INSIDE THIS ISSUE
• U.S. Events >
Institutional investors have filed a flurry of new mortgage-backed securities lawsuits over the past two months against the investment banks and mortgage lenders who sold these toxic products. This has been due, in large part, to the recent release of thousands of highly confidential, internal documents showing that many investment banks and mortgage lenders actively engaged in fraud when selling these products.
For instance, within the past two months:
· The New York Attorney General announced that he was launching an investigation into the mortgage-backed securities practices at JPMorgan Chase and UBS.
· Congress released a 635-page final report detailing the lending practices at Washington Mutual Bank. The report references hundreds of internal emails, documents, and memos showing that insiders at Washington Mutual Bank knew that they were selling institutional investors highly toxic securities that were backed by bad home loans that would never be repaid.
· Thousands of other highly incriminating documents have recently been released by Congress and through litigation in other cases involving Bear Stearns, JPMorgan Chase, Washington Mutual Bank, and Countrywide Financial Corporation.
In light of these recent developments, institutional investors are filing new mortgage-backed securities lawsuits against the investment banks and mortgage lenders that sold these products.
The mortgage-backed securities crisis that engulfed the country in 2008 had its primary origins in the greed-driven investment banking and mortgage lending industries. The problems in the mortgage-backed security sector started when bankers and mortgage lenders gave hundreds of thousands of loans to homebuyers who could not afford them. Investment banks then repackaged these bad home loans into newly created investments called mortgage-backed securities, and sold them to institutional investors such as state and local pension funds.
Investors who purchased mortgage-backed securities were entitled to the cash flows coming from the mortgages that the investment banks and mortgage lenders had pooled into the securities. As the borrowers on the home loans sent in their monthly mortgage payments, the holders of the mortgage-backed securities would receive a dividend payment. But if these borrowers defaulted on their home loans, the holders of the mortgage-backed securities would not get paid. This is why, when selling mortgage-backed securities to investors, the investment banks and mortgage lenders represented that they were originating good loans—i.e., loans that the borrowers could afford and would be able to repay.
Unbeknownst to investors, investment banks and mortgage lenders were packaging hundreds of thousands of bad home loans—i.e., loans that were given to people who could not afford them and would never be repaid—into the mortgage-backed securities that were being sold to investors. The investment banks and mortgage lenders did this so that they could earn millions of dollars in highly lucrative fees. Moreover, the investment banks and mortgage lenders did not bear the risk of loss on the bad loans because by pooling the loans into mortgage-backed securities and then selling them to investors, they were able to shift the risk of default to the institutional investors who had purchased the securities.
Eventually, this house of cards collapsed. Homeowners began defaulting on the bad loans in record numbers, investors who had purchased mortgage-backed securities stopped receiving dividend payments, and the mortgage-backed securities themselves were rendered virtually worthless.
Institutional Investors Filing Individual Actions
In the immediate aftermath of the meltdown in themortgage-backed security market, investors brought class action lawsuits representing investors who purchased mortgage-backed securities from a specific investment bank and/or mortgage lender. Courts have issued several rulings in those cases, however, that have had the practical effect of leaving the vast majority of investors in mortgage-backed securities with no recourse against the investment banks and mortgage lenders who sold these toxic products.
As a result, institutional investors are filing individual suits to recover damages. These cases are legally compelling for several reasons—particularly because they allow investors to assert fraud and negligent misrepresentation claims that are difficult to prove on a class-wide basis. However, the statute of limitations period will soon be expiring on many of these claims. Thus, we recommend that our institutional investor clients immediately review their mortgage-backed security holdings to determine whether they have suffered sufficient losses to warrant bringing an action against the investment banks and mortgage lenders that sold these products.
Important Discovery Ruling Obtained In WaMu Mortgage-Backed Certificates Litigation
Earlier this month, U.S. District Judge Marsha J. Pechman granted the plaintiffs’ motion for a critical protective order in an action pending in the Western District of Washington on behalf of a putative class of purchasers of the mortgage-backed securities of Washington Mutual Bank. The plaintiffs, represented by Scott+Scott as co-lead counsel, sought to block 12 subpoenas issued to absent class members, large financial institutions who were neither named plaintiffs nor otherwise actively involved in this case. The oppressive subpoenas sought as many as 21 document categories, many of them of extraordinary breadth.
It has been an unfortunate recent trend in mortgage-backed securities litigation for embattled issuer defendants to serve wide swaths of discovery subpoenas on absent class members. Compliance with these broad discovery requests turns out to be an invasive and expensive process. Historically, absent class members have found under the law reasonable protection from such abusive discovery practices. Defendants have the burden of showing good cause when seeking such discovery, and courts have readily granted motions for protective orders to prohibit enforcement of subpoenas served on absent class members.
Generally speaking, in mortgage-backed securities cases, there has been relatively no basis upon which to justify the need for discovery from non-party financial institutions. However, in January 2011, a New York District Court entered a ruling denying class certification, the first in a mortgage-backed securities action, which issuer defendants have sought to use as traction to obtain discovery from absent class members.
The plaintiffs in the case, captioned New Jersey Carpenters Health Fund, et al. v. Residential Capital, LLC, et al., No. 08-8781, alleged that the investment bank made misleading statements and omissions about residential mortgage loan origination practices in the offering documents for two mortgage-backed securities offerings from 2006 and 2007. The plaintiffs sought certification of a class comprising of investors who purchased $3.4 billion worth of securities via the two transactions.
In rendering the decision, Judge Harold Baer Jr., U.S. District Court for the Southern District of New York, relied in part on discovery obtained by the defendants from financial institutions to reach the conclusion that there was evidence that some of the investors had previous knowledge of the underwriting guidelines and practices that were alleged to be misstated in the offering documents. Judge Baer agreed with the defendants' contention that different putative class members had different levels of knowledge regarding the underwriting guidelines and practices based on their respective levels of sophistication and time of purchase, creating "individualized issues" among prospective class members. While finding that the plaintiffs met four of the requirements for forming a class action: commonality, typicality, adequacy, and numerosity, Judge Baer held that they were not able to prove predominance and superiority, which caused the judge to deny certification.
The WaMu defendants relied on the opinion in Residential Capital to argue that the plaintiffs’ motion for a protective order blocking discovery from absent class members should be denied because the information sought from the class members was relevant to demonstrating that individual issues existed among putative class members and that certification of a class was inappropriate. In her May 9 order granting the protective order, Judge Pechman rejected the defendants’ contention. Finding that the defendants failed to meet their burden to justify the necessity of issuing subpoenas to 12 absent class members, the court noted:
Defendants have not made a strong or even satisfactory showing of necessity to support their subpoenas. Defendants half-heartedly suggest their subpoenas are targeted at gathering information to attack the question of predominance under Rule 23(b)(3).
* * *
As best the Court can divine, Defendants’ theory is that these “sophisticated investors” had more knowledge about the mortgage-backed securities market and therefore Plaintiffs cannot rely on the fraud on the market presumption. However, as this Court and the Ninth Circuit has held, the defense of nonreliance is not generally an issue for class certification.
Importantly, the court observed that nothing in Residential Capital explains why the particular individualized knowledge rendered class certification improper and, in any event, the Residential Capital holding runs contrary to Ninth Circuit law, which defers questions about non-reliance to trial.
The plaintiffs’ motion for class certification was filed on March 11, 2011. The matter is captioned In re Washington Mutual Mortgage-Backed Securities Litigation, Master Case No. C09-0037 (W.D. Wash.).
Rejecting Prudential’s claims that “paying” the beneficiaries of our fallen servicemen and women by sending them a “checkbook” of IOUs was the same as actually paying them money, Federal District Judge Michael A. Ponsor issued a written order on May 5, 2011, denying Prudential’s motion to dismiss claims that it has violated the federal statute and contract governing life insurance for servicemembers and veterans, committed fraud, and breached its fiduciary duty to the beneficiaries. The court held that “[a] lump-sum payment by check (which actually transfers the funds to the beneficiary) is simply not the same as a lump-sum payment by checkbook (which allows the insurance company to retain the funds and earn interest on them).” The court also held that plaintiffs’ allegation that “Defendant intentionally misrepresented essential elements of the Alliance Account in order to induce beneficiaries to maintain the insurance proceeds in the accounts” is sufficient to state a claim for fraud against Prudential.
The ruling applies to all four nationwide class action lawsuits that were filed against Prudential last year after it was revealed that instead of paying the beneficiaries of servicemembers and veterans in a lump-sum as required, Prudential was keeping the beneficiaries’ money in its general account while sending checkbooks that the beneficiaries could use to withdraw funds. The cases are now consolidated in the U.S. District Court of Springfield, Massachusetts, before Judge Ponsor. The plaintiffs allege that Prudential pays only a small amount of interest on the withheld funds, substantially less than it pays beneficiaries under civilian life insurance policies, and a small fraction of what Prudential makes through its use of the beneficiaries’ money.
It can do this because, as Scott+Scott Partner Christopher M. Burke states, “Records currently reflect that Prudential entered into this ‘no-bid’, monopolistic arrangement with the Veterans Administration some 44 years ago. Since that time, it appears no other insurance companies have been given the right to compete for and provide group life insurance to our service men and women.” When the story first broke, neither the Secretary of Defense when questioned, nor most of Congress, knew of this fraudulent scheme to enrich Prudential at the expense of our military nor of the unnaturally close relationship that had developed between Prudential and the Veterans Administration.
Discovery in the case is now moving forward.
Class actions are an essential means of vindicating investor and consumer rights, owing to the considerable cost of litigating complex claims and to the significant resources that many defendants wield. Rather than play on a level field, companies pursue various methods of limiting their exposure to class actions. One such method, used ever more frequently, requires investors and consumers to “agree” that, as a condition of doing business with a company, they will arbitrate any potential claims against the company and waive their right to arbitrate those claims on a class-wide basis. Many courts consider these “agreements” controversial, if not unenforceable, because investors and consumers have minimal bargaining power to begin with. Further, the agreements permit the defendants to act with impunity whenever the cost of bringing an individual claim is greater than an individual plaintiff’s damages. Two recent Supreme Court decisions have nevertheless limited the circumstances in which the plaintiffs can bring class arbitrations, and accordingly require investors and consumers to carefully scrutinize arbitration agreements before entering into them.
The first decision, Stolt-Nielsen S.A., et al. v. Animalfeeds International Corp., No. 08-1198, came down on April 27, 2010. Writing for a majority made up of the minimum five justices, Justice Alito concluded that when parties enter into an arbitration agreement but do not implicitly or explicitly address whether they may arbitrate claims on a class-wide basis, the Federal Arbitration Act (“FAA”) categorically precludes class arbitration. Purporting to apply state law principles of contract interpretation, which the FAA requires, Justice Alito reasoned that an agreement is only formed when parties consent to particular terms, that the difference between individual arbitration and class arbitration is in and of itself substantial and, therefore, that an agreement to arbitrate on an individual basis does not constitute an agreement to arbitrate on a class-wide basis. Significantly, this implies that the benefit a defendant contracts for in arbitration agreement is not simply the right to proceed out of court, but the right to the extremely streamlined process entailed in arbitrating against an individual.
Although the majority decision has a broad sweep, given that the FAA applies to virtually all arbitration agreements enforced in the United States, Justice Ginsburg noted several limitations in dissent. As she explained, the decision leaves open the possibility that even when a contract does not explicitly adopt class arbitration, principles of contract interpretation applied to the facts of a given contract may demonstrate that the parties implicitly agreed to class arbitration. Also, because the parties in Stolt-Nielsen were sophisticated business entities, and the plaintiff had actually chosen the contract with the relevant arbitration clause, the decision does not mean that a party with minimal bargaining power can waive its right to class arbitration simply by entering into an agreement that does not address class arbitration.
The second decision, AT&T Mobility LLC v. Concepcion et ux., No. 09-893, was issued exactly one year after Stolt-Nielsen on April 27, 2011. Writing for another majority of five, Justice Scalia concluded that if a party enters into an arbitration agreement and explicitly waives its right to class arbitration, the FAA precludes that party from challenging the class arbitration waiver on the grounds that it is unconscionable under state law. Thus, a party could not challenge a class arbitration waiver because the party had minimal bargaining power and economic considerations also prevented the party from bringing claims on an individual basis. Justice Scalia argued that the FAA’s purpose is not just to enforce arbitration agreements, but also to promote arbitration by ensuring that it is more attractive to defendants than litigation. According to the majority decision, if defendants can be required to participate in class arbitration on the grounds that a waiver is unconscionable, they will find arbitration agreements less attractive than if they could force plaintiffs to arbitrate individually, and will be less likely to enter into arbitration agreements, thereby undermining the FAA. Remarkably, this suggests that the benefit a defendant receives from arbitrating against an individual plaintiff outweighs the destruction of the plaintiff’s ability to seek redress for injuries caused by the defendant.
In dissent, Justice Breyer countered that the FAA only seeks to ensure that arbitration agreements lead to disputes being adjudicated out of court. It does not guaranty that such agreements should be as attractive to defendants as possible, particularly when they undermine traditional principles of state contract law, like unconscionability. Justice Breyer also took issue with the majority’s insistence that, due to various financial incentives in the relevant arbitration agreement, plaintiffs would actually be better off arbitrating their claims on an individual as opposed to a class-wide basis. But an arbitration waiver unaccompanied by financial incentives that, at least arguably, make individual arbitration viable may be susceptible to attack. Additionally, the majority leaves open the possibility that plaintiffs could successfully challenge a class arbitration waiver if they entered into it as a result of fraud or some similar circumstance.
After Stolt-Nielsen and Concepcion, parties to an arbitration agreement may only bring claims on a class-wide basis if the arbitration agreement explicitly or implicitly permits class arbitration, and they may not challenge class arbitration waivers as unconscionable. Given the hurdles that the plaintiffs face when they cannot pursue claims as part of a class, in order to adequately protect themselves, it is imperative that consumers and investors take pains to reserve their right to bring class-wide claims wherever possible and limit the contracts they enter into that do not reserve this critical right.
Conferences And Educational Seminars
+June 1-2, 2011
The 6th Annual Illinois Public Employee Retirement Systems Summit (ILPERS)
Marriott Chicago Downtown Magnificent Mile
Information Management Network in collaboration with Northwestern University of Continuing Studies provide an overview of how pension leadership, legislature, and lack of funding in state budgets challenge the public employees’ pension system across the Union. Earn continuing education credits.
+June 5-8, 2011
Massachusetts Association of Contributory Retirement Systems Annual Spring Conference (MACRS)
Resort and Conference Center at Hyannis
The four-day conference will focus on a variety of issues of particular importance to the Massachusetts retirement community. Treasurer and Receiver General Steve Grossman will address the attack on public pensions.
+June 6-7, 2011
Pennsylvania State Building & Construction Trades Council, AFL-CIO (PABCTC)
The council is made up of 16 Regional Council and more than 115 local unions from 15 International Building Trades Unions. The focus of this conference is to provide a comprehensive overview of current legislative and regulatory issues facing the members, including job creation measures, construction industry standards, and defensive battles occurring on the federal and state level.
+June 8-10, 2011
Social Investment Forum 2011 Conference (SIF)
Responsible Investing: Impact and Innovation! Keynote and plenary presentations from Al Gore, Chairman, Generation Investment Management; Luis Aguilar, Commissioner, Securities and Exchange Commission; Janet Cowell, Treasurer State of North Carolina and Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on Consumer Finance, as well as asset owners in pension funds, foundations, and along with policymakers and corporate leaders.
+June 8-10, 2011
99th Annual Convention of the Michigan Pipe Trades Association
Atheneum Conference Center
Attending the convention will be 110 delegates including business managers, financial secretaries, business agents and elected officers of the 13 UA Locals which make up the Association. Also in attendance will be officers and guests from the UA Local Unions in Ohio, Indiana, Illinois, Wisconsin, as well as Washington, DC.
American Conference Institute’s and Responsible-investor.com’s National Summit on the Future of Fiduciary Responsibility
Millennium UN Plaza Hotel
This conference will feature key insights and expert advice for assessing the role of shareholders and institutional investors in corporate governance reform measures: dissecting the impact of Dodd-Frank’s new corporate governance rules, regulations, and limitations on investors.
+June 13-15, 2011
International Foundation of Employee Benefit Plans (IFEBP)
Las Vegas, NV
For more than 40 years attendees continue to benefit from a wide selection of educational programs. In today’s ever-changing world of economic turmoil, pending legislation and subsequent new requirements affecting benefits administrators of multiemployer trust funds, it is imperative administrators attend training and educational seminars. Session topics include “Investment and Fund Assets”-“Key Areas of Legal and Legislative Compliance”- “Trust Fund Accounting”
+June 26-29, 2011
Florida Public Pension Trustee Association’s 27th Annual Conference (FPPTA)
Renaissance Orlando at SeaWorld
FPPTA’s primary purpose in conducting an annual educational forum is to provide the basis for improved financial and operational performance of the public employee retirement systems in the state. FPPTA acts as a central resource for educational purposes for the public pension industry including topics such as the political reality of public pension plans and private sector versus public sector plans.
Government Finance Officers’ Association Conferences
+June 2, 2011
Connecticut GFOA Annual Meeting
+June 1-3, 2011
Canada: British Columbia GFOA
Delta Ocean Pointe
+June 8-10, 2011
Hilton Virginia Beach Oceanfront Hotel
Virginia Beach, VA
+June 16-17, 2011
Clarion Fontainebleau Hotel
Ocean City, MD
+June 16-19, 2011
Municipal Association of South Carolina
Hilton Head, SC
+June 25-29, 2011
Boca Raton Resort and Club
Boca Raton, FL
Scott + Scott LLP is a nationally recognized law firm headquartered in Connecticut with offices in New York City, Ohio and California. The firm represents individual as well as institutional investors who have suffered from corporate stock fraud. Scott+Scott has participated in recovering billions of dollars and achieved precedent-setting reforms in corporate governance on behalf of its clients. In addition to being involved in complex shareholder securities and corporate governance actions, Scott+Scott also has a significant national practice in antitrust, ERISA, consumer, civil rights and human rights litigation. Through its efforts, Scott+Scott promotes corporate social responsibility.
Scott+Scott’s PT+SM System is the firm’s proprietary investment portfolio tracking service. Carefully combining the firm’s proprietary computer-based portfolio monitoring software with Scott+Scott’s hands-on approach to client relations is a proven method for institutional investors and their trustees to successfully
- Monitor their investment portfolios
- Identify losses arising from corporate fraud
- Consider what level of participation any given situation requires
- Recover funds obtained on their behalf through investor litigation action
To obtain more information about Scott+Scott’s PT+SM services or to schedulea presentation to fund trustees, fund advisors or asset managers, please
contact: David R. Scott + Toll Free: 800.404.7770 email: email@example.com
+ UK Tel: 0808.234.1396 >>>>>>>>>>>>>>>>>>>
Scott + Scott LLP, Attorneys at Law Copyright © 201
Attorney Advertising: Results depend on a number of factors unique to each matter. Prior results do not guarantee a similar outcome.