Federal Housing Finance Agency as Conservator for the Federal National Mortgage Association et al v. Goldman, Sachs & Co. et al
OPINION AND ORDER granting in part and denying in part 76 Motion to Dismiss. (Signed by Judge Denise L. Cote on 11/12/12) (SAH)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
FEDERAL HOUSING FINANCE AGENCY, etc.,
GOLDMAN, SACHS & CO., et al.,
11 Civ. 6198 (DLC)
OPINION & ORDER
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
Richard H. Klapper
Michael T. Tomaino, Jr.
Jordan T. Razza
125 Broad Street
New York, NY 10004-2498
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
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.
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
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.
are to begin in all cases in January 2013, and all fact and
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. 7188 (DLC), 2012 WL 5395646 (S.D.N.Y. Nov. 5, 2012)
(“Chase”); FHFA v. Merrill Lynch & Co., No. 11 Civ. 6202 (DLC),
2012 WL 5351188 (S.D.N.Y. Nov. 8, 2012) (“Merrill”); FHFA v.
Deutsche Bank, No. 11 Civ. 6192 (DLC), slip op. (Nov. 12, 2012).
expert discovery in this matter, 11 Civ. 6198 (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 these coordinated actions.
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 Goldman Sachs & Co.
affiliates of Goldman Sachs and associated individuals are also
Goldman Sachs affiliates served as lead underwriter
for all 40 of the securitizations at issue, as sponsor for 36 of
them, and as depositor for 35 of those.
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
The Court hereby adopts by reference the reasoning
and, to the extent they are relevant here, the rulings of those
All capitalized terms have the meanings
previously assigned to them.
Adequacy of Fraud Allegations
As in other cases filed by this plaintiff, defendants’
motion to dismiss devotes particular attention to the adequacy
of the FHFA’s allegations in support of its fraud claims.
sure, each of these coordinated actions must be considered on
its own bottom.
The roles of these defendants in the RMBS
securitization process and their familiarity with it differ from
those of defendants in other cases in material respects.
plaintiff’s allegations in support of its fraud claims differ
Nonetheless, an independent review of the
plaintiff’s allegations in this case compels an outcome similar
to those this Court has reached in previous Opinions in this
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
With respect to the scienter component of FHFA’s
fraud claims based on LTV and owner-occupancy information,
however, the Amended Complaint relies almost entirely on the
disparity between the statistics reported by the defendants and
the results of the Agency’s own analysis.
As explained in
previous Opinions, 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.
WL 5451188, at *2.3
Accordingly, the defendants’ motion to
dismiss is granted with respect to the plaintiff’s fraud claims
based on LTV and owner-occupancy reporting.
Scope of Common Law Fraud Liability
The motion to dismiss raises a single issue that has not
been addressed in prior Opinions in this litigation.
argue that FHFA’s fraud claims against Goldman Sachs must be
dismissed with respect to the four securitizations for which
Goldman acted only as an underwriter, because it cannot be said
that the company exercised ultimate control over the contents of
the Offering Documents that it used to solicit the GSEs’
purchase of the securities.
and legally dubious.
This proposition is both factually
As a factual matter, Goldman’s assertion
that it lacked control over the contents of the prospectus
supplements is difficult to square with the fact that the bank’s
name is prominently displayed on each of them, at bottom of the
cover page and set off from the surrounding text.
As a legal
matter, New York law imposes broad primary liability for fraud.
Directors and officers, for example, “may be held individually
The Amended Complaint seeks to buttress its showing of scienter
with regard to LTV representations in particular by alleging
that Goldman knew of the falsity of the underlying appraisals by
virtue of its role as a sponsor and depositor of many
securitizations, which allegedly offered it a “unique window
into the quality of the underlying loans.” But the plaintiff
pleads no facts to establish the Goldman employees knew
specifically of appraisal problems at the originators.
liable if they participated in or had knowledge of the fraud,
even if they did not stand to gain personally.”
Better Homes Depot, Inc., 760 N.E.2d 1274, 1278 (N.Y. 2001).
Defendants argue, however, that a recent decision by the Supreme
Court addressing the scope of liability under SEC Rule 10(b)-5
supports their argument.
In Janus Capital Group, Inc. v. First Derivative Traders,
131 S. Ct. 2296 (2011), the Supreme Court considered whether an
investment advisor could be held liable in a private cause of
action under SEC Rule 10(b)-5 for statements included in a
prospectus it prepared on behalf of its client mutual fund.
rule prohibits “mak[ing] any untrue statement of a material
fact” in connection with the purchase or sale of securities.
CFR § 240.10b–5 (2010).
A defendant’s liability thus turns, in
part, on whether he “made” the material misstatements at issue
within the meaning of the rule.
In concluding that the
investment advisor could not be said to have “made” the
statements included in the challenged prospectus, the Court
[f]or purposes of Rule 10b–5, the maker of a statement
is the person or entity with ultimate authority over
the statement, including its content and whether and
how to communicate it. Without control, a person or
entity can merely suggest what to say, not “make” a
statement in its own right. One who prepares or
publishes a statement on behalf of another is not its
maker. . . . Even when a speechwriter drafts a
speech, the content is entirely within the control of
the person who delivers it. And it is the speaker who
takes credit--or blame--for what is ultimately said.
Janus Capital, 131 S. Ct. at 2302.
The Court’s avowedly “narrow” holding with regard to the
scope of liability under Rule 10(b)-5 was driven by a number of
considerations that are inapplicable to common law fraud claims
like those asserted here.
First, the Court emphasized
repeatedly that its decision was compelled, in part, by
“[c]oncerns with the judicial creation of a private cause of
action,” which require giving “narrow dimensions” to private
rights under Rule 10(b)-5.
New York’s fraud cause of
action, however, is not a judicial gloss on a legislative
enactment, but rather a right that arises out of the common law
unencumbered by the separation-of-powers concerns that counsel
judicial caution in the context of Rule 10(b)-5.
For similar reasons, the Supreme Court’s conclusion that
“[o]ne who prepares or publishes a statement on behalf of
another is not its maker,” reached after a rigorous survey of
dictionary definitions, id. 2302-03, is of little relevance
here, where there is no statutory text to parse.
York courts sometimes omit the term “made” altogether when
reciting the elements of common law fraud.
New York University
v. Continental Ins. Co., 662 N.E.2d 763, 769 (N.Y. 1995).
The holding in Janus was also driven by the fact that “[a]
broader reading of ‘make,’ including persons or entities without
ultimate control over the content of a statement, would
substantially undermine” Supreme Court precedent holding that
Rule 10b–5's private right of action does not include suits
against aiders and abettors.
Janus, 131 S. Ct. at 2302 (citing
Central Bank of Denver, N.A. v. First Interstate Bank of Denver,
N. A., 511 U.S. 164 (1994)).
But no such precedent exists under
New York law; to the contrary, the availability of aiding and
abetting liability in common law fraud actions is well
See, e.g., Stanfield Offshore Leveraged Assets,
Ltd. v. Metropolitan Life Ins. Co., 883 N.Y.S.2d 486, 489 (App.
In light of these distinctions, there is no reason to
believe that the Supreme Court’s holding in Janus will cause New
York to retreat from its long-held position regarding the scope
of common law fraud liability.
Given this conclusion, the
Agency has adequately pleaded a fraud claim against Goldman
Sachs as an underwriter even without an allegation that Goldman
Sachs had “ultimate authority” over the contents of the Offering
Documents for the four securitizations.
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.
New York, New York
November 12, 2012
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