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.
On February 24, 2014, Syncora Holdings Ltd. announced that its wholly owned, New York financial guarantee insurance subsidiary, Syncora Guarantee Inc. (Syncora), has settled its RMBS-related claims with JPMorgan and affiliates thereof. Syncora filed several lawsuits against JPMorgan and affiliates between 2009 and 2012, alleging that the insurer had to pay out hundreds of millions of dollars in insurance claims because JPMorgan and its affiliates misrepresented the quality of the RMBS and the loans underlying the securities. According to Syncora’s announcement, in return for releases of all of Syncora’s claims against JPMorgan and certain affiliates arising from certain insured RMBS transactions that were the subject of litigation or dispute, Syncora will receive a cash settlement. The settlement amount was not disclosed. The cases are Syncora Guarantee Inc. v. EMC Mortgage LLC, et al., case number 650420/2012; Syncora Guarantee Inc. v. EMC Mortgage LLC, et al., case number 653519/2012; and Syncora Guarantee Inc. v. JPMorgan Securities LLC, case number 651566/2011, in the Supreme Court of the State of New York, County of New York; and Syncora Guarantee Inc. v. EMC Mortgage Corp., case number 1:09-cv-03106, in the U.S. District Court for the Southern District of New York. Read Syncora’s announcement here. Read more about the litigations here, here, here, and here.
On February 25, 2014, Morgan Stanley disclosed in a filing with the Securities and Exchange Commission that it had “ reached an agreement in principle with the Staff of the Enforcement Division of the U.S. Securities and Exchange Commission (the ‘SEC’) to resolve an investigation related to certain subprime RMBS transactions sponsored and underwritten by the Company in 2007.” According to Morgan Stanley’s filing, “[p]ursuant to the agreement in principle, the Company would be charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act, and the Company would pay disgorgement and penalties in an amount of $275 million and would neither admit nor deny the SEC’s findings. The SEC has not yet presented the proposed settlement to the Commission and no assurance can be given that it will be accepted.” Read Morgan Stanley’s SEC filing here.
On February 12, 2014, the Judicial Panel on Multidistrict Litigation (JPML) rejected a motion to centralize several cases currently in New York and Kansas federal courts brought by the National Credit Union Administration (NCUA) against various banks – including Credit Suisse, Barclays, Morgan Stanley, RBS, UBS, and Wachovia — in connection with the sale of residential mortgage-backed securities (RMBS). The NCUA brought the cases on behalf of four liquidated credit unions against several underwriters and issuers of some 200-plus RMBS purchased by the credit unions. NCUA generally alleged that the offering documents for the RMBS certificates at issue contained misstatements concerning: (1) compliance with the underwriting guidelines pursuant to which the underlying mortgage loans were originated; (2) compliance with “reduced documentation” standards; and (3) the disclosed “loan-to-value” ratios. Pursuant to 28 U.S.C. § 1407, defendants moved to centralize this litigation in the District of Kansas. In rejecting the motion, the JPML concluded that Section 1407 centralization will not serve the convenience of the parties and witnesses or further the just and efficient conduct of the litigation. The JPML further noted that, while the actions share some general common factual questions as to several RMBS offerings, they involve different RMBS certificates purchased by different credit unions from different defendants. Thus, wrote the JPML, alternatives to centralization exist, in particular informal cooperation among the involved attorneys and coordination between the involved courts, that may minimize whatever possibilities there may be of duplicative discovery or inconsistent pretrial rulings. The case is In re: National Credit Union Administration Board Mortgage-Backed Securities Litigation, case number 2505, before the U.S. Judicial Panel on Multidistrict Litigation. Read the JPML’s order here.
On February 4, 2014, Morgan Stanley disclosed in a filing with the Securities and Exchange Commission that it had “reached an agreement in principle to resolve its mortgage-backed securities litigation pending in the United States District Court for the Southern District of New York, case number 11 Civ. 6739, with the Federal Housing Finance Agency as conservator for Freddie Mac and Fannie Mae for $1.25 billion.” The lawsuit is one of a number of cases related to residential mortgage-backed securities (RMBS) offerings filed by the Federal Housing Finance Agency (FHFA) against 18 financial institutions in September 2011. According to Morgan Stanley’s filing, “[t]he agreement in principle is subject to final approvals by the parties.” The case is Federal Housing Finance Agency, et al. v. Morgan Stanley, et al., case number 11-cv-06739, in the U.S. District Court for the Southern District of New York. Read Morgan Stanley’s SEC filing here.
On January 31, 2014, a court in New York approved Bank of America’s proposed $8.5 billion settlement designed to resolve nearly all of its legacy Countrywide-issued first-lien residential mortgage-backed securitization (RMBS) exposure. Bank of America agreed to the settlement in June 2011, and had the support of a group of 22 investors. But AIG led an investor group that objected to the settlement, arguing that the settlement was inadequate and that the trustee, Bank of New York Mellon, had a conflict of interest in agreeing to the proposed settlement. In approving the settlement, Justice Barbara Kapnick ruled that Bank of New York Mellon acted reasonably and in good faith in determining that the settlement was in the best interests of the investors. Kapnick did, however, withhold her approval from the settlement of claims relating to certain loans that had been modified because, according to the court, Bank of New York Mellon should not have settled claims related to mortgages that had been modified without investigating their potential worth. The case is In the Matter of the Application of the Bank of New York Mellon, case number 651786/2011, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
On January 30, 2014, New York’s Appellate Division, First Department affirmed part of a lower court’s decision allowing an Australian-based hedge fund to proceed with a $1 billion lawsuit against Goldman Sachs in connection with two collateralized debt obligations (CDOs). The hedge fund, Basis Yield Alpha Fund (Basis), sued Goldman in October 2012, alleging that Goldman sold it $80 million of notes issued by two CDOs – Timberwolf 2007-1 and Point Pleasant 2007-1 – that lost all their value almost immediately after closing. The lawsuit further alleged that Goldman bet against the CDOs via credit default swaps, and that Goldman executives knew that the notes issued by the CDOs were poor quality, contrary to the representations the executives made to Basis. New York Supreme Court Justice Shirley Werner Kornreich allowed Basis to proceed with its claims for fraud, fraudulent inducement, fraudulent concealment, negligent misrepresentation, unjust enrichment, and rescission. The First Department found that the motion court properly declined to dismiss the fraud claims because the disclaimers and disclosures in the offering circulars did not preclude, as a matter of law, Basis’s claim of justifiable reliance on Goldman’s misrepresentations and omissions. But the First Department further found that the remaining claims should have been dismissed. The case is Basis Yield Alpha Fund v. Goldman Sachs Group, Inc., et al., index number 652996/11, in the New York State Supreme Court, Appellate Division, First Department. Read the court’s opinion here.
On January 29, 2014, a New York state court allowed U.S. Bank, as trustee for Home Equity Mortgage Trust Series 2006-5, to proceed with a lawsuit against Credit Suisse unit DLJ Mortgage Capital, Inc., in connection with the securitization of approximately 12,000 mortgage loans. Home Equity Mortgage Trust Series 2006-5 filed the lawsuit in October 2012, alleging that DLJ Mortgage misrepresented the health of the loans and refused to repurchase them. In refusing to dismiss the case, Justice Melvin L. Schweitzer rejected DLJ’s argument that the six-year statute of limitations on the trust’s contract claims began to run on a contractual “as of” date before the contract was executed in October 2006. The court further found that DLJ’s 120-day cure or repurchase period closed before the operative pleadings were filed. The court did, however, limit the damages the trust could seek, barring the trustee from seeking consequential and rescissory damages on the grounds that the purchase agreement did not provide for the recovery of consequential damages and that rescission is generally available only where there are no available legal remedies, which the court said was not the case here. The case is Home Equity Mortgage Trust Series 2006-5 v. DLJ Mortgage Capital Inc., et al., case number 653787/2012, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
On January 28, 2014, Jefferies Group LLC announced in an SEC disclosure that it had reached a non-prosecution agreement in principle with the United States Attorney for the District of Connecticut and a settlement agreement in principle with the SEC, which remains subject to review and approval by the SEC Commissioners, relating to an investigation of the purchases and sales of mortgage-backed securities. The investigation arose in connection with a Jefferies mortgage-backed-securities(MBS) trader who was later indicted by the United States Attorney for the District of Connecticut in January 2013 and separately charged in a civil complaint by the SEC. The government alleged that the trader, Jesse Litvak, misrepresented MBS sellers’ asking price to buyers or misrepresented buyers’ price to sellers, keeping the difference and accumulating approximately $2.7 million in illicit gains. According to Jefferies, the non-prosecution and settlement agreements in principle include an aggregate $25.0 million payment, of which approximately $11.0 million are payments to trading counterparties impacted by Litvak’s activities, approximately $10 million of which is a fine payable to the U.S. Attorney’s Office, and approximately $4.0 million of which is a fine payable to the SEC. Read Jefferies’s SEC disclosure here.