IndyMac MBS class action to settle for $340 mln – but SCOTUS case alive

September 23, 2014

The U.S. Supreme Court handed down an unusual order Tuesday, directing the lawyers in a case called Public Employees’ Retirement System of Mississippi v. IndyMac to file letter briefs explaining whether a newly proposed settlement of the underlying mortgage-backed-securities class action affects the question presented to the Supreme Court. That sure caught my attention.

The IndyMac case, scheduled to be argued on Oct. 6, is the most consequential case of the term for securities lawyers. It’s not potentially catastrophic, like last term’s Halliburton v. Erica P. John Fund, but it does impact big institutional investors that sometimes prefer to opt out of securities class actions and bring their own suits. Will the IndyMac settlement strip those investors of their chance to challenge an opinion by the 2nd U.S. Circuit Court of Appeals that sets an inviolable three-year limit on their individual claims?

I don’t think so. It’s true that on Monday, Berman DeValerio, lead counsel in the underlying IndyMac class action in federal court in Manhattan, notified U.S. District Judge Lewis Kaplan that plaintiffs have reached a $340 million settlement agreement with the underwriter defendants in the case. But because of the complicated procedural history of the class action, the settlement doesn’t resolve all claims by the Mississippi pension fund that appealed the 2nd Circuit’s ruling to the Supreme Court. In fact, according to the settlement brief, “none of the securities at issue on the appeal to the U.S. Supreme Court were underwritten by the settling defendants.”

The settlement also leaves alive possible causes of action against Goldman Sachs, which was dismissed as a defendant in the class action and didn’t participate in the proposed settlement. We’ll have to see what both sides tell the Supreme Court in the letter briefs due Thursday, but I’ll be very surprised if the class action settlement spells the end of the Supreme Court case.

Institutional investors certainly hope it doesn’t. The 2nd Circuit held in its IndyMac decision that the three-year statute of repose for private claims under the Securities Act of 1933 is not tolled by the filing of a class action. Because securities class actions typically take more than three years to be resolved, the real-world consequence of the 2nd Circuit decision is that big pension and healthcare funds can’t wait to see what they’d recover from a class action settlement before they decide whether to bring their own cases. Unless the Supreme Court overturns the 2nd Circuit, in order to protect their potential claims, investors will have to file individual placeholder suits before the statute of repose’s three-year deadline, even if the same claims are already being litigated in a class action.

In the IndyMac case, the Mississippi pension fund has fallen inside and out of the bounds of class membership, depending partly on the operative definition of MBS class standing. (That definition has changed over the five-year course of the litigation.) The long story of the fund’s involvement with the IndyMac class is spelled out in the settlement brief – good luck following it – but the only thing that matters to other institutional investors who want to see IndyMac overturned is that the Supreme Court case should still be a go.

The underwriter defendants won’t even have to change lawyers at the Supreme Court, even though most of them are part of the proposed settlement. Gibson, Dunn & Crutcher, which had been the underwriters’ counsel of record, also represents Goldman Sachs, the remaining IndyMac MBS underwriter. The Mississippi pension fund has David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel. Neither Frederick nor Theodore Olson of Gibson Dunn responded to my phone messages.

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