•   Scott+Scott Obtains Denial Of Defendants’ Motion To Dismiss In WaMu Mortgage-Backed Securities Suit

•   Financial Reform Bill Focuses On Incentive-Based Compensation Issues

•   Class Representatives In The Class Action Mechanism

•   Understanding Attorney-Client Privilege

•   Events In the USA

(Flashlit version)

Scott+Scott Obtains Denial Of Defendants’ Motion To Dismiss In WaMu Mortgage-Backed Securities Suit

Scott+Scott LLP attorneys scored a major victory for purchasers of Washington Mutual Mortgage Pass-Through Certificates when, on September 29, 2010, aU.S. District Court Judge, denied the motion of certain executive officers of Washington Mutual to dismiss the securities class action complaint filed against them. Filed in the Western District of Washington on April 1, 2010, the lead plaintiffs’ consolidated class action complaint alleges that the offering documents of specific WaMu Mortgage Pass-Through Certificates sold, primarily to institutional investors, between January 26, 2006 and June 26, 2007 contained material misstatements and omissions.  The complaint charges the defendants, key executive officers with Washington Mutual Asset Acceptance Corporation (WMAAC), with violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.

The Washington Mutual Mortgage Pass-Through Certificates are fixed-income securities that represent an undivided interest in a pool of mortgages put together by WMAAC.  The complaint alleges that the Registration Statements and Prospectuses for the Certificate offerings, among other material misstatements, falsely represented that the pool of mortgages underlying the Certificates—which generate the income stream “passed through” to Certificate purchasers—were underwritten according to the standards outlined in these documents.  In reality, the complaint charges, WMAAC disregarded their stated standards in selecting mortgages for the Certificates, conducting little or no due diligence as to whether the mortgages were originated in conformity with their stated underwriting guidelines—systematically ignoring deficient lending documentation and inflated appraisal values.

Indeed, within months after each of the offerings, the delinquency and default rates on the Certificates’ underlying mortgages increased exponentially and the ratings of the Certificates all collapsed.  Over 94.1% of the $44.2 billion of Certificates initially rated AAA have been downgraded to speculative “junk” status.  Moreover, over 51% of the mortgage loans underlying the Certificates are currently in some stage of default or are in foreclosure.

The Washington Mutual defendants filed their motion to dismiss the suit on April 27, 2010.  In the motion, the defendants argued that, among other things, lead plaintiffs’ complaint failed to plead actionable misrepresentations or omissions in the underwriting guidelines in the offering documents, contending, alternatively, that the offering documents contained the disclosure that Washington Mutual periodically made exceptions to its guidelines; that all the prospectus documents contained numerous risk disclosures; and that the defendants were shielded from liability because the Certificate purchasers’ sole remedy, pursuant to the purchase and sale agreement for each Certificate, is substitution of offending mortgages in the Certificate pool. Scott+Scott vigorously opposed these contentions.

On September 29, 2010, the district court, finding no need to hear oral argument on the matter, as is customary, denied the Washington Mutual defendants’ motion to dismiss in part.  The federal judge held that lead plaintiffs had adequately alleged false or misleading statements in the offering documents finding that: “Plaintiffs’ underwriting allegations survive dismissal because the statements may be misleading if they mask the extent to which the sponsor’s underwriting guidelines were disregarded… [i]n essence, Plaintiffs allege the underwriting guidelines ceased to exist.”  The district court decision allows lead plaintiffs to proceed with claims on behalf of purchasers in seven offerings of Certificates, through which over $10.8 billion of the securities were sold to investors.

As the case now moves forward, the next step in the litigation will be a case management conference with the court where the parties’ proposed schedule on how the case should proceed.

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Financial Reform Bill Focuses On Incentive-Based Compensation Issues

After bailing out many financial institutions and enduring a catastrophic financial crisis, the news of high salaries and bonuses being paid to financial executives and Wall Street traders outraged taxpayers and shareholders alike.  Understandably, taxpayers were frustrated and outraged government funds were being used to pay exorbitant bonuses to executives who directly contributed to the failure of their companies and the financial crisis.  Shareholders and investors were similarly enraged that these companies’ compensation policies encouraged executives and traders to engage in practices that increased financial institutions’ exposure to risk by providing short-term incentives that were inconsistent with these companies’ long-term goals and strategies.

Some compensation programs offered large payments to managers or employees to produce sizable increases in short-term revenue or profit–without regard for the potentially substantial short or long-term risks associated with that revenue or profit–can encourage managers or employees to take risks that are beyond the capability of the financial institution to manage and control.

According to Scott Alvarez, general counsel of the Board of Governors of the Federal Reserve System, who testified before the House Committee on Financial Services in September, “[i]t is clear that flawed incentive compensation practices in the financial industry were one of many factors contributing to the financial crisis that began in 2007.” In response, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July, which included several provisions addressing executive compensation.  In September, regulators tasked with implementing the changes outlined in the Dodd-Frank Bill, including the Federal Reserve and the Securities Exchange Commission (SEC), testified before the House Committee on Financial Services to reinforce the fact that their focus would be on regulating incentive-based compensation structures.  Specifically, regulators seek to prevent companies from encouraging inappropriate and excessive risk-taking.  Everyone is hoping to avoid another collapse of the financial industry and more bailouts.

Mr. Alvarez stated that “[e]ach organization is responsible for ensuring that its incentive compensation arrangements are consistent with the safety and soundness of the organization.”  To that end, Meredith Cross, Director of the Division of Corporation Finance at the SEC, testified that the SEC “will require disclosure to the appropriate federal regulators of the structures of incentive-based compensation and prohibit incentive-based payment arrangements that the regulators determine encourage inappropriate risks by covered financial institutions.” “More specifically,” she stated, “to the extent that risks arising from a company’s compensation policies and practices are reasonably likely to have a material adverse effect on the company, companies must provide disclosure about those policies and practices.”

These rules are aimed at not only protecting taxpayers, but also investors, who would be negatively impacted when a company’s risk is increased.  Indeed, Ms. Cross said the SEC believes that “information about executive compensation must be straightforward and meaningful to facilitate investor access and use of that information.”  The challenge for the SEC and the House Committee on Financial Services, however, will be keeping up with the continually evolving and complex compensation practices being adopted by these institutions.

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Class Representatives In The Class Action Mechanism

Class representatives serve an important role in class action lawsuits by representing the interests of the class, which consists of numerous parties with similar claims against the same defendants for similar injuries.  To be named as a class representative, a class member must demonstrate that he or she has the necessary qualifications to represent the interests of the class.  During the class certification process, the court determines whether the proposed class representative can capably and adequately represent the class and whether the action may proceed on a class action basis.

When a court determines whether to approve the plaintiff in a class action as the class representative, the plaintiff must demonstrate to the court that he or she is a part of the class, has suffered an injury, maintains the same claims and defenses of the other class members and will adequately represent the interests of the class. To demonstrate these qualifications, a proposed class representative may be asked to produce specific documents. For instance, a proposed class member in a securities class action lawsuit may be called on to produce documents that show details of the securities purchased and sold that are at issue in the lawsuit.

A proposed class representative may also be subject to a deposition by defense counsel.  During a deposition, defense counsel will ask the proposed class representative a number of questions regarding the lawsuit, the injury they suffered and how the proposed representative became involved with the lawsuit.  These types of questions are aimed at finding out whether the proposed class representative is suitable to be appointed as the class representative.  For example, defense counsel may try to uncover differences between the proposed representative’s claims or injuries and the claims or injuries of the unnamed class members in an attempt to disqualify the proposed representative.  In a securities case, for example, this means finding out if the proposed representative purchased the particular security at issue during the class period.  To further illustrate this point, in a recent products liability case, a proposed class representative testified that the defendant had sold him an “avocado”–meaning that the car was so defective, he couldn’t even call it a “lemon.”  Defense lawyers argued that this testimony showed that the class representative’s car was more defective than the vehicles purchased by the unnamed class members and that, therefore, the plaintiff was not a proper class representative.

Once a class is certified and the class representative is appointed, the class representative’s obligations do not end.  To adequately serve the interests of the class, the named class representatives must stay informed of developments in the lawsuit through communication with their attorney.  Scott+Scott LLP continually updates the class representatives it represents to ensure they stay informed of all developments in their case.  Furthermore, if the parties decide to settle the lawsuit, the class representative will be presented with the settlement offer for acceptance before it is presented to the court and the rest of the class for their review.

Class representatives play a vital role in class action litigation.  Their close participation, from providing important documents and information in the early stages of a lawsuit to approving a settlement to benefit numerous unnamed class members, is fundamental to the success of the class action mechanism.

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Understanding Attorney-Client Privilege

The attorney-client privilege protects confidential communications between an attorney and client. It forbids an attorney from disclosing confidential communications obtained from a client during the course of professional consultations.  Although the underlying rationale has changed over time, courts long have viewed the privilege’s chief justification as encouraging full and frank communication between the attorney and clients so that the attorney is sufficiently well-informed to provide sound legal advice.

The privilege applies: (1) where legal advice of any kind is sought, (2) from a an attorney in his capacity as a legal advisor, (3) and the communications relate to legal advice, (4) and are made in confidence, (5) at the client’s instance, those communications are permanently protected from disclosure, (6) except when the protection is waived.

Elements (1)-(3) show that the attorney-client privilege is intended to apply to communications in which the client seeks legal advice, as contrasted with business advice.  Where an attorney communication contains both legal and business advice, courts look to whether the predominant purpose of the communication is to render or solicit legal advice.  Therefore, unless the communication is designed to meet problems that can fairly be characterized as predominately legal, the privilege does not apply.

Since the effect of invoking privilege is to impede the full discovery of the truth, courts frequently say that the attorney-client privilege is to be strictly construed.  The rationale behind the narrow application of privilege is because it is viewed as an exception to the general rule that the public has a right to every person’s evidence in a court proceeding.  The practical effect of the strict construction means that communications alone, rather than the context and purpose of the engagement are protected.  Thus, for example, when a client meets with a lawyer, the communication of legal advice is protected from disclosure.  The fact of the meeting, its date, time, and participants are not protected.

The client holds the privilege and has ultimate authority to waive or raise the privilege. Accordingly, the privilege can only be waived if the client has authorized the waiver, expressly or by implication.

However, the privilege is not absolute and can be deemed waived as a result of intentional or unintentional disclosures to anyone who is not in privity with the client.  For example, a waiver would occur if the client, after receiving legal advice about a contract dispute with a vendor, disclosed that advice on the golf course to a trusted friend.  Thus, there is no requirement that waiver be intentional and knowing.  Rather, waiver may follow from inadvertent disclosures or from any conduct by the client that would make it unfair thereafter to assert the privilege.  And once a waiver of the attorney-client privilege is deemed to have occurred for whatever reason, the privilege is generally treated as waived for all purposes and in all circumstances thereafter.

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Events In the USA

+ October 3- 5, 2010
Global Asset Allocation Summit
The Encore
Las Vegas, NV

     Opal Financial Group is presenting this conference to address asset allocation strategies relative to Public Pensions, Endowments, Foundations and Taft Hartley Funds.

+  October 9- 14, 2010
National Council on Teacher Retirement Annual Convention
The Westin
La Cantera Resort
San Antonio, TX

This year marks the 88th year for the NCTR convention.  The seminars will cover topics including real estate trends, global investing alternatives and legal issues affecting public plans.

+  October 16- 20, 2010
NPEA – National Pension Education Association Hyatt Regency Hotel
Lake Tahoe, NV

NPEA has provided education and networking opportunities for its member systems for over 30 years.  This seminar will share information on technology, education as well as trends and legislative issues in the pension industry

+  October 18- 20, 2010
Northeast Public Employee Retirement Systems Forum
Seaport World
Trade Center
Boston, MA

The 6th annual NEPA Conference will bring together public pension funds and investment consultants from all over the northeast region of the United States to provide a forum for sharing experiences.

Government Finance Officers Association Conferences

+  October 3- 6, 2010
Georgia GFOA
Savannah, GA

+  October 6- 8, 2010
Louisiana GFOA
Baton Rouge, LA

+  October 6- 8, 2010
Virginia GFOA
Roanoke, VA

+  October 7- 8, 2010
Tennessee GFOA
Franklin, TN

+  October 13- 15, 2010
Kansas GFOA
Overland Park, KS

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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  
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  • 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 schedule a presentation to fund trustees, fund advisors or asset managers, please contact:    

David R. Scott + Toll Free: 800.404.7770    

email: + UK Tel: 0808.234.1396     Table of Contents


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