Federal Housing Finance Agency v. Deutsche Bank AG et al
Filing
140
ORDER granting in part and denying in part 61 Motion to Dismiss. (Signed by Judge Denise L. Cote on 11/12/12) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
FEDERAL HOUSING FINANCE AGENCY, etc.,
:
:
Plaintiff,
:
-v:
:
DEUTSCHE BANK AG, et al.,
:
:
Defendants.
:
:
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11 Civ. 6192 (DLC)
OPINION & ORDER
APPEARANCES:
For Plaintiff Federal Housing Finance Agency:
Philippe Z. Selendy
Kathleen M. Sullivan
Adam M. Abensohn
Jordan A. Goldstein
Quinn Emanuel Urquhart & Sullivan, LLP
51 Madison Avenue, 22nd Floor
New York, New York 10010-1601
For Defendants:
Thomas C. Rice
David J. Woll
Alan Turner
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
DENISE COTE, District Judge:
This is one of sixteen actions currently before this Court
in which the Federal Housing Finance Agency (“FHFA” or “the
Agency”), as conservator for Fannie Mae and Freddie Mac
(together, the “Government Sponsored Enterprises” or “GSEs”),
alleges misconduct on the part of the nation’s largest financial
institutions in connection with the offer and sale of certain
mortgage-backed securities purchased by the GSEs in the period
between 2005 and 2007.1
As amended, the complaints in each of
the FHFA actions assert that the Offering Documents used to
market and sell Residential Mortgage-Backed Securities (“RMBS”)
to the GSEs during the relevant period contained material
misstatements or omissions with respect to the owner-occupancy
status, loan-to-value (“LTV”) ratio, and underwriting standards
that characterized the underlying mortgages.
On the basis of
these allegations, the complaints assert claims under Sections
11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C.
§§ 77k, l(a)(2), o; the Virginia Securities Act, VA Code Ann.
§ 13.1-522(A)(ii), (C); and the District of Columbia Securities
1
The sixteen cases are: FHFA v. UBS Americas, Inc., et al., 11
Civ. 5201 (DLC); FHFA v. JPMorgan Chase & Co., et al., 11 Civ.
6188 (DLC); FHFA v. HSBC North America Holdings, Inc., et al.,
11 Civ. 6189 (DLC); FHFA v. Barclays Bank PLC, et al., 11 Civ
6190 (DLC); FHFA v. Deutsche Bank AG, et al., 11 Civ. 6192
(DLC); FHFA v. First Horizon National Corp., et al., 11 Civ 6193
(DLC); FHFA v. Bank of America Corp., et al., 11 Civ. 6195
(DLC); FHFA v. Citigroup Inc., et al., 11 Civ. 6196 (DLC); FHFA
v. Goldman, Sachs & Co., et al., 11 Civ. 6198 (DLC); FHFA v.
Credit Suisse Holdings (USA), Inc., et al., 11 Civ. 6200 (DLC);
FHFA v. Nomura Holding America, Inc., et al., 11 Civ. 6201
(DLC); FHFA v. Merrill Lynch & Co., Inc., et al., 11 Civ. 6202
(DLC); FHFA v. SG Americas, Inc., et al., 11 Civ. 6203 (DLC);
FHFA v. Morgan Stanley, et al., 11 Civ. 6739 (DLC); FHFA v. Ally
Financial Inc., et al., 11 Civ. 7010 (DLC); FHFA v. General
Electric Co., et al, 11 Civ. 7048 (DLC). The FHFA has also
brought two similar actions, which are pending in federal courts
in California and Connecticut. See FHFA v. Countrywide
Financial Corp., et al., No. 12 Civ. 1059 (MRP) (C.D. Cal.);
FHFA v. Royal Bank of Scotland, No. 11 Civ. 1383 (AWT) (D.
Conn).
2
Act, D.C. Code § 31-5606.05(a)(1)(B), (c).
In six of the cases,
including this one, the Agency has also asserted claims of fraud
and aiding and abetting fraud against the entity defendants
under the common law of New York State (the “Fraud Claim
Cases”).
As pleaded, these fraud claims attach to each of the
three categories of misstatements upon which the plaintiff’s
securities law claims are based.
The Court has already issued several Opinions addressing
motions to dismiss in other cases brought by the FHFA.2
Familiarity with those Opinions is assumed; all capitalized
terms have the meanings previously assigned to them.
Following this Court’s decision of the motion to dismiss in
FHFA v. UBS, discovery began in all of the coordinated cases.
Briefing of defendants’ motions to dismiss in the remaining
fifteen cases has occurred in two phases, with the motions in
this case and the other Fraud Claim Cases becoming fully
submitted on October 11, 2012.
The motions in the remaining
nine cases were fully submitted November 9, 2012.
Depositions
are to begin in all cases in January 2013, and all fact and
2
Federal Housing Finance Agency v. UBS Americas, Inc. et al.,
858 F. Supp. 2d 306 (S.D.N.Y. 2012) (“UBS I”); Federal Housing
Finance Agency v. UBS Americas, Inc., et al., No. 11 Civ. 5201
(DLC), 2012 WL 2400263 (S.D.N.Y. June 26, 2012) (“UBS II”);
Federal Housing Finance Agency v. JPMorgan Chase & Co., et al.,
No. 11 Civ. 6188 (DLC), 2012 WL 5395646 (S.D.N.Y. Nov. 5, 2012)
(“Chase”); FHFA v. Merrill Lynch & Co., No. 11 Civ. 6202 (DLC),
2012 WL 535118 (S.D.N.Y. Nov. 8, 2012) (“Merrill”).
3
expert discovery in this matter, 11 Civ. 6192 (DLC), must be
concluded by December 6, 2013.
Trial in this matter is
scheduled to begin on September 29, 2014, as part of the third
tranche of trials in the coordinated actions.
DISCUSSION
This case concerns RMBS Certificates allegedly purchased by
the GSEs between September 2005 and October 2007.
Each of the
GSE Certificates pertains to one of 40 securitizations offered
for sale pursuant to one of eight shelf-registration statements.
The lead defendant is Deutsche Bank AG.
Various corporate
affiliates of Deutsche Bank and associated individuals are also
defendants.
Deutsche Bank affiliates served as lead underwriter
for all 40 of the securitizations at issue, and as sponsor and
depositor for 35 of them.
Each individual defendant signed one
or more of the Offering Documents.
Defendants’ motion presses a number of arguments that are
also pressed by other defendants in these coordinated actions,
some of which have been addressed by this Court’s previous
Opinions.
The Court hereby adopts by reference the reasoning
and, to the extent they are relevant here, the rulings of those
prior Opinions.
The motion to dismiss devotes particular attention to the
claim that the FHFA’s scienter allegations are insufficient to
4
support its fraud claims.
These defendants’ footprint in the
mortgage-backed securities market differed somewhat from that of
the defendants in Chase.
Despite this fact and the different
allegations that flow from it, however, the Amended Complaint
fails and survives in similar fashions.
As in Chase, the facts
alleged in the Amended Complaint are sufficient to plead fraud
with respect to the Offering Materials’ representations
regarding mortgage-underwriting standards.
With respect to the
scienter component of FHFA’s fraud claims based on LTV and
owner-occupancy information, however, the Amended Complaint
relies entirely on the disparity between the statistics reported
by the defendants and the results of the Agency’s own analysis.
Without additional support, this disparity is insufficient to
allege fraudulent intent with the specificity required by Rules
8(a) and 9(b), Fed. R. Civ. P.
Accordingly, the defendants’
motion to dismiss is granted with respect to the plaintiff’s
fraud claims based on LTV and owner-occupancy reporting.
The defendants also raise several arguments that were not
fully addressed by this Court’s prior Opinions.
These arguments
will be addressed in turn.
I.
Reliance on Term Sheets and Free Writing Prospectuses
Defendants argue that the FHFA’s fraud claims must be
dismissed because the Amended Complaint does not allege “that
any representative of either GSE read or relied on” the
5
Prospectus Supplements, which are alleged to have contained most
of the misrepresentations, “before deciding to purchase the
Certificates.”
As described in the Amended Complaint, the GSEs
purchased the securities at issue on the basis of term sheets
and free writing prospectuses (“Preliminary Materials”) that
identified the originators of the underlying loans and contained
“critical data as to the Securitizations, including with respect
to anticipated credit ratings by the credit rating agencies,
loan-to-value and combined loan-to-value ratios for the
underlying collateral, and owner occupancy statistics.”
These
Preliminary Materials also referred to registration statements
and base prospectuses on file with the SEC, which included
places for assurances regarding mortgage originators’ adherence
to their stated underwriting guidelines.3
This information was
subsequently incorporated into Prospectus Supplements that the
3
Consistent with SEC Rule 344, the term sheets and free writing
prospectuses included a legend that substantially provided, in
relevant part:
The issuer has filed a registration statement
(including a prospectus) with the SEC for the offering
to which this term sheet relates. Before you invest,
you should read the prospectus in that registration
statement and other documents the issuer has filed
with the SEC for more complete information about the
issuer and this offering.
See 17 C.F.R. § 230.433(c)(2)(i) (mandating such language in
free writing prospectuses); see also Securities Offering Reform,
SEC Release No. 75, 2005 WL 1692642, at *48 (July 19, 2005)
(“Preliminary term sheets and other descriptive material
containing only the terms of the securities or the offering
. . . , whether or not filed, are . . . free writing
prospectuses.”).
6
GSEs received after their purchases of the securitizations
closed.
Defendants maintain that because the GSEs did not receive
or read the final prospectus supplements until after closing,
they could not reasonably have relied on the information
contained therein in deciding to purchase the securities.
Defendants also argue that, to the extent the Agency’s fraud
claims rely on representations made in Preliminary Materials
that were available to the GSEs prior to their purchase of the
securities, they must be dismissed (1) because the Amended
Complaint does not quote from or cite to these materials, and
(2) these materials contained certain disclaimers regarding the
accuracy of the information contained therein.
These arguments are meritless.
Although it is true that
the Amended Complaint focuses primarily on statements that were
made in the Prospectus Supplements to support FHFA’s securities
law claims, it also alleges that the data “incorporated into the
Prospectus Supplements” was the very same data included in the
Preliminary Materials provided to the GSEs.
The plaintiff’s
allegations regarding the falsity of the Prospectus Supplements
are therefore sufficient to plead the falsity of overlapping
information in the Preliminary Materials as well.
Nor are defendants correct that disclaimers in the term
sheets and free writing prospectuses preclude the plaintiff from
7
pleading reasonable reliance as a matter of law.
Although the
Preliminary Materials stated that the information contained
therein was “preliminary” and “subject to change,” such
statements are not disclaimers of reliability; to the contrary,
the use of these materials to market and sell the Certificates
suggests that defendants fully intended the GSEs to rely on the
representations they contained.
In any case, FHFA’s complaint
is not that the information in the Preliminary Materials was
inconsistent with that in the final Prospectus Supplements but
that both sets of materials contained the same, inaccurate,
information.
Defendants also point to the fact that the Preliminary
Materials instructed investors to “read the prospectus . . . and
other documents . . . filed with the SEC” before investing.
But, their selective elision of the verb “has,” see supra note
3, obscures the fact that this SEC-mandated language refers to
documents already on file at the time the term sheets were
circulated, not to any final Prospectus Supplement that may be
filed in the future.
Nor does the fact that the final
Prospectus Supplements told investors to “rely only on
information contained in this document” establish as a matter of
law that the GSEs’ previously concluded purchases could not have
been made in reliance on representations in the Preliminary
8
Materials that were materially identical to those in the final
Prospectus Supplements.4
II.
Law Applicable to Plaintiff’s Blue Sky Claims
Next, defendants assert that the plaintiff’s Blue Sky
claims are governed by New York’s Martin Act, not the Virginia
and D.C. securities statutes.
Defendants cite this Court’s
conclusion in UBS I that New York rather than D.C. and Virginia
law governed FHFA’s common law negligent misrepresentation
claims and argue that a similar analysis should apply here.
The premise of this argument -- that choice-of-law analysis
is appropriate where a defendant’s conduct is arguably governed
by the statutes of multiple jurisdictions -- is debatable.
FHFA’s Blue Sky claims do not arise under the common law but are
instead creatures of statute.
Virginia and the District of
Columbia are indisputably independent sovereigns, distinct from
the State of New York and capable of statutorily proscribing
conduct that touches or concerns them.
The plaintiff asserts
claims under Virginia and District of Columbia law because these
jurisdictions host the headquarters of Freddie Mac and Fannie
4
Defendants’ reliance on language in the Prospectus Supplements
notifying investors that the offering entities had “not
authorized anyone to provide you with different information,” is
likewise unavailing both because, as noted, the information in
the Preliminary Materials was not different and because the
information they contained was provided by defendants
themselves, not anyone requiring authorization to speak on their
behalf.
9
Mae, respectively.
Notably, defendants have made no argument
that the conduct at issue is beyond the legislative authority of
either jurisdiction.
See Hartford Fire Ins. Co. v. California,
509 U.S. 764, 813 (1993) (Scalia, J., dissenting) (defining
legislative jurisdiction as “the authority of a state to make
its law applicable to persons or activities” (citation
omitted)); see also Allstate Ins. Co. v. Hague, 449 U.S. 302,
308 (1981) (requiring a state to have “significant contacts”
with an activity in order for the states law to be applicable).
In other contexts, it is uncontroversial that the
securities regulations of competing sovereigns may be
simultaneously applied to a single set of facts.
For example,
as in this case, plaintiffs regularly assert state and federal
securities claims simultaneously.
Defendants do not suggest,
however, that such claims create a conflict that must be
resolved through preemption or choice-of-law analysis.
Nor
could they. “It is well-settled that federal law does not enjoy
complete preemptive force in the field of securities.”
Baker,
Watts & Co. v. Miles & Stockbridge, 876 F.2d 1101, 1107 (4th
Cir. 1989).
Section 16 of the Securities Act explicitly
provides that “[t]he rights and remedies provided by this
subchapter shall be in addition to any and all other rights and
remedies that may exist at law or in equity.” 15 U.S.C. § 77p.
The Virginia and D.C. Blue Sky statutes contain nearly identical
10
disclaimers.
5606.05(j).
See VA Code Ann. § 13.1-522(G); D.C. Code § 31And although no such language appears in New York’s
Martin Act, a recent holding of the New York Court of Appeals
that “an injured investor may bring a common-law claim (for
fraud or otherwise) that is not entirely dependent on the Martin
Act for its viability,” Assured Guar. v. J.P. Morgan Inv. Mgmt.,
962 N.E.2d 765, 770 (N.Y. 2011), suggests a fortiori that the
Martin Act does not purport to bar claims that have been
statutorily authorized by a co-equal sovereign.
For these
reasons, the majority of jurisdictions that have considered the
issue have rejected defendants’ suggestion that a plaintiff may
not challenge a single course of conduct under the Blue Sky Laws
of multiple jurisdictions simultaneously.
See In re Countrywide
Fin. Corp. Mortg.-Backed Sec. Litig., Nos. 2:11–ML–02265–MRP,
2:11–CV–10414 MRP, 2012 WL 1322884, at *2 (C.D. Cal. Apr. 16,
2012) (collecting cases).
Even assuming that a choice of law analysis is appropriate,
however, defendants are incorrect that plaintiff’s claims are
governed by New York’s Martin Act.
As in UBS I, the plaintiff’s
state-law claims are governed by New York choice-of-law
principles pursuant to Klaxon Co. v. Stentor Elec. Mfg. Co., 313
U.S. 487, 496–97 (1941).
Under New York’s interest analysis
approach, the first step in addressing any choice-of-law issue
is to determine whether a “true conflict” exists between the
11
interests of the jurisdictions with respect to the particular
legal issue.
If, after examining “the policies and purposes
sought to be vindicated by the conflicting laws,” it appears
that one jurisdiction has no interest in applying its law, that
jurisdiction must give way.
In re Crichton’s Estate, 228 N.E.
2d 799, 806 n.8 (N.Y. 1967).
Here, defendants posit a conflict between New York’s Martin
Act, which provides no private cause of action for violations of
its provisions, and the securities statutes of Virginia and the
District of Columbia, which do permit private suits.
As already
noted, however, the New York Court of Appeals has recently made
clear that, although the Martin Act did not create a private
right of action to enforce its provisions, it does not preclude
a private plaintiff from bringing a securities-related claim
rooted in some other source of law.
Assured Guar. v. J.P.
Morgan Inv. Mgmt., 962 N.E.2d at 770.
Thus, because New York
has no interest in precluding claims like those brought by the
plaintiff, even if defendants were correct that choice-of-law
analysis is appropriate here, their effort to obtain dismissal
of the Blue Sky claims would fail.
III.
Successor Liability of DB Products/DBPS
Finally, the motion argues that defendant DB Products is
not liable as a successor to MortgageIt, which served as
depositor for certain of the securitizations and originated some
12
of the underlying mortgages.
The Amended Complaint alleges that
"Defendant DB Products is liable as successor-in-interest to
[MortgageIT] for the misstatements and omissions in that
Registration Statement under Section 11 of the Securities Act."
Similar allegations are made in support of its Virginia
Securities Law and common law fraud claims.
Defendants dispute
whether DB Products is a legal successor to MortgageIT, citing
the terms of the merger agreement that led to the acquisition of
the company by the Deutsche Bank group.
But this argument turns
on an issue of fact that is inappropriate for resolution on a
motion to dismiss.
Defendants remain free to raise the issue of
DB Products' successor liability on summary judgment.
CONCLUSION
The defendants' July 13 motion to dismiss is granted with
respect to the plaintiff's claims of owner-occupancy and LTVratio fraud and denied in all other respects.
SO ORDERED:
Dated:
New York, New York
November 12, 2012
United S
13
Judge
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