HSH Nordbank AG et al v. RBS Holdings USA Inc. et al

Filing 32

MEMORANDUM OPINION & ORDER re: 17 MOTION to Dismiss filed by RBS Securities Inc., Financial Asset Securities Corp. RBS Holdings USA Inc. For the reasons stated above, Defendants' motion to strike under Fed. R. Civ. P.12(f) is deni ed. Defendants' motion to dismiss is granted in part and denied in part, as set forth above. The Clerk of Court will terminate the motions (Dkt. No. 17). The Court will conduct a Rule 16 conference in this matter on April 30, 2015 at 11:00 a.m. in Courtroom 705 of the Thurgood Marshall United States Courthouse, 40 Foley Square, New York, New York, 10007. Pursuant to this Court's Individual Rules of Practice in Civil Cases, the parties are directed to submit a joint letter and proposed Case Management Plan by April 23, 2015. SO ORDERED. ( Initial Conference set for 4/30/2015 at 11:00 AM in Courtroom 705, 40 Centre Street, New York, NY 10007 before Judge Paul G. Gardephe.) (Signed by Judge Paul G. Gardephe on 3/20/2015) (ama)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

USDC SONY
DOCUMENT
ELECTRONICALLY FILED
DOC#:
DATE FILED:

HSN NORDBANK AG, HSH NORDBANK
AG, LUXEMBOURG BRANCH and HSH
NORDBANK SECURITIES S.A.,

MEMORANDUM
OPINION & ORDER

Plaintiffs,
- against -

13 Civ. 3303 (PGG)

RBS HOLDINGS USA INC., RBS
SECURITIES INC. (F IKJ A GREENWICH
CAPITAL MARKETS, INC.) and
FINANCIAL ASSET SECURITIES CORP.,
Defendants.

PAUL G. GARDEPHE, U.S.D.J.:
This action arises from Plaintiffs' investment in residential mortgage-backed
securities that were issued or underwritten by RBS Holdings USA Inc., RBS Securities Inc., and
Financial Asset Securities Corp. (collectively, the "Defendants" or "RBS"). Defendants have
moved (1) to strike certain paragraphs of the Complaint pursuant to Fed. R. Civ. P. 12(f); and (2)
to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b)(6). (Def. Mot. (Dkt. No. 17)) For the
reasons stated below, the motion to strike will be denied, and the motion to dismiss will be
granted in part and denied in part.

BACKGROUND 1
I.

MORTGAGE SECURITIZATION
Residential mortgage-backed securities (RMBS) are financial instruments

1

This Court's factual statement is drawn from the Complaint. "In considering a motion to
dismiss ... the court is to accept as true all facts alleged in the complaint." Kassner v. 2nd Ave.
Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007) (citing Dougherty v. Town ofN. Hempstead
Bd. of Zoning Appeals, 282 F.3d 83, 87 (2d Cir. 2002)).

collateralized by residential mortgages. Securitization is a process that pools together thousands
of individual mortgages into trusts that issue securities to investors in the form of certificates.
(Cmplt. (Dkt. No. 11) ii 40) A trustee manages each trust, overseeing, inter alia, the distribution
of the trust's revenue to certificate holders. (Id.) This revenue is derived from the monthly
payments of the borrowers whose mortgages are held by the trust. (Id.)
The RMBS process begins when lending institutions, or "originators," make home
loans to consumers that are secured by mortgages. (ilL ii 41) An RMBS "sponsor" or "seller" usually an investment bank affiliate - purchases these mortgages in bulk from one or more
originators. (Id.) To facilitate lending, sponsors regularly provide "warehouse" lines of credit to
originators. (Id.

ii 42)

of that same bank. (Id.

Sponsors ultimately sell the loans to a "depositor" - often another affiliate

ii 41)

The depositor is also considered the securities' "issuer." (l.QJ

An issuer typically re-underwrites the loans made by the originators,
independently assessing the borrowers' ability to meet mortgage obligations. This assessment
involves reviewing the loan files provided by the originators, which contain the information the
originators gathered in the lending process. (Id.~~ 43-44) An issuer usually delegates this work
to third-party due diligence vendors, such as Clayton Holdings, LLC ("Clayton"). (Id. i-144) The
vendor verifies key information contained in the loan files, including the borrower's debt-toincome ratio, the reported appraisal value of the home, and whether the property is owneroccupied. (Id.) The vendor then gives the issuer a report that includes the vendors' findings,
describes the originators' stated underwriting guidelines, and identifies which loans comply with
the guidelines. (Id.
~

~

45) The issuer uses this report to determine which loans to securitize. (Id.

46)

2

Following this review, the depositor "deposits" all of the loans into the trust. (Id.

if 47)

The trust then issues certificates of varying seniority called "tranches," which entitle

certificate holders to a portion of the payments the borrowers make. (Id.~ 48) The depositor
next passes the certificates to underwriters, who offer them for sale to investors. (Id.

if 49)

Investors interested in purchasing certificates receive "Offering Materials" that
characterize the securitized loans. (Id.~ 46) Prepared by the issuer, the Offering Materials make
representations as to the mortgages' loan-to-value (LTV) and combined loan-to-value (CLTV)
ratios, the originators' adherence to underwriting standards, and the mortgaged properties'
owner-occupancy status. (IQJ The Offering Materials also certify that the mortgages and all
necessary underlying documentation will be transferred to the trust on or before the closing date.
(Id.)

II.

THE PARTIES
Plaintiff HSH Nordbank AG ("Nordbank AG") is a commercial bank

incorporated in Germany. (Id.

if 29)

Plaintiff HSH Nordbank AG, Luxembourg Branch

("Nordbank Luxembourg") is a division of HSH Nordbank AG, with its main office in
Luxembourg.

(Id.~

30) Plainitff HSH Nordbank Securities S.A. ("Nordbank Securities") is a

wholly owned subsidiary of HSH Nordbank AG, with its principal place of business in
Luxembourg. (Id.

if 31)

Defendants RBS Holdings USA Inc. ("RBS Holdings"), RBS Securities Inc.
("RBS Securities"), and Financial Asset Securities Corp. ("F ASC") are Delaware corporations
headquartered in Stamford, Connecticut. (Id.~ 32-34) RBS Holdings was known as Greenwich
Capital Holdings, Inc. until April 2009. (Id.~ 32) RBS Holdings is the parent company of both
RBS Securities and FASC. (IQJ

3

RBS Securities is a registered broker-dealer. (Id.~ 33) It was the lead or co-lead
underwriter for each of the securitizations at issue and sold each of the certificates to Plaintiffs.

(MJ Prior to April 2009, RBS Securities was known as Greenwich Capital Markets, Inc.

(Id.)

FASC was the depositor for each of the securitizations. (Id. ~ 34)

III.

THE COMPLAINT
Plaintiffs allege various improprieties by Defendants in connection with the

creation, offering, and sale of certain RMBS. Plaintiffs assert against all Defendants claims for
common law fraud, fraudulent concealment, and, in the alternative, negligent misrepresentation.
(Id.~~

258-284)
As to Defendants RBS Holdings and RBS Securities, Plaintiffs assert claims of

aiding and abetting fraud.

(Id.~~

285-291) In the alternative, against RBS Securities only,

Plaintiffs assert a claim of rescission based on mutual mistake.

(Id.~~

292-298)

In 2006, Plaintiffs purchased approximately $54,351,000 worth of RMBS
certificates from the Defendants (the "Certificates"). @

~i;

1, 10) Defendants sold, marketed,

and issued these Certificates in three separate RMBS securitizations: SVHE 2006-0PT2, AMIT
2006-1, and FHLT 2006-A (collectively, the "Securitizations"). (Id. at 14, Table ("tbl.") 1)
Defendants acquired the loans underlying these Certificates from third-party mortgage
originators (and non-parties to this action) Fremont Investment & Loan (''Fremont"), Option One
Mortgage Corporation ("Option One"), and Aames Investment Corporation ("Aames"). (Id.
~~

142, 152, 157) Plaintiffs allege numerous knowing misrepresentations of material fact made

by Defendants in the Securitizations' respective Offering Materials, which included registration
statements, prospectuses, preliminary offering circulars, and other filings.

4

(Id.~

2)

Defendants' alleged misrepresentations relate to different stages of the
securitization process. At the origination stage, Defendants allegedly failed to reveal in the
Offering Materials that originators systematically abandoned their underwriting standards,
thereby reducing the quality ofloans in the securitization pool. (Id. ~' 121-128) After
origination, Defendants allegedly securitized and sold loans that their due diligence vendor had
reported as defective. (Id.

ir 10)

Plaintiffs further claim that Defendants understated the LTV and CL TV ratios of
the Securitizations' loan pools by overstating the appraised values of the underlying properties.
(Id. irir 65-82) These metrics materially affect investors' assessments ofloan pools, for they
reflect the amount of equity borrowers have in their homes, which, in tum, affects the likelihood
ofrepayment. (Id.

ir 66) The ratios also inform investors of the likelihood that the holder of the

note will suffer a loss in the event of default. (Id.

~

68) Finally, the Complaint alleges

misrepresentations about the owner-occupancy status of mortgaged properties included in the
Securitizations, as well as failures to transfer mortgages and notes to the trusts. (Id.

~ir

83-92,

162-198)
DISCUSSION2
I.

DEFENDANTS' MOTION TO STRIKE

Defendants have moved to strike Paragraphs 118-19, 122, 131-36, and 139-59 of
the Complaint because they rely on complaints and citations to news articles from other actions.
See Def. Mot. (Dkt. No. 17) at 2; Def. Br. (Dkt. No. 18) at 12-13 (citing RSM Prod. Corp. v.
Fridman, 643 F. Supp. 2d 382, 403 (S.D.N.Y. 2009), aff d, 387 F. App'x 72 (2d Cir. 2010)
2

This Court addressed very similar issues and arguments in Landesbank Baden-Wilrttemberg v.
RBS Holdings USA Inc., 14 F. Supp.3d 488 (S.D.N.Y. 2014). In that case, investors alleged
similar improprieties in connection with the creation, offering, and sale of RMBS by, among
others, two of the defendants in the instant case.
5

("Second Circuit case law is clear that paragraphs in a complaint that are either based on, or rely
on, complaints in other actions that have been dismissed, settled, or otherwise not resolved, are,
as a matter oflaw, immaterial within the meaning of Fed. R. Civ. P. 12(f).") (citing Lipsky v.
Commonwealth United Corp., 551 F.2d 887, 892-94 (2d Cir. 1976))).
"To prevail on a [Rule 12(f)] motion to strike, a party must demonstrate that (1)
no evidence in support of the allegations would be admissible; (2) that the allegations have no
bearing on the issues in the case; and (3) that to permit the allegations to stand would result in
prejudice to the movant." In re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458, 471
(S.D.N.Y. 2012) affd, 525 F. App'x 16 (2d Cir. 2013) (internal quotation marks and citations
omitted). Defendants have not met this standard.
Defendants rely on RSM Prod. Corp., 643 F. Supp. 2d 382, which in tum relies on
Lipsky, 551 F.2d 887. Although "some courts in this district have stretched the holding in
Lipsky to mean that any portion of a pleading that relies on unadjudicated allegations in another
complaint is immaterial under Rule 12(f)[,] [n]either Circuit precedent nor logic supports such an
absolute rule." In re Bear Steams Mortgage Pass-Through Certificates Litig., 851 F. Supp. 2d
746, 768 n.24 (S.D.N.Y. 2012) (internal citation omitted).
Here, the news reports and complaints cited in the disputed paragraphs are neither
extraneous nor immaterial to the Complaint's allegations. For example, Plaintiffs allege that
"Defendants' systematic misrepresentation of the quality of the Certificates they created and sold
to investors is [] evidenced by a forensic review of loans conducted by Assured Guaranty
Municipal Corp." (Cmplt. (Dkt. No. 11) ~ 118) In referring to this study, Plaintiffs cite to the
complaint filed in Assured Guaranty Municipal Corp. v. RBS Securities, Inc., No. 13 Civ. 2019
(S.D.N.Y.) (ECF No. 1, Mar. 26, 2013). "It makes little sense to say," as Defendants urge, "that

6

information from such a study-which [Plaintiffs' Complaint] could unquestionably rely on if it
were mentioned in a news clipping or public testimony - is immaterial simply because it is
conveyed in an unadjudicated complaint." Bear Stearns, 851 F. Supp. 2d at 768 n.24.
Accordingly, Defendants' motion to strike will be denied.

II.

LEGAL STANDARD GOVERNING MOTION TO DISMISS
To survive a Rule 12(b)(6) motion to dismiss, a complaint must contain "enough

facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570 (2007). "In considering a motion to dismiss ... the court is to accept as true all facts
alleged in the complaint," Kassner v. 2nd Ave. Delicatessen, Inc., 496 F.3d 229, 237 (2d Cir.
2007) (citing Dougherty v. Town ofN. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 87 (2d
Cir. 2002)), and the court must also "draw all reasonable inferences in favor of the plaintiff." Id.
(citing Fernandez v. Chertoff, 471 F.3d 45, 51 (2d Cir. 2006)).
A complaint is inadequately pled "if it tenders 'naked assertion[ s]' devoid of
'further factual enhancement,"' Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly,
550 U.S. at 557) (alteration in original), and does not provide factual allegations sufficient "to
give the defendant fair notice of what the claim is and the grounds upon which it rests." Port
Dock & Stone Corp. v. Oldcastle Ne., Inc., 507 F.3d 117, 121 (2d Cir. 2007) (citing Twombly,
550 U.S. at 555).
Fraud claims are subject to Fed. R. Civ. P. 9(b), which states that "a party must
state with particularity the circumstances constituting fraud or mistake." To satisfy Rule 9(b),
"the complaint must: (I) specify the statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements were made, and (4) explain why the
statements were fraudulent." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir. 2006)

7

(citation and quotation marks omitted). The complaint must also plead facts that give rise to a
strong inference of fraudulent intent. S.Q.K.F.C., Inc. v. Bell Atlantic TriCon Leasing Corp., 84
F.3d 629, 634 (2d Cir. 1996).

III.

STATUTE OF LIMITATIONS
A.

New York's Borrowing Statute

A federal court sitting in diversity applies the law of the forum in which it sits.
Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). Under New York's "borrowing statute," nonresident plaintiffs' claims must comply with the statute oflimitations of either (1) New York or
(2) the jurisdiction in which the claim accrued, whichever is shorter. N.Y. C.P.L.R. § 202.
Accordingly, this Court must determine where Plaintiffs' claims accrued.
New York law dictates that "a cause of action accrues at the time and in the place
of the injury." Global Fin. Corp. v. Triarc Corp., 93 N.Y.2d 525, 529 (1999). "When an alleged
injury is purely economic, the place of injury usually is where the plaintiff resides and sustains
the economic impact of the loss." Id.; see also Appel v. Kidder, Peabody & Co., 628 F. Supp.
153, 156 (S.D.N.Y. 1986) ("Where ... the harm claimed is economic, the loss is sustained where
the economic impact of the defendant's conduct is felt, usually but not invariably at the
plaintiffs place of residence."). "If the injured party is a corporation, then the place of residence
for the purposes of [the borrowing statute] is traditionally the state of incorporation or the
corporation's principal place of business." Baena v. Woori Bank, 2006 WL 2935752, at *6
(S.D.N.Y. Oct. 11, 2006). Ultimately, '"the thrust of the inquiry' is 'who became poorer, and
where did they become poorer' as a result of the conduct complained of." Appel, 628 F. Supp. at
156 (quoting Maiden v. Biehl, 582 F. Supp. 1209, 1218 (S.D.N.Y. 1984)).

8

PlaintiffNordbank AG is a "commercial bank incorporated in Germany" (Cmplt.
(Dkt. No. 11) if 29), and it is undisputed that the bank is a resident of Germany. (Def. Br. (Dkt.
No. 18) at 29) Nordbank Luxembourg is a "division" ofNordbank AG (Cmplt. (Dkt. No. 11)

if 30), and it is well established that a "branch or agency of a bank is not a separate entity."

In re

Liquidation ofN.Y. Agency & Other Assets of Bank of Credit & Commerce Int'l, S.A., 90
N.Y.2d 410, 422 (1997). Its claims, therefore, also accrued in Germany. Finally, Nordbank
Securities is a wholly owned subsidiary ofNordbank AG (Cmplt. (Dkt. No. 11) ~ 31), so its
losses would likewise be felt by Nordbank AG in Germany.

See,~,

Baena, 2006 WL

2935752, at *7 (applying limitation period of state in which parent company resides, because
"economic impact of the injury was ultimately felt by" parent). Accordingly, this Court finds
that the German statute oflimitations applies to all of Plaintiffs' claims. 3
B.

The German Statute of Limitations
The parties disagree as to the proper application of the German statute of

limitations, and they have submitted competing expert opinions concerning this issue.
Defendants argue that the statute of limitations begins to run on December 31 of the year in
which a plaintiff learns of, or was grossly negligent in failing to discover, its fraud claim. (Def
Br. (Dkt. No. 18) at 30 (citing Janke Deel. (Dkt. No. 19) i!i! 7-8)) According to Defendants,
"Plaintiffs were or should have been on notice of their claims" at some point in 2007, so the
statute of limitations began to run on December 31, 2007. (Def. Br. (Dkt. No. 18) at 30)
Defendants cite various news reports and lawsuits, as well as monthly performance reports sent

3

This Court does not address Defendants' argument that Plaintiffs' negligent misrepresentation
claim is time-barred under New York law, because that claim will be dismissed on other
grounds. See Part VII, infra.
9

to Plaintiffs, in support of their argument that Plaintiffs had notice of their claims in 2007. (Id. at
31-34)
Plaintiffs contend that their claims are not time-barred under German law,
because "the three-year period does not begin to run until the end of the year in which a plaintiff
actually obtains knowledge, or would be grossly negligent not to have obtained knowledge, of
facts sufficient to disclose (I) the identity of potential defendants, (2) the nature and existence of
the fraud, and (3) the defendants' intent." (Pltf. Br. (Dkt. No. 24) at 27 (citing Mansel Deel.
(Dkt. No. 27) ~~ 4-6) (emphasis omitted)) Plaintiffs argue that Defendants have not
demonstrated that Plaintiffs knew (or were grossly negligent in not knowing) of their claims in
2007. (Pltf. Br. (Dkt. No. 24) at 29)
The parties also disagree about the German law standard for gross negligence,
particularly as applied to a corporation. While Plaintiffs contend that "German law sets a high
bar to start the three-year clock" (Pltf. Br. (Dkt. No. 24) at 28), Defendants claim that Plaintiffs'
German law expert - Professor Dr. Mansel - has overstated the gross negligence standard,
particularly as it applies to corporations. (Def. Reply Br. (Dkt. No. 22) at 14)
"Limitations-based arguments in RMBS fraud actions have not generally been
accepted at the motion to dismiss phase." HSH Nordbank AG v. Goldman Sachs Grp., Inc., 992
N.Y.S.2d 158, 2013 WL 8476977 at *2 (Sup. Ct. N.Y. Cty. 2013) (citing Capital Ventures Int'l.
v. J.P. Morgan Mortgage Acquisition Corp., 2013 WL 535320, at *7 (D. Mass. Feb. 13, 2013);
In re Countrywide Fin. Corp. Mortgage-Backed Sec., 2012 WL 1322884, at *4 (C.D. Cal. Apr.
16, 2012); Allstate Ins. Co. v. Morgan Stanley, No. 651840/2011, 2013 WL 2369953, at *9
(N.Y. Sup. Ct. N.Y. Cty. 2013)). Prospective plaintiffs in such actions often "have a difficult

10

task in obtaining sufficient notice of the facts underlying their claims." Id. at 3 (citing In re
Countrywide, 2012 WL 1322884, at *4).
Based on the present record, this Court cannot conclude as a matter of law that
Plaintiffs were put on notice of their claims in 2007. In support of their argument that Plaintiffs
knew or should have known of their claims at that time, Defendants point to statements in the
media, monthly reports showing spikes in delinquencies in the underlying mortgages of the
securitizations at issue, RMBS lawsuits, and known economic losses on the Certificates. (Def.
Br. (Dkt. No. 18) at 31-34; Reply Br. (Dkt. 22) at 14-15) Even assuming, arguendo, that German
law requires a prospective plaintiff to monitor foreign news accounts and litigation, it does not
follow that Plaintiffs were or should have been on notice of their fraud claims in 2007. See
Allstate, 2013 WL 2369953, at *9 ("The collapse of the various loan originators ... would not
necessarily apprise plaintiffs that Morgan Stanley was complicit in their wrongdoing."). The
information cited by Defendants is not necessarily indicative of misrepresentation or scienter,
two key elements of Plaintiffs' fraud claim. See, M.,_, Capital Ventures Int'l, 2013 WL 535320,
at *7 (poor performance would not necessarily alert plaintiff to the alleged abandonment of
underwriting standards).
A determination as to when Plaintiffs knew or were grossly negligent in not
knowing about their fraud claims must await the development of a more complete factual record.

IV.

FRAUDULENTINTENT
As to Plaintiffs' common law fraud claims, Fed. R. Civ. P. 9(b) requires Plaintiffs

to "(1) specify the statements that [they] contend[] were fraudulent, (2) identify the speaker, (3)
state where and when the statements were made, and (4) explain why the statements were
fraudulent." Lerner, 459 F.3d at 290. Plaintiffs' allegations must give rise to a strong inference

11

of fraudulent intent, see S.Q.K.F.C., Inc., 84 F.3d at 634, which "may be established either (a) by
alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b)
by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or
recklessness."' Lerner, 459 F.3d at 290-91 (quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d
1124, 1128(2dCir.1994)).
The Complaint alleges that Defendants made fraudulent representations in
connection with (1) underwriting guidelines; (2) LTV and CLTV ratios; (3) owner-occupancy
rates; (4) credit ratings; and (5) proper assignment of mortgages. (Cmplt. (Dkt. No. 11) Yiir 4-16)
Plaintiffs do not argue that Defendants had a motive to make fraudulent misrepresentations
"beyond a general profit motive common to all corporations, which does not suffice." Deutsche
Zentral-Genossenchaftsbank AG v. HSBC North Am. Holdings, Inc., 2013 WL 6667601, at *19
(S.D.N.Y. Dec. 17, 2013) (citing Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000)). They do
argue, however, that sufficient circumstantial evidence exists to give rise to a strong inference of
"conscious misbehavior or recklessness." (Pltf. Br. (Dkt. No.24) at 15-19)

A.

Abandonment of Underwriting Guidelines
In their Offering Materials, Defendants represent that the loans underlying their

mortgage securitizations will either adhere to the originators' underwriting guidelines or have
"sufficient compensating factors." (Cmplt. (Dkt. No. 11) ~ 120) Defendants also represent that
they will perform their own due diligence on loans made by the originators. (Id.

~ir

126-27)

Plaintiffs contend that these statements were misrepresentations, because Defendants "knew they
were false from their own actions and due diligence [],which demonstrated that originators
systematically disregarded their underwriting guidelines." (Id.

12

if 128)

The Complaint alleges that Defendants and their third-party due diligence vendor,
Clayton, had access to and performed due diligence on the underlying loan files, and that
Defendants either "knew or were reckless in not knowing that the loans did not conform to the
[originators'] specified underwriting guidelines." (Id.~~ 97, 100-01, 107-08, 112) In support of
this claim, Plaintiffs point to a Federal Housing Finance Agency ("FHF A") forensic review of
loans from SVHE 2007-0PTI, a securitization not at issue here, but one which apparently was
assembled by the Defendants. According to Plaintiffs, 80% of the loan files FHFA reviewed
"had not been written within the stated guidelines, or otherwise breached Defendants'
representations." (Id.

~

131)

Plaintiffs also rely on a report prepared by Clayton (the "Clayton Report"),
summarizing the results of its due diligence reviews of more than 67,000 loans securitized by
RBS "from the first quarter of 2006 through the second quarter of2007."

(Id.~

10, 97)

According to the Clayton Report, FASC "waived in" - i.e., decided to purchase and securitize "over 53% of the loans that Clayton had reviewed and rejected as non-conforming with the
underwriting guidelines and without compensating factors." (Id.

~

104) All of the

Securitizations at issue were assembled during the time period covered by this report. (Id.

~

10)

Plaintiffs also rely on the deposition of an unnamed Clayton employee - testifying
in an unrelated action - in which the witness states that "Clayton supervisors would often inform
the due diligence underwriters that the purchasers wanted the underwriters to approve loans that
often did not satisfy the underwriting guidelines."

(Id.~

107) This desire allegedly extended

"[a]cross all clients," including Defendants. (Id.)
With respect to the loans securitized in the trusts, Plaintiffs further argue that - by
virtue of Defendants' warehouse lending arrangements with Fremont and Option One -

13

Defendants were uniquely positioned to become aware that the originators had abandoned their
underwriting guidelines. (Id. ~ 113-117) The Complaint alleges that RBS had "direct access to
the underlying loan files and detailed information for [the] loans," giving it an "inside look into
the true quality of the loans it securitized." (Id. ~ 115)
This Court concludes that Plaintiffs have sufficiently alleged that Defendants
'"knew facts or had access to information suggesting that their public statements were not
accurate."' F. Hous. Fin. Agency v. JPMorgan Chase & Co., 902 F. Supp. 2d 476, 491
(S.D.N.Y. 2012) (quoting ECA, Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan
Chase Co., 553 F.3d 187, 199 (2d Cir. 2009)). Plaintiffs' allegations also raise a strong inference
that Defendants either knew, or were reckless in not knowing, that their Offering Materials
falsely stated that the loans comprising the Securitizations met originators' underwriting
guidelines. 4

4

In a December 18, 2014 letter, Defendants cite to IKB Int'l S.A. v. Bank of Am. Corp., 584 F.
App'x 26, 27 (2d Cir. 2014)- a non-precedential summary order- to suggest that Plaintiffs'
allegations in this action are insufficient to plead a strong inference of fraudulent intent. (Dec.
18, 2014 Ltr. (Dkt. No. 30) at 2) In that case, the court noted that the complaint alleged that
defendants had access to information inconsistent with their alleged misstatements, but did not

"'specifically identify the reports or statements containing this information."' IKB Int'l S.A.,
584 F. App'x at 28 (citing Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000)). Moreover, the
complaint cited a third-party due diligence report that was published "well after the issuance of
the securities at issue," but did not indicate that the "report represent[ed] a retrospective
summary of information previously provided by [the due diligence vendor] to the defendants on
a 'securitization by securitization' basis." Id. Here, Defendants argue that because Plaintiffs do
not allege that the Clayton Report and the FHF A study were made available to the Defendants
before the securitizations at issue were created, these documents cannot support an inference of
fraudulent intent.
Plaintiffs' fraudulent intent claim turns not on the Clayton Report and the FHFA study, however,
but instead on the allegations that Clayton provided reports "on a daily basis" to RBS setting
forth (1) the number ofloans RBS was purchasing that failed to meet underwriting guidelines
and lacked "compensating factors," and (2) Clayton's justification for giving these loans a failing
grade. (Cmplt. (Dkt. No. 11) ~ 10) The Clayton Report is offered not because it was made
available to Defendants, but instead because it is representative of the type of information
Defendants received from Clayton on a daily basis, and of the type of due diligence that was
14

B.

CL TV Ratios and Owner-Occupancy Rates
Plaintiffs claim that "originators deliberately inflated their appraisals" of

mortgaged properties, and that Defendants became aware of this conduct as a result of their own
due diligence. (Cmplt. (Dkt. No. 11) ~ 73) According to the Complaint, these inflated appraisals
led to a substantial "understatement of the CLTV ratios, and a corresponding understatement of
the investment risk" associated with the Certificates purchased by Plaintiffs. (Id. ~ 81)
Plaintiffs' statistical study indicates that Defendants understated the weighted average CLTV
ratios for the loans underlying the SVHE 2006-0PT2 by 14 percent, while CLTV rations for the
AMIT 2006-1 trust were understated by 10.3 percent. (Id. at 25, tbl. 3) For the FHLT 2006-A
trust, Plaintiffs found a 4.7 percent understatement of the weighted averaged CLTV ratio. (IQJ
Plaintiffs' loan-level investigation also revealed that owner-occupancy rates in the SVHE 2006OPT2, AMIT 2006-1, and FHLT 2006-A trusts were overstated by 29.9, 25.4, and 29.9 percent,
respectively. (Id. at 30, tbl. 4)
The Complaint does not, however, allege facts sufficient to raise a strong
inference of scienter with respect to misrepresentations about CLTV ratios and owner-occupancy
rates. While Plaintiffs' loan-level investigations support an inference that originators
systematically overstated appraisal values, they do not raise a strong inference that Defendants
knew about this activity. "It is true ... that the magnitude of inaccuracy can sometimes provide
circumstantial evidence that a fraud defendant made her false statements knowingly or
recklessly." JPMorgan Chase, 902 F. Supp. 2d at 493 (citing In re Scholastic Corp. Sec. Litig.,
252 F.3d 63, 73 (2d Cir. 2001); Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000)). "Generally,
however, such evidence must be supported by additional circumstantial evidence in order for the
performed on loan pools. Accordingly, IKB Int'l provides no support for Defendants' arguments
concerning fraudulent intent.

15

plaintiff to carry her pleading burden, particularly where the originator of the false information is
a third-party." Id. (citing In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2003 WL
21488087, at *7 (S.D.N.Y. June 25, 2003)).
Here, as in JPMorgan Chase, Plaintiffs have not pled sufficient facts to
demonstrate that Defendants knew at the relevant time that ( 1) originators were systematically
overstating appraisal values, or (2) owner-occupancy rates were significantly overstated. See
also Fed. Hous. Fin. Agency v. Goldman, Sachs & Co., 2012 WL 5494923, at *2 (S.D.N.Y. Nov.
12, 2012); Fed. Hous. Fin. Agency v. Ally Fin. Inc., 2012 WL 6616061, at *2-3 (S.D.N.Y. Dec.
19, 2012). Plaintiffs imply that Defendants' due diligence process was designed to determine not
only whether a loan's characteristics complied with its originator's guidelines, but also to test the
veracity of the originators' information. (Cmplt. (Dkt. No. 11) ~ 221-222) The Complaint does
not allege, however, that the Defendants' due diligence disclosed the appraisal inaccuracies.
Similarly, although Plaintiffs claim that the Defendants represented that "mortgaged properties
would be appraised (or otherwise valued) using a particular standard"

(Id.~

5), Plaintiffs have

not pled facts showing that Defendants either (I) checked the CL TV and owner-occupancy
information provided by the originators to determine whether this information was accurate, or
(2) represented that they would so. Accordingly, Plaintiffs have not pled facts sufficient to raise
a strong inference of scienter with respect to allegedly misrepresented CL TV ratios or owneroccupancy rates.
C.

Credit Ratings

Plaintiffs allege that Defendants falsely represented that the investment ratings
provided by credit rating agencies would take "into consideration the characteristics of the
Mortgage Loans and the structural, legal and tax aspects associated with the certificates." (Id.

16

,-r 232) Defendants allegedly knew that these representations were false, because "Defendants
misled the rating agencies concerning, among other things, the CL TV ratios, owner-occupancy
rates and adherence to underwriting guidelines." (Id. ,-i 235) The Complaint adds that "[t]hese
misrepresentations caused dramatic understatements by the rating agencies of both the likely
rates of default and the resultant loss severity of defaulted loans." (Id.)
To the extent that the alleged misrepresentations about credit ratings are based on
Plaintiffs' claims that Defendants knew that originators had abandoned underwriting guidelines,
those claims adequately plead scienter. See Fed. Hous. Fin. Agency v. Merrill Lynch & Co., 903
F. Supp. 2d 274, 282 n.4 (S.D.N.Y. 2012) ("[G]iven the allegation that defendants provided the
same false information to the ratings agencies that they included in the Offering Materials,
allegations tending to show recklessness with respect to the one support a similar inference with
respect to the other. Thus, plaintiffs allegations of credit-rating fraud survive insofar as they
rely on the defendants' provision of false information regarding underwriting standards to the
ratings agencies.") Insofar as the alleged misrepresentations involve CL TV ratios and owneroccupancy rates, the Complaint does not adequately plead scienter, for the reasons discussed
above.
D.

Mortgages and Note Transfers

Plaintiffs also allege that the mortgage-backed securities they purchased from
Defendants were not, in fact, backed by mortgages. (Cmplt. (Dkt. No. 11) ~~ 162-166) Two
investigations conducted by Plaintiffs concluded that Defendants frequently did not assign the
underlying mortgages and notes to the issuing trusts, contrary to their representations. (Id.

ft 163) The Complaint asserts that, "as it was [FASC 's] responsibility to effectuate the transfers,
Defendants knew that the statements were false, and that the mortgages would not be properly

17

and timely assigned, at the time the representations were made." (Id.~ 180) Plaintiffs also point
to a "preliminary investigation" they performed - conducted at a time that is not disclosed - that
allegedly reveals that the "pattern by Defendants of not transferring notes and mortgages to trusts
pre-dated the issuance of the Certificates."

(Id.~

217)

These allegations are not sufficient to raise a strong inference of fraudulent intent.
S.Q.K.F .C., 84 F.3d at 634. Plaintiffs do not identify the source of the "preliminary
investigation," when it was conducted, whether Defendants were made aware of the results of the
investigation, and, if so, when. While Plaintiffs' investigations suggest that Defendants may not
have satisfied their obligations concerning the assignment of mortgages and notes, there is little
pied to show that Defendants never intended - at the time they made their representations about
assignment - not to assign the underlying mortgages and notes. Cf. Goldman Sachs Grp., Inc.,
2013 WL 8476977 at *6 (breach of contract is proper remedy absent factual allegations that
failure to assign and transfer notes and mortgages was a deliberate, premeditated practice); see
also Dowlings, Inc. v. Homestead Dairies, Inc., 88 A.D. 1226, 1229 (3d Dept. 2011) ("Promises
of future performance, alone, are insufficient to sustain a claim of fraud."). Accordingly,
Plaintiffs' fraud claims regarding faulty transfer of mortgages and notes are insufficient.

V.

MATERIAL MISSTATEMENTS AND OMISSIONS
Defendants argue that Plaintiffs have not adequately alleged the materiality of

(1) Defendants' failure to disclose that originators had abandoned their underwriting standards,
and (2) Defendants' misrepresentations regarding credit ratings, to the extent that those alleged
misrepresentations involve a failure to disclose to the credit rating agencies that originators had
abandoned their underwriting standards. (See Def. Br. (Dkt. No. 18) at 13-14, 18)

18

A.

Underwriting Guidelines
The Complaint alleges that Defendants falsely represented that all loans included

in the Securitizations either conformed with the originators' underwriting guidelines or had
sufficient "compensating factors" to justify their securitization. (Id.~ 120-128) Plaintiffs further
allege that Defendants knew that these statements "were false from their own actions and due
diligence [],which demonstrated that originators had systematically disregarded their
underwriting guidelines." (Id.~ 128) According to Plaintiffs, "Defendants nevertheless
represented to investors, such as Plaintiffs, that the underwriting guidelines were being
followed." (Id.)
Defendants offer two arguments as to why these statements were not materially
misleading. (Def Br. (Dkt. No. 18) at 13-15) First, Defendants argue that they "disclose[ d] the
very risks Plaintiffs contend were concealed," because the Offering Materials disclosed that
originators might make exceptions to their underwriting guidelines. (Id. at 13) Next, they argue
that Plaintiffs' allegations regarding underwriting guidelines are not sufficiently particularized,
because these allegations do not necessarily relate to the loans backing the Certificates at issue
here. (Id. at 13-15)
As to Defendants' first argument, "[c]ourts considering RMBS claims have
overwhelmingly held that such disclosures or warnings do not give notice to investors of the
defendant's 'wholesale abandonment of underwriting standards."' Allstate Ins. Co. v. Credit
Suisse Sec. (USA) LLC, 2014 WL 432458, at *8 (Sup. Ct. N.Y. Cty. Jan. 24, 2014) (listing
cases) (quoting Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance
Corp., 632 F.3d 762, 773 (1st Cir. 2011)); see also Public Emps. Ret. Sys. of Miss. v. Merrill
Lynch & Co., 714 F. Supp. 2d 475, 483 (S.D.N.Y. 2010) ("[T]he alleged repeated deviation from

19

established underwriting standards is enough to render misleading the assertion in the
registration statements that underwriting guidelines were generally followed."); N.J. Carpenters
Health Fund v. Royal Bank of Scot. Grp., PLC, 709 F.3d 109, 122-23 (2d Cir. 2013) (reversing
dismissal of fraud claims where plaintiff had provided "fairly specific" account of how
originators had abandoned underwriting standards).
Likewise meritless is Defendants' argument that there is no nexus between the
originators' abandonment of sound underwriting practices and the loans in the securitized pools
at issue. "A plaintiff need not allege that any particular loan or loans were issued in deviation
from the underwriting standards, so long as the complaint alleges 'widespread abandonment of
underwriting guidelines."' Emps.' Ret. Sys. of the Gov't of the Virgin Is. v. J.P. Morgan Chase
& Co., 804 F. Supp. 2d 141, 152 (S.D.N.Y. 2011) (quoting Tsereteli v. Residential Asset

Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 392 (S.D.N.Y. 2010)). As discussed above,
the Complaint alleges, inter alia, that (1) the Clayton Report concluded that RBS allowed a
substantial percentage of "waive-ins" during the relevant time period; and (2) FHF A's report
found substantial deviation from underwriting guidelines in another RBS securitization created at
about the same time as the securitizations at issue here. (Cmplt. (Dkt. No. 11

ifif I 04, 131)

These allegations are sufficient to raise an inference that the originators systematically
abandoned their underwriting guidelines with respect to the loans underlying the Certificates. In
not disclosing this alleged practice, the Offering Materials contained material misstatements or
om1ss10ns.
B.

Credit Ratings

The Complaint alleges that the Offering Materials represented that the credit
ratings were based on an assessment of the likelihood of delinquencies and defaults in the

20

underlying mortgage pools. (Cmplt. (Dkt. No. 11) if 232) Plaintiffs contend that these
representations were false and misleading because FASC ''obtained and marketed inflated ratings
for the Certificates by misrepresenting the risk profile of the underlying loans to the rating
agencies." (Id.~ 233) Defendants argue that they are not responsible for credit ratings, which
"are statements only of the rating agencies that assigned them." (Def. Br. (Dkt. No. 18) at 18)
Defendants add that "Plaintiffs do not allege that Defendants inaccurately conveyed the ratings
assigned by the rating agencies and, as such, the Offering Materials contain no misstatement."

Defendants' arguments are not persuasive. "'The truth of a statement made in the
prospectus is adjudged by the facts as they existed when the registration statement became
effective."' In re Agria Corp. Sec. Litig., 672 F. Supp. 2d 520, 526 (S.D.N.Y. 2009) (quoting In
re Flag Telecom Holdings Ltd. Sec. Litig., 308 F. Supp. 2d 249, 254 (S.D.N.Y. 2004)). Here,
Defendants stated in their Offering Materials that the securities "rating takes into consideration
the characteristics of the Mortgage Loans and the structural, legal and tax aspects associated with
the certificates." (Cmplt. (Dkt. No. 11) ~ 232) Plaintiffs claim that this statement was
knowingly false and misleading, at the time it was made, because Defendants knew, inter alia,
that originators were not adhering to their stated guidelines, rendering the information made
available to rating agencies unreliable. If Defendants knew, as Plaintiffs allege, that the rating
agencies could not properly assess the risk presented by the underlying loans, the Offering
Materials' representation that the credit ratings reflected the characteristics of the underlying
mortgage loans was false and misleading. Accordingly, Plaintiffs have sufficiently pied
misstatements regarding credit ratings. Accord Stichting Pensioenfonds ABP v. Credit Suisse
Grp. AG, 2012 WL 6929336, at* 10 (Sup. Ct. N.Y. Cty. Nov. 30, 2012) (statements regarding

21

agencies' rating method actionable where plaintiff alleged that Credit Suisse knew that the data
given to the rating agencies was false). 5

VI.

RELIANCE
A.

Justifiable Reliance
"A misrepresentation is only actionable if it (1) induces a party to act, and (2) the

party was justified ... in being so induced." Landesbank Baden-Wiirttemberg v. RBS Holdings
USA Inc., 14 F. Supp.3d 488, 510 (S.D.N.Y. 2014). "New York law imposes an affirmative
duty on sophisticated investors to protect themselves from misrepresentations made during
business acquisitions by investigating the details of the transaction." Global Minerals & Metals
Corp. v. Holme, 35 A.D.3d 93, 100 (1st Dept. 2006). However, where the misrepresented facts
are "peculiarly within the misrepresenting party's knowledge," reliance is justifiable. Dall.
Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 785 (2d Cir. 2003). "[B]ecause justifiable
reliance 'involve[s] many factors to consider and balance, no single one of which is dispositive,'
it is 'often a question of fact for the jury rather than a question of law for the court."' JPMorgan
Chase, 902 F. Supp. 2d at 496 (quoting STMicroelectronics, N.V. v. Credit Suisse Sec. (USA)
LLC, 648 F.3d 68, 81 (2d Cir. 2011)).

5

Defendants also argue that Plaintiffs' fraud claims should be dismissed because the
Complaint's use of group pleading violates Fed. R. Civ. P. 9(b)'s particularity requirement.
(Def. Br. (Dkt. No. 18) at 5-6) Defendants' argument is misplaced, because the Complaint
alleges common law fraud, rather than a federal securities law violation. See In re Optimal U.S.
Litig., 837 F. Supp. 2d 244, 264 (S.D.N.Y. 2011) (group pleading is permitted where plaintiffs
state a common law fraud claim, as opposed to a federal securities law claim, and "allege
interaction between the corporate entities relating to the subject matter of the alleged fraudulent
misstatement or omission that is more than conclusory"). Here, the Complaint explains - at
length - the role that each Defendant played in each Securitization, and how each Defendant is
responsible for the alleged misrepresentations. (Cmplt. (Dkt. No. 11) iJiJ 50-64) These

allegations are sufficient to make out a common law fraud claim, and do not violate Rule 9(b).
22

Plaintiffs contend that they reasonably relied on the Defendants' Offering
Materials in deciding to purchase the Certificates, and that their "review and analysis could not
uncover the fact that the representations of material fact were false." ((Cmplt. (Dkt. No. 11)
~~

250, 265)
Defendants argue that the Complaint does not plead facts showing justifiable

reliance. (Def. Br. (Dkt. No. 18) at 10) First, Defendants claim that Plaintiff's failure to specify
the persons who read and relied on their misrepresentations is fatal to their claim. The case law
Defendants rely on for this argument is not on point, however. In Devaney v. Chester, 709 F.
Supp. 1255 (S.D.N.Y. 1989) - after four amended complaints and extensive discovery - the
court dismissed plaintiffs action because of his inability to specify who had read and relied on a
written statement allegedly made by the defendant. Devaney, 709 F.Supp. at 1264. Here, there
has been no discovery, and Plaintiffs have identified the entities involved in making investment
decisions regarding the Certificates.
Am. Fin. Int'l Gm.-Asia, L.L.C. v. Bennett, No. 05 Civ. 8988 (GEL), 2007 WL
1732427 (S.D.N.Y. June 14, 2007), also does not support Defendants' argument. In Bennett, the
complaint did not "allege that plaintiffs read the allegedly misleading registration statements, or
even that they knew of their existence." Bennett, 2007 WL 1732427, at *9. Here, Plaintiffs have
alleged that they would not have purchased the Certificates had it not been for the Defendants'
representations in the Offering Materials.

(See,~,

Cmplt (Dkt. No. 11) ~~ 237, 241, 246)

Relying on HSH Nordbank v. UBS AG, 95 A.D.3d 185 (1st Dept. 2012),
Defendants next argue that - given Plaintiffs' financial sophistication - their failure to inquire
into information allegedly in Defendants' sole possession is incompatible with a finding of
justifiable reliance. (Def. Br. (Dkt. No. 18) at 11-12) Defendants further contend that their

23

"extensive and detailed risk disclosures" should preclude a finding of justifiable reliance. (Id. at
11) Neither argument is persuasive. First, the alleged misrepresentation in Nordbank did not
relate to facts peculiarly within the seller's knowledge. "'[T]he core subject of the complainedofrepresentations [in that case] was the reliability of the credit ratings used to define the
permissible composition of the reference pool,"' and the defendant there established that "the
reliability of the credit ratings could have been ascertained from reviewing market data or other
publicly available information." Lorelely Fin. (Jersey) No. 3 Ltd. V. Citigroup Global Mkts.
Inc., 119 A.D.3d 136, 147-48 (1st Dept. 2014) (quoting and citing Nordbank, 96 A.D.3d at 196,
199).
Here, Defendants have not undermined Plaintiffs' claim that "review and analysis
could not uncover the fact that the representations of material fact were false." (Cmplt (Dkt. No.
11) ~ 250) Moreover, the disclaimers in Nordbank "relate[d] directly or indirectly to the
reliability of credit ratings in the relevant market." Nordbank, 96 A.D.3d at 199. Defendants'
disclaimers and disclosures, by contrast, do not "relate directly or indirectly" to the specific
particular type of information allegedly misrepresented - namely, the originators' abandonment
of underwriting guidelines. See Loreley, 119 A.D.3d at 147.
This Court concludes that Plaintiffs have adequately pied justifiable reliance.

B.

Loss Causation
Defendants also contend that Plaintiffs have not pied loss causation, because they

have not alleged "facts 'which, if proven, would show that [their losses were] caused by the
alleged misstatements as opposed to intervening events."' (Def. Br. (Dkt. No. 18) at 23)
(quoting Lentell v. Merrill Lynch & Co., 396 F.3d 161, 174 (2d Cir. 2005)). Courts have
repeatedly rejected this argument in other RMBS cases.

24

See,~,

MBIA Insurance Co. v.

Countrywide Home Loans, Inc., 87 A.D.3d 287, 296 (1st Dept. 2011) ("It cannot be said, on this
pre-answer motion to dismiss, that MBIA's losses were caused, as a matter oflaw, by the 2007
housing and credit crisis."); Dexia Holdings, Inc. v. Countrywide Fin. Corn., No. 2: 11 Civ.
7165(MRP), 2012 WL 1798997, at *6 (C.D. Cal. Feb. 17, 2012) ("The link between a risk of
default and a Certificate's value is indisputable and provides sufficient causal nexus to survive a
motion to dismiss .... Untangling the effect of the alleged misrepresentations from the effects of
the broader financial crisis will present a complicated issue of fact. It is therefore better saved
for a more complete factual record.")
Here, Plaintiffs have adequately alleged that Defendants' alleged
misrepresentations in the Offering Materials caused the drop in the Certificates' value, and that
the Certificates' value would have been much higher - notwithstanding the collapse in the
housing market- had Defendants not committed fraud. (Cmplt. (Dkt. No. 11) if 27, 257) These
allegations satisfy Plaintiffs' burden at this stage.
C.

Cognizable Damages

Finally, Defendants contend that Plaintiffs have not - and cannot -plead any
cognizable damages, for they have neither sold the Certificates nor suffered any missed
payments of principal or interest. (Def. Br. (Dkt. No. 18) at 24) Defendants' argument
misapprehends New York law, however, under which fraud damages are calculated based on the
difference between the price paid for an asset and its true value on the sale date. Merrill Lynch
& Co. v. Allegheny Energy, Inc., 500 F.3d 171, 183 (2d Cir. 2007); see also NECA-IBEW

Health & Welfare Fund v. Goldman Sachs Co., 693 F.3d 145, 166 (2d Cir. 2012) ("[B]asic
securities valuation principles ... belie the proposition that a fixed income investor must miss an
interest payment before his securities can be said to have declined in 'value.' The reasonable

25

inference from [plaintiffs] allegations is that, because the loans backing the Certificates were
riskier than defendants represented, the future cash flows to which [plaintiff] was entitled ...
required a higher discount rate once the Offering Documents' falsity was revealed, resulting in a
lower present value."). Plaintiffs have adequately alleged that the Certificates are worth far less
than what they paid for them, and that their true value would have been much lower at the time
of sale, had RBS disclosed, inter alia, that originators had systematically abandoned their
underwriting standards. See Cmplt. (Dkt. No. 11) if~120-128, 255-257; see also Allstate Ins. Co.
v. Ace Securities Corp., No. 650431/2011, 2013 WL 1103159 at *28 (Sup. Ct. N.Y. Cty. Mar.
14, 2013) ("While defendants assert that the proper measure of damages is the difference
between the price paid for a security and its true worth at the time of purchase, it is easily
inferable from the pleadings that plaintiffs paid an inflated price for the RMBS and are thus []
entitled to recover for the impermissible premium they paid.") Accordingly, Defendants' motion
to dismiss for failure to plead cognizable damages will be denied.

VII.

NEGLIGENT MISREPRESENTATION AND FRAUDULENT CONCEALMENT
"A claim for negligent misrepresentation requires the plaintiff to allege: ' ( 1) the

existence of a special or privity-like relationship imposing a duty on the defendant to impart
correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable
reliance on the information."' HSH Nordbank AG v. Barclays Bank PLC, 42 Misc.3d 1231(A),
2014 WL 841289, at *22 (Sup. Ct., N.Y. Cty. Mar. 3, 2014) (quoting Mandarin Trading Ltd. v.
Wildenstein, 16 N.Y.3d 173, 180 (2011)). "A cause of action for fraudulent concealment
requires proof of the elements of fraud based on a misrepresentation ... as well as 'an allegation
that the defendant had a duty to disclose material information and that it failed to do so."' Id.
(quoting P.T. Bank Cent. Asia v. ABN AMRO Bank N.V., 301A.D.2d373, 376 (1st Dept.

26

2003)). "A fraudulent concealment claim must be based on a 'special relationship or fiduciary
obligation."' Id. (quoting Gomez-Jiminez v. New York Law Sch., 103 A.D.3d 13, 18 (1st Dept.
2012), leave to appeal denied, 20 N.Y.3d 1093 (2013)).
Plaintiffs have not alleged facts demonstrating the special relationship necessary
to sustain actions for negligent misrepresentation and fraudulent concealment. The parties here
are "sophisticated entities [who were] engaged in an arm's length transaction." Id. Based on the
allegations in the Complaint, no special relationship - fiduciary or otherwise - existed between
them. Plaintiffs argue that the "special facts doctrine" applies and imposed a duty on Defendants
to disclose because of their "superior knowledge of essential facts." (Pltf. Br. (Dkt. No. 24) at
23) However, they have not cited any case involving RMBS in which a negligent
misrepresentation or fraudulent concealment claim has been permitted to proceed on this theory,
and New York courts routinely dismiss such claims. See HSH Nordbank AG v. Barclays Bank
PLC, 2014 WL 841289, at *22 ("Plaintiffs do not allege the special or fiduciary relationship
necessary to support either a negligent misrepresentation or fraudulent concealment claim.");
MBIA Ins. Corp., 87 A.D.3d at 297 ("Because MBIA has failed to allege facts showing that
these sophisticated commercial entities engaged in anything more than an arm's length business
transaction, the negligent misrepresentation claim was properly dismissed."); Goldman Sachs
Grp., Inc., 2013 WL 8476977 at *12 ("Goldman Sachs's exclusive access to the underlying loan
files does not constitute the type of unique or specialized knowledge necessary to state such a
claim."). Accordingly, Plaintiffs' negligent misrepresentation and fraudulent concealment
claims will be dismissed.

27

VIII. AIDING AND ABETTING FRAUD
Plaintiffs assert a cause of action against Defendants RBS Holdings and RBS
Securities for aiding and abetting the alleged fraud committed by FASC. (Cmplt. (Dkt. No. 11)
,-r~

285-291) To state a claim for aiding and abetting fraud, Plaintiffs must allege "(1) the

existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor;
and (3) substantial assistance by the aider and abettor in achievement of the fraud." Stanfield
Offshore Leveraged Assets, Ltd. v. Metro. Life Ins. Co., 64 A.D.3d 472, 476 (1st Dept. 2009).
Defendants argue that this claim should be dismissed because (1) RBS Holdings
and RBS Securities are each named as principals in the fraud count and "obviously cannot aid
and abet [themselves]"; (2) Plaintiffs have not pled with the requisite particularity actual
knowledge of the fraud; and (3) the Complaint does not "separately identity those acts which
constituted substantial assistance and those which constituted the primary violation." (Def. Br.
(Dkt. No. 18) at 24-25)
Defendants' arguments are not persuasive. First, the Complaint does not claim
that RBS Securities aided and abetted its own fraud. Instead, it alleges that "RBS Securities
delivered the Offering Materials prepared by [FASC] that contained the false statements."
(Cmplt. (Dkt. No. 11) ~ 287) Such an act would be sufficient to show "substantial assistance."
Second, "a plaintiff alleging an aiding-and-abetting fraud claim may plead actual knowledge
generally, particularly at the prediscovery stage, so long as [fraudulent] intent may be inferred
from the surrounding circumstances." DDJ Mgmt., LLC v. Rhone Grp., LLC, 78 A.D.3d 442,
443 (1st Dept. 2010).
Here, the Complaint sets forth allegations as to each Defendant's role in the
securitization process and the preparation of the Offering Materials. (Cmplt. (Dkt. No. 11)

28

~~ 50-64) It also alleges that "[RBS Holdings] and RBS Securities had actual knowledge that the

statements in the Offering Materials concerning the credit quality of the underlying loans for all
Trusts were false .... [Such knowledge] is directly inferable from their substantial involvement
in the securitization process, and the fact that several officers and/or directors of [FASC] were
also officers and directors of RBS Securities and/or the parent of RBS [Holdings]." (Id.~ 288)
Plaintiffs' allegations are sufficient at this stage. 6 Accordingly, Defendants' motion to dismiss
the aiding-and-abetting fraud claim will be denied.

IX.

RESCISSION BASED ON MUTUAL MISTAKE
Plaintiffs allege a cause of action for rescission based on mutual mistake. They

argue that if RBS Securities was unaware of the alleged failures to transfer title to the trusts,
"then a mutual mistake of a material fact existed at the time of[] contract, and the transactions
are void." (Cmplt. (Dkt. No. 11) ~ 298) The mutual mistake alleged by Plaintiffs would be that
the Offering Materials provided for "an investment in trusts that actually owned residential
mortgages and underlying promissory notes at the time of investment," when, in reality, they
would not. (Id. «.[ 296)
Plaintiffs' rescission claim fails, because the Offering Materials' statements
regarding title transfer are forward-looking, in that they contemplate Defendants' future
obligations under the parties' agreements. "The doctrine of mutual mistake affords equitable
relief only where the parties were mistaken as to facts existing at the time the contract was
entered into." Raphel v. Booth Mem'l Hosp., 67 A.D.2d 702, 703 (2d Dept. 1979) (emphasis in
original). Plaintiffs argue that "[t]he mortgage loans were to be transferred to the Trusts at the
6

Defendants also argue that the aiding and abetting claim must be dismissed because Plaintiffs
have not delineated what acts constitute substantial assistance and what acts are primary
violations. (Def. Br. (Dkt. No. 18) at 25) Defendants have not cited law demonstrating that such
a delineation is required at this stage of the proceedings, however.
29

closing of the Securitizations - at the same time the Certificates were issued. Thus, the loan
transfers were not 'future' events but contemporaneous ones." (Pltf. Br. (Dkt. No. 24) at 26).
However, all of the Complaint's allegations about title transfer contemplate future performance,
not existing facts. (See, M,., Cmplt. (Dkt. No. 11) if 175 ("On the Closing Date, the Depositor
will transfer to the Trust. ... ");id.

if 176 ("Defendants also promised to deliver the promissory

notes to the Trustees for the Trust.") (emphasis added)) Given that Plaintiffs have not pled
mutual mistake as to a then-existing fact, this Court will dismiss Plaintiffs' cause of action for
rescission based on mutual mistake.
CONCLUSION

For the reasons stated above, Defendants' motion to strike under Fed. R. Civ. P.
12(f) is denied. Defendants' motion to dismiss is granted in part and denied in part, as set forth
above. The Clerk of Court will terminate the motions (Dkt. No. 17).
The Court will conduct a Rule 16 conference in this matter on April 30, 2015 at
11 :00 a.m. in Courtroom 705 of the Thurgood Marshall United States Courthouse, 40 Foley
Square, New York, New York, 10007. Pursuant to this Court's Individual Rules of Practice in
Civil Cases, the parties are directed to submit a joint letter and proposed Case Management Plan
by April 23, 2015.
SO ORDERED.

Dated: New York, New York
March 20, 2015

30