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Structured Finance Litigation Blog

FHFA Announces $99.5 Million RMBS Settlement With RBS

Posted in Federal Housing Finance Agency, Investment Banks/Deal Sponsors, RBS, Regulators/Government Entities

On June 19, 2014, the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, announced a settlement for $99.5 million with RBS Securities, Inc. According to the announcement, the settlement resolves claims against RBS in FHFA v. Ally Financial Inc. in the Southern District of New York alleging violations of federal and state securities laws in connection with private-label mortgage-backed securities purchased by Freddie Mac between 2005 and 2007. A separate lawsuit involving RBS – FHFA v. The Royal Bank of Scotland Group – is not affected by the settlement. Read the FHFA’s press release here. Read the settlement agreement here.

Royal Park Sues Trustee Deutsche Bank for Failing to Enforce RMBS Repurchase Obligations

Posted in Deutsche Bank National Trust, Institutional Investors, Royal Park, Trustees

On June 18, 2014, Belgium-based Royal Park Investments SA/NV filed a class action lawsuit and, in the alternative, derivative action claims against Deutsche Bank National Trust in federal court in New York in connection with 10 residential mortgage-backed securities (RMBS) trusts for which Deutsche Bank serves as trustee. According to Royal Park’s complaint, Deutsche Bank failed to enforce obligations by the mortgage originators and RMBS issuers to repurchase the defective loans underlying the RMBS trusts, resulting in what Royal Park alleges are billions of dollars in damages suffered by Royal Park, the 10 RMBS trusts in question, and a class of other investors in the trusts. Royal Park alleges that Deutsche Bank knew, by at least April 2011, that the loans underlying the RMBS were “so obviously defective that they had already been foreclosed on, liquidated and written off as losses,” but nevertheless refused to act before the statute of limitations on their claims expired in 2012 and 2013. The case is Royal Park Investments SA/NV v. Deutsche Bank National Trust Co., case number 14-cv-04394, in the U.S. District Court for the Southern District of New York. Read Royal Park’s complaint here.

RMBS Investors Take New Tack, File Derivative Actions Against Trustees

Posted in Bank of New York Mellon, BlackRock, Citibank, Deutsche Bank National Trust, DZ Bank, HSBC Bank USA, Institutional Investors, PIMCO, Prudential, Trustees, U.S. Bank National Association, Wells Fargo National Association

On June 18, 2014, a number of large institutional investors – including BlackRock, PIMCO, Prudential, and DZ Bank – sued six residential mortgage-backed securities (RMBS) trustees in New York state court for breaching their fiduciary duties and failing to force mortgage originators and RMBS issuers to repurchase defective loans. The trustees named include Bank of New York Mellon, Citibank, Deutsche Bank, HSBC, Wells Fargo, and U.S. Bank. The complaints, styled as derivative actions in which the investors are suing on behalf of the trusts, involve more than 2,200 RMBS trusts with combined original principal balances of more than $2 trillion. As the Wall Street Journal reported, “[a] focus on the trustees represents a new tack for the investors who have spent recent years demanding that firms that made the loans and sold bonds repurchase them.”

Federal Government and State Attorneys General Reach Nearly $1 Billion Settlement with SunTrust Mortgage

Posted in Consumer Financial Protection Bureau, Department of Housing and Urban Development, Department of Justice, Mortgage Originators, Regulators/Government Entities, SunTrust Mortgage Inc.

On June 17, 2014, the United States Department of Justice (DOJ) announced that it, along with the Department of Housing and Urban Development (HUD), the Consumer Financial Protection Bureau (CFPB), 49 state attorneys general, and the District of Columbia’s attorney general, have reached a $968 million agreement with SunTrust Mortgage Inc. (SunTrust) to address mortgage origination, servicing, and foreclosure abuses. According to the DOJ’s press release, SunTrust admitted that between January 2006 and March 2012, it originated and underwrote FHA-insured mortgages that did not meet FHA requirements, that it failed to carry out an effective quality control program to identify noncompliant loans, and that it failed to self-report to HUD even the defective loans it did identify. SunTrust also admitted that numerous audits and other documents disseminated to its management between 2009 and 2012 described significant flaws and inadequacies in SunTrust’s origination, underwriting, and quality control processes, and notified SunTrust management that as many as 50 percent or more of SunTrust’s FHA-insured mortgages did not comply with FHA requirements. The agreement resolves potential violations of civil law based on SunTrust’s deficient mortgage loan origination and servicing activities. The agreement does not prevent state and federal authorities from pursuing criminal enforcement actions related to this or other conduct by SunTrust, or from punishing wrongful securitization conduct that is the focus of the Residential Mortgage-Backed Securities Working Group of President Barack Obama’s Financial Fraud Enforcement Task Force. The agreement does not prevent the CFPB from pursuing civil enforcement actions against SunTrust for violations of the CFPB’s new mortgage servicing rules that took effect on Jan. 10, 2014. State attorneys general also preserved, among other things, all claims against the Mortgage Electronic Registration Systems (MERS) and all claims brought by borrowers. Additionally, the agreement does not prevent any action by individual borrowers who wish to bring their own lawsuits. Read the DOJ’s press release here.

Court Dismisses RMBS Lawsuit Against Goldman Sachs

Posted in Blue Heron Funding Ltd., Goldman Sachs, Institutional Investors, Investment Banks/Deal Sponsors, Kleros Preferred Funding, Phoenix Light

On June 13, 2014, a New York state judge dismissed a $450 million residential mortgage-backed securities (RMBS) lawsuit against Goldman Sachs filed by a number of investors, including Phoenix Light SF Ltd., Blue Heron Funding Ltd., and Kleros Preferred Funding V PLC. Plaintiffs filed the action in July 2013, alleging that Goldman both misrepresented the quality of loans underlying the RMBS and failed to disclose that it was betting against the securities with short positions. In granting Goldman’s motion to dismiss, Judge Charles E. Ramos found that “[t]he true nature of the risk being assumed could, admittedly, have been ascertained by reviewing [] loan files and plaintiffs never asked for them. . . . The obligation of a sophisticated investor to inquire cannot be merely excused.” The case is Phoenix Light SF Ltd., et al. v. The Goldman Sachs Group Inc., et al., no. 652356/2013, in the Supreme Court of the State of New York, County of New York. Read the decision here.

Court Allows NCUA to Proceed with State Law RMBS Claims Against UBS

Posted in Investment Banks/Deal Sponsors, National Credit Union Administration, Regulators/Government Entities, UBS

On June 10, 2014, a federal judge in New York allowed the National Credit Union Administration (NCUA) to proceed with its state law claims against UBS Securities LLC in one of several actions that the NCUA filed as liquidating agent of Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union in connection with the credit unions’ purchases of residential mortgage-backed securities (RMBS). The NCUA filed its action in September 2013, alleging that UBS made misrepresentations in the underwriting and subsequent sale of RMBS to the credit unions. UBS moved to dismiss the NCUA’s federal securities law claims and the state law claims as to two securities. U.S. District Judge Denise Cote dismissed the federal claims, noting that their dismissal was undisputed by the parties, but she denied UBS’s motion with respect to the state law claims, finding that a loan analysis and other publicly available information were enough to support the NCUA’s allegations that the originators of the securities in question disregarded underwriting standards. The case is National Credit Union Administration Board v. UBS Securities Inc., case number 13-cv-06731 in the U.S. District Court for the Southern District of New York. Read the court’s opinion here.

New York Court of Appeals Adopts Strict Textual Interpretation of No-Action Clauses

Posted in Athilon Capital, Institutional Investors, Investment Banks/Deal Sponsors, Quadrant Structured Products

On June 10, 2014, the New York Court of Appeals, in response to certified questions from the Supreme Court of the state of Delaware, clarified New York law on no-action clauses, concluding that a trust indenture’s no-action clause that specifically precludes enforcement of contractual claims, but omits reference to “the Securities,” does not bar a securityholder’s independent common law or statutory claims. The opinion stemmed from a lawsuit filed in Delaware’s Court of Chancery by Quadrant Structured Products, which had purchased securities issued by Athilon Capital Corp. and administered under two trust indentures. In its lawsuit, Quadrant alleged that Athilon, as well as its officers, directors, and affiliates, had breached its fiduciary duties by paying junior securityholders to the detriment of senior subordinated securities, including Quadrant’s subordinated notes. Defendants moved to dismiss, asserting that Quadrant’s claims were barred by a no-action clause in the indenture that permitted only trustee-initiated lawsuits upon request of a majority of securityholders and prohibited individual securityholder actions. After initially finding for Athilon, the Delaware Court of Chancery, on remand, issued a report in Quadrant’s favor, concluding that the no-action clause applied only to contractual claims arising under the indenture and did not bar claims arising under common law or statutory rights. Upon receipt of the report, the Delaware Supreme Court certified the issue to the New York Court of Appeals. Relying on the expressio unius est exclusio alterius canon of construction (“the express mention of one thing excludes all others”), the New York Court of Appeals “conclude[d] that a no-action clause which by its language applies to rights and remedies under the provisions of the indenture agreement, but makes no mention of individual suits on the securities, does not preclude enforcement of a securityholder’s independent common law or statutory rights.” The case is captioned Quadrant Structured Products Co. v. Vincent Vertin, et al., Case No. 112 in the New York Court of Appeals. Read the opinion here.

Second Circuit Vacates Judge Rakoff’s Rejection of Settlement in SEC v. Citigroup

Posted in Citigroup, Investment Banks/Deal Sponsors, Regulators/Government Entities, Securities and Exchange Commission (SEC)

On June 4, 2014, the United States Court of Appeals for the Second Circuit vacated an order by U.S. District Judge Jed S. Rakoff in which he refused to approve a settlement between the Securities and Exchange Commission (SEC) and Citigroup Global Markets Inc. (Citi). The underlying dispute concerns SEC allegations that Citigroup sold a $1 billion mortgage-bond deal called Class V Funding III without disclosing that the bank bet against $500 million of the assets in the deal. In November 2011, Judge Rakoff rejected the parties’ proposed $285 million settlement on the basis that the settlement was not in the public’s interest, particularly because the SEC permitted Citi to neither admit nor deny wrongdoing as part of the settlement. The SEC appealed Judge Rakoff’s decision to the Second Circuit. In vacating the trial court’s order, the Second Circuit wrote that “[i]t is an abuse of discretion to require, as the district court did here, that the SEC establish the ‘truth’ of the allegations against a settling party as a condition for approving the consent decrees.” According to the Second Circuit’s opinion, “Trials are primarily about the truth. Consent decrees are primarily about pragmatism.” The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., No. 11-5227, in the U.S. Court of Appeals for the Second Circuit. Read the court’s opinion here.

Federal Court Remands States’ RMBS Actions Against S&P

Posted in Ratings Agencies, Standard & Poor's (S&P), The McGraw-Hill Companies Inc.

On June 3, 2014, a federal court in New York granted a motion by numerous states to remand back to state court seventeen lawsuits against credit rating agency McGraw Hill Financial and its subsidiary, Standard & Poor’s Financial Services (S&P), concerning ratings of mortgage-backed securities. The states filed their lawsuits in their own state courts, alleging that S&P misled the states’ citizens in representing that bond ratings were objective and independent rather than influenced by undisclosed conflicts of interest. Defendants removed the cases to federal court where they were consolidated and assigned to U.S. District Judge Jesse M. Furman of the Southern District of New York. The states, arguing that their cases arose solely under state law rather than federal law, moved to remand the cases back to state court. Judge Furman granted the states’ motion, finding that “[t]he presumption against federal jurisdiction is especially strong in cases of this sort, involving States seeking to vindicate quasi-sovereign interests in enforcing state laws and protecting their own citizens from deceptive trade practices and the like.” The case is In re: Standard & Poor’s Rating Agency Litigation, case number 13-md-02446, in the U.S. District Court for the Southern District of New York. Read the court’s opinion here.

Court Dismisses MBIA RMBS Action Against JPMorgan

Posted in Bear Stearns & Co., Bond Insurers, Investment Banks/Deal Sponsors, JP Morgan Chase, MBIA

On May 6, 2014, a New York state court granted JPMorgan’s summary judgment motion for dismissal in a fraud action that MBIA Insurance filed in connection with a $1.2 billion residential mortgage-backed securities (RMBS) transaction. MBIA filed the action in 2012, alleging that it was fraudulently induced by Bear Stearns (which JPMorgan acquired in 2008) to issue an insurance policy for the transaction and that it sustained approximately $168 million in claims for delinquencies and charge-offs. According to MBIA, Bear Stearns, the underwriter for the transaction, intentionally misrepresented the quality of the loans underlying the securities by submitting an altered due diligence report. The court found evidence to support the assertion that Bear Stearns had altered the due diligence report but found no evidence that MBIA relied on the misinformation to its detriment. The court noted that while “there may be triable issues of fact on a theory of fraudulent concealment, the insurer has not pleaded such a theory.” The court held that JP Morgan is entitled to summary judgment of dismissal of the present complaint but without prejudice to MBIA interposing an amended complaint. The case is MBIA Insurance Corp. v. JP Morgan Secs. LLC, No. 64676/2012, in the Supreme Court of the State of New York, County of Westchester. Read the decision here.