FHFA Lawsuits Against Barclays Bank, Morgan Stanley, & Deutsche Bank Over RMBS to Proceed to Trial

The U.S. District Court for the Southern District of New York is allowing the Federal Housing Finance Agency’s residential mortgage-backed securities lawsuits against Deutsche Bank AG, Morgan Stanley (MS), Barclays Bank PLC (BCS), and RBS Securities to go to trial even while granting the dismissal of some of the motions having to do with alleged misstatements about owner-occupancy information and loan-to-value ratio. FHFA is the conservator for Freddie Mac and Fannie Mae against numerous financial institutions for alleged securities law violations related to the sale and offer of RMBS.

According to the complaints, which are part of 17 FHFA lawsuits that were brought in September 2011, from 2005 to 2007 the offering documents used to sell RMBS to the government sponsored enterprises included material misstatements or omissions about LTV, owner-occupancy status, and mortgage-underwriting standards. (Based on these allegations, the SEC made claims under the Virginia Securities Act, the 1933 Securities Act, and the District of Columbia Securities Act) In the FHFA’s complaints against Morgan Stanley, Deutsche Bank, and in four of the other cases, the agency is making New York common law claims of aiding and abetting fraud and fraud on the basis of three categories of alleged misstatements that the securities law claims were based upon.

Per the Federal Housing Finance Agency v. Deutsche Bank AG, the financial firm, a number of its corporate affiliates, and associated individuals were named defendants for acting as lead underwriter for 40 securitizations, as well as a depositor and sponsor for 35 of them. The defendants submitted motions to dismiss the fraud claims and claims, pointing to DC law and Virginia law as basis.

In its opinion, the District Court held that the plaintiff alleged enough facts to plead fraud related to the offering documents’ representations about underwriting standards and while it may not have depended on the prospectus supplements before making the decision to buy the certificates, the plaintiff did depend on the preliminary materials, which held the same information as the supplements. The court threw out the claims about owner-occupancy information and LTV, however, finding that the plaintiff depended totally on the statistics reported by the defendants and the outcome of the FHFA’s analysis. It found that without more support, there was not enough to allege fraudulent intent.

Meantime, Barclays sought to have the Virginia securities law-based claims thrown out by contending that Securitized Asset Backed Receivables LLC (SABR), a depositor that it owns, and individual defendants can’t be held liable under Virginia law over misstatements linked to securities that they didn’t personally sell to the plaintiff. The court granted the motion to dismiss all claims.

As for the claims against Morgan Stanley related to 33 securitizations put up for sale pursuant to shelf-registration statements with Morgan Stanley affiliates in the role of lead underwriter, sponsor, and depositor for the majority of them, the court granted the LTV and owner-occupancy fraud claims but said that there wasn’t enough necessary specificity to claim fraudulent intent. Yet, pointing to its previous holding in JPMorgan Chase & Co. (JPM), it held that the plaintiff claimed enough facts to plead fraud related to representations about mortgage-underwriting standards and therefore the related fraud claim would not be thrown out
As for the securities law claims against RBS, which served as underwriter for some of the securitizations and had filed motions to have the claims against them dismissed, the court threw out the underwriter liability claim after finding out that the plaintiff did not allege that the financial firm “actually solicited the GSEs investment.”

Federal Housing Finance Agency v. Deutsche Bank AG (PDF)

Federal Housing Finance Agency v. JPMorgan Chase & Co.

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