The sudden upsurge in the number of subprime and credit crisis-related securities lawsuit dismissal motion rulings, noted in yesterday’s post, is continuing. As outlined below, courts in four separate cases also recently issued rulings. Each of the cases involved ’33 Act claims brought by purchasers of mortgage-backed securities. In each case, a part of the plaintiffs’ cases survived the motions, although in two of the cases the outcome is at best a mixed bag for the plaintiffs.
Here are the four cases, in chronological order:
DLJ Mortgage Capital/Credit Suisse: In a March 29, 2010 order (here), Southern District of New York Judge Paul Crotty granted in part and denied in part the defendants dismissal motions in the subprime-related lawsuit that had been filed against DLJ Mortgage Capital, which had sponsored and sold the mortgage-backed securities; Credit Suisse Management, which had issued the offering documents; the offering underwriters; individual signatories to the offering documents and rating agencies.
Judge Crotty granted the motion to dismiss, on the grounds of lack of standing, with respect to four offerings referenced in the complaint in which the plaintiffs had not purchased securities.
Judge Crotty also granted the motion to dismiss regarding allegations based on the offering documents’ statements concerning the mortgage originators’ practices concerning appraisals, loan to value ratios and ratings, holding that these allegations are not actionable where "the Complaint fails to allege that the speaker did not truly believe the statements at the time it was made public."
However, Judge Crotty denied the motions to dismiss with respect to the plaintiffs’ allegations concerning the mortgage originators’ "systematic disregard of the mortgage underwriting guidelines." Judge Crotty rejected the defendants’ argument that the offering documents contained sufficient cautionary language, because "the disclosures fail to make clear the magnitude of the risk" adding that "the allegations here are extreme, yet plausible in light of the rapid and precipitous decline in market value, concurrent with skyrocketing mortgage loan delinquency rates and plummeting credit ratings."
Residential Capital LLC/RALI Certificates: In a March 31, 2010 order (here), Southern District of New York Harold Baer, Jr., citing his own prior ruling in the Royal Bank of Scotland/Harborview Mortgage Trust case (about which, refer to yesterday’s post, here), granted in part and denied in part the defendants’ motions to dismiss in the lawsuit brought with respect to mortgage-backed certificates issued by Residential Capital, known as RALI Certificates.
Judge Baer granted, based on lack of standing, plaintiffs’ allegations concerning 55 of the 59 offerings referenced in the complaint in which the plaintiffs had not purchased shares.
Judge Baer also granted the motions to dismiss with respect to the plaintiffs’ allegations that the offering documents failed to disclose that the credit rating model used to evaluate the securities was outdated and that the credit enhancements offered in connection with the securities were inadequate.
Judge Baer noted that "there is no allegation that these offerings did not receive the stated credit rating or credit enhancements detailed in the Offering Documents," and that "there is no factual allegation that indicates the ratings and credit enhancements described in the documents were incorrect at the time offered."
Judge Baer also granted the motion to dismiss with respect to the alleged failure to disclose material conflicts with the rating agencies, holding that the defendants had no duty to disclose this information.
However, Judge Baer denied the motion to dismiss with respect to the plaintiffs’ allegations that the originator of the mortgages collateralizing the RALI Certificates "systematically disregarded" the underwriting guidelines. Relying on his prior opinion in the Royal Bank of Scotland case, Judge Baer noted that that the allegations that about the mortgage originators "improper underwriting practices coupled with the loan pools’ near-total credit rating collapse and default rate spike are sufficient to create a fair inference that the [originator] totally disregarded the underwriting guidelines."
Citigroup Mortgage Loan Trust: In an April 6, 2010 order (here), Southern District of New York Judge Leonard Wexler held granted in part and denied in part the motions to dismiss in the lawsuit relating to mortgage-backed securities issued by Citigroup Mortgage. As in the cases discussed above, Judge Wexler dismissed the allegations relating to the 16 of 18 offerings referenced in the complaint in which the named plaintiff had not purchased securities.
With respect to the remaining allegations that the offering documents had misrepresented the underwriting standards used in connection with the underlying mortgages, including in particular the loan to value ratios, appraisals and debt to income ratios, Judge Wexler said that "the strong nature of the cautionary language contained in the disclosure materials brings this case very close to the dismissal line."
However, "given the length of the Complaint" and "the fact that most of the Plaintiffs’ claims have been dismissed," Judge Wexler concluded that he "will not dismiss the case at this time." Rather Judge Wexler gave the plaintiffs’ leave to replead the remaining causes of action, according to his very specific guidelines, which "will put the court in a better position from which to evaluate the merits of the claim alleged."
Deutsche Alt-A Securities: In a second opinion also issued on April 6, 2010 (here), Judge Wexler on substantially similar grounds as stated in connection with the Citigroup Mortgage Loan Trust case, granted in part and denied in part the defendants’ motions to dismiss in the securities suit relating to the mortgage-backed securities issued by Deutsche Alt-A Securities. As in the Citigroup case, Judge Wexler gave the plaintiffs leave to replead the remaining claims that were not dismissed due to lack of standing.
Certain generalizations emerge from the recent surge in subprime and credit crisis securities lawsuit dismissal motions rulings. The first and most obvious is that plaintiffs are not going to be allowed to raise ’33 Act claims in connection with offerings in which they did not purchase securities. This could substantially narrow many of these cases.
On the other hand, the winning allegation for plaintiffs (which appears to have been repeated verbatim in many of these mortgage-backed securities offering cases) seems to be that the mortgage originators "systematically disregarded" the underwriting guidelines. Courts seem skeptical of allegations concerning outdated credit rating models, inadequate credit enhancements and rating agency conflicts of interest.
The name of the game for plaintiffs in these cases is to survive a dismissal motion, and the plaintiffs will generally put a dismissal motion ruling in the win column even if only a small part of the case survives. So even though big chunks of all of these cases were dismissed, there may be enough in each of these cases for these plaintiffs to live for another day.
However in the two opinions of Judge Wexler referenced above, in which he said he would not dismiss the remaining allegations "at this time," the plaintiffs’ position arguably is more precarious, as the plaintiffs must replead their remaining allegations, after which their remaining and repled claims apparently must again withstand judicial scrutiny.
The sudden cascade of dismissal motion rulings is quite remarkable. It is not entirely clear why there has suddenly been such an onslaught of rulings in these subprime and credit crisis related securities suits. To some extent, it may just be coincidental. It may also be due to the fact that many of these cases are now maturing and are reaching the stage where they are now finally ripe for dismissal motion rulings.
In addition, a number of these rulings seem to be emerging now because there is a developing body of case law providing guidance on how these cases should be sorted out. Each of the rulings cited recent decisions in similar cases. There is a certain sense that the basic ground rules have now been worked out, making it a lot more straightforward to work out the remaining cases.
But whatever the reason may be, there certainly are an awful lot of decisions coming down all of a sudden. It is getting hard just to keep track.
I have in any event added all of these recent rulings to my running tally of subprime and credit crisis securities suit dismissal motion resolutions, which can be accessed here.
Many thanks to a loyal reader for copies of the decisions in the Citigroup and Deutsche cases. Thanks also to Joel Laitman of the Cohen Milstein firm for providing copies of the rulings in the Residential Capital and DLJ Mortgage cases. Cohen Milstein is sole lead plaintiffs’ counsel in these latter two cases.
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