Federal Deposit Insurance Corporation et al v. Bear Stearns Asset Backed Securities I L.L.C. et al

Filing 190

MEMORANDUM ORDER: denying 172 Motion to Dismiss. For the foregoing reasons, Defendants' motion to dismiss the Second Amended Complaint is denied in its entirety. This Memorandum Order resolves docket entry no. 172. This case remains referred to Magistrate Judge Fox for general pretrial management. SO ORDERED. (Signed by Judge Laura Taylor Swain on 10/18/2019) (ama)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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FEDERAL DEPOSIT INSURANCE CORP.,
as receiver for CITIZENS NATIONAL
BANK and receiver for STRATEGIC
CAPITAL BANK,
Plaintiff,
-v-

No. 12-CV-04000-LTS-KNF

CREDIT SUISSE FIRST BOSTON
MORTGAGE SECURITIES CORP.,
CREDIT SUISSE MANAGEMENT LLC,
CREDIT SUISSE SECURITIES (USA) LLC,
DEUTSCHE BANK SECURITIES INC.,
HSBC SECURITIES (USA) INC., RBS
SECURITIES INC., and UBS SECURITIES
LLC,
Defendants.
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MEMORANDUM ORDER
Plaintiff, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for
both Citizens National Bank (“CNB”) and Strategic Capital Bank (“SCB,” and together with
CNB, the “Banks”), brings this action pursuant to the Securities Act of 1933 (the “1933 Act”),
15 U.S.C. § 77a et seq., against Credit Suisse First Boston Mortgage Securities Corp. (“Credit
Suisse Mortgage”), Credit Suisse Management LLC (“Credit Suisse Management”), Credit
Suisse Securities (USA) LLC (“Credit Suisse Securities”), Deutsche Bank Securities Inc.
(“DBS”), HSBC Securities (USA) Inc. (“HSBC”), RBS Securities Inc. (“RBS”), and UBS
Securities LLC (“UBS”) (collectively, “Defendants”), in connection with the issuance of certain
certificates backed by collateral pools of residential mortgage loans. The Court has jurisdiction
of this action pursuant to 28 U.S.C. § 1331.

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Defendants now move, pursuant to Federal Rule of Civil Procedure 12(b)(6), to
dismiss Plaintiff’s Second Amended Complaint. (Docket Entry No. 172.) The Court has
considered carefully the parties’ submissions. For the reasons stated below, Defendants’ motion
is denied.
BACKGROUND
The Court presumes familiarity with the history of this dispute and the facts as
detailed in the Court’s March 24, 2015, Opinion and Order. (Docket Entry No. 135.) The
following summary of facts is drawn from the Second Amended Complaint (“SAC,” Docket
Entry No. 166), the documents incorporated by reference therein, and other documents of which
the Court may properly take judicial notice.
Between September 2007 and March 2008, Plaintiff’s predecessors, CNB and
SCB, purchased ten residential mortgage backed securities (“RMBS”) certificates
(“Certificates”) that were either issued or underwritten by Defendants. Defendant Credit Suisse
Management did not itself underwrite or issue any Certificates; rather, “through stock ownership,
agency, or otherwise” Credit Suisse Management controlled Credit Suisse Mortgage, which
issued two of the Certificates. (SAC ¶¶ 4, 7, 137.) The Certificates were backed by mortgage
loans originated by IndyMac Bank F.S.B. (“IndyMac”), American Home Mortgage (“AHM”),
GMAC Mortgage Corporation (“GMAC”), and Wachovia Mortgage Corporation (“Wachovia”),
among others. (Id. at Schedules 1–3, 5, 7, 10–12 Item 28(a).) Plaintiff alleges that Defendants
made untrue statements or omitted material facts about these mortgage loans in each Certificate’s
prospectus supplement. (SAC ¶¶ 1, 78–80.)
On May 22, 2009, the FDIC closed the Banks and placed them into receivership.
Notwithstanding the existence of information reflecting problems with the RMBS market

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generally, distribution reports issued by RMBS trustees reflecting early payment defaults
(“EPDs”), and financial difficulties of certain loan originators, Plaintiff did not discover
Defendants’ false and misleading statements until 2011, after Plaintiff conducted a “forensic
analysis of a random sample of the loans in each of the securitizations[,]” using vendor-provided
data that was not available before May 22, 2008. (SAC ¶¶ 3, 115.)
DISCUSSION
Defendants move, pursuant to Federal Rule of Civil Procedure 12(b)(6), to
dismiss Plaintiff’s SAC. (See Docket Entry No. 172.) In determining whether a plaintiff has set
forth the “short and plain statement of the claim showing that [it is] entitled to relief” required by
the Federal Rules (see Fed. R. Civ. P. 8(a)(2)), the Court looks to whether the allegations in the
complaint establish the “facial plausibility” of the plaintiff’s claims. Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009). “A claim has facial plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Id. (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)). Such a showing
“must be enough to raise a right to relief above the speculative level,” requiring “more than
labels and conclusions, [or] a formulaic recitation of the elements of a cause of action.”
Twombly, 550 U.S. at 555 (internal quotation marks omitted). In deciding a Rule 12(b)(6)
motion to dismiss, the Court assumes the truth of the facts asserted in the complaint and draws
all reasonable inferences from those facts in favor of the plaintiff. See Harris v. Mills, 572 F.3d
66, 71 (2d Cir. 2009) (citation omitted).
Defendants assert that the SAC should be dismissed as time-barred, for failure to
allege reliance, and as against certain Defendants that were not underwriters with respect to the

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particular tranches of RMBS that the Banks purchased. The Court addresses each of these
contentions in turn.
Statute of Limitations
“Dismissal under Fed. R. Civ. P. 12(b)(6) is appropriate when a defendant raises .
. . [a statutory bar] as an affirmative defense and it is clear from the face of the complaint, and
matters of which the court may take judicial notice, that the plaintiff’s claims are barred as a
matter of law.” Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008)
(internal quotation marks and emphasis omitted). In deciding a motion to dismiss, the Court may
“take judicial notice of the fact that press coverage, prior lawsuits, or regulatory filings contained
certain information, without regard to the truth of their contents[.]” See id. (emphasis omitted).
Under Section 13 of the 1933 Act, a plaintiff’s claims are time-barred if not
“brought within one year after the discovery of the untrue statement or the omission, or after
such discovery should have been made by the exercise of reasonable diligence[.]” 15 U.S.C.S. §
77m (LexisNexis 2012). Pursuant to the FDIC Extender Provision1, Plaintiff’s claims are timely
unless the one-year statute of limitations period had already expired when the Banks entered
receivership on May 22, 2009. (See 12 U.S.C. §§ 1821(d)(14)(A)(ii)(I) and (B)(i).)
“The filing period commences when the plaintiff discovers (or should have
discovered) the securities-law violation[;]” a “securities-law violation is discovered when the
plaintiff learns sufficient information about [the violation] to . . . plead it in a complaint with
enough detail and particularity to survive a [Federal Rule of Civil Procedure] 12(b)(6) motion to
dismiss.” Fed. Hous. Fin. Agency for Fed. Nat’l Mortg. Ass’n v. Nomura Holding Am., Inc.,

1

The “FDIC Extender Provision” is a provision of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, codified as 12 U.S.C. § 1821(d)(14).

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873 F.3d 85, 119 (2d Cir. 2017) (internal quotation marks omitted). “Whether sufficient facts
existed at [a particular] time is, by definition, a fact-intensive inquiry and, thus, generally illsuited for resolution at the motion to dismiss stage.” In re Bear Stearns Mortg. Pass-Through
Certificates Litig., 851 F. Supp. 2d 746, 763 (S.D.N.Y. 2012).
In their Joint Memorandum of Law in Support of Defendants’ Motion to Dismiss
the Second Amended Complaint (“Defs. Br.,” Docket Entry No. 173), Defendants proffer four
principal sources of information in support of their argument that Plaintiff had notice of its
claims before May 22, 2008: (i) data concerning EPDs and “purportedly high rates of
delinquencies in the securitizations[;]” (ii) lawsuits against IndyMac, an originator of loans
backing certain securitizations at issue; (iii) negative reports and downgrades from ratings
agencies; and (iv) negative news articles about the RMBS industry generally and about
originators IndyMac, American Home, GMAC/Residential Capital, and Wachovia. (Defs. Br. at
11–20.)
The overwhelming majority of the information Defendants cite concerns “general,
industry-wide practices that are not merely untethered to the transactions that are the subject of
the [SAC], but are unconnected to any of the entities that were involved in the origination,
packaging, and sale of the [Certificates].” In re Bear Stearns, 851 F. Supp. 2d at 764 (internal
quotation marks omitted). Most of the news articles discuss trouble in the residential mortgage
industry generally, or focus primarily on subprime loans, which are riskier than the Alt-A loans
that Plaintiff asserts comprised the Certificates the Banks purchased. (See generally Frankel
Declaration, Docket Entry No. 174; see also Plaintiff’s Memorandum of Law in Opposition to
Defendants’ Motion to Dismiss the Second Amended Complaint (“Pl. Br.”), Docket Entry No.
177, at 20.) Without evidence of a more direct connection to the Certificates and the transactions

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at issue here, the Court cannot conclude that this information put Plaintiff on notice of its claims.
See Fed. Deposit Ins. Corp. v. Chase Mortg. Fin. Corp., 2013 WL 5434633 at *4 (S.D.N.Y.
2013) (“FDIC/Chase”) (finding that negative publicity on the mortgage industry or similar
securities to those at issue is insufficient where “none of that information is connected to the
specific certificates or transactions at issue”).
Defendants also point to three Certificates that were downgraded below
investment grade on May 14, 2008, just days before the Banks entered receivership. Defendants
argue that these downgrades should have put the Banks on notice of their claims before May 22,
2008, thus time-barring Plaintiff’s claims. However, downgrades below investment grade do
not, standing alone, reflect an underlying violation of securities law and may “occur for any
number of reasons . . . that are unrelated to the problematic underwriting and quality control
practices that form the basis of [the instant] complaint.” In re Bear Stearns, 851 F. Supp. 2d at
766. For the reasons discussed above, the other information available to the Banks prior to May
22, 2008, was too attenuated from the transactions at issue to have put the Banks on notice of
their claims. It is Defendants’ “burden to prove that a reasonable investor . . . would have
conducted a fulsome investigation and uncovered information sufficient to make out a plausible
claim for relief by [the date on which the statute of limitations expired.]” Nomura, 873 F.3d at
122 (finding that defendants had failed to adduce evidence that a reasonable investor in
plaintiff’s shoes would have uncovered information sufficient to state a claim “just weeks after
the credit downgrades”). Defendants have not sustained this burden, as they have provided no
basis for the Court to conclude that, within eight days of the downgrades, the Banks would have
conducted an investigation enabling them to uncover all the information necessary to plead their
claims with sufficient particularity to survive a 12(b)(6) motion.

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Defendants have failed to proffer “uncontroverted evidence irrefutably
demonstrat[ing] [that the] plaintiff discovered or should have discovered facts sufficient to
adequately plead a claim” prior to May 22, 2008. In re Bear Stearns, 851 F. Supp. 2d at 763
(internal quotation marks omitted). Therefore, Defendants’ motion to dismiss Plaintiff’s claims
is denied insofar as it is based on the statute of limitations.
Presumption of Reliance
It is well settled that a plaintiff bringing Section 11 claims need not allege
reliance. See In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d Cir. 2010).
However, the presumption of reliance dissipates “after the issuer has made generally available to
its security holders an earning statement covering a period of at least twelve months beginning
after the effective date of the registration statement[.]” 15 U.S.C.S. § 77k(a) (LexisNexis 2012).
Defendants contend that Plaintiff must plead reliance because (i) RMBS trustees issued monthly
distribution reports concerning the loans underlying the Certificates, and (ii) those monthly
distribution reports should be considered “earning statements” within the meaning of Section 11.
Defendants’ motion to dismiss must be decided based on the face of Plaintiff’s
complaint. Plaintiff is entitled to a presumption of reliance and is not required to plead its claims
in a way that negates the applicability of the presumption. Plaintiff does not mention monthly
distribution reports in the SAC, and Defendants have proffered no basis for the Court to take
judicial notice of those reports and analyze their content. Therefore, the Court need not take up
at this time the issue of whether the distribution reports were earnings reports within the meaning
of the statute, and Defendants’ motion is denied insofar as it seeks dismissal of the SAC for
failure to plead reliance.

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Participation in the Offerings
Liability under Section 11(a)(5) of the 1933 Act extends to anyone who
“participate[s], directly or indirectly, in purchasing securities from an issuer with a view to
distribution, in offering or selling securities for an issuer in connection with a distribution, or in
the underwriting of such an offering.” In re Lehman Bros. Mortg.-Backed Sec. Litig., 650 F.3d
167, 177 (2d Cir. 2011).
Defendants contend that Plaintiff has failed to state a claim against Deutsche
Bank and UBS because neither party was identified in the offering documents as an underwriter
of the particular tranches of the RALI 2006-QS18, RAST 2006-A11, and RAST 2007-A1
securitizations that the Banks purchased. (Defs. Br. at 29–31.) However, Deutsche Bank and
UBS are named as co-underwriters in the relevant prospectus supplements and, according to the
SAC, Deutsche Bank and UBS endorsed alleged misstatements relating to asset pools backing
the entire securitization. (See SAC Schedules 2, 3, and 10, Items 28(f), 37, 62, 68, 79, 106.)
Furthermore, as co-underwriters of the securitizations, Deutsche Bank and UBS had a financial
interest in the success of the offering as a whole, not just the specific tranches that they sold.
Therefore, viewing the allegations and the documents incorporated by reference into the SAC in
the light most favorable to the Plaintiff, the Court finds plausible Plaintiff’s allegation that
Deutsche Bank and UBS indirectly participated—as that statutory term has been interpreted in
the applicable regulations and by the Second Circuit—in the relevant offerings, even if Deutsche
Bank and UBS did not directly sell the particular tranches that Plaintiff purchased.
Control Person Liability
Defendants argue that Plaintiff has failed to plead sufficiently that Credit Suisse
Management is liable as a “control person” of Credit Suisse Mortgage under Section 15 of the

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1933 Act. 15 U.S.C. § 77o. Control is defined for purposes of the statute as “the power to direct
or cause the direction of the management and policies of [the primary violators], whether
through the ownership of voting securities, by contract, or otherwise.” In re Lehman Bros., 650
F.3d at 185.
Here, Plaintiff has alleged adequately that Credit Suisse Management was a
“controlling person” under Section 15 because (i) Plaintiff has stated a claim against Credit
Suisse Mortgage for a primary violation, and (ii) Plaintiff alleges that “Credit Suisse
Management, by or through stock ownership, agency, or otherwise, controlled [Credit Suisse
Mortgage] within the meaning of Section 15 of the 1933 Act” and that Credit Suisse Mortgage
“was a wholly-owned subsidiary of Credit Suisse Management during 2007 and 2008.” (SAC ¶¶
137–38.) These allegations are sufficient to support plausibly an inference that Credit Suisse
Management had the “power to direct or cause the direction of the management and policies of”
Credit Suisse Mortgage. In re Lehman Bros., 650 F.3d at 185; see also FDIC/Chase, 2013 WL
5434633 at *10 (finding allegations that “CitiMortgage, FHHLC, and JPMorgan by or through
stock ownership, agency, or otherwise, controlled [CMSI, FHASI, and Chase, respectively]
within the meaning of Section 15 of the 1933 Act” sufficient to state a Section 15 claim).
Therefore, Defendants’ motion is denied insofar as it seeks dismissal of the SAC for failure to
state a claim for control person liability.

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CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss the Second Amended
Complaint is denied in its entirety. This Memorandum Order resolves docket entry no. 172.
This case remains referred to Magistrate Judge Fox for general pretrial management.
SO ORDERED.
Dated: New York, New York
October 18, 2019
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge

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