Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—SDNY: Controlling Law Change Forces Reconsideration of Previously Dismissed Fraud Claims, (May 1, 2013)

By Jay Fishman, J.D.

The United States District Court for the Southern District of New York granted the plaintiff New Jersey Carpenters Funds/Boilermaker Blacksmith National Pension Trusts’ (collectively “Carpenters”) motion to reconsider its previously dismissed claims in two cases alleging fraud and misleading statements in the underwriting guidelines of mortgage-backed security offering documents, in violation of Sections 11, 12(a)(2) and 15 of the Securities Act (New Jersey Carpenters Heath Fund v. Residential Capital, LLC, April 30, 2013, Baer, Jr., H.).

The court, in March 2010, granted class standing only for the claims comprising security certificates actually bought by Carpenters’ purchasers. The court in July 2010, however, granted motions to intervene brought by certain of the plaintiff funds (Intervenors) in both cases, the Harborview and RALI cases, on behalf of certificate purchasers in six dismissed offerings. Lastly, the court on reconsideration in this case revised its original holding in both the Harborview and RALI cases, by permitting Carpenters’ class standing for many of the previously dismissed non-purchased certificates, in light of an intervening change in the controlling law.

Controlling law. The court specifically relied on NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., in which the United States Court of Appeals for the Second Circuit held that a plaintiff has class standing to assert claims on behalf of certificate purchasers from other offerings, or from different tranches of the same offering, if the plaintiff plausibly alleges that: (1) the purchasers personally suffered some actual injury as a result of the defendant’s putatively illegal conduct; and (2) the conduct implicates the same set of concerns’ as the conduct alleged to have caused injury to other members of the putative class by the same defendants (previous law turned on whether the plaintiff would have statutory or Article III standing to seek recovery for misleading statements in the certificates’ offering documents). The Second Circuit, applying its holding to the facts in NECA, determined that a “plaintiff has class standing to assert the claims of purchasers of certificates backed by mortgages originated by the same lenders that originated the mortgages backing the plaintiff’s certificates.”

Harborview case. Carpenters, in the Harborview case, initially asserted certificate-purchaser claims in 15 different offerings issued between 2006 and 2007 that were based on two registration statements, but the court, in October 2010, granted class standing for only two of them. The court, on reconsideration granted Carpenters’ request to reinstate the purchasers’ claims on 12 of the 13 dismissed offerings based on Carpenters’ NECA-like assertions that: (1) six of the 12 offerings shared Countrywide Home Loans (Countrywide) and American Home Mortgage (AHM) as the originator with Carpenters’ 2006-4 and 2006-7 offerings; and (2) two offerings shared AHM and Bank United as originators with the Intervenors 2006-10 and 2006-14 offerings. Additionally, the Harborview amended complaint alleged that Countrywide, AHM and Bank United systematically disregarded the underwriting guidelines.

RALI case. Carpenters, in the RALI case, initially asserted certificate purchaser claims in 59 different offerings issued between 2006 and 2007 that were based on two registration statements, but the court, in October 2010, granted class standing for only four of them. Carpenters argued that the 55 dismissed offerings were sponsored and issued by the defendants, Residential Funding Corp. and Residential Accredited Loans, Inc. (Residential), the same defendants that sponsored and certified the four offerings whose certificates the purchasers bought. Carpenters noted that 57 of the 59 offerings shared Homecomings Financial Networks, Inc. (HFN) as the principal originator of the offerings bought by the purchasers, as well as of the mortgage loans. Carpenters admitted, however, that the 59 offerings were underwritten by 10 different underwriters.

The court, on reconsideration, disregarded Residential’s argument that NECA did not apply to the RALI case because there were two different registration statements and because the offerings involved different time periods, types of mortgages, and underwriting guidelines. Residential failed to explain why or how these considerations would be relevant under NECA.

Nevertheless, the court permitted class standing for only 37 of the 55 dismissed offerings, determining that Carpenters met the two-prong NECA test only for those 37 offerings. Specifically, the court reaffirmed Carpenters lack of class standing to assert the purchasers’ claims on 18 of the RALI offerings because, by virtue of the total 59 offerings being handled by ten different underwriters, Carpenters could not prove that the purchasers in all of the 55 offerings suffered actual harm resulting from Residential’s conduct and that the conduct, therefore, implicated the same set of concerns’ as the conduct alleged to have caused injury to other members of the putative class by the same defendants.

Attorneys: Daniel Brett Rehns (Cohen Milstein Sellers & Toll P.L.L.C.) and Richard A Speirs (Zwerling, Schachter & Zwerling) for New Jersey Carpenters Health Fund, Boilermaker Blacksmith National Pension Trust and New Jersey Carpenters Vacation Fund. David E. Potter (Lazare Potter & Giacovas, LLP) and Jeffrey A. Lipps (Carpenter Lipps & Leland, LLP) for RALI Series 2006-QO1 Trust, Residential Accredit Loans, Inc., Residential Capital, LLC and Residential Funding, LLC. Michael Stephan Kraut (Morgan, Lewis and Bockius LLP) for Deutsche Bank Trust Company Americas and U.S. Bank National Association. David A. Beck (Carpenter Lipps & Leland LLP) for Bruce Paradis and Kenneth M. Duncan. Stephanie J. Goldstein (Fried, Frank, Harris, Shriver & Jacobson) for Goldman Sachs & Co., RBS Greenwich Capital, UBS Investment Bank, Credit Suisse Securities, LLC, Deutsche Bank Securities, Inc., RBS Securities Inc., Citigroup Global Markets, Inc., Bank of America Corporation, UBS Securities, LLC, JP Morgan Chase, Inc. and Morgan Stanley & Co., Inc. Robert J. Kopecky (Kirkland & Ellis, LLP) for GMAC RFC Securities.

Companies: Bank of America Corporation; Citigroup Global Markets, Inc.; Credit Suisse Securities LLC; Deutsche Bank Securities, Inc.; Deutsche Bank Trust Company Americas; GMAC RFC Securities; Goldman Sachs & Co.; JP Morgan Chase, Inc.; Morgan Stanley & Co., Inc.; RBS Greenwich Capital; RBS Securities Inc.; Residential Accredit Loans, Inc.; Residential Capital, LLC; Residential Funding, LLC; UBS Investment Bank; UBS Securities, LLC; U.S. Bank National Association

The case is No. 08 CV 8781 (HB).

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