Orrick's Financial Industry Week In Review - April 2, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments

The JOBS Act

On March 27, the U.S. House of Representatives approved the Jumpstart Our Business Startups Act (the JOBS Act).  The Act had already passed the Senate and the President is expected to sign the Act shortly.  The Act lifts the ban on "general solicitation and general advertising" for Rule 144A and certain Reg. D offerings, expands the Reg. A safe harbor limit from $5 million to $50 million and, in certain cases, raises the cap from 500 to 2,000 of the number of shareholders a company may have before it must register.  The Act will also permit companies to raise up to $1 million in small amounts within any 12-month period without registering ("crowdfunding").  Finally, the Act creates the concept of an "emerging growth company" – generally companies with annual gross revenue of less than $1 billion – and relieves these companies from certain provisions of the Dodd-Frank Act and Sarbanes-Oxley Act.  Most of the Act's provisions, including the changes to Rule 144A and Reg. D, will become effective upon the effectiveness of rules to be adopted by the SEC.  Full text of the Act could be found here.

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Request for Comments to Leveraged Finance Guide Revisions

On March 26, the Fed, FDIC, and OCC issued a joint release requesting comments on proposed revisions to the interagency leveraged finance guide issued in 2001.  The revisions focus on five areas: (i) risk-management; (ii) underwriting standards; (iii) valuation standards; (iv) pipeline management; and (v) reporting and analytics.  Comments must be submitted by June 8thRelease.

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Effective Date of Swaps Pushout Provision

On March 30, the FDIC, Fed, and OCC issued guidance clarifying that the effective date of Section 716 of the Dodd-Frank Act (known as the Swaps Pushout provision) is July 16, 2013.  Section 716 prohibits the provision of Federal assistance to any entity defined under that section to be a swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity.  Joint Release.  Guidance.

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MSRB Seeks Approval of "Sophisticated Municipal Market Professional" Definition

On March 26, the MSRB requested approval from the SEC to revise the definition of "sophisticated municipal market professional" (SMMP) so that it is consistent with the new FINRA suitability rule for institutional customers.  The proposal defines "SMMP" as an "institutional customer of a dealer that: (i) the dealer has a reasonable basis to believe is capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions in municipal securities and (ii) affirmatively indicates that it is exercising independent judgment in evaluating the recommendations of the dealer.  Request for Approval.  MSRB Release.

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Rating Agency Developments

On March 30, DBRS released its Canadian structured finance surveillance methodology.  DBRS Report.

On March 30, Moody's released its global methodology for incorporation of joint-default analysis into its bank ratingsMoody's Report.

On March 29, S&P published its criteria for rating commercial paper programs issued by sovereign governmentsS&P Release.

On March 28, S&P released its methodology for assessing the impact of interest shortfalls on U.S. RMBSS&P Release.

On March 28, Fitch released its state housing finance agencies general obligation rating criteria.  Fitch Report.

On March 27, Moody's released its methodology for rating special tax bondsMoody's Report.

On March 26, DBRS released a general methodology for rating Canadian structured finance transactions.  DBRS Report.

Note: Free registration is required for Fitch, Moody's and S&P releases and reports.

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RMBS Litigation

Novastar Wins Dismissal of RMBS Action

On March 29, 2012, Judge Deborah A. Batts of the Southern District of New York dismissed with prejudice a putative RMBS class-action lawsuit against Novastar Mortgage and other defendants.  The plaintiff, New Jersey Carpenters Retirement Fund, alleged in its Second Amended Complaint that Novastar disregarded its underwriting guidelines in originating loans that served as collateral for approximately $1.3 billion in RMBS certificates that were marketed to investors.  Judge Batts dismissed the action, which brought claims under Sections 11, 12, and 15 of the Securities Act of 1933, because the plaintiff failed to tie any of its allegations about Novastar's general underwriting practices to the specific loans in the collateral pool for the certificates at issue.  Judge Batts also rejected plaintiff's allegations that Novastar granted improper exceptions in the course of its underwriting, observing that the risk disclosures in the offering documents explained that Novastar permitted exceptions when, in the loan underwriter's judgment, there were sufficient compensating factors.  Because the plaintiff failed to identify any specific instance in which Novastar granted an exception when it did not subjectively believe that one was warranted, Judge Batts found that plaintiff's allegations lacked sufficient specificity to survive a motion to dismiss.  Finally, Judge Batts also found that the extensive risk disclosures in the offering documents rendered the alleged misstatements about which plaintiff complained immaterial as a matter of law.  This was especially true in light of the total mix of information available to plaintiff at the time of its purchase of the securities at issue in 2007.  Orrick represents the Novastar Defendants in this matter.  Order.

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Walnut Place's $1.1 Billion RMBS Suit Against Countrywide Dismissed

On March 28, 2012, Justice Barbara R. Kapnick of the Supreme Court of the State of New York dismissed Walnut Place LLC's suit against Countrywide and Bank of America in connection with the repurchase of $1.1 billion in Countrywide RMBS.  Walnut Place, a holder of the certificates issued by the securitization trusts at issue, filed the action as a derivative suit asserting breach of contract claims.  It alleged that Countrywide made false representations and warranties in the offering documents concerning the characteristics and credit quality of the loans underlying the securities at issue.  In dismissing the case, the court held that the lawsuit was premature, noting that it was filed by Walnut Place only a few days after the bondholders' trustee, nominal defendant Bank of New York Mellon, had requested more time to evaluate Walnut Place's pre-litigation demand concerning the alleged breaches.  Order.

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SEC Files Lawsuit to Compel Compliance with Subpoenas Related to RMBS

On March 23, 2012, the SEC filed an administrative enforcement action against Wells Fargo & Co. in the Northern District of California seeking an order compelling Wells Fargo to comply with six subpoenas the agency issued to obtain information about the quality of RMBS that the bank sold.  According to the SEC's application, Wells Fargo has failed to respond adequately to the subpoenas, which seek documents regarding, among other things, the bank's underwriting practices, the quality of the mortgage loans, compensation matters, and training materials.  The SEC initiated the investigation in November 2010.  Wells Fargo received a Wells notice from the SEC on February 24, 2012, following the issuance of the six subpoenas, and, according to the SEC, has refused to produce any documents since the Wells notice was issued.  Application.  

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Deutsche Bank Settles RMBS Claims for $32.5 Million

On March 26, 2012, lead plaintiffs in a putative RMBS class-action lawsuit against affiliates of Deutsche Bank AG sought approval of a $32.5 million settlement.  The action arose out of alleged misrepresentations Deutsche Bank made concerning the quality of RMBS it sold.  The settlement amount equates to an estimated average recovery of $12.80 per $1,000 in original face value of the RMBS certificates at issue.  The settlement will not become final until it is approved by the Eastern District of New York.  Approval Motion.

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Allstate RMBS Lawsuit to Stay in Federal Court

On March 27, 2012, Judge Deborah A. Batts of the Southern District of New York denied Allstate Insurance Co.'s motion to remand its lawsuit against JPMorgan Chase Bank NA to state court.  The lawsuit arises out of alleged misrepresentations and omissions by JPMorgan regarding the riskiness and credit quality of over $700 million in RMBS sold to Allstate.  Judge Batts found federal subject matter jurisdiction based on the FDIC's presence as a third-party defendant.  Order.  

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Orrick Webinars

Navigating the Municipal Bankruptcy Minefield - A guide for municipalities, bond investors, credit enhancement providers, trustees and counsel

Personal and corporate bankruptcies are designed to give filers a "fresh start." But struggling municipalities seeking the same outcome from a Chapter 9 filing are likely to be disappointed - instead facing months or years of expensive legal battles with angry employees and creditors, along with increased scrutiny from Federal regulators looking for bankruptcy-related and other disclosure and tax-law violations.

On March 22, 2012, Orrick's George Greer, John Knox, Marc Levinson, Lorraine McGowen and Larry Sobel partnered with The Bond Buyer for a detailed web seminar that explained the fast-changing landscape for municipalities in bankruptcy, and strategies that issuers and their professional advisors can employ to streamline the process and avoid violations.  Topics discussed included:

- Ins and outs of Chapter 9 workouts

- Keeping the market informed and avoiding liability with appropriate disclosure

- Tax-law opportunities and pitfalls relating to asset sales and workouts

Please click here to view the webinar.

Additional Resources

- Webinar Presentation: Navigating the Municipal Bankruptcy Minefield

- Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress by John Knox and Marc Levinson

- SEC Investigations and Enforcement Actions by George Greer


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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