Last week, U.S. District Judge Katherine B. Forrest of the Southern District of New York reinstated a failure-to-notify claim brought by plaintiff Deutsche Bank National Trust Company (the trustee) against defendant Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”). This notification claim is distinct from the trustee’s claim for breach of contract—based on Morgan Stanley’s alleged breaches of the agreements governing the residential mortgage-backed security (“RMBS”) transaction—and concerns Morgan Stanley’s failure to inform the trustee about alleged misrepresentations made by Morgan Stanley about the mortgage loans which served as the underlying collateral for the securities issued by the Morgan Stanley Structured Trust I 2007-1 (“the trust”).
Last month, the U.S. Court of Appeals for the Second Circuit upheld a 2014 ruling holding issuers of residential mortgage-backed securities (RMBS) liable for securities fraud. In the opinion by U.S. Circuit Judge Richard C. Wesley, the court emphasized the policies underlying the passage of the Securities Act of 1933 and related state laws, which aim to protect securities purchasers by imposing a duty on sellers of securities to disclose all material information before such public offerings.
On July 12, 2017, the Royal Bank of Scotland (RBS) and the Federal Housing Finance Agency (“FHFA”) announced an agreement to settle claims arising out of RBS’s sale of allegedly faulty residential mortgage-backed securities (“RMBS”). RBS will pay $5.5 billion to settle the claims.
On May 1 and 3, UBS Securities LLC and Credit Suisse Securities USA LLC announced settlements of significant claims brought against them by the National Credit Union Administration (“NCUA”), the federal agency serving as liquidation agent for credit unions that folded during the economic crisis. Credit Suisse will pay $400 million and UBS $445 million to settle the NCUA claims.
On Wednesday, April 12, Justice Ramos of the Commercial Division of the New York Supreme Court dismissed with prejudice four lawsuits filed by Royal Park Investments SA/NV (“Royal Park”). The lawsuits alleged fraud and negligent misrepresentation with respect to residential mortgage-backed securities (“RMBS”) sold to Fortis NV/SA (“Fortis”) – formerly an independent Belgian bank that was sold off to BNP Paribas during the financial crisis – between 2005 and 2007. The claims sought damages totaling $3.7 billion from four of the world’s largest banks: Morgan Stanley, Credit Suisse, Deutsche Bank, and UBS.
Investment advisor TCW Asset Management Company (“TCW”) scored a major victory last week when an appellate court dismissed a $128 million RMBS fraud suit that was filed against it by two Australian-based Cayman Island hedge funds: Basis Pac-Rim Opportunity Fund (Master) and Basis Yield Alpha Fund (Master) (together, “Basis”). Basis sued TCW for alleged fraud in selecting RMBS assets for, and recommending an investment in, a $400 million investment vehicle called Dutch Hill II.
On March 2, a five-judge panel of the First Department Appellate Division in New York reversed Justice Kornreich’s October 19, 2015, denial of TCW’s motion for summary judgment. The panel found that Basis failed to present evidence of loss causation, i.e., that TCW’s alleged fraud caused Basis’ loss. Once TCW made a showing that Basis’ loss was not due to any misrepresentations or omissions by TCW and that Dutch Hill II would have collapsed regardless as a result of the market crash, the burden shifted back to Basis to raise an issue of fact on loss causation. The appellate panel’s decision turned on Basis’ “complete failure” to show that its loss was caused directly by TCW’s alleged fraud, and not by intervening economic forces such as the housing market crash.
RMBS fraud plaintiffs should heed the warning of the appeals court: in the event of a market collapse coincident with loss, investors must demonstrate loss causation by showing that misstatements rather than macroeconomic forces ultimately caused the loss.
The case is Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Management Co., docket number 654033/12, in the Supreme Court of the state of New York, Appellate Division, First Department.
Attorneys for Deutsche Bank National Trust Co. argued recently to a First Department panel that several of the RMBS putback claims that it was pursuing as trustee against Morgan Stanley should be revived after they were dismissed in April for being untimely. The claims were originally commenced when the Federal Housing Finance Agency filed summonses with notice on the final day before the expiration of the statute of limitations. However, Deutsche Bank, as trustee, subsequently filed the complaints for the claims. The trial court threw out the claims, finding that certificate holders lacked standing to sue and that the trustee could not benefit from tolling agreements entered into by Morgan Stanley and certain other certificate holders.
At the recent argument, Deutsche Bank’s attorney argued that the certificate holders were not barred from filing the summonses with notice and that the trustee could benefit from them, because they were filed derivatively. In addition, he argued that Deutsche Bank was a third-party beneficiary of the tolling agreements at issue because the agreements applied to representatives of the certificate holders and that Deutsche Bank, as trustee, was a representative. Morgan Stanley’s attorney argued that “merely purporting” to file derivatively did not allow the certificate holders to sidestep contractual provisions that deprived them of standing to sue. He also argued that Deutsche Bank’s reliance on the word “representative” in the tolling agreements was misplaced because, read in its entirety, the provision at issue did not apply to the trustee, and the trustee represents the whole group of certificate holders, not any individual one.
The panel did not render a decision at the hearing.
On December 7, New York Supreme Court Justice Eileen Bransten dismissed a $500 million lawsuit against UBS AG (“UBS”) brought by Ace Decade Holdings Limited (“Ace Decade”), a British Virgin Islands company, for lack of personal jurisdiction and forum non conveniens. Ace Decade alleged that UBS fraudulently induced it to invest in shares of a company publicly traded in Hong Kong through a UBS-affiliated intermediary in Hong Kong, an affiliation that UBS concealed. Ace Decade’s investment allegedly resulted in a loss of more than $500 million.
Ace Decade pled that both general and specific jurisdiction existed because UBS had systematic contact with New York and transacted business in New York that gave rise to the claims: the “cause of action [arose] from a transaction that UBS induced Ace Decade to make…months after Ace Decade moved to New York,” “UBS made misrepresentations to Ace Decade over several months while they were in New York,” and “UBS’s tortious acts injured Ace Decade in New York.”
In its motion to dismiss, UBS argued that under Daimler AG v. Bauman, 134 S. Ct. 746, 754 (2014), UBS is not subject to general jurisdiction in New York because UBS is incorporated in and has its principal place of business in Switzerland. Furthermore, UBS argued that New York lacked specific jurisdiction because the transactions giving rise to Ace Decade’s claims occurred in Hong Kong, not New York. Lastly, UBS argued that New York was not a convenient forum for several reasons, including the fact that trying the case in New York would impose undue hardship on UBS because almost all relevant witnesses and documents were abroad.
Justice Bransten agreed with UBS and held that the Court lacked personal jurisdiction. She stated that “the record makes clear that the ‘original critical events’ associated with the [i]nvestment occurred in Hong Kong.” The fact that Ace Decade moved to New York after entering into all relevant agreements and committing to make an investment was not a sufficient basis for jurisdiction. The Court also concluded that even if it could properly exercise jurisdiction, the action would be dismissed based on forum non conveniens because all relevant documents and witnesses are located in Hong Kong.
On November 29, a five-judge panel of New York’s Appellate Division affirmed the dismissal of CIFG Assurance North America, Inc.’s (“CIFG”) claims against Bear Stearns & Co. (now known as J.P. Morgan Securities LLC (“J.P. Morgan”)) based on alleged material misrepresentations in connection with an insurance contract. However, the panel found that CIFG’s claims should not have been dismissed with prejudice because CIFG should have been given an opportunity to replead.
The complaint alleged that Bear Stearns & Co. (“Bear Stearns”) made material misrepresentations that induced CIFG to provide financial guaranty insurance in connection with two collateralized debt obligations (“CDOs”). According to CIFG, Bear Stearns created the CDOs to rid itself of toxic, high-risk residential mortgage-backed securities (“RMBS”) that it was carrying on its books. CIFG alleged that Bear Stearns needed a third party to insure the CDOs’ senior tranches to make them marketable to investors. Bear Stearns approached CIFG to provide financial guaranty insurance on certain senior notes issued by the CDOs and made material misrepresentations to induce CIFG to do so. Specifically, Bear Stearns allegedly represented to CIFG that the CDOs’ assets would be selected by independent and reputable collateral managers when, in reality, Bear Stearns allegedly paid off the managers to allow itself to choose the collateral and load the CDOs with the toxic RMBS from its own books. CIFG also claimed that Bear Stearns held a number of short positions against the CDOs’ portfolios and profited substantially therefrom. Due to the large volume of toxic RMBS in the portfolios, both CDOs collapsed within a year of closing, which forced CIFG to pay over $100 million to discharge its liabilities under the insurance. CIFG alleges that it would have never issued the insurance had it known that the collateral managers would be taking direction from Bear Stearns.
In affirming the dismissal, the Appellate Division found that the “complaint contains insufficient information about the insurance policies CIFG was allegedly fraudulently induced to issue, and the circumstances under which those policies were issued.” Furthermore, the Appellate Division found that the complaint failed to include any detail as to how Bear Stearns “solicited” the insurance from CIFG and was void of any information about the underlying CDO transaction. Lastly, the panel noted that “the complaint merely states that CIFG paid over $100 million to discharge its liabilities under the insurance, but does not identify to whom those payments were made, or the events that triggered the payments.” Based on all of these deficiencies, the panel held that CIFG’s misrepresentation claim did “not clearly inform defendant as to the complained-of incidents, and it was properly dismissed.” Nonetheless, the Appellate Division held that CIFG should be given an opportunity to replead and rejected J.P. Morgan’s argument to dismiss the claim as time-barred.
The case is captioned CIFG Assurance North America Inc. v. J.P. Morgan Securities LLC, index number 654074/2012, in the New York Supreme Court, Appellate Division, First Department.
Earlier last month, the Appellate Division, First Department, reversed a trial court’s dismissal of investment fund Phoenix Light’s $700 million residential mortgage-backed securities (RMBS) fraud suits against Credit Suisse and Morgan Stanley. In a brief opinion, the appellate court held that Phoenix Light’s allegations that it relied on defendants’ misrepresentations and omissions in their respective RMBS offering materials were sufficient to state a fraud claim.
Justice Ramos of the Supreme Court of the State of New York, Commercial Division, had previously granted the defendants’ motions to dismiss Phoenix Light’s common law fraud, fraudulent inducement, and aiding and abetting fraud claims. In so holding, Justice Ramos relied on the fact that Phoenix Light never alleged that it requested mortgage loan files or due diligence reports from the defendants to conduct independent analysis of the loans underlying the RMBS. Phoenix Light argued that such requests to the defendants would have been futile, but the trial court held that a sophisticated investor should have done so.
The Appellate Division disagreed, relying on its prior decision in IKB International S.A. v. Morgan Stanley, 142 A.D.3d 447 (1st Dept. 2016), among other authority. In IKB’s case against Morgan Stanley, the First Department concluded that even if the plaintiff bank had demanded loan files from Morgan Stanley, the defendant would not have provided said files. Thus, IKB’s allegations of justifiable reliance were sufficient as pleaded. Further, in the Phoenix Light opinion, the court noted that RMBS plaintiffs are not required to plead that they received representations and warranties made directly by defendants concerning the underlying loans, merely that such representations and warranties were made to the defendants by third parties with the relevant information. As such, Phoenix Light’s pleaded reliance on the defendants’ offering materials was sufficient.
The cases are captioned Phoenix Light SF Ltd. et al. v. Credit Suisse AG et al., index number 653123/2013, and Phoenix Light SF Ltd. et al. v. Morgan Stanley et al., index number 652986/2013.