Federal Housing Finance Agency v. Royal Bank of Scotland Group PLC et al

Filing 61

RULING granting Plaintiff's Motion to Commence Discovery Pursuant to Rule 26 of the Federal Rules of Civil Procedure (Doc. No, 25 ). Signed by Judge Alvin W. Thompson on 08/17/2012. (Giering, A)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
--------------------------------x
FEDERAL HOUSING FINANCE AGENCY, :
AS CONSERVATOR FOR THE FEDERAL :
NATIONAL MORTGAGE ASSOCIATION
:
AND THE FEDERAL HOME LOAN
:
MORTGAGE CORPORATION,
:
:
Plaintiff,
:
:
V.
:
:
THE ROYAL BANK OF SCOTLAND
:
GROUP PLC, et al.,
:
:
Defendants.
:
--------------------------------x

Civ. No. 3:11-cv-01383(AWT)

ORDER RE MOTION TO COMMENCE DISCOVERY
The plaintiff, Federal Housing Finance Agency ("FHFA"),
brought this action as conservator for the Federal National
Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"), against Royal Bank of
Scotland Group PLC, RBS Holdings USA, Inc., RBS Securities, Inc.,
RBS Financial Products, Inc., RBS Acceptance, Inc., Financial
Asset Securities Corp., Joseph N. Walsh, Carol P. Mathis, Robert
J. McGinnis, John C. Anderson, and James M. Esposito, alleging,
inter alia, violations of the federal securities laws.

On

December 2, 2011, the defendants moved to dismiss the complaint,
and on March 2, 2012 they moved to dismiss the plaintiff's
amended complaint.
The Private Securities Litigation Reform Act ("PSLRA")

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provides that: "In any private action arising under this chapter,
all discovery and other proceedings shall be stayed during the
pendency of any motion to dismiss. . . ."
4(b)(3)(B).

15 U.S.C. § 78u-

The parties disagree as to whether this provision

applies to this action, and the plaintiff has filed a motion to
commence discovery.

The defendants contend that the PSLRA’s

automatic stay applies here because the plaintiff is bringing
private causes of action under the federal securities laws, and
is prosecuting this action as conservator for Fannie Mae and
Freddie Mac, which are private corporations rather than
government actors.

In the alternative, the defendants argue that

even if the automatic stay of discovery under the PSLRA did not
apply to this case, a stay should be granted under Federal Rule
of Civil Procedure 26(c).
For the reasons set forth below, the motion is being
granted.
Factual Background
Fannie Mae was established in 1938 as a federal agency and
was converted into a private corporation in 1968.

Freddie Mac

was created as an alternative to Fannie Mae to make the secondary
mortgage market more competitive and efficient.

"Both firms are

structured as private corporations, but they are federally
chartered and play an important role in the national housing
market by making it easier for home buyers to obtain loans."

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Judicial Watch, Inc. v. Fed. Hous. Fin. Agency, 646 F.3d 924, 926
(D.C. Cir. 2011).
In July 2008, in response to the crisis in the housing and
mortgage market, Congress passed the Housing and Economic
Recovery Act of 2008 ("HERA"), creating the FHFA.

See Pub. L.

No. 110–289 § 1101, 122 Stat. 2654 (codified at 12 U.S.C. §
4511).

The HERA granted the director of the FHFA conditional

authority to place regulated entities, including Fannie Mae and
Freddie Mac, into conservatorship and/or receivership "for the
purpose of reorganizing, rehabilitating, or winding up [their]
affairs."

12 U.S.C. § 4617(a); see also id. § 4616.

On

September 6, 2008, the Director of the FHFA placed Fannie Mae and
Freddie Mac under the FHFA's temporary conservatorship with the
objective of stabilizing the institutions so they could return to
their normal business operations.

In its capacity as conservator

of a regulated entity, the FHFA has "all rights, titles, powers,
and privileges of the regulated entity, and of any stockholder,
officer or director of such regulated entity with respect to the
regulated entity and the assets of the regulated entity."

12

U.S.C. § 4617(b)(2)(A)(i).
HERA included an explicit limitation the ability of courts
to review actions of FHFA in its capacity as conservator: "[N]o
court may take any action to restrain or affect the exercise of
powers or functions of the Agency as a conservator or a

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receiver."

12 U.S.C. § 4617(f).

See also Kuriakose v. Fed.

Hous. Loan Mortg. Co., 674 F. Supp. 2d 483, 493 (S.D.N.Y. 2009)
("The court lacks jurisdiction to adjudicate matters which may
restrict the FHFA’s ability to exercise these powers.").
This Action is Not a Private Action Under the PSLRA
The PSLRA provides that "[i]n any private action arising
under this chapter, all discovery and other proceedings shall be
stayed during the pendency of any motion to dismiss, . . . ."
(emphasis added).

15 U.S.C. § 78u-4(b)(3)(B).

Congress enacted

the PSLRA to address "a perceived need to deter strike suits
wherein opportunistic private plaintiffs file securities fraud
claims of dubious merit in order to exact large settlement
recoveries."

Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000).

In Congress’s view, such actions "unnecessarily increase the cost
of raising capital and chill corporate disclosure."

S. Rep.,

104-98 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 683.

Congress

also enacted the PSLRA after "identif[ying] ways in which the
class-action device was being used to injure 'the entire U.S.
economy.'"

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,

547 U.S. 71, 81 (2006) (quoting H.R. Rep. No. 104-369 (1995), at
31).

"In response to perceived abuse of the class action device

in litigation involving nationally traded securities, Congress
enacted the Private Securities Litigation Reform Act ('PSLRA'),
15 U.S.C. §§ 77z-1; 78u-4."

Backus v. Connecticut Cmty. Bank,

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N.A., Civ. No. 3:09-CV-1256, 2009 WL 5184360 (D. Conn. Dec. 23,
2009).
The plaintiff observes, correctly, that these concerns are
not implicated here.

In this case, the plaintiff is a government

agency, not a private party, and this is not a class action.
Rather, FHFA is bringing this action pursuant to its
Congressional authorization under HERA to pursue claims as
conservator for Fannie Mae and Freddie Mac.

Therefore, the

concerns motivating Congress in enacting the PSLRA are not
present here.
The defendants contend that, nonetheless, FHFA has brought a
"private action" under the PSLRA because the FHFA has asserted
"private causes of action" under the Securities Act.

However,

courts have refused to apply the PSLRA to causes of action that
are available to private plaintiffs in cases where the suit was
filed by the SEC.

See In re Reserve Fund Sec. & Derivative

Litig., 732 F. Supp. 2d 310, 317-19 (S.D.N.Y. 2010) (holding that
when the SEC brought suit under Section 10(b) and Rule 10b-5, the
PSLRA did not apply to the action); Sec. & Exch. Comm'n v.
Pentagon Capital Mgmt. PLC, 612 F. Supp. 2d 241, 263-64 (S.D.N.Y.
2009) (same).
agency.

Like the SEC, the FHFA is an independent federal

See 12 U.S.C. § 4511(a) (providing that the FHFA is an

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"independent agency of the Federal Government").1
The holdings in these cases reinforces the conclusion,
suggested by discussion in numerous other cases, that the
material distinction for purposes of determining whether an
action is a "private action" under the PSLRA is the nature of the
plaintiff, not the nature of the causes of action.

In Tellabs,

Inc. v. Makor Issues & Rights, Ltd., a case decided after the
enactment of the PSLRA, the Court noted: "This Court has long
recognized that meritorious private actions to enforce federal
antifraud securities laws are an essential supplement to criminal
prosecutions and civil enforcement actions brought, respectively,
by the Department of Justice and the Securities and Exchange

1

See also, e.g., Nevada v. Countrywide Home Loans Servicing,
LP, No. 3:10-cv-419-RCJ-PAL, 2011 WL 4356507, at *5 (D. Nev.
Sept. 16, 2011) ("[T]he Court finds that the Federal Housing
Finance Agency ('FHF') is an independent agency of the federal
government who has authority over Fannie Mae."); Leon Cnty.,
Florida v. Fed. Hous. Fin. Agency, Case No. 4:10CV436-RH/WCS,
2011 WL 4620866, at *1 (N.D. Fla. Sept. 30, 2011) ("The Federal
Housing Finance Agency ('FHFA') is a federal agency that has
duties both as a regulator, and, since 2008, as the conservator
of the Federal National Mortgage Association Corporation ('Fannie
Mae') and Federal Home Loan Mortgage Corporation ('Freddie
Mac')"); In re Fannie Mae 2008 Securities Litigation, Nos. 08
Civ. 7831(PAC), 09 Civ. 1352(PAC), 2009 WL 4067266, at *1
(S.D.N.Y. Nov. 24, 2009) ("FHFA is an agency of the United States
Government and acts as the conservator for Fannie Mae.");
Williams v. Timothy F. Geithner, Civil No. 09-1959 ADM/JJG, 2009
WL 3757380, at *3 (D. Minn. Nov. 9, 2009) ("FHFA is a federal
agency that supervises and regulates housing finance and also
serves as the Conservator for Fannie Mae and Freddie Mac."); In
re Fed. Home Loan Mortg. Corp. Derivative Litig., 643 F. Supp. 2d
790, 791 (E.D.Va. 2009) (describing FHFA as "the federal agency
acting as conservator of Freddie Mac pursuant to the Housing and
Economic Recovery Act of 2008").
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Commission (SEC)."
distinction.

551 U.S. 308, 313 (2007).

This was not a new

See Bateman Eichler, Hill Richards, Inc. v. Berner,

472 U.S. 299, 310 (1985) ("[W]e repeatedly have emphasized that
implied private actions provide 'a most effective weapon in the
enforcement' of the securities laws and are 'a necessary
supplement to Commission action.'") (quoting J.I. Case Co. v.
Borak, 377 U.S. 426, 432 (1964)); Aaron v. Sec. & Exch. Comm'n,
446 U.S. 680, 718, n.9 (1980) (Blackmun, J, concurring in part
and dissenting in part) ("In reliance on the different purposes
of Commission enforcement proceedings and private actions,
Congress enacted § 21(g) of the Act, §

15 U.S.C. 78u(g), which

provides that, absent consent from the Commission, private
actions may not be consolidated with Commission proceedings.");
Parklane Hosiery Co. v. Shore, 439 U.S. 322, 337 n.24 (1979)
("The Securities Exchange Act of 1934 provides for prompt
enforcement actions by the SEC unhindered by parallel private
actions.

15 U.S.C. § 78u(g)."); Chris-Craft Indus., Inc. v.

Piper Aircraft Corp., 480 F.2d 341, 356 (2d Cir. 1973) ("In J.I.
Case Co. v. Borak, 377 U.S. 426 (1964), the Supreme Court
emphasized that private actions provide 'a necessary supplement
to Commission action' and that 'the possibility of civil damages
or injunctive relief serves as a most effective weapon in the
enforcement' of the securities laws.") (quoting Borak, 377 U.S.
at 432); Sec. & Exch. Comm'n v. Texas Gulf Sulphur Co., 401 F.2d

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833, 854 (2d Cir. 1968) ("[W]hether the case before us is treated
solely as an SEC enforcement proceeding or as a private action,
proof of a specific intent to defraud is unnecessary.") (footnote
omitted).
Also, in SEC v. Prater, which was an enforcement action, the
court concluded that "[s]ince actions brought by the SEC are not
considered 'private litigation,' the standard imposed in the
PSLRA for pleading scienter does not apply to the SEC."
Supp. 2d 210, 215 (D. Conn. 2003).

296 F.

The court observed that "the

securities laws apply differently to the SEC than they do to a
private plaintiff, because Congress designated the SEC as 'the
primary enforcement agency for the securities laws.'"

Id.

(quoting Sec. & Exch. Comm'n v. Rana Research, 8 F.3d 1358, 1364
(9th Cir. 1993)).

Other courts in the Second Circuit have

reached the same conclusion.

See, e.g., In re Reserve Fund. Sec.

& Derivative Litig., 732 F. Supp. 2d 310, 318 (S.D.N.Y. 2010)
("The PSLRA applies only to private actions, not to actions filed
by the Commission."); Sec. & Exch. Comm'n v. Pentagon Capital
Mgmt. PLC, 612 F. Supp. 2d 241, 263-64 (S.D.N.Y. 2009) ("By the
terms of the PSLRA, its heightened pleading standard does not
apply to actions brought by the SEC."); Sec. & Exch. Comm'n v.
Dunn, 587 F. Supp. 2d 486, 501 (S.D.N.Y. 2008) ("Any argument
that Congress intended to apply the provisions of the PSLRA to
SEC enforcement actions ignores the statute’s plain language.").

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The conclusion that the material factor is the nature of the
plaintiff, and not the nature of the cause of action, is
consistent with the fact that during the period since the HERA
established the FHFA, courts have noted how the HERA afforded the
FHFA with several tools unavailable to private litigants.

For

example, "Congress explicitly provided a taxation exemption to
the FHFA when acting as conservator. . . . Congress also exempted
the FHFA, when acting as a conservator, from any penalties and
fines."

Nevada v. Countrywide Home Loan Servicing, LP, No. 3:10-

cv-419-RCJ-PAL, 2011 WL 4356507, at *5 (D. Nev. Sept. 16, 2011).
See also 12 U.S.C. § 4617(f) ("[N]o court may take any action to
restrain or affect the exercise of powers or functions of the
Agency as a conservator or a receiver."); Nevada v. Countrywide
Home Loans Servicing, LP, No. 3:10-cv-419-RCJ-PAL, 2011 WL
484298, at *3 (D. Nev. Feb. 4, 2011) ("[T]he court finds that
FHFA, as conservator for Fannie Mae and as an intervenor in this
case, is a federal agency with the right to remove.").
The defendants also argue, relying on O'Melveney & Myers v.
Fed. Deposit Ins. Corp., 512 U.S. 79, 85 (1994) (in case where
FDIC sued as receiver, the Court noted that "the FDIC is not the
United States, and even if it were we would be begging the
question to assume that it was asserting its own rights rather
than, as receiver, the rights of [the regulated entity]."), that
"[w]hen a federal agency files suit in its capacity as

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conservator or receiver of a regulated entity, it steps into the
regulated entity's shoes."

(Defs.' Mem. Opp'n Pl.'s Mot. to

Commence Disc. (Doc. No. 31), 13.)

However, the fact that a

federal agency has stepped into the shoes of a person who would
be a private plaintiff does not convert the federal agency into a
private plaintiff and the action into a "private action."

It

simply makes it a federal agency standing in the shoes of a
person who would be a private plaintiff.

This conclusion is

supported by the fact that courts have treated federal agencies
acting in their capacities as receivers or conservators
differently from private litigants.

See, e.g., Fed. Deposit Ins.

Corp. v. Meyer, 510 U.S. 471, 483 (1994) (holding that the FDIC
and its statutory predecessor could only be sued because they had
"waive[d] the agency's sovereign immunity"); Stevens v. Fed.
Deposit Ins. Corp., No. 11-CV-00841, 2011 WL 3925087, at *3 n.3
(C.D. Cal. Aug. 25, 2011) ("This court disagrees with plaintiff's
assertion that this immunity waiver makes FDIC something other
than a bona fide agency of the United States; indeed, if it were
not a bona fide government agency, no waiver of immunity would
have been required.

Although 'the FDIC as receiver 'steps into

the shoes' of the failed' bank, this does not make the FDIC as a
whole any less a government agency.") (quoting O’Melveny, 512
U.S. at 86).
Therefore, the court concludes that FHFA’s suit here is not

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a "private action" under the PSLRA.
The Defendants Have Not Met Their Burden Under Rule 26(c)
In the alternative, the defendants argue that even if the
automatic stay of discovery under the PSLRA did not apply to this
case, a stay should be granted under Federal Rule of Civil
Procedure 26(c).

Under Rule 26(c), "the party seeking a

protective order has the burden of showing that good cause exists
for issuance of that order," Gambale v. Deutsche Bank AG, 377
F.3d 133, 142 (2d Cir. 2004) (quotation marks omitted), a burden
that requires "a strong showing."

Moss v. Hollis, CIV. No. B-90-

177 (PCD), 1990 WL 138531, at *1 (D. Conn. June 29, 1990).

"The

pendency of a dispositive motion is not, in itself, an automatic
ground for a stay."

Morien v. Munich Reinsurance Am., Inc., 270

F.R.D. 65, 67 (D. Conn. 2010).

The court considers several

factors when determining whether a stay of discovery is
appropriate: "1. Whether the defendant has made a strong showing
that the plaintiff’s claim is unmeritorious; 2. The breadth of
discovery and the burden of responding to it; and 3. The risk of
unfair prejudice to the party opposing the stay."

Morien, 270

F.R.D. at 67.
After a review of all of the papers in this case, the court
concludes that the defendants have not met their burden with
respect to a stay of discovery for substantially the reasons set
forth by the plaintiff at pages 9 and 10 of its reply memorandum.

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(See Reply Mem. Supp. Pl.'s Mot. to Commence Disc. Pursuant to
Rule 26 of the Fed. R. Civ. P. (Doc. No. 34), 9-10.)

Therefore,

the court declines to order a stay under Fed. R. Civ. P. 26(c).
Conclusion
Based on the foregoing, the Plaintiff’s Motion to Commence
Discovery Pursuant to Rule 26 of the Federal Rules of Civil
Procedure (Doc. No. 25) is hereby GRANTED.
The parties shall promptly make their initial disclosures
and have a status conference with the court's parajudicial
officer.
It is so ordered.
Dated this 17th day of August 2012 at Hartford, Connecticut.
/s/
Alvin W. Thompson
United States District Judge

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