Supreme Court Declines to Undo Plaintiff’s Second Circuit Success
On March 18, 2013, the U.S. Supreme Court denied Goldman Sachs’ petition for certiorari, or review, of the Second Circuit’s reinstatement of plaintiff NECA-IBEW Health & Welfare Fund’s (“NECA”) case against seven trusts backed by residential real estate loans.
As described more fully in the fourth quarter 2012 Corporate Governance Bulletin, investors were sold billions of dollars in mortgage-backed certificates in 17 separate offerings that used the same common shelf registration statement with supplemental prospectuses for each offering. These were further subdivided into tranches, or levels of seniority, all underwritten by Goldman Sachs & Co. and issued by GS Mortgage Securities Corp. (collectively, “Goldman”). Plaintiff alleged that the shelf registration statement and the prospectuses contained false and misleading statements and omissions as to the true nature, risk (including borrowers’ ability to repay the loans pooled therein), and overall quality of the certificates and sued Goldman and certain officers and directors of Goldman-related entities. While NECA had purchased certificates in two of the offerings, it sought to represent purchasers in all 17. The district court judge dismissed NECA’s complaint, ruling that the fund had not suffered a direct injury because the certificates were still making monthly payments and because NECA had not yet sold them. The judge also held that NECA could, at best, only represent those purchasers who bought not only in the same specific offering, but also in the same specific tranches that the fund had purchased. NECA appealed to the Second Circuit, and the appeal was argued in February 2012.
On September 6, 2012, the Second Circuit’s ruling reinstated NECA’s claims against defendants where they were made on behalf of purchasers who shared “the same set of concerns” over securities originating from the same lenders whose mortgage pools also made up NECA’s purchases (and which would share any misstatements as to the underlying mortgages’ quality). This allowed NECA to sue over seven of the offerings, and not just in the specific tranches that the fund had purchased. The Second Circuit also found that NECA had adequately alleged it had been damaged by the certificates’ decline in value, regardless of any payments still being made. The defendants petitioned the Supreme Court for a writ of certiorari, with Goldman claiming that the Second Circuit’s decision presented massive new liability concerns for Wall Street: “The stakes implicated by the Second Circuit’s new and expansive standard for class standing are difficult to overstate,” wrote Goldman. “[T]he decision will effectively increase by tens of billions of dollars the potential liability that financial institutions face in this and similar class actions.”
In responding to Goldman’s petition, NECA pointed out that the Second Circuit had simply (and correctly) followed established Supreme Court precedent, since, “to the extent that specific Offerings were backed by loans from the two originators whose loans backed [the certificates NECA bought], ‘NECA’s claims raise a sufficiently similar set of concerns to permit it to purport to represent Certificate-holders from those Offerings.’” In March, the Supreme Court, without comment, denied Goldman’s petition.
Since the Second Circuit revived NECA’s suit in September, the decision has already been cited positively in at least a half dozen district court cases against entities such as Lehman Bros., DLJ Mortgage Capital, Inc., Morgan Stanley, Credit Suisse, Bank of America, JPMorgan Chase, and Winstar, and in matters involving debt instruments as well as mortgage-backed securities. Victor Li, of the online publication The AmLaw Litigation Daily, noted that the ruling has had a powerful impact in the MBS litigation-heavy Second Circuit, including the Southern District of New York:
Two weeks after the decision came down, a judge in Central Islip resuscitated claims against JPMorgan Chase, finding that plaintiffs now had standing in 30 out of 33 MBS issuing trusts. In January, other federal judges in New York cited the decision in reinstating securities claims against Credit Suisse and Morgan Stanley, and also allowed a trustee’s liability suit against Bank of America and U.S. Bancorp to proceed. Earlier this month the Second Circuit ordered U.S. District Judge Deborah Batts to heed the decision when it revived a class action brought on behalf of investors in a $1.32 billion MBS offering underwritten and sold by Royal Bank of Scotland Group PLC, Wells Fargo & Co, and several other big banks.*
Likewise, on April 30, 2013, U.S. District Court Judge Harold Baer cited the decision in allowing plaintiffs to go ahead with claims against Royal Bank of Scotland over 14 MBS offerings valued at $25 billion after previously allowing them to pursue only two offerings.
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), cert. denied, __ U.S. __, 133 S. Ct. 1624 (2013).
*Victor Li, Supreme Court Nixes Goldman Sachs Appeal over MBS Investor Standing, The Litigation Daily, March 18, 2013, available here: