Opinion

Alison Frankel

How a lone New York judge squeezed billions from banks in MBS cases

Alison Frankel
Jul 28, 2014 21:56 UTC

Asking a federal appeals court to step into the fray of an ongoing case to reverse a decision by a trial judge is extraordinary. Petitions for a writ of mandamus, as such requests are known, assert that trial judges have committed such egregious errors that their appellate overseers must undo the damage immediately, before the case gets to a final judgment. Mandamus petitions are a desperation move, a last resort when you’ve got nothing to lose from alienating a trial judge who’s already ruled against you.

Last Thursday, RBS filed not one but three mandamus petitions at the 2nd, 9th and 10th circuits — an apparently unprecedented response to what the bank claims is an unprecedented abdication of responsibility by trial judges presiding over cases brought by the National Credit Union Administration (NCUA).

The suits, which involve billions of dollars in mortgage-backed securities purchased by failed credit unions, were filed in different federal districts, and the Judicial Panel on Multidistrict Litigation denied requests by bank defendants to consolidate them. But according to RBS, the trial judges took it upon themselves to streamline discovery, agreeing to abide by the rulings of a single “coordination judge.”

Why does RBS, which had previously asked for the cases to be consolidated, now bitterly oppose coordinated discovery?

Because the judge whose rulings will apply in all of the NCUA cases is U.S. District Judge Denise Cote of Manhattan, the avenging angel of financial crisis litigation.

MBS investors bring in Paul Clement to appeal N.Y. timeliness opinion

Alison Frankel
Jan 23, 2014 20:34 UTC

There are probably fewer than 100 lawyers in America who argue regularly before the U.S. Supreme Court and the highest state courts of appeal. And of those, a scant handful argue against corporate interests. That is particularly true when banks are involved: Lawyers who practice at big firms that regularly represent (or hope to represent) financial institutions avoid cases that endanger those relationships, even when one bank is suing another. But the renowned former U.S. Solicitor General Paul Clement left behind those concerns in 2011 when he left King & Spalding and joined Bancroft, a tiny appellate startup. Last year, Clement took up the Supreme Court case of small merchants suing American Express for antitrust violations. (He lost.) Now he’s turned up to oppose banks in one of the biggest-dollar appeals in the courts. On Tuesday, as first reported by the New York Commercial Litigation Insider, Clement appeared as counsel of record in HSBC’s motion, as a mortgage-backed securities trustee, for the New York Appellate Division, First Department to reconsider its Dec. 19 ruling on the timeliness of MBS breach-of-contract claims or else let the case proceed to the state’s highest court.

The appellate opinion in Ace Securities v. DB Structured Products, as you probably recall, shut the door on N.Y. state-court mortgage-repurchase suits filed more than six years after the MBS sponsor closed on its agreement to acquire the underlying loans for securitization. That ruling, as Clement and HSBC co-counsel Kasowitz Benson Torres & Friedman explained in the reconsideration brief filed Tuesday, has the potential to wipe out hundreds of cases already brought by MBS trustees and certificate holders, implicating “hundreds of billions of dollars in losses,” according to the brief. Clement and Kasowitz argue that the Appellate Division’s skimpy three-page opinion on the timeliness of put-back suits “fails to grapple with…conflicting precedents in a meaningful way,” so HSBC should either have a chance to reargue before the intermediate appeals court or to take its case to New York’s Court of Appeals. (Quinn Emanuel Urquhart & Sullivan‘s name isn’t on the new filing, but I’ve been told the firm is involved in the appeal on behalf of the certificate holder that originally directed HSBC to sue over supposedly deficient underlying loans in the Deutsche Bank MBS offering.)

The brief also points out that courts around the country have reached conflicting conclusions about when, under New York law, the six-year statute of limitations begins to run on MBS mortgage repurchase claims. Even federal judges in Manhattan, ruling in the wake of the Appellate Division’s opinion last month, have split on the question (as I’ve reported). That muddle must be resolved, according to the new brief. “Analogous lawsuits ostensibly governed by the same New York laws now will be permitted to proceed in some courts but not others,” it says. “What is more, DB and other RMBS sponsors will be able to evade all liability for their actions under this court’s decision, even though other RMBS investors have already collected massive settlements in cases that include failure-to-repurchase claims nearly identical to those raised here. That untenable situation readily warrants the reconsideration of this court or, in the alternative, the immediate attention of the Court of Appeals.”

New ruling puts Fannie, Freddie in line for windfall MBS recovery

Alison Frankel
Dec 17, 2013 20:24 UTC

Has there ever been a more lopsided multibillion-dollar case than the Federal Housing Finance Agency’s fraud litigation against the banks that sold mortgage-backed securities to Fannie Mae and Freddie Mac? I don’t think U.S. District Judge Denise Cote of Manhattan, who is overseeing securities fraud suits against 11 banks that haven’t already settled with the conservator for Fannie and Freddie, has sided with the banks on any major issue, from the timeliness of FHFA’s suits to how deeply the defendants can probe Fannie and Freddie’s knowledge of MBS underwriting standards in the late stages of the housing bubble. But even in that context, Judge Cote’s summary judgment ruling Monday – gutting the banks’ defenses against FHFA’s state-law securities claims – is a doozy.

In effect, Cote’s decision will permit FHFA to recover more from MBS issuers than Fannie Mae and Freddie Mac would have made if their MBS investments had paid as promised. Of course, FHFA and its lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres & Friedman still have to show that the banks knew or had reason to know that their offering documents misrepresented the mortgage-backed securities they were peddling to Fannie Mae and Freddie Mac. But if FHFA meets that burden, the banks can’t ward off claims under the state securities laws of Virginia and the District of Columbia by blaming Fannie and Freddie’s MBS losses on broad declines in the economy and the housing market.

What’s more, those state securities laws give FHFA the right to rescission – or restitution of the entire purchase price of the MBS Fannie and Freddie bought – plus fees, costs and, most importantly, interest. The Virginia statute mandates that securities fraudsters chip up 6 percent interest – more than the scheduled interest rate in many of the MBS trusts in which Fannie and Freddie invested. The banks, in other words, are now exposed to liability far beyond the actual losses Fannie Mae and Freddie Mac suffered – and even beyond what FHFA’s wards would have earned if the MBS trusts had performed exactly as the banks said they would at the time of sale. That extra interest would be a true windfall for FHFA.

The 2nd Circuit splits with 10th on tolling time bar in securities cases

Alison Frankel
Jul 2, 2013 21:36 UTC

Is the statute of repose – the once obscure cousin of the statute of limitations that burst into prominence as a defense in litigation over mortgage-backed securities – coming to the U.S. Supreme Court?

That’s the thrilling prospect now before us, thanks to a decision last week by the 2nd Circuit Court of Appeals in a case against the onetime mortgage securitizer IndyMac and underwriters of some of its MBS offerings. The 2nd Circuit panel – Judges Jose Cabranes, Reena Raggi and Susan Carney – ruled that the filing of a class action does not stop the clock for class members on the three-year statute of repose for federal securities claims. That holding is contrary to a ruling from the 10th Circuit, which found in Joseph v. Q.T. Wiles in 2000 that a pending class action tolls the statute of repose as well as the statute of limitations. The Roberts Court is known for granting review even of arcane issues that have split the federal circuits, and tolling of the statute of repose could impact the outcome of a lot more cases than, say, the intersection of appellate deadlines and awards for contractual legal fees, which the Supreme Court is already scheduled to hear next term.

Plaintiffs lawyer Joseph Tabacco of Berman DeValerio, who was on the wrong end of last week’s 2nd Circuit decision, told me his clients have not yet decided on their next step, which could be to ask the 2nd Circuit for en banc review or to ask the panel for a ruling that its holding applies only prospectively. The statute of repose isn’t as problematic in this particular case as it once seemed, Tabacco said, because some plaintiffs who had been excluded from the IndyMac MBS class action saw their claims revived after the 2nd Circuit remade the rules for MBS class standing in NECA-IBEW v. Goldman. Nevertheless, Tabacco told me, “this is too important an issue” to let the 2nd Circuit panel’s decision go unchallenged. “There are well-reasoned opinions on both sides,” he said. “Clearly, this is an open legal question.”

It’s (finally) time for objectors to BofA’s MBS deal to make their case

Alison Frankel
Jun 4, 2013 13:15 UTC

To say that the hearing to evaluate Bank of America’s proposed $8.5 billion breach of contract settlement with investors in Countrywide mortgage-backed securities got off to a slow start would be something of an understatement. In a courtroom so crowded that New York State Supreme Court Justice Barbara Kapnick repeatedly admonished observers to clear a path to the door, the judge heard hours of pretrial motions, many on issues she regarded as already settled. In particular, objectors to the settlement – led by AIG, several Federal Home Loan Banks and other assorted pension and investment funds – told Kapnick that they should not be forced to proceed with opening statements until they’ve had a chance to take depositions based on privileged communications between Bank of New York Mellon, the Countrywide MBS trustee, and its lawyers at Mayer Brown. Kapnick ordered the documents produced late last month, and AIG counsel Daniel Reilly of Reilly Pozner said it wouldn’t be fair to begin a hearing to determine whether BNY Mellon made a reasonable decision to agree to the $8.5 billion settlement – which resolves potential claims by 530 trusts that Countrywide breached representations and warranties about underlying mortgage loans – until objectors have quizzed witnesses on the confidential material.

Kathy Patrick of Gibbs & Bruns, who represents BlackRock, Pimco, MetLife and other major institutional investors that negotiated the deal with BofA and BNY Mellon, said the objectors just wanted to delay Kapnick’s final reckoning of the settlement, which is being evaluated in a special proceeding under New York trust law. Reilly, who argued unsuccessfully last week for a stay of the case while the state appeals court considers whether it should be heard by a jury, insisted that he just wants the proceeding to be fair. Judge Kapnick, meanwhile, seemed preoccupied with getting the actual hearing under way. “I am trying to make this go ahead,” she told the objectors at one stage. “I am not going to reopen a point we spent an inordinate amount of time arguing about,” she said at another. “At some point, you have to get going with this.”

The delay issue came to a head in the afternoon session, when yet more motions to limit testimony and evidence had to be resolved. Reilly asked the judge to restrict Patrick from asserting that 93 percent of Countrywide MBS investors support the settlement when, in fact, the majority of certificate holders haven’t opined one way or the other. Patrick stood up and promised that she’d henceforth say that 93 percent do not object to the deal.

As MBS trustee put-back suits mount, Minn. case sets bad precedent

Alison Frankel
Oct 4, 2012 22:28 UTC

I have a bold assertion: Breach of contract suits by mortgage-backed securities trustees are no longer a rarity. In my daily feed of new filings, I’m seeing a fairly regular trickle of cases asserting trustee claims that mortgage originators didn’t live up to their representations and warranties about the loans they sold to MBS trusts. The roster of firms filing cases for trustees has expanded as well. Kasowitz, Benson, Torres & Friedman still seems to be the likeliest to appear on the signature page of MBS trustee complaints, but last week MoloLamken filed a put-back suit in New York State Supreme Court for the trustee of a Morgan Stanley MBS trust, and Holwell Shuster & Goldberg brought a put-back claim in the same court for the trustee of a Deutsche Bank-backed trust.

So, now that put-back filings have become as relatively commonplace as Miguel Cabrera home runs, it’s time to start asking how successful the cases will be. Banks have been disposing of billions of dollars of put-back demands asserted by bond insurers and by Fannie Mae and Freddie Mac for years, but those claims haven’t been resolved through litigation. And Bank of America reached its proposed $8.5 billion global settlement with private investors in Countrywide mortgage-backed securities before the investors’ lawyers at Gibbs & Bruns filed a complaint claiming that Countrywide breached MBS representations and warranties. As far as I’m aware, there has been no publicly disclosed settlement of a put-back case filed by an MBS trustee acting at the behest of private certificate holders.

With that paucity of precedent, a ruling this week in one of the earliest put-back cases on the dockets is bad news for certificate holders. The suit, filed by Kasowitz Benson against the originators of loans in a $555 million Wells Fargo MBS offering, stemmed from an investigation that noteholders demanded back in April 2010. In a sample of 200 of the 3,000 loans in the underlying pool, investors identified material breaches in 150, or 75 percent, of the sample. When the originators EquiFirst and WMC Mortgage refused to accede to put-back demands based on breaches in the sample, the MBS trustee, U.S. Bank, sued on behalf of noteholders.

BofA catches big break: Walnut drops challenge to $8.5 bln MBS deal

Alison Frankel
Jul 24, 2012 15:52 UTC

Late last month, without any fanfare, a New York appeals court issued a terse, one-page ruling that upheld the dismissal of Walnut Place’s breach-of-contract suit against Countrywide, Bank of America and Countrywide’s mortgage-backed securitization trustee, Bank of New York Mellon. It was an abrupt end for what was once a promising attempt at vindication for an MBS investor. It was also a huge setback for Walnut, its lawyers at Grais & Ellsworth and all the other Countrywide MBS investors who were counting on litigation against BofA as an alternative to the bank’s proposed $8.5 billion global settlement of breach-of-contract, or put-back, claims.

That one-page appellate ruling reverberated powerfully on Monday, when Walnut – otherwise known as the Boston hedge fund Baupost – filed a request to withdraw from the special New York proceeding to evaluate BofA’s MBS settlement. Framed as a letter to New York State Supreme Court Justice Barbara Kapnick from Grais partner Owen Cyrulnik, the request offered no explanation for Walnut’s withdrawal; Cyrulnik and Baupost spokeswoman Elaine Mann declined to comment.

But Baupost was facing an imminent decision about whether to request leave to appeal the dismissal of its case against BofA to New York’s highest court. Given the unlikely prospect that the Court of Appeals would agree to take the case, the hedge fund appears to have decided not to continue to spend money on litigation with little chance of a return. And given that the dismissal of Walnut’s suit makes it very difficult for the hedge fund – or any other MBS investor – to recover on put-back claims outside of the global settlement, Walnut apparently determined that it wasn’t economically rational to continue its challenge to the $8.5 billion deal. (From what I’ve heard, Bank of America did not pay Walnut anything in exchange for the hedge fund’s withdrawal; a Bank of America spokesman declined to comment to my Reuters colleague Karen Freifeld.)

Hot new filing claims internal docs show rating agencies lied on MBS

Alison Frankel
Jul 3, 2012 04:40 UTC

If you’re reasonably literate about the financial crisis, you probably know that the credit rating agencies have slipped through the carnage like a cat walking away from a knocked-over vase. With their opinions on publicly offered mortgage-backed securities protected by the First Amendment, Standard & Poor’s and Moody’s have won dismissals of the vast majority of MBS investor claims against them in state and federal court, despite powerful evidence from congressional investigations that they worked with underwriters to confer investment-grade ratings on securities backed by dreck. With one possible exception, the only surviving cases against rating agencies involve claims by investors in private placements, who have successfully argued that private ratings aren’t protected free speech.

The near-spotless litigation record of the rating agencies means we’ve seen very little internal evidence, in the form of emails between rating execs, emails between the agencies and underwriters and deposition testimony from credit rating agency insiders. The only hard evidence on the agency’s role in the economy’s collapse came from a Senate report.

Until Monday.

In a series of filings in federal court in Manhattan, Abu Dhabi Commercial Bank and its lawyers at Robbins Geller Rudman & Dowd disclosed thousands of pages of internal communications and deposition transcripts to back their claims that S&P and Moody’s are liable for fraud and negligent misrepresentation in connection with their rating of a structured investment vehicle underwritten by Morgan Stanley. Based on a declaration by plaintiffs that accompanied the documents, a huge percentage of the newly disclosed material has never previously been seen by the public – and a good many of the documents deal not just with the Morgan Stanley SIV but more broadly with the rating process inside S&P and Moody’s at a time when the two leading agencies were swamped with mortgage-backed securities to rate.

Welcome to the MBS party, SEC — you’re only 3 years late!

Alison Frankel
Feb 10, 2012 15:16 UTC

If the Securities and Exchange Commission were an ordinary investor, it would already be too late in trying to sue the banks that issued (allegedly) deficient mortgage-backed securities.

The SEC is not, of course, an ordinary investor. On Wednesday night, the Wall Street Journal broke the news that the SEC plans to send Wells notices, otherwise known as target letters, to several banks that issued mortgage-backed notes and certificates. The Journal said the agency is looking at whether the banks misled investors about the quality of mortgage loan pools underlying securities issued in 2007 and 2008.

But here’s the thing: The first federal-court MBS class action, against Countrywide, was filed in 2007. By 2008, bond insurers and private investors were busily suing MBS issuers in state and federal courts in New York, starting the clock on the three-year statute of limitations for suits under the federal Securities Act of 1933 and the two-year time limit for fraud cases under the Exchange Act of 1934. Private investors who entertained thoughts of bringing federal claims for mortgage-backed notes issued in 2007 and 2008 would be tossed out of court quicker than you can say “time-barred.”

Expectations for the new mortgage-backed securities task force

Alison Frankel
Jan 30, 2012 14:53 UTC

I follow mortgage-backed securities litigation closely enough to be disgusted at the greed that fueled the securitization of insufficiently underwritten mortgages issued to homeowners who had no hope of paying them off. Sure, MBS investors and the bond insurers that backed MBS trusts were sophisticated and, to some extent, forewarned about the timebombs lurking in those mortgage pools. But you can’t read the voluminous MBS filings by monolines and investors — including the federal agency that oversees Fannie Mae and Freddie Mac — without wishing that someone be held accountable for sending the housing market on a slide, and dragging down the rest of the economy with it.

To date, accountability has been an elusive goal. I’m not talking about private suits or breach-of-contract put-back claims, in which MBS issuers are beginning to acknowledge billions of dollars of exposure to investors and insurers. But state and federal regulators and prosecutors have lagged behind the private plaintiffs bar (and the Federal Housing Finance Agency). As best I can tell, there have been no criminal prosecutions of people or institutions involved in mortgage-backed securitizations. On the civil side, the U.S. Attorney for the Southern District of New York, Preet Bharara, brought an MBS-based suit against Deutsche Bank last May. This summer, the New York Attorney General, Eric Schneiderman, filed Martin Act claims against Bank of New York Mellon for its conduct as Countrywide MBS securitization trustee. In October, the Delaware AG, Joseph Biden III, filed a civil suit against the Mortgage Electronic Registry System that accuses the banks that established MERS of using it as a vehicle to bundle mortgages they didn’t actually own. And last week, the Illinois AG, Lisa Madigan, sued Standard & Poor‘s for giving undeserved AAA ratings to overly risky mortgage-backed notes.

Those, however, are the only major government cases stemming from mortgage-backed securitizations that I’m aware of. For well over a year, the MBS industry has been under intense scrutiny by government investigators, from (among others) Congress, the Justice Department, the Securities and Exchange Commission, and the N.Y., Delaware, and Massachusetts AGs’ offices. So far, we haven’t seen a lot of tangible results from those investigations.

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