential mortgage-backed securities (RMBS) cases involving Bank of America, Countrywide Financial, Merrill Lynch, and certain named individuals. The cases alleged violations of federal and state securities laws in connection with private-label RMBS purchased by Fannie Mae and Freddie Mac between 2005 and 2007. The settlement agreement provides for an aggregate payment of approximately $9.33 billion by Bank of America that includes the litigation resolution as well as a purchase of securities by Bank of America from Fannie Mae and Freddie Mac. According to the FHFA, the settlement agreement covers private label securities claims between FHFA and Bank of America in the following cases: Federal Housing Finance Agency v. Bank of America Corp., et al., No. 11 Civ. 6195 (DLC) (S.D.N.Y.); Federal Housing Finance Agency v. Countrywide Financial Corp., et al., No. 12 Civ. 1059 (MRP) (C.D. Cal.); Federal Housing Finance Agency v. Merrill Lynch & Co., Inc., et al., No. 11 Civ. 6202 (DLC) (S.D.N.Y.); and one Merrill Lynch security in Federal Housing Finance Agency v. First Horizon National Corp., No. 11 Civ. 6193 (DLC) (S.D.N.Y.). Read the FHFA’s press release here.
On March 21, 2014, the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, announced that it had reached a settlement with Credit Suisse, related companies, and specifically named individuals for $885 million. According to the FHFA, the settlement resolves all claims in the lawsuit FHFA v. Credit Suisse, et al., as well as all claims against the Credit Suisse defendant in FHFA v. Ally Financial Inc., et al. alleging violations of federal and state securities laws in connection with private-label mortgage-backed securities (PLS) purchased by Fannie Mae and Freddie Mac during 2005-2007. Under the terms of the agreement, Credit Suisse will pay approximately $234 million to Fannie Mae and approximately $651 million to Freddie Mac and certain claims against Credit Suisse related to the securities involved will be released. Read the settlement agreement and the FHFA’s press release here.
On March 18, 2014, Harding Advisory LLC, an investment advisory firm, and its owner, Wing F. Chau, sued the Securities and Exchange Commission (SEC) in New York federal court, alleging that the SEC violated their constitutional rights by bringing an administrative proceeding instead of a lawsuit in connection with a $1.5 billion collateralized debt obligation (CDO). The SEC announced its charges in October 2013, alleging that Harding and Chau compromised their independent judgment as collateral manager to a $1.5 billion CDO named Octans I CDO Ltd. in order to accommodate trades requested by Magnetar Capital LLC, which had invested in the equity of the CDO, and whose interests were not necessarily aligned with the debt investors. Harding and Chau allege in their lawsuit that the SEC, by bringing an administrative proceeding rather than a lawsuit, deprived Harding and Chau of “the right to a jury trial, the use of the discovery procedures available in federal court to shape their defense, the ability to challenge claims before trial” and “the protections of the Federal Rules of Evidence to bar unreliable evidence.” The lawsuit seeks a declaration that the SEC has violated the plaintiffs’ rights to equal protection and due process and an injunction blocking the agency from pursuing its case as an administrative proceeding. The case is Chau, et al. v. SEC, case number 14-cv-01903, in the U.S. District Court for the Southern District of New York. Read the complaint here.
On February 27, 2014, New York’s Appellate Division, First Department unanimously reversed a trial court’s decision dismissing Assured Guaranty Municipal Corp.’s (Assured) claims for rescissory and consequential damages in an action against Credit Suisse concerning $1.8 billion in residential mortgage-backed securities (RMBS). Assured sued loan originator DLJ Mortgage and underwriter Credit Suisse in October 2011, alleging that the defendants misrepresented the poor quality of the loans packaged into the RMBS. The trial court judge, Justice Shirley Werner Kornreich, dismissed Assured’s claims for rescissory damages and consequential damages based on a determination that plaintiffs’ remedies were limited by the pooling and servicing agreement’s “sole remedy” clause. On appeal, the First Department found that the “motion court erred in holding that, as a matter of law, the remedy available to plaintiff monoline insurers for breach of defendant’s representations and warranties under the pooling and servicing agreement is limited to cure of the breach or the substitution or repurchase of the particular securitized loan.” According to the First Department, “the certificate insurer is not one of the parties affected by the ‘sole remedy’ clause of the representations and warranties provision” because the “failure to include a particular party, here the certificate insurer, among those governed by a contract provision can only be construed as the intentional exclusion of that party from its application.” The First Department unanimously reversed the trial court and reinstated the claims for rescissory damages and consequential damages in their entirety. The case is Assured Guaranty Municipal Corp., et al. v. DLJ Mortgage Capital Inc., et al., case number 652837/2011, in the Supreme Court of the State of New York, Appellate Division, First Judicial Department. Read the court’s opinion here.
On February 27, 2014, the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, announced that it had reached a settlement with Société Générale, related companies, and specifically named individuals for $122 million. The settlement resolves claims in the lawsuit captioned FHFA v. Société Générale, et al., alleging violations of federal and state securities laws in connection with private-label mortgage-backed securities purchased by Fannie Mae and Freddie Mac during 2006. Under the terms of the settlement agreement, Société Générale will pay roughly half of the settlement proceeds to Fannie Mae and half to Freddie Mac, and certain claims against Société Générale related to the securities involved will be released. Read the settlement agreement and the FHFA’s press release here.