2nd Circuit remakes MBS class action rules in Goldman ruling

By Alison Frankel
September 10, 2012

Now they tell us? More than four years after investors in mortgage-backed securities began filing class actions accusing MBS issuers of deceiving them in offering documents — and at least three years after federal judges began tossing class claims because name plaintiffs didn’t have the requisite standing — the 2nd Circuit Court of Appeals has redefined standing in MBS class actions. In a 38-page opinion that revives a class action against Goldman Sachs, the appeals court rejected what had been conventional wisdom, finding that a union healthcare fund represented by Robbins Geller Rudman & Dowd isn’t limited to claims based on specific offerings it invested in. Instead, wrote Judge Barrington Parker for a panel that also included judges Reena Raggi and Raymond Lohier, the union fund has standing to assert claims related to every certificate backed by mortgages originated by the same lenders that originated the loans backing the notes purchased by the fund.

That’s a little confusing, so I’ll explain. Robbins Geller’s class action, like every MBS securities case, alleged that investors were misled about the quality of the mortgage loan pools underlying 17 Goldman-sponsored trusts. The Goldman trusts were backed by mortgages from a plethora of subprime lenders, including Wells Fargo, Washington Mutual, GreenPoint Mortgage and SunTrust Mortgage. All 17 were governed by one shelf registration statement, but Goldman also issued prospectus supplements for each trust. Even though the union fund invested in only two of the 17 offerings, Robbins Geller asserted claims on behalf of all 17, based on alleged misstatements in the shelf registration covering all the trusts. U.S. District Judge Miriam Cedarbaum of Manhattan, in an aggressive but not unprecedented interpretation of MBS class standing, ruled that the union fund could only assert class claims on behalf of investors who bought notes in the exact same intratrust tranches as Robbins Geller’s client.

The 2nd Circuit said not only that Cedarbaum erred in her analysis of standing but also that all of the federal judges who have restricted MBS class claims to offerings in which name plaintiffs invested have applied the wrong reasoning. According to the appeals court, the correct question to guide MBS standing determinations is whether other certificate holders have “the same set of concerns” as the name plaintiff. (Oddly, that language comes from the U.S. Supreme Court’s 2003 ruling on affirmative action, Gratz v. Bollinger.) In the MBS context, the court said, plaintiffs’ claims are based on alleged misrepresentations about the quality of the loans underwritten by particular mortgage originators. So according to the 2nd Circuit, MBS class action plaintiffs have standing to bring claims on behalf of all investors whose certificates were backed by loans from the same lenders that supplied the mortgages underlying the name plaintiff’s notes.

In this particular case, the two trusts in which Robbins Geller’s client invested were backed by GreenPoint and Wells Fargo mortgages. The appeals court said the union fund could therefore assert claims on behalf of all the investors in those two trusts, as well as investors in five other Goldman MBS trusts backed by GreenPoint and Wells Fargo loans. The fund does not have standing to bring claims related to Goldman MBS offerings based on loans by other mortgage originators.

One thing to note: The 2nd Circuit was careful to distinguish between standing and class certification. Just because a name plaintiff can get past the threshold issue of its standing to assert claims on behalf of a class of investors, the appeals court wrote, that doesn’t mean the putative class will ultimately meet the criteria for class certification. That class cert standard remains a bit of a muddle in MBS cases; the 2nd Circuit was set to revisit MBS class certification in another Goldman suit, but the appeal was mooted when the case settled.

So how significant is the 2nd Circuit’s expansion of MBS standing? That’s not entirely clear. As I’ve previously written, we’re already in the late stages of MBS class action litigation, and the ruling certainly isn’t going to make a difference in the half-dozen settled cases. But there are at least another half-dozen MBS class actions still in the works. Standing has already been litigated in many of them, but plaintiffs with the stomach for more litigation can presumably move to add claims based on the 2nd Circuit’s holding. If those motions are granted, the class will undoubtedly face additional litigation over discovery related to the additional trusts and, eventually, over class certification.

Nevertheless, Darren Robbins of Robbins Geller and Steven Toll of Cohen Milstein Sellers & Toll both told me the 2nd Circuit decision is great news for MBS class action plaintiffs. “We hope the certification rulings in the future will follow the scope of the 2nd Circuit’s ruling,” Toll said in an email. Robbins said there are still billions of dollars at stake in pending MBS class actions in which this ruling may apply. “Just in this case, the decision makes a difference of millions of dollars,” Robbins said. He also noted that the 2nd Circuit’s holding that MBS investors need not show an out-of-pocket loss to establish damages will help individual plaintiffs in MBS cases.

I left a message for Goldman counsel Richard Klapper of Sullivan & Cromwell but didn’t hear back.

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