NY judge plays referee as big banks face mortgage claims
* Financial institutions face lawsuits by federal agency
* Federal judge Denise Cote presides over bulk of cases
* Defendants have lost motions to dismiss
* Appeals court weighs banks' challenge in test case
By Nate Raymond
NEW YORK, Jan 28 (Reuters) - When the Federal Housing Finance Agency sued 18 banks and financial institutions two years ago over risky housing debt sold in the run-up to the mortgage crisis, a host of judges were assigned to the cases.
Ultimately, one Manhattan federal judge volunteered to oversee the bulk of the lawsuits. And for the government agency, whose legal action is one of the biggest to target banks and lenders over losses tied to home loans packaged into securities, things have been going almost entirely its way ever since.
The defendants, in arguments before U.S. District Judge Denise Cote, have failed to get the cases dismissed and the lawsuits are proceeding toward trial at a relatively fast pace.
Cote has handled 16 of the lawsuits, which the FHFA filed in its role as conservator for housing finance giants Fannie Mae and Freddie Mac. The lawsuits accuse JPMorgan Chase & Co, Bank of America Corp and others of misleading Fannie Mae and Freddie Mac about the quality of loans underlying more than $200 billion in securities that they bought.
The banks deny the allegations. They also have asked a federal appeals court to review one of Cote's most important rulings, which allowed the FHFA's lawsuit against UBS AG to continue despite the Swiss bank's contention that the claims were filed too late to be valid.
The UBS lawsuit is a test case, and the future of all the lawsuits could rest on the appeals court's ultimate decision. Judge Cote, beginning in November, began issuing decisions allowing the other lawsuits to move forward as well.
Cote, 66, was appointed to the federal bench by President Bill Clinton in 1994 and is best-known for presiding over the WorldCom securities fraud case nearly a decade ago. She is known as a no-nonsense judge who stresses efficiency in large, complex cases.
She has also at times encouraged those big cases to settle, and settlement talks have begun in the FHFA cases at her urging.
General Electric Co and its mortgage entities last week became the first defendants to settle. Terms were not disclosed in the case, the smallest of the FHFA's 18 lawsuits.
The FHFA had accused GE in the lawsuit of misleading Freddie Mac into purchasing $549 million of mortgage-backed securities. In contrast, the agency's lawsuit against JPMorgan Chase involves about $33 billion in securities sold.
The stakes in the lawsuits are high. For the banks, the cases are a big reminder of lingering legal liabilities from the 2008 financial crisis. Wall Street analysts, according to one estimate, have said the banks could face up to $39 billion in damages if found liable.
For the FHFA, the lawsuits are an attempt to recoup money lost to soured investments amid criticism regulators have not done enough to hold Wall Street to account for its role in the meltdown. The lawsuits also named 131 individuals as defendants.
The cases could also be a way to mitigate losses for taxpayers, who have poured almost $190 billion into Fannie Mae and Freddie Mac since the government took them into conservatorship in September 2008.
DIFFERENT COURTS, DIFFERENT JUDGES
The FHFA cases originally were filed in Manhattan federal court, Connecticut federal court and in State Supreme Court in Manhattan, alleging violations of securities laws.
While the agency has not commented on why it chose certain venues, having some cases in state court would potentially buffer any adverse rulings a federal judge might make.
The New York cases landed before Cote -- who according to a court transcript said she "very happily" took them on -- after the banks sought to move the state court cases to federal court.
Eleven judges were randomly assigned to the New York cases. The banks pushed for one judge to rule on initial motions to dismiss, saying they wanted to get the cases "off to the same start, guided by a common set of legal rulings." The FHFA, for its part, had recommended more limited consolidation.
Fifteen of the 16 cases before Cote are remaining, now that the GE case has settled. Another case remains in Connecticut and another was moved to Los Angeles.
The first trial before Cote is set for next January, in the UBS case. But she has made clear she wants the cases to be resolved. The first court-ordered settlement conference was Jan. 11.
"I think this litigation should settle," Cote said at a hearing last year. "I expect it will settle."
The banks and the FHFA declined to comment. Judge Cote also declined comment. Judges typically do not comment outside of court on ongoing litigation.
Cote, who once was a federal prosecutor who headed the criminal division of the Manhattan U.S. Attorney's Office, has developed a reputation in other large cases for moving things along quickly.
In the WorldCom case, which involved a barrage of fraud claims against investment banks that underwrote the collapsed telecom company's securities, she ordered settlement talks very early in the case. The WorldCom defendants ultimately agreed to pay more than $6 billion, one of the largest ever class-action securities fraud recoveries.
"She was pumping out orders within days of a motion being briefed," said Sean Coffey, the lead counsel for the WorldCom plaintiffs and now a managing director at BlackRobe Capital Partners LLC. "To say she was hands on was an understatement."
Cote is also overseeing the U.S. Justice Department and class-action litigation against Apple Inc and publishers accused of fixing prices for electronic books.
She has tried to streamline proceedings, and has arranged many telephone conferences rather than forcing lawyers from around the country to fly to New York, said Steven Berman, lead counsel for the e-books plaintiffs in the class action.
"She gets you on the phone, boom, you're done," he said.
The sprawling FHFA litigation can draw big crowds. A hearing in December filled every seat in her courtroom with lawyers from firms such as Skadden, Arps, Slate, Meagher & Flom and Sullivan & Cromwell for the defendants and Quinn Emanuel Urquhart & Sullivan for the FHFA.
Cote's rulings at times have frustrated the banks, such as orders limiting discovery by the defendants into only the side of Fannie Mae's and Freddie Mac's businesses that purchased the securities.
Also, in December, the judge ruled that the FHFA could attempt to prove its case about whether the mortgages in question conformed to proper lending standards by using just a sample of the underlying loans in the securities, rather than having to review each of the 1.1 million total loans in the lawsuits.
Cote has said her aim is to create ways for the cases to move as efficiently as possible. At the December hearing, she said, it was "important to remember that we have all accomplished a lot already."
"We have a framework," she said. "We know the goals we're working towards."
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