Second Circuit Reinstates MBS Suit, Easing Standing Hurdle For Investors


On March 1, the U. S. Court of Appeals for the Second Circuit held that an investor plaintiff may be able to assert claims on behalf of a class for securities in which it had not invested, and additionally found that the investor had alleged sufficient facts of abandoned mortgage underwriting standards to survive defendants’ motion to dismiss. N.J. Carpenters Health Fund v. The Royal Bank of Scot. Grp., PLC, No. 12-1701, 2013 WL 765178 (2d Cir. Mar. 1, 2013). An investor claimed on behalf of a putative class that the offering documents for six mortgage-backed securities (MBS) materially misrepresented the standards used to underwrite the loans. The district court initially dismissed the case as to five of the trusts, holding that the investor could not bring claims on securities in which it had not invested. The investor amended its complaint and focused on the one trust in which it had invested. The district court then held that the allegations were not specific enough to the loans at issue, and that the risks were sufficiently disclosed and known at the time of the transaction. After the district court’s rulings, the Second Circuit held in another case, NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), that where an issuer had issued multiple securities under the same shelf registration statement, an investor who invested in at least some of those securities could, on behalf of a putative class, bring claims on securities in which it had not invested so long as all of the relevant claims involved “the same set of concerns.” On appeal in the instant case, the Second Circuit held that in light of its decision in NECA-IBEW, the investor had standing to bring its claims as to all six of the original MBS. The court also held that the “allegations in the complaint-principally, that a disproportionately high number of the mortgages in a security defaulted, that rating agencies downgraded the security’s ratings after changing their methodologies to account for lax underwriting, and that prior employees of the relevant underwriter had attested to systematic disregard of underwriting standards-state a plausible claim that the offering documents” violated the 1933 Securities Act. The court remanded the case for further proceedings.

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