Federal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Coporation v. Ally Financial Inc. et al
ORDER granting in part and denying in part 136 Motion to Dismiss; granting in part and denying in part 139 Motion to Dismiss; granting in part and denying in part 142 Motion to Dismiss; granting in part and denying in part 145 Motion to Dismiss; granting in part and denying in part 147 Motion to Dismiss. (Signed by Judge Denise L. Cote on 12/19/12) (SAH)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
FEDERAL HOUSING FINANCE AGENCY, etc.,
ALLY FINANCIAL INC., et al.,
For Plaintiff Federal Housing Finance Agency:
Marc E. Kasowitz
Christopher P. Johnson
Michael A. Hanin
Kanchana Wangkeo Leung
Kasowitz, Benson, Torres & Friedman LLP
New York, New York 10019
For Defendants Ally Financial Inc. and
GMAC Mortgage Group, LLC:
Richard A. Spehr
Michael O. Ware
Mayer Brown LLP
New York, New York 10019
For Defendant Ally Securities, LLC
Kirkland & Ellis LLP
601 Lexington Avenue
New York, New York 10022
Robert J. Kopecky
Devon M. Largio
Kirkland & Ellis LLP
300 North LaSalle Street
Chicago, Illinois 60654
11 Civ. 7010 (DLC)
OPINION & ORDER
Jeffrey A. Lipps
Jennifer A.L. Battle
Carpenter Lipps & Leland LLP
280 North High Street, Suite 1300
Columbus, Ohio 43215
For Defendant Barclays Capital:
David H. Braff
Brian T. Frawley
Jeffrey T. Scott
Sullivan & Cromwell LLP
125 Broad Street
New York, New York 10004
For Defendant Citigroup Global Markets Inc.:
Brad S. Karp
Susanna M. Buergel
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, NY 10019-6064
For Defendant Credit Suisse Securities (USA) LLC:
Richard W. Clary
Michael T. Reynolds
Cravath, Swaine & Moore LLP
825 Eighth Avenue
New York, New York 10019
For Defendant Goldman Sachs:
Richard H. Klapper
Michael T. Tomaino, Jr.
Jordan T. Razza
125 Broad Street
New York, NY 10004-2498
For Defendant JPMorgan Securities LLC:
Sharon L. Nelles
Jonathan M. Sedlak
Sullivan & Cromwell LLP
125 Broad Street
New York, New York 10004-2498
For Defendant RBS Securities Inc.:
Thomas C. Rice
David J. Woll
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
For Defendant UBS Securities LLC:
Jay B. Kasner
Scott D. Musoff
Robert A. Fumerton
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
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 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
the FHFA actions assert that the Offering Documents used to
market and sell Residential Mortgage-Backed Securities (“RMBS”)
to one or both of the GSEs during the relevant period contained
material misstatements or omissions with respect to the owneroccupancy status, loan-to-value (“LTV”) ratio, and underwriting
standards that characterized the underlying mortgages.
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 Act, D.C. Code § 31-5606.05(a)(1)(B), (c).
In six of
the cases, including this one, the Agency has also asserted
common law claims of fraud and aiding and abetting fraud against
certain entity defendants (the “Fraud Claim Cases”).
pleaded, these fraud claims attach to each of the three
(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.
categories of misstatements upon which the plaintiff’s
securities law claims are based.2
The Court has already issued several Opinions addressing
motions to dismiss in other cases brought by the FHFA.3
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
As noted in previous Opinions, the plaintiff also pleads
defendants’ statements regarding the credit ratings of the
Certificates as a separate category of misstatement under the
Securities Act and, in the cases with fraud claims, fraudulent
representation. The plaintiff’s claims in this respect are
largely derivative of the three core representations described
FHFA v. UBS Americas, Inc. et al., 858 F. Supp. 2d 306
(S.D.N.Y. 2012) (“UBS I”); FHFA v. UBS Americas, Inc., et al.,
No. 11 Civ. 5201 (DLC), 2012 WL 2400263 (S.D.N.Y. June 26, 2012)
(“UBS II”); FHFA 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., et al., No. 11 Civ. 6202 (DLC),
2012 WL 5351188 (S.D.N.Y. Nov. 8, 2012) (“Merrill”); FHFA v.
Deutsche Bank, et al., No. 11 Civ. 6192 (DLC), 2012 WL 5471864
(S.D.N.Y. Nov. 12, 2012) (“Deutsche Bank”); FHFA v. Goldman
Sachs & Co, et al., No. 11 Civ. 6198, 2012 WL 5494923 (S.D.N.Y.
Nov. 12, 2012) (“Goldman”); FHFA v. Barclays Bank PLC, et al.,
No. 11 Civ. 6190 (DLC), 2012 WL 5844189 (S.D.N.Y. Nov. 19, 2012)
(“Barclays”); FHFA v. Morgan Stanley, No. 11 Civ. 6739 (DLC),
2012 WL 5868300 (S.D.N.Y. Nov. 19, 2012); FHFA v. Bank of
America, No. 11 Civ. 6195 (DLC), slip op. (S.D.N.Y. Dec. 18,
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
discovery in this matter, 11 Civ. 7010 (DLC), must be concluded
by December 6, 2013.
Trial in this matter is scheduled to begin
in January 2015 as part of the fourth tranche of trials in these
This case concerns RMBS Certificates allegedly purchased by
Freddie Mac between September 2005 and May 2007.
Each of the
GSE Certificates pertains to one of 21 securitizations offered
for sale pursuant to one of six shelf-registration statements.
Each of the 21 securitizations was sponsored by non-party
Residential Funding Company, LLC, formerly known as Residential
Funding Corporation (“RFC” or the “ResCap Sponsor”).
in the complaint, RFC is an indirect, wholly-owned subsidiary of
defendant GMAC Mortgage Group, Inc. (“GMACM”), which is, in
turn, a wholly-owned subsidiary of Ally Financial Inc. (“AFI”),
the lead defendant in this case.
The following non-parties, all
of which are wholly owned, indirect subsidiaries of GMACM and
AFI, acted as depositors for the 21 securitizations: Residential
Asset Mortgage Products, Inc. (“RAMP”), Residential Asset
Securities Corporation (“RASC”), Residential Accredit Loans,
Inc. (“RALI”) (collectively, the “ResCap Depositors”).
RAMP, RASC, and RALI were originally named as defendants in this
action, but were released as defendants after they filed for
bankruptcy protection along with their indirect parent company
Residential Capital LLC (“ResCap”).
In addition to the ways
already discussed, AFI affiliates are alleged to have been
involved in the securitization process through defendant Ally
Securities, LLC (“Ally Securities”), a wholly-owned subsidiary
of AFI that served as the co-lead underwriter for five of the
securitizations and was an underwriter for an additional eight
The Amended Complaint asserts securities law claims against
AFI and GMACM as well as the following banks, which served as
underwriter or co-lead underwriter for one or more of the 21
securitizations but are not otherwise affiliated with AFI:
Barclays Capital Inc. (“Barclays”), Citigroup Global Markets
Inc. (“Citi”), Credit Suisse Securities (USA) LLC (“Credit
Suisse”), Goldman, Sachs & Co. (“Goldman”), JPMorgan Securities,
LLC -- in its own right and as successor-in-interest to Bear
Stearns Companies, Inc. (“BSC”) -- (“JPMS”), RBS Securities Inc.
(“RBS”), and UBS Securities LLC (“UBS”).
The plaintiff’s fraud-
related claims are asserted only against AFI, JPMS (in its own
right and as successor-in-interest to BSC), Goldman, and GMACM
(collectively, “the fraud defendants”).
The following five groups of defendants have each filed
separate motions to dismiss the Amended Complaint:
1) AFI and
GMACM; 2) Ally Securities; 3)RBS; 4) Goldman; and 5) a group
consisting of the remaining underwriter defendants.
press a number of arguments that are also pressed by other
defendants in these coordinated actions, the majority of which
have been addressed by this Court’s previous Opinions.
Court hereby adopts by reference the reasoning and, to the
extent they are relevant here, the rulings of those prior
Adequacy of Fraud Allegations Against Underwriter Defendants
As in other cases filed by this plaintiff, several of the
motions to dismiss devote particular attention to the adequacy
of the FHFA’s scienter allegations.
To be sure, each of these
coordinated actions must be considered on its own bottom.
roles of these defendants in the RMBS securitization process and
their familiarity with it differ from each other and 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
As in other cases, the plaintiff has abandoned its Virginia
Blue Sky claims with regard to securitizations it purchased
before September 6, 2006. Accordingly, these claims are
to those this Court has reached in previous Opinions in this
With respect to JPMS and Goldman in particular, the Amended
Complaint in this case largely repeats allegations that the
Court has already found sufficient to plead fraud-based claims
against these defendants and their corporate affiliates in other
cases brought by the plaintiff.
See Chase, 2012 WL 5395646,
*11-14; Goldman, 2012 WL 5494923, *2.
As the brief for JPMS
notes, certain of these allegations pertain to activities by
those affiliates of the banks that sponsored or served as
depositors for securitizations other than those at issue here.
Those allegations have limited relevance here, where the
securitizations at issue were almost exclusively packaged by AFI
Other allegations, however, provide a strong basis
for inferring that the banks acted knowingly or recklessly in
continuing to underwrite RMBS offerings backed by mortgages that
failed to conform to stated guidelines.
In particular, the
Amended Complaint cites the waiver rates in the Clayton Report
and defendants’ own statements regarding the due diligence they
performed on the supporting loans pools for these very
securitizations to assert that, to the extent JPMS, BSC, and
Goldman were ignorant of the fact that a substantial number of
the supporting loans were not originated according to stated
guidelines, it was only because they consciously disregarded
As to Ally Securities, it is likewise true that, given the
firm’s representations that it reviewed portions of the loan
pool for compliance with guidelines, the high defect rate
alleged in the Amended Complaint is strongly suggestive that the
firm knew the loans were underwritten to standards lower than
those reported in the Offering Documents.
This allegation is
further buttressed by FHFA’s allegations that Ally Securities
was strongly motivated to disregard loan defects in order to
benefit itself and its corporate affiliates and had particular
insight into the quality of the supporting loans given the role
its corporate affiliates played in originating, purchasing, and
securitizing those loans.
As in Chase, these allegations are more than adequate to
plead fraud with respect to the Offering Documents’
representations regarding mortgage-underwriting standards.
Chase, 2012 WL 5395646, at *11-14.
But because these
allegations do not bear on defendants’ knowledge that their
statements regarding LTV and owner-occupancy fraud in particular
were false, see Merrill, 2012 WL 5451188, at *2, the plaintiff’s
claims based on those two categories of statements must be
AFI’s motion to dismiss also raises several arguments that
are not fully addressed by prior Opinions in this litigation.
Those arguments will be addressed in turn.
Control-Person Allegations Against AFI
First, AFI argues that the Amended Complaint’s allegations
are insufficient to support the plaintiff’s control-person
claims against it and GMACM.
Section 15 of the Securities Act
and its state law equivalents impose liability on “[e]very
person who, by or through stock ownership, agency, or otherwise
. . . controls any person liable under [Section 11] or [Section
15 U.S.C. § 77o.
The plaintiff’s control-person claims
against AFI and GMACM are premised on alleged primary violations
of Sections 11 and 12(a)(2) by Ally Securities, the ResCap
Sponsor, and the ResCap Depositors.5
In prior Opinions in this litigation, this Court has
repeatedly rejected arguments like AFI’s where, as here, the
Amended Complaint alleged that the putative control party (1)
exercised direction and control over a vertically integrated
structure of wholly owned subsidiaries that sold the
Certificates, (2) shared officers and directors with those
subsidiaries, (3) supplied them with essential services and
financial support, and (4) profited substantially from this
The Agency’s claims of aiding and abetting fraud against AFI
and GMACM are likewise based on allegations of primary fraud by
Ally Securities, the ResCap Sponsor, and the ResCap Depositors.
vertically integrated approach to the securitization process.
See, e.g., UBS I, 858 F.Supp.2d at 333.
AFI argues, however,
that an operating agreement entered into between AFI and ResCap
in June 2005 (the “Operating Agreement”) demonstrates as a
matter of law that AFI and GMACM did not exercise control over
the ResCap Sponsor and the ResCap Depositors during the period
that the securitizations at issue were sold.
AFI argues that
the Operating Agreement may be considered on this motion to
dismiss because it is incorporated by reference into the Amended
As AFI notes, the Operating Agreement provides, inter alia,
ResCap was prohibited from paying dividends or other
distributions to AFI unless ResCap’s stockholder equity
reached $6.5 billion;
ResCap was to have at least two directors who were
independent of AFI, one of which would chair ResCap’s Audit
ResCap was prohibited from engaging in financial
transactions with AFI affiliates unless the transaction was
on terms that would be agreed to between parties
negotiating at arms length;
ResCap was obligated to maintain books and records separate
from those of any other AFI affiliate;
ResCap was to maintain a corporate identity separate from
that of AFI, and its employees and officers were prohibited
from also being officers of AFI or GMACM.
AFI maintains that, taken together, these requirements defeat
any suggestion that AFI or GMACM controlled the operations of
ResCap or its subsidiary entities.
The Amended Complaint contains allegations, however, that
call into question the appearance of independence that might be
conveyed by the Operating Agreement in isolation.
the Amended Complaint quotes the following statement from a
registration statement filed by ResCap in July 2005, only one
month after the Operating Agreement was executed:
[AFI] control[s] all fundamental matters affecting
[ResCap] . . . [AFI] indirectly owns all of [ResCap’s]
outstanding common stock and has the power to elect
and remove all of [ResCap’s] directors, including the
two independent directors.
And while the Amended Complaint does not allege that AFI
violated the Operating Agreement’s prohibition on its officers’
simultaneously serving as officers of ResCap or its
subsidiaries, the Amended Complaint does allege that in several
instances officers of AFI served on the board of ResCap or its
It may be the case that, whether because of the Operating
Agreement or for other reasons, the involvement of AFI and GMACM
in ResCap’s securitization activities was not sufficient to give
rise to control-person liability.
But the terms of the
Operating Agreement are not so unambiguous, when read in light
of the plaintiff’s allegations in support of its Section 15
claims, to permit such a finding as a matter of law.
AFI’s effort to obtain dismissal of the plaintiff’s aiding-andabetting fraud claims likewise fails in light of the analysis
II. Demand for Punitive Damages
AFI and GMACM also seek to strike the plaintiff’s demand
for punitive damages as to them.
As a threshold matter, they
argue that the availability such relief is an issue governed by
the law of Michigan -- where both AFI and GMACM have their
Although AFI accepts that its liability on the plaintiff’s
aiding-and-abetting fraud claims is an issue of New York law, it
argues that the damages component of those claims is governed by
the law of Michigan.
The choice-of-law issue is significant,
since “punitive damages are available under Michigan law only
when expressly authorized by [that state’s] Legislature.”
Gilbert v. DaimlerChrysler Corp., 685 N.W.2d 391, 400 (Mich.
New York and Minnesota, where the plaintiff asserts the
underlying fraud took place, impose no such limitation.
As explained in previous Opinions, FHFA’s common 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
New York embraces a choice-of-law doctrine known as
dépeçage, pursuant to which “the rules of one legal system are
applied to regulate certain issues arising from a given
transaction or occurrence, while those of another system
regulate the other issues.”
Hunter v. Greene, 734 F.2d 896, 901
(2d Cir. 1984) (citation omitted).
The New York Court of
Appeals has recognized that the doctrine may sometimes require
that a plaintiff’s demand for punitive damages be analyzed under
the law of a state other than the one under whose law the cause
of action arises.
See James v. Powell, 225 N.E.2d 741, 746-47
A court must consider “the object or purpose of
the wrongdoing,” and give controlling effect to the “law of the
jurisdiction with the strongest interest in the resolution of
the particular issue presented.”
Id. (citation omitted); see
also Restatement (Second) of Conflict of Laws § 171 cmt. c &
Reporters Note (1971) (citing Powell for the proposition that
“situations may arise where one state has the dominant interest
with respect to the issue of compensatory damages and another
state has the dominant interest with respect to the issue of
In this case, the plaintiff alleges that the purpose of AFI
and GMACM’s aiding and abetting activity was to enable the
fraudulent activities of the entities whose primary conduct is
at issue -- Ally Securities, the ResCap Sponsor, and the ResCap
That fraudulent activity was participation in the
creation of SEC filings containing misrepresentations and the
sale of Certificates through those filings.
It can hardly be
disputed that New York and Minnesota, within whose borders the
primary conduct allegedly took place, have a stronger interest
in deterring such facilitation than does Michigan.
The law of
those states therefore governs the plaintiff’s demand for
punitive damages. Finally, because the Court has already
determined that allegations of the type the plaintiff makes here
are sufficient to sustain a demand for punitive damages under
New York law, and because Minnesota law is not materially
different in this respect, AFI’s motion to strike must be
The defendants’ July 13 motions to dismiss are granted with
Plaintiff’s claims of owner-occupancy and LTV-ratio fraud;
Plaintiff’s Virginia Securities Act claims for Certificates
purchased before September 6, 2006;
Plaintiff’s Virginia Securities Act claims against Ally
Securities, Barclays, and Credit Suisse with respect to
Certificates purchased from other parties and attendant
Plaintiff's Section 12(a) (2) claims against Ally Securities
and RBS in connection with Certificates purchased from
other parties and attendant control-person claims.
The motions to dismiss are denied in all other respects.
New York, New York
December 19, 2012
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