National Credit Union Administration Board v. Wachovia Capital Markets, LLC

Filing 111

OPINION & ORDER re: 52 MOTION to Dismiss the Complaint filed by Wachovia Capital Markets, LLC. Defendant's February 5, 2014 motion to dismiss is denied. (Signed by Judge Denise L. Cote on 5/6/2014) (tro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------X
:
:
NATIONAL CREDIT UNION ADMINISTRATION
BOARD, as Liquidating Agent of
:
:
Southwest Corporate Federal Credit
:
Union and Members United Corporate
Federal Credit Union,
:
:
:
Plaintiff,
:
-v:
WACHOVIA CAPITAL MARKETS, LLC, now known :
as WELLS FARGO SECURITIES, LLC,
:
:
:
Defendant.
:
------------------------------------------X

13 Civ. 6719 (DLC)
OPINION & ORDER

APPEARANCES:
For the Plaintiff:
David Fredrick, Wan J. Kim, Gregory G. Rapawy, and Andrew C.
Shen
Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.
Sumner Square, 1615 M Street, N.W., Suite 400
Washington, DC 20036
David H. Wollmuth, Fredrick R. Kessler, Steven S. Fitzgerald,
and Ryan A. Kane
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue, 12th Floor
New York, NY 10010
George A. Zelcs
Korein Tillery LLC
205 North Michigan Avenue, Suite 1950
Chicago, IL 60601
Stephen M. Tillery, Greg G. Gutzler, Peter H. Rachman, and
Robert L. King
Korein Tillery LLC
505 North Seventh Street, Suite 3600
St. Louis, MO 63101

For the Defendant:
Andrew W. Goldwater
Friedman Kaplan Seiler & Adelman LLP
7 Times Square
New York, NY 10036
David H. Fry, Christian K. Wrede, and Hannah E. Shearer
Munger, Tolles & Olson LLP
560 Mission Street, 27th Floor
San Francisco, CA 94105

DENISE COTE, District Judge:
This Opinion addresses a motion to dismiss filed in one of
seven actions brought in this district by the National Credit
Union Administration Board (“NCUA”), as liquidating agent of
Southwest Corporate Federal Credit Union (“Southwest”) and
Members United Corporate Federal Credit Union (“Members United”)
(collectively, the “Credit Unions”).

NCUA has sued various

financial institutions involved in the packaging, marketing, and
sale of residential mortgage-backed securities (“RMBS”) that the
Credit Unions purchased in the period from 2005 to 2007. 1

The

Nat’l Credit Union Admin. Bd. (“NCUA”) v. Morgan Stanley & Co.,
Inc., et al., 13 Civ. 6705 (DLC); NCUA v. Wachovia Capital
Markets, LLC n/k/a Wells Fargo Secs., LLC, 13 Civ. 6719 (DLC);
NCUA v. Goldman Sachs & Co., et al., 13 Civ. 6721 (DLC); NCUA v.
RBS Secs., Inc., et al., 13 Civ. 6726 (DLC); NCUA v. Barclays
Capital, Inc., 13 Civ. 6727 (DLC); NCUA v. UBS Secs., LLC, 13
Civ. 6731 (DLC); and NCUA v. Credit Suisse Secs. (USA) LLC, et
al., 13 Civ. 6736 (DLC).
Two other actions, initially brought by NCUA, have since
settled. NCUA v. Bear Stearns & Co., et al., 13 Civ. 6707
(DLC); NCUA v. Residential Funding Secs., LLC n/k/a Ally Secs.,
LLC, 13 Civ. 6730 (DLC).
1

2

complaints in the NCUA actions generally assert that the
Offering Documents used to market and sell RMBS to the Credit
Unions during the relevant period contained material
misstatements or omissions with respect to (1) whether the
underlying mortgage loans were underwritten according to certain
risk guidelines, and (2) certain statistics regarding the
quality of the underlying loans, including the loan-to-value
(“LTV”) ratio, the owner-occupancy status, and the borrowers’
debt-to-income (“DTI”) ratio.
The Court has already issued an Opinion addressing a motion
to dismiss filed in the lead case brought by NCUA:

NCUA v.

Morgan Stanley & Co., Inc., et al., 13 Civ. 6705 (DLC), 2014 WL
241739 (S.D.N.Y. Jan. 22, 2014) (“Morgan Stanley”).

Familiarity

with that Opinion is assumed; all capitalized terms have the
meanings previously assigned to them.
This action is brought against Wachovia Capital Markets,
LLC (“Wachovia”), now known as Wells Fargo Securities, LLC, and
it asserts claims under the Texas Securities Act, Tex. Rev. Civ.
Stat. Ann. art. 581, § 33 (2013) (“Texas Blue Sky Law”).
Wachovia has moved to dismiss many of the claims brought against
it.

For the reasons set forth below, the motion is denied.

Seven other actions are currently being brought by NCUA
against these and other defendants in Kansas and California.
3

BACKGROUND
This case concerns two RMBS Certificates that were
underwritten and sold by Wachovia and purchased by Southwest:
WMLT 2006-AMN1 (“AMN1”) and WMLT 2006-ALT1 (“ALT1”).
Certificates were rated AAA.

Both

AMN1 and ALT1 were purchased in

June and December 2006, respectively, for a total of
$25,738,350.

By mid-2009, the Certificates were downgraded to

junk status.

By June of 2013, approximately 25% of the loans

for each Certificate were delinquent.
Four originators were involved in these securities.

For

AMN1, American Mortgage Network, Inc. (“AmNet”) originated 100%
of the loans in the security.

For ALT1, four originators

contributed loans in the security: National City Mortgage Co.
(~66% of the loans), Accredited Home Lenders, Inc. (~19%),
Wachovia Mortgage Corp. (~12%), and AmNet (~3%).

As relevant

here, NCUA alleges that AmNet’s percentage of loans “originated
for distribution” was 90.3% in 2006 and 71.9% in 2007.
The Wachovia complaint asserts material misstatements in
the Offering Documents with respect to the statistics relating
to the quality of the underlying loans, with an emphasis on LTV
ratios and owner-occupancy rates.

A portion of the complaint

discusses the results of a forensic analysis of the ALT1
security, which found materially higher LTV ratios and lower
owner-occupancy rates than those listed in the Offering
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Documents for ALT1.

The complaint also asserts that the

Offering Documents contained material misstatements with respect
to originators’ compliance with the underwriting guidelines (and
the reduced documentation program underwriting guidelines).
On February 5, 2014, following this Court’s ruling on the
motion to dismiss in Morgan Stanley, Wachovia moved to dismiss
most of the claims in this action. 2

In an Order of February 7,

that motion was stayed pending resolution of a motion to
transfer filed before the Judicial Panel on Multi-District
Litigation Panel (“JPML”).
motion to transfer.

On February 12, the JPML denied the

Following a conference with the parties on

March 11, the stay was lifted, and a schedule was entered for
briefing the motion to dismiss.

The motion became fully

submitted as of April 25, 2014.

DISCUSSION
Wachovia’s present motion consists of essentially two sets
of arguments.

First, Wachovia moves to dismiss all claims

concerning misrepresentations in the Offering Documents for
AMN1, arguing that NCUA has failed to plead sufficient
The Court scheduled briefing on the motion to dismiss the lead
NCUA case -- NCUA v. Morgan Stanley, 13 Civ. 6705 (DLC) -- and
stayed such briefing in the related cases until it had filed its
Opinion on that motion. In the event that the motion were
denied, which it was in significant part, the Court advised the
parties that discovery would proceed in all actions and that any
motions to dismiss in the remaining actions could be filed.
2

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allegations regarding AmNet, the originator that contributed the
loans underlying AMN1.

Second, Wachovia moves to dismiss all

claims concerning misrepresentation of LTV and DTI ratios.
Both sets of these arguments have been addressed in this
Court’s previous Opinions, the Opinion in Morgan Stanley and two
Opinions in the RMBS cases brought by the Federal Housing
Finance Agency (“FHFA”), as conservator of the Federal National
Mortgage Association (“Fannie Mae”) and the Federal Home Loan
Mortgage Corporation (“Freddie Mac”).

Fed. Hous. Fin. Agency

(“FHFA”) v. UBS Americas, Inc., et al., 858 F. Supp. 2d 306
(S.D.N.Y. 2012) (“UBS”); FHFA v. JPMorgan Chase & Co., 902 F.
Supp. 2d 476, 493 (S.D.N.Y. 2012) (“JPMorgan”).

The Court

hereby adopts by reference the legal standards and reasoning in
these prior Opinions.

The claims at issue here are strict

liability claims subject to the pleading standard set forth in
Rule 8(a), Fed.R.Civ.P.

Morgan Stanley, 2014 WL 241739, at *15.

Any claim must be “plausible on its face.”

Id.

Only a brief

discussion is necessary to apply the standards described in
these prior Opinions to the arguments raised by Wachovia.

I. Adequacy of Claims Regarding AMN1
The parties agree that, for NCUA to state plausibly any
claims regarding misrepresentations about underwriting conduct
in the Offering Documents relating to AMN1, it must set forth
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originator-specific allegations.

Morgan Stanley, 2014 WL

241739, at *16 (citing N.J. Carpenters Health Fund v. Royal Bank
of Scotland Grp., 709 F.3d 109, 122 (2d Cir. 2013)).

The

parties acknowledge that these allegations may be supported by
“government reports, court filings, and other publicly available
information.”

Id.

Wachovia contends NCUA’s allegation that

AmNet had a high percentage of “originate-to-distribute” loans
is insufficient to state a claim as to AMN1.
NCUA has plausibly pled its claims related to the
underwriting conduct for loans contained in AMN1.

In reaching

this conclusion, the Court is mindful that there is no single
set of allegations that every plaintiff must include to state a
plausible claim regarding an originator’s underwriting
practices.

“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.”
(2009).

Ashcroft v. Iqbal, 556 U.S. 662, 678

This determination requires “[v]iewing the allegations

of the complaint as a whole,” Matrixx Initiatives, Inc. v.
Siracusano, 131 S. Ct. 1309, 1323 (2011), and is a “contextspecific task that requires the reviewing court to draw on its
judicial experience and common sense.”

Iqbal, 556 U.S. at 679.

Thus, each complaint must be examined in its totality to
determine whether its set of allegations and the context it
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provides for those allegations meet the pleading standard at
issue.

See N.J. Carpenters, 709 F.3d at 123 n.7 (refusing to

set forth a “minimum” that a plaintiff must plead for RMBS
strict liability claims).

That examination shows that

Wachovia’s motion is premised on an unfairly restricted reading
of the complaint, and that the complaint comfortably pleads a
plausible claim regarding AmNet and AMN1.
As explained in the complaint, the practice of originating
mortgages in order to sell (or distribute) them through the
securitization process encouraged shoddy underwriting practices
because the securitization of mortgage loans breaks down the
direct relationship between the borrower and the lender.

The

originator of the loan, which is the party enforcing the
underwriting standards, and the securitizer of the loans have
minimal risk if the borrower defaults on her mortgage payment.
The investor in the security bears that credit risk, but has the
least information about the borrower or the originator’s
underwriting standards and conduct.

The complaint alleges,

quoting a 2011 white paper issued by the Financial Stability
Oversight Council (“FSOC”), that the “originate-to-distribute
model” compensated originators based on volume rather than the
quality of the mortgages and thus “exacerbated” the
circumstances wherein originators “lower[ed] underwriting

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standards in ways that investors may have difficulty detecting.” 3
The sole originator with respect to AMN1, AmNet, had a very
high originate-to-distribute ratio.
sold, it was 90.3%.

In 2006, the year AMN1 was

Within one year of the securitization, over

5% of the mortgages represented by that Certificate were
delinquent or in default.
described above.

That trend has only worsened, as

Because AmNet was the sole originator of the

loans contained in AMN1, the performance of the loans underlying
that Certificate permit inferences not only about the quality of
the loans but also about AmNet itself and its underwriting
practices.

These allegations, when viewed in their totality,

create a plausible inference that AmNet systematically failed to
comply with its reported underwriting guidelines, and thus that
the allegations of misstatements in the Offering Documents
relating to the underwriting conduct for the AMN1 loans are
plausible.

See Morgan Stanley, 2014 WL 241739, at *16 (stating

that a “linkage” between “security-specific allegations” and
“originator-specific allegations” “raises a plausible inference
of a material misstatement or omission by the defendants with
respect to whether the loans complied with underwriting
practices”).
Financial Stability Oversight Council, Macroeconomic Effects of
Risk Retention Requirements, at 3 (Jan. 2011), available at
http://www.treasury.gov/initiatives/wsr/Documents/
Section%20946%20Risk%20Retention%20Study%20%20(FINAL).pdf.
3

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This conclusion is underscored by Plumbers’ Union Local No.
12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762,
772–74 (1st Cir. 2011), the First Circuit decision that the
Second Circuit adopted in N.J. Carpenters, 709 F.3d at 122.

In

Nomura, the originator at issue was alleged to have a “business
model[] aimed at milling applications at high speed to generate
profits from the sale of such risky loans to others.”
at 772 (citation omitted).

632 F.3d

It allegedly “approved as many loans

as possible, even scrubbing loan applications of potentially
disqualifying material.”

Id. (citation omitted).

The First

Circuit described these allegations as “fairly specific,” id. at
773, and thus sufficient to survive a motion to dismiss.
774.

Id. at

AmNet is alleged to have an analogous business model here,

as explained above.

Accordingly, Wachovia’s motion to dismiss

the claims as to AMN1 is denied.
Wachovia disputes that originate-to-distribute percentages
reflect abandonment of underwriting guidelines, arguing that
such percentages are a “post-origination” statistic that are
“consistent with” but do not “plausibly suggest” that AmNet
abandoned its underwriting guidelines.

A 90.3 originate-to-

distribute ratio cannot be dismissed as a post-hoc statistic.
It is not just plausible, but indeed likely, that AmNet achieved
this impressive rate of distribution by designing and
implementing a business model to sell the mortgages it
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originated.

If that is so, then the findings by the FSOC about

the impact of such a business model on underwriting practices
are highly relevant, and permit a reasonable inference to be
drawn that AmNet abandoned its underwriting guidelines.
Wachovia also argues that the originator-specific facts are
too thin when compared to the facts in N.J. Carpenters and
Nomura.

It argues that NCUA cannot rely on an originate-to-

distribute ratio to support an allegation about the nature of an
originator’s underwriting practices.
precedents and the complaint.

Wachovia misreads those

To begin, the facts here are

analogous to those in Nomura, as explained above.

Moreover, the

facts in N.J. Carpenters on which Wachovia relies (e.g., the
existence of confidential witnesses) were not essential to the
Second Circuit’s holding.

A virtually identical argument was

made and rejected in Morgan Stanley.
n.16.

2014 WL 241739, at *16

Additionally, as explained above, there is no litmus test

under Rule 8(a), Fed.R.Civ.P., and Wachovia’s attempt to impose
a pleading straight jacket on NCUA based on the facts in N.J.
Carpenters and Nomura is misguided.

Finally, Wachovia misreads

the complaint as relying solely on an originate-to-distribute
ratio to state a claim about an originator’s underwriting
practices.

Here, because AmNet was the sole originator for

AMN1, the poor performance of the Certificate and the
Certificate’s loans sheds additional light on the originator’s
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practices.

Together, the distribution ratio and the performance

data are more than sufficient to state a plausible claim that
this originator engaged in the alleged underwriting practices,
and thus a plausible claim as to Wachovia’s misrepresentations
about that underwriting conduct in the Offering Documents
relating to AMN1.

II. Adequacy of Claims Regarding LTV and DTI ratios
Wachovia next argues that all claims regarding
misstatements with respect to LTV and DTI ratios must be
dismissed.

It asserts that the allegation regarding LTV ratios

must be dismissed since the complaint does not adequately plead
that appraisers did not believe in the accuracy of their
appraisals.

Wachovia also points out that there are no specific

allegations at all regarding DTI ratios for either Certificate.
The complaint’s allegations regarding the underwriting
process generally for these two Certificates are as follows.
The troubling performance data, including mortgage delinquency
rates and the collapse in the credit ratings for each
Certificate, have been recounted above.

In addition, Wachovia

has not challenged the sufficiency of the allegations regarding
the originators’ lack of compliance with underwriting guidelines
as to ALT1, and the plausibility of such allegations as to AMN1
has just been addressed.

The complaint also describes the
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results of forensic reviews for the loans that could be
identified in the pools backing the ALT1 Certificate.

Using a

valuation model that permitted a calculation of property values
in 2006 for roughly 35% of the loans within ALT1, the review
determined that the Offering Documents materially understated
the LTV ratios for those loans.

A separate forensic review of

roughly 60% of the ALT1 loans showed that the Offering Documents
materially overstated the percentage of owner-occupied
properties.

Taken together, these allegations plead a plausible

claim regarding the misrepresentations of LTV and DTI ratios for
both Certificates.
Wachovia principally challenges the adequacy of NCUA’s
pleadings with respect to LTV ratios.

It asserts that, because

LTV ratios are based on appraisals that are matters of opinion,
the plaintiff must “show that the estimates were both
objectively false and disbelieved by the speaker when made
(‘subjectively false’).”

UBS, 858 F. Supp. 2d at 325 (citing

Fait v. Regions Fin. Corp., 655 F.3d 105, 113 (2d Cir. 2011)).
Citing UBS, Wachovia argues that NCUA failed to allege
subjective falsity, i.e., that the appraisers did not believe
their own appraisals.
To begin, some of the LTV ratios at issue here do not
incorporate appraisal values.

They are based instead on the

purchase price for the property, and are therefore clearly
13

representations of fact and not opinion.
In any event, UBS provides little assistance to Wachovia.
In UBS, this Court rejected the defendants’ argument that the
representations in the Offering Documents about LTV ratios and
housing appraisals were not actionable because they were
statements of opinion and not fact.

858 F. Supp. 2d at 324-28.

The UBS Opinion held that an appraisal constitutes a factual
statement in the sense that it “represents the appraiser’s true
belief as to the value of the property,” and that liability
could attach to that implied assertion where the assertion is
shown to be false.

Id. at 326.

Relying on that analysis, the

UBS Opinion examined whether the plaintiff had adequately
alleged that the appraisals, as presented through the LTV ratios
“were both false and not honestly believed when made.”
328 (citation omitted).

Id. at

The Opinion found that the forensic

review conducted in that case showed that the “LTV data reported
in the offering materials deviates so significantly from the
results of plaintiff’s loan-loan level analysis as to raise a
plausible inference that the appraisers knowingly inflated their
valuations.”

Id.

The plaintiff in UBS had also relied on a

“series of news stories, lawsuits and government investigations
that have revealed instances in which appraisers connected to
some of the mortgage originators at issue were found to have
systematically and knowingly overstated the value of homes in
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order to allow borrowers to obtain larger loans than they could
afford.”

Id.

Relying on such robust allegations, the complaint

in UBS so comfortably stated a plausible claim that this Court
did not confront, and thus did not decide, the threshold for
pleading falsity of statements regarding LTV ratios.
It is likewise unnecessary here to decide the threshold for
pleading falsity of statements regarding LTV ratios.

After all,

under the ordinary Rule 8(a) pleading standard as applied to
state-of-mind elements of a non-fraud claim, a plaintiff need
only plead facts that permit a reasonable inference of
subjective falsity.

See, e.g., Nielsen v. Rabin, ___ F.3d ___,

2014 WL 552805 (2d Cir. Feb. 13, 2014) (applying the Rule 8
standard in the context of a deliberate indifference mental
state for a Section 1983 claim).

As was true in UBS, the

plaintiff has more than adequately pleaded such a claim.
The complaint includes an industry-wide allegation of
inflated appraisal prices, stating that mortgage fraud
“flourished” during the period of time in question.

In doing

so, NCUA cites to the same 2012 Report by the Financial Crisis
Inquiry Commission that was cited in UBS.

In addition, NCUA

adds allegations regarding the results of its forensic review of
loans underlying one of the two Certificates.
Notwithstanding the fact that a forensic review is not
necessary to pleading falsity of statements regarding LTV
15

ratios, 4 Wachovia nevertheless takes issue with NCUA’s forensic
review here.

Wachovia argues, citing Opinions of this Court in

the FHFA actions, that the numerical disparity shown by a
forensic review is insufficient on its own to establish
subjective falsity.

The cases cited, however, concern the

question of whether a numerical disparity is sufficient to
establish scienter in fraud claims, not subjective falsity in
strict liability claims.

See, e.g., JPMorgan, 902 F. Supp. 2d

at 493; see also UBS, 858 F. Supp. 2d at 326-27 (distinguishing
subjective falsity in strict liability claims from scienter in
fraud claims).
Wachovia also objects that there was no forensic review
conducted for loans underlying AMN1.

But, just as there is no

requirement that a forensic review be conducted for loans
underlying any Certificate, in the event a plaintiff relies on a
forensic review, there is no need that the forensic review be
conducted for each Certificate.

See JPMorgan, 902 F. Supp. 2d

at 488 (noting that, in JPMorgan, forensic review of loan files
was conducted for three of 127 Certificates and that, in UBS,
forensic review was conducted for three of twenty-two
Certificates).

The linkage between a Certificate and the

systematic failure alleged in a complaint may be provided by the
For the reasons explained in JPMorgan, a plaintiff has no
burden to undertake such a forensic review to state a claim.
902 F. Supp. 2d at 489-90.
4

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performance of the loans underlying the Certificate, or the
credit-rating history of each Certificate.

Id. at 488-49.

That

linkage has been adequately established here, as explained
above.
Finally, Wachovia briefly objects that there are
insufficient allegations regarding the falsity of the DTI
ratios, particularly given the absence of any forensic analysis
concerning the accuracy of the ratios reported in the Offering
Documents.

The troubling delinquency record for each

Certificate, when combined with the other allegations in the
complaint, is sufficient to state a plausible claim that the DTI
ratios were also false.

See Morgan Stanley, 2014 WL 241739, at

*16.

CONCLUSION
Defendant’s February 5, 2014 motion to dismiss is denied.

Dated:

New York, New York
May 6, 2014
__________________________________
DENISE COTE
United States District Judge

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