As a result of the First Circuit’s January 20, 2011 opinion, the plaintiffs in the Nomura Asset Acceptance Corporation mortgage-backed securities lawsuit have managed to revive a slender portion of their case, albeit on a rather precarious basis. The First Circuit otherwise affirmed the lower court’s dismissal of the remainder of their case.


The First Circuit’s opinion could be influential in other mortgage-backed securities suits, particularly on questions surrounding the standing of claimants to assert claims based on offerings in which they did not purchase securities.


The First Circuit’s January 20 opinion can be found here.



As discussed here, purchasers of mortgage pass-through certificates filed this action in March 2008 against Nomura Asset Acceptance Corporation, certain of its directors and officers, the eight mortgage trusts that had issued the certificates, and the offering underwriters who had supported the 2005 and 2006 public offerings of the certificates.


On September 30, 2009, District of Massachusetts Judge Richard G.Stearns granted the defendants’ motions to dismiss, as discussed here. Judge Stearns held that the plaintiffs lacked standing to assert claims in connection with the six out of the eight offerings in which the named plaintiffs had not purchased certificates. Judge Stearns found that the plaintiffs had not adequately pled claims with respect to the two remaining offerings.


With respect to the plaintiffs’ allegations concerning the mortgage originators’ underwriting standards, Judge Stearns found that the offering documents contain a "fusillade of cautionary statements" that "abound with warnings about the potential perils." Judge Stearns noted that plaintiffs’ contention that they were not "on notice" of those perils "begs credulity."


The plaintiffs appealed.


The January 20 Opinion

In a January 20 opinion written by Judge Michael Boudin for a three judge panel, the First Circuit affirmed Judge Stearns’ dismissal except with respect to the plaintiffs’ allegations concerning the mortgage originators’ underwriting practices.


With respect to the standing issue, the plaintiffs had argued that the class action vehicle affords a proper basis for representative plaintiffs to assert claims for a broad class of claimants, and that the eight mortgage-backed offerings were sufficiently linked by the common shelf registrations statement on which the certificate issuer relied.


In rejecting these assertions and concluding that the named plaintiffs lacked standing in the six offerings in which they themselves had not purchased securities, the First Circuit stated:


In our case, as in others involving mortgage-backed securities, the necessary identify of issues and alignment of incentives is not present so far as the claims involve sales of certificates in the six trusts. Each trust is backed by loans from a different mix of banks; no named plaintiff has a significant interest in establishing wrongdoing by the particular group of banks that financed a trsut from which the named plaintiffs made no purchases. Thus, the claims related to the six trusts from which the named plaintiffs never purchased securities were properly dismissed, as were the six trusts and defendants connected to nly those six trusts.


The First Circuit also noted that "the named plaintiffs have no stake in establishing liability as to misconduct involving the sales of those certificates."


The First Circuit then turned to the sufficiency of plaintiffs’ allegations of securities law violations. The First Circuit had little trouble affirming the district court’s dismissal with respect to the plaintiffs’ allegations concerning mortgage appraiser practices and concerning the offering documents statement of the rating agencies ratings.


However, the First Circuit reached a different conclusion with respect to the plaintiffs allegations that, contrary to representations in the offering documents, the originators of the mortgages underlying the certificates "routinely violated" lending guidelines and instead simply approved as many loans as possible.


The First Circuit acknowledged the district court’s conclusion that the offering documents contained warnings about the mortgage originators’ practices, but disagreed with the district court’s conclusion that these warnings precluded a possible finding of liability. (The First Circuit omitted to mention that the district court had found that the offering documents contain a "fusillade of cautionary statements" and that it "begs credulity" that the plaintiffs were not put on notice of these concerns.)


The First Circuit, by contrast to the district court found that "plaintiffs’ allegations of wholesale abandonment may not be proved, but – if accepted at this stage – it is enough to defeat dismissal." The First Circuit found that "the specific allegations" as to the mortgage originator’s practices "offer enough basis to warrant some initial discovery aimed at these precise allegations."


Having granted the plaintiffs a revival of at least one category of their claims, the First Circuit made it clear that the revived claims may have only a precarious lease on life. The First Circuit added with respect to these claims that the district court is "free to limit discovery stringently and to revisit the adequacy of the allegations thereafter and even before possible motions summary judgment."



A recurring question in many of these mortgage-backed securities suits had been the question whether or not a named plaintiff that bought securities in one offering initiated pursuant to a shelf registration statement can assert claims based on other offering based on the same shelf registration, even if the named plaintiffs bought no securities in the other offerings.


In general, the district courts have been holding that the plaintiffs lack standing at least as to the offerings in which they did not purchase securities, but the question has continued to arise.


As the first Court of Appeals ruling on this question as part of the current wave of subprime-related litigation, the First Circuit’s conclusion on the standing issues is likely to be highly influential even outside of the First Circuit, and indeed could just about put an end to the issue.


The First Circuit’s reversal with respect to the plaintiffs’ allegations concerning the mortgage originators’ underwriting practices is interesting, if for no reason than the rather stark difference in perceptions of the plaintiffs’ allegations at the district court level and at the appellate court level. Whereas, the district court found that the suggestion that investors were not put on notice of the alleged practices "begs credulity," the appellate court, while providing relatively little explanation for its different conclusion, found that the allegations at least merited some discovery.


Perhaps the one way that the First Circuit’s differing conclusion may be understood is by reference to many other district court opinions in mortgage-backed securities cases in which the courts have concluded that allegations that the mortgage originators "systematically disregarded" stated underwriting guidelines are sufficient to state a claim. The First Circuit did not refer to these other court’s conclusion, but its holding shares a common thread with these other courts’ decisions.


And so the plaintiffs in this case have (just) managed to live for another day – at least as to two of the eight offerings, and at least one of the three categories of alleged misrepresentations. Whether this new lease on life in the end will be sufficient for the plaintiffs remains to be seen. The First Circuit issued an engraved invitation for the district court on remand to afford the plaintiffs only the most circumscribed discovery and also to revisit the adequacy of the plaintiffs’ claims – "even before summary judgment," whatever that may have been meant to suggest.


I have in any event modified my running tally of the subprime and credit crisis lawsuit dismissal motions to reflect the First Circuit’s limited reversal of the district court’s dismissal in this case. The dismissal motion register can be accessed here.


The First Circuit’s reversal, however limited, does at least serves as a reminder that it may be dangerous to jump to too many conclusions about how plaintiffs are faring in the subprime and credit crisis related cases. There are still many more cases to be heard, and, as this case shows, there is always the possibility that further proceedings may alter or even undo prior results.


It is probably worth noting that the First Circuit’s opinion in the Nomura case represents the forth appellate ruling so far as part of the litigation wave arising out of the subprime meltdown and credit crisis-related litigation wave. As discussed in my recent status update on the credit crisis litigation, appellate courts have affirmed the dismissals of at least three subprime securities suits: NovaStar Financial (here), Centerline (here) and Impac Mortgage (here). The Nomura case represents the first appellate decision that did not result in a complete affirmance of the lower court’s ruling of dismissal.


Special thanks to a loyal reader for providing me with a copy of the First Circuit’s opinion in the Nomura case.


Law Firm Memo Round-Up: From this week’s mailbag, here is a brief register of several law firm memos. First, a January 11, 2011 memo from the Vinson & Elkins law firm presents a brief update of the current state of play regarding ERISA stock drop cases. Second, the 2011 Edition of "Corporate Governance and Securities law: A Public Company Handbook" from the Curtis, Mallet-Prevost, Colt & Mosle law firm can be found here. Finally, the Shearman & Sterling law firm’s January 2011 memo entitled "FCPA Digest: Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act" can be found here.


As Israel is to Louisiana, Nigeria is to Alabama: And Yemen is to Vermont, at least according to an absolutely fascinating map published this past week in The Economist magazine that matches each U.S. state with a country whose GDP most closely resembles that particular state’s GDP. Ohio’s economy is comparable, for example to Belgium’s, while New York’s is equivalent to that of Australia, and Virginia’s is comparable to Poland. Even the District of Columbia is the equivalent of Kuwait.


The comparisons are interesting, but the larger message is that every single U.S. state has an economy as big as that of some countries, so collectively the United States economy is huge.


The map also affords interesting comparisons by population.. If you click on the blue "Population" box, the map displays the country whose population size is equivalent to each state – Oklahoma is comparable to Congo-Brazzaville, Virginia is equivalent to Burundi, Idaho is equivalent to Guinea-Bissau, Wyoming is equivalent to the Solomon Islands, Colorado is equivalent to Eritrea, and so on.Absolutely fascinating.


A Moviegoer’s Comment: This past Saturday night after a viewing of the film "The King’s Speech," the audience in the east side Cleveland movie theater where my wife and I were watching the film broke into applause. Now, I enjoyed the film and I appreciated the actors’ fine performances. But exactly to whom or to what was the audience showing its appreciation? Am I the only one that finds applauding for a movie a little odd?


Admittedly, it is unusual for me to have seen this movie, or any movie, in a theater. Our viewing of "The King’s Speech" marked the first time that my wife and I had gone to the movies, just the two of us, since we saw "The Madness of King George" about sixteen years ago. Without intending, we seem to have limited our range of moviegoing exclusively to films portraying British monarchs named George that have disabilities constraining their abilities to fulfill their kingly duties. This is, shall we say, a rather limited genre. .


I don’t know if there is such an Oscar, but if there were an award for best adaptation of classical music for dramatic effect, "The King’s Speech" would be a clear winner. The film’s use of the first portion of the Second Movement from Beethoven’s Seventh Symphony during the dramatic moment that Colin Firth as King George VI finally delivered his "speech" was brilliant. The movie ends with an excerpt from Beethoven’s Emperor Concerto, which is a nice touch, as well.


In appreciation for the movie’s use of music, here is video with an interesting graphic depiction of the Second Movement from Beethoven’s 7th.