January 19, 2011 / 11:23 PM / 7 years ago

IFR-ABS- Class-action status denied to MBS lawsuit

6 Min Read

 by Adam Tempkin
 NEW YORK, Jan 19 (IFR) - A Federal District Court judge in
Manhattan denied class-action certification yesterday in a
mortgage-backed securities action brought by investors against
Royal Bank of Scotland.  Legal specialists say that this is the
first ruling on class certification among multiple MBS actions
pending in venues around the country.
Plaintiffs in the case, titled New Jersey Carpenters
Vacation Fund, et al. v. The Royal Bank of Scotland Group, Plc,
et al. , alleged that the investment bank made misleading
statements and omissions about residential mortgage-loan
origination practices in the offering documents for two MBS
offerings from 2006 and 2007. The plaintiffs sought
certification of a class comprising investors who purchased
US$3.4bn worth of securities via the two transactions, which
were issued off of the Haborview Mortgage Loan Trust and
Residential Accredit Loan Inc. (RALI) trust.
Judge Harold Baer Jr. of the U.S. District Court for the
Southern District of New York denied class certification on two
grounds. First, the Court upheld the defense's so-called
"affirmative defense", which basically means that there was
real evidence that some of the investors had previous knowledge
of the underwriting guidelines and practices that were
allegedly misstated in the offering documents. These investors
bought the bonds anyway.  The judge also says that certain
investors in the class action had more information than others
regarding the underwriting guidelines, based on when each
investor bought the bonds.
Secondly, the Court held that class-action treatment would
not be a superior method for resolving investors' claims, where
the proposed class consisted of large, institutional and
sophisticated investors who could pursue their own claims on an
individual basis. Moreover, some of those class members may
actually have competing interests in prosecuting the action.
While this is only a Federal District Court opinion, and
will likely not be a controlling precedent, legal experts say
that the judge's reasoning may influence class-certification
motions for MBS lawsuits pending across the country. "The first
decision out of the box often guides the thinking of future
courts, especially where as here, I assume, most, if not all
cases were brought in the Southern District of New York, and as
a result all judges are in the same two buildings," said an
attorney with experience in securities class actions.
"In most securities class-action lawsuits, people assume a
class will be certified," said another attorney who spoke on
condition of anonymity. "This decision shows that there are
real standards that have to be met in order for there to be a
class-action litigation; it's not just assumed.  Plaintiffs
have the burden to show that all elements are met."
Interestingly, legal experts say that Judge Baer said that
plaintiffs actually met four important requirements for forming
a litigation class-action: commonality, typicality, adequacy,
and numerosity.  However, they were not able to prove so-called
predominance and superiority, which caused the judge to deny
certification of a litigation class.
While the plaintiffs failed to prove these last two
standards for the purposes of certifying a so-called
"litigation class", there is a lower burden to proving these
prongs for a "classwide settlement", which still may be
possible despite the denial of a litigation class, legal
experts say.
 "The standards that apply to certification of a settlement
class are more lenient than the standards that apply to a
litigation class," said the securities class-action attorney.
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
While most of the evidence is confidential, the judge states
that several of the putative class members or their investment
advisers "are sophisticated investors with significant
experience in asset-backed securities."
"Among them, JP Morgan is alleged to have had knowledge
regarding originators' systematic disregard of underwriting
guidelines in another lawsuit brought by Intervenor-Plaintiff
Iowa Public Employees' Retirement System ("IPERS")," the
opinion says. "For Plaintiffs to take the position in this
litigation that JPMorgan had no such knowledge would, to say
the least, present unique issues."
The judge lists other sophisticated investment advisors to
the plaintiff, including Western Asset Management Company, as
well as other putative class members that would have had
knowledge of deteriorating underwriting guidelines, including
Blackrock Management, Ellington Management Group, and Fortress
Investment Group.
However, it is not clear from the Court's opinion whether
the investment advisors who knew about the lowered standards
actually advised their clients of what they knew.
(Adam Tempkin is a senior IFR analyst)
(adam.tempkin@thomsonreuters.com; Reuters Messaging;
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