Orrick's Financial Industry Week in Review - January 30, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


OCC Proposed Stress Tests

On January 24, the OCC requested comment on a notice of proposed rulemaking to implement Section 165(i)(2) of the Dodd-Frank Act, which would: (i) require national banks and Federal savings associations with consolidated assets of more than $10 billion to conduct annual stress tests and (ii) impose reporting and disclosure requirements.  Comments must be submitted by March 26. 
OCC Release. Proposed Rule.

FHA Increases Lender Indemnification and Performance Standards

On January 20, the FHA announced a final rule to: (i) revise the process by which the FHA requires lenders to indemnify HUD for insurance claims on mortgages that do not meet the agency's guidelines and (ii) require all lenders with authority to insure mortgages on HUD's behalf to meet stricter performance standards. In a separate Federal Register notice, the FHA will propose to reduce the maximum allowable seller concession to reflect public comments to a proposal published on July 15, 2010. The new proposal will have a 30 day comment period. FHA Release. Final Rule.

FHFA Analysis Behind Exclusion of Principal Forgiveness as a Loss Mitigation Tool

On January 23, the FHFA, in response to a request from members of Congress, released the analysis that led it to exclude principal forgiveness as a loss mitigation tool by Fannie Mae and Freddie Mac. FHFA Release. FHFA Letter.


Rating Agency Developments


On January 25, Fitch updated its global dealer floorplan rating criteria. Fitch Release.

On January 24, DBRS released its CMBS rating methodology. DBRS Release.

On January 23, S&P updated its U.S. interest rate criteria to include assumptions for the five-year CMT Index. S&P Release.

On January 23, DBRS released its U.S. RMBS securities loss model and rating methodology. DBRS Report.

On January 23, DBRS described its U.S. RMBS surveillance process. DBRS Report.

Note: Free registration is required for Fitch and S&P releases and reports.


RMBS Litigation


John Hancock Sues JP Morgan Over RMBS

On January 20, 2012, John Hancock Life Insurance Co. filed a complaint in New York state court against JPMorgan Chase & Co. and several related entities and individuals seeking to recover for losses allegedly incurred on certificates John Hancock purchased in 21 separate RMBS offerings from JPMorgan, Bear Stearns, and Washington Mutual Inc. John Hancock alleges that the defendants made misrepresentations concerning the quality of the mortgage loans underlying the certificates and failed to perform adequate due diligence. The complaint alleges violations of the Securities Act of 1933, common law fraud, negligent misrepresentation, aiding and abetting fraud, and fraudulent inducement, and seeks rescission and damages. Complaint.

Sealink Funding Sues Morgan Stanley for RMBS Losses

On January 20, 2012, Sealink Funding Ltd. filed a complaint in New York state court against several Morgan Stanley entities in connection with certificates in 11 RMBS offerings allegedly purchased by Sealink during 2006 and 2007 for approximately $556 million. Sealink alleges that Morgan Stanley made misrepresentations about its due diligence regarding the mortgage loans underlying the certificates and the underwriting guidelines used by the originators of those loans. Sealink asserts claims for common law fraud, fraudulent inducement, and negligent misrepresentation, and seeks rescission and damages. Complaint.

Loreley Financing Sues Citigroup Over CDO Investments

On January 24, 2012, several Loreley Financing Ltd. entities filed a complaint in New York state court against several Citigroup affiliates over nearly $1 billion in CDO investments backed by subprime mortgages, purchased in 2006 and 2007. Loreley alleges that Citigroup knowingly misrepresented the quality of the mortgage loans in order to transfer risk from its balance sheet.  Loreley further accuses Citigroup of concealing the role of Magnetar in designing certain CDOs.  Loreley asserts claims for common law fraud, rescission of contract, fraudulent conveyance, and unjust enrichment, and seeks rescission, disgorgement, injunctive relief, and damages. Complaint.

Dexia Sues JPMorgan for RMBS Losses

On January 19, 2012, Dexia SA/NV and related entities filed a complaint in New York state court against JPMorgan Chase & Co. and several related entities in connection with certificates in 53 RMBS offerings that Dexia allegedly purchased from JPMorgan, Bear Stearns, and Washington Mutual for approximately $1.7 billion. Dexia alleges that the defendants created, issued, and sold RMBS based on loans that the defendants knew to be of poor quality, made false and misleading representations about those loans to investors, and exerted undue pressure on credit rating agencies.  Dexia asserts claims for negligent misrepresentation, aiding and abetting fraud, and fraudulent inducement, and seeks rescission and damages. Complaint.

BayernLB Sues Morgan Stanley Over RMBS

On January 25, 2012, Bayerische Landesbank filed a complaint in New York state court against several Morgan Stanley entities seeking to recover for losses allegedly incurred in connection with certificates in 22 RMBS offerings that BayernLB allegedly purchased in 2006 and 2007 for approximately $486 million. BayernLB alleges that Morgan Stanley made misrepresentations in the offering documents for those RMBS concerning the underwriting standards of the originators of the mortgage loans underlying the certificates, the appraisals of the mortgaged properties, and other facts regarding the quality of the mortgage loans. BayernLB asserts claims for common law fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation, and seeks rescission and damages.  Complaint.


European Financial Industry Developments


FSA Fines David Einhorn and Greenlight Capital £7.2 Million for Market Abuse Activity

On 25 January, the U.K. Financial Services Authority (FSA) decided to fine David Einhorn and his hedge fund Greenlight Capital Inc £7.2 million for engaging in market abuse in relation to an equity fund raising by Punch Taverns Plc raising in 2009. Mr. Einhorn learnt of the proposed fund raising after which he instructed that his fund's holding in the firm be sold. While the FSA accepted that Mr. Einhorn did not believe the information to be inside information, the FSA considered that his belief was unreasonable and that his failure to identify the information as such was a serious breach of the standard of market conduct expected from someone with his professional experience and of his industry standing. Press Release. Decision Notice for David Einhorn. 
Decision Notice for Greenlight Capital Inc.




A New Era of Federal Prosecutions: Challenges for Main Street and Wall Street

February 2, 2012 – The Director's Roundtable will be presenting a panel discussion in New York on key issues related to the new wave of investigations launched by the Securities and Exchange Commission, Department of Justice, and FBI. At the center of the investigations are public companies and financial institutions, as well as so called "expert networking" firms that provide investment information.  Orrick partner Amy Ross will moderate. Click here to register.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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