Firm Defeats Motion to Dismiss Blue Sky Claims in an RMBS Case Against Wachovia
May 6, 2014
In September 2013, the Firm, as co-counsel, filed Complaints on behalf of the National Credit Union Administrations Board (“NCUA”), as liquidating agent of Southwest Corporate Federal Credit Union (“Southwest”) and Members United Corporate Federal Credit Union (“Members United”) (collectively, the “Credit Unions”), against various financial institutions alleging material misrepresentations and omissions in the issuance and sale of residential mortgage-backed securities (“RMBS”) that the Credit Unions purchased from 2005 to 2007. In January 2014, in the lead case, the United States District Court for the Southern District of New York (Cote, J.) issued an opinion denying a motion to dismiss as to the Illinois and Texas Blue Sky Law claims. See National Credit Union Admin. Bd. v. Morgan Stanly & Co., 13 Civ. 6705 (SDNY) (DLC), Docket No. 54.
In February 2014, Wachovia Capital Markets, LLC, n/k/a Wells Fargo Securities, LLC (“Wachovia”) moved to dismiss most of the remaining Illinois Blue Sky law claims against it. Those claims concern two RMBS Certificates, which were rated AAA when sold to Southwest for approximately $26 million in 2006 but were downgraded to junk status with approximately 25% of the loans for each Certificate delinquent by June 2009.
On May 6, 2014, the Court issued an Opinion & Order denying Wachovia’s motion to dismiss in its entirety. See National Credit Union Admin. Bd. v. Wachovia Capital Markets, LLC n/k/a Wells Fargo Secs., LLC, 13 Civ. 6719 (SDNY) (DLC), Docket No. 111. In doing so, the Court held that “[i]t is not just plausible, but indeed likely, that [the sole originator of loans in one of the certificates, which is alleged to have had a 90.3 originate-to-distribute ratio at the time] achieved this impressive rate of distribution by designing and implementing a business model to sell the mortgages it originated” and “[i]f that is so, then the findings by the [Financial Stability Oversight Council] about the impact of such a business model on underwriting practices [i.e., “that the ‘originate-to-distribute model’ compensated originators based on volume rather than the quality of the mortgages and thus ‘exacerbated’ the circumstances wherein originators ‘lower[ed] underwriting standards in ways that investors may have difficulty detecting’”] are highly relevant, and permit a reasonable inference to be drawn that [such originator] abandoned its underwriting guidelines.” Id. at pp. 10-11. In addition, the Court held that the troubling performance data, the allegations regarding the originators’ lack of compliance with underwriting guidelines and forensic reviews of certain loans backing one of the certificates “plead a plausible claim regarding the misrepresentations of LTV and DTI ratios for both Certificates.” Id. at p. 13.
A copy of the Complaint is available here.