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 purchase.
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) (firstname.lastname@example.org; Reuters Messaging; email@example.com)) For other fixed-income market reports, please double-click on the symbol:
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