Firm Defeats Motion to Dismiss Certain Blue Sky Claims in an RMBS Case Against UBS

In September 2013, the Firm, as co-counsel, filed Complaints on behalf of the National Credit Union Administration Board (“NCUA”), as liquidating agent of Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union (together, 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 Stanley & Co., 13 Civ. 6705 (SDNY) (DLC), Docket No. 54. In May 2014, in a second case, the Court issued an opinion denying a motion to dismiss most of the remaining Illinois Blue Sky law claims there. SeeNational Credit Union Admin. Bd. v. Wachovia Capital Markets, LLC n/k/a Wells Fargo Secs., LLC, 13 Civ. 6719 (SDNY) (DLC), Docket No. 111.

Meanwhile, in March 2014, UBS Securities LLC (“UBS”) moved to dismiss the Illinois and Texas Blue Sky law claims as to two of the twenty RMBS Certificates on which NCUA bases its First Amended Complaint. Those Certificates, which were rated AAA when sold to the Credit Unions for approximately $35 million in 2007, were downgraded to junk status in 2008 with almost 25% of their aggregate loans delinquent twelve months after they were issued.

On June 10, 2014, the Court issued an Opinion & Order denying UBS’s motion to dismiss the Blue Sky law claims. In holding that “the complaint plausibly pleads that UBS made a material misrepresentation regarding the extent to which the loans underlying [the two Certificates] complied with underwriting guidelines,” the Court cited the following allegations: “(1) the industry-wide practice of originators failing to comply with underwriting guidelines, including the practices of originators responsible for many of the loans underlying the other eighteen Certificates; (2) UBS’s poor performance during due diligence, as reflected in the Clayton Holdings analysis; (3) the poor performance of each of the twenty UBS Certificates on which NCUA has brought suit; (4) the downgrade of the two Certificates … to junk status in 2008; and (5) the rapid pace at which a very substantial percentage of the loans for those two Certificates became delinquent.” National Credit Union Admin. Bd. v. UBS Securities LLC, 13 Civ. 6731 (SDNY) (DLC), Docket No. 115 at 12 & 19.

A copy of the First Amended Complaint is available here.