In a pair of separate rulings late last week, district court judges took on the plaintiffs’ allegations in a couple of high profile lawsuits arising out of the subprime meltdown. The courts’ rulings make it clear that the plaintiffs’ allegations in these cases will be highly scrutinized, but that (in one of the two cases) the judicial hurdles are not entirely insurmountable.
First, in a May 15, 2009 ruling in the Washington Mutual Securities Class Action, Western District of Washington Judge Marsha Pechman granted the defendants’ motions to dismiss with respect to the plaintiffs’ ‘34 Act allegations, with leave to amend. She also granted the motion with respect to certain of the plaintiffs’ ’33 Act allegations, also with leave to amend, but she denied the motions to dismiss with respect to the plaintiffs’ ’33 Act allegations concerning the company’s October 2007 securities offering.
In granting the motions with respect to the ’34 claims, Judge Pechman was sharply critical of the clarity and organization of the plaintiffs’ consolidated class action complaint. She characterized the complaint as “verbose and disordered” and states that the plaintiffs’ allegations concerning the elements of the claim are “spread disjointedly” throughout the complaint, as a result of which the complaint “never offers a cohesive presentation of the required elements for securities fraud for each defendant.” Judge Pechman refers to the complaint as embodying “puzzle pleading.”
The opinion recounts that two days prior to oral argument on the dismissal motions, Judge Pechman had directed plaintiffs’ counsel to address the alleged misleading statements of each of the defendants and to connect the statement to the allegations allegedly showing that the defendant knew the statements were false. At the hearing, the opinion recounts, plaintiffs’ counsel “indicated that the relevant allegations were too numerous to identify even in three hours of argument.”
This response to her concerns clearly raised Judge Pechman’s ire; she said that she “remains mystified at counsel’s failure to allege cohesive claims, submit helpful briefing or prepare a response to the Court’s inquiry in advance of oral argument.” She added that counsel “cannot expect the Court to engage in the necessary analysis when counsel is not prepared to do so.” She added that if counsel is “unable to rectify the problems identified in this Order when they file the amended Complaint, the Court may be obligated to review whether counsel can adequately represent the proposed class.”
Given the attention-grabbing nature of Judge Pechman’s rebuke on the plaintiffs’ ’34 Act allegations, it might easily be overlooked that she denied the defendants’ motion to dismiss regarding plaintiffs’ ’33 Act claims relating to the company’s October 2007 securities offering. Judge Pechman specifically found that plaintiffs’ allegations with respect to the October 2007 offering were sufficient.
However, Judge Pechman granted the defendants’ motions to dismiss as to the company’s three offerings in August 2006, September 2006 and December 2007, because the plaintiff class lacked standing with respect to those offerings. The court allowed the plaintiffs’ leave to name additional plaintiffs to obtain standing as to the three other offerings. The court deferred consideration of the plaintiffs’ allegations with respect to these three offerings awaiting the plaintiffs’ efforts to establish standing. The court’s rulings with respect to the October 2007 offering raises the prospect that if the plaintiffs are able to establish standing, their ’33 Act allegations regarding these other offerings may also survive.
Though plaintiffs’ counsel cannot be happy with their rough treatment in Judge Pechman’s order, at least a portion of their complaint survive the motion to dismiss, and they now have the opportunity to try to amend the complaint to address the court’s concerns.
I have in any event added the May 15 ruling in the WaMu case to my table of subprime and credit crisis related dismissal motions grants and denials, which can be accessed here.
Andrew Longstreth’s May 18, 2009 Law.com article regaring the WaMu decision can be found here.
Cleveland Subprime Nuisance Case Dismissed: In a decision also dated May 15, 2009, Northern District of Ohio Judge Sara Lioi granted the defendants’ motion to dismiss in a case in which the City of Cleveland sought to hold 21 investment banks liable under Ohio nuisance law in connection with the banks’ securitization of subprime mortgages. The complaint alleged that the banks (which had not originated the mortgages) had facilitated the making of loans to subprime borrowers who could not afford the debt. After the borrowers defaulted, the lenders foreclosed. The city sought to hold the banks liable for its burdens and costs in maintaining the foreclosed properties.
My prior post criticizing the City of Cleveland for filing the lawsuit can be found here.
Judge Lioi granted the defendants motions to dismiss on four grounds: that the claims were preempted by Ohio law regulating mortgage lending; that the claim was barred by the “economic loss rule”; that the allegations failed to demonstrate that securitizing subprime loans constituted an “unreasonable interference with a public right”; and that the allegations were not sufficient to satisfy causation requirements – that is, the securitizers’ conduct had caused the City’s problems.
The opinion is interesting in a number of respect, perhaps first and foremost in connection with Judge Lioi’s holding that the securitizers’ conduct could not be deemed a public nuisance because the City had not alleged that the defendants had violated any laws. In reaching this conclusion, Judge Lioi extensively reviewed the panoply of governmental laws and regulations regarding mortgages, which she said were “specifically aimed at encouraging lending to traditionally underserved segments of the population.” From this Judge Lioi discerned a “picture” of “express governmental encouragement of the type of lending that forms the basis of the City’s claim.”
In holding that the banks can’t be liable for conduct that not only is not illegal but that the government expressly encouraged, Judge Lioi may implicitly be suggesting the true source of the City’s woes. It was, after all, governmental policy, for these kinds of loans to be made.
Judge Lioi’s extensive review (at pages 32 and 33 of the opinion) of the myriad of intervening causes that led to the City’s very real problems emphatically underscores the essentially foolishness of trying to hold the investment banks liable for the problems the City is facing because of its heavy load of foreclosed properties. As Judge Lioi observed, the “confluence of events certainly was no small problem given the large volume of foreclosures in Cleveland and the city’s budgetary constraints but under no circumstance can it be described as having been directly caused by Defendants’ conduct.”
A May 15, 2009 memorandum from the Skadden law firm analyzing Judge Lioi’s opinion can be found here. Plaintiffs’ counsel reportedly already has filed a notice of appeal.
Update: Readers may recall my recent post (here) about the questions surrounding the $9.3 million that was unaccounted for from the settlement of a settlement class action lawsuit. One of the plaintiffs’ lawyer, Gene Cauley, had asserted his rights under the Fifth Amendment at a April 20, 2009 hearing at which the court sought to establish the whereabouts of the money.
In a May 18, 2009 post (here), the WSJ.com blog reports that Cauley has now agreed to plead guilty to criminal charges and has also submitted a filing to the Arkansas Supreme Court in which he has agree to give up his law license. Unfortunately, the money itself is not yet accounted for, and according to statements of Cauley’s attorney cited in the blog post, may prove difficult to recover.