Judge Forrest today denied a motion to dismiss a shareholder class action against Deutsche Bank alleging a fraudulent scheme to sell mortgage-backed securities it knew were riskier than advertised:
Plaintiffs allege that defendants engaged in a scheme to defraud investors by increasing short term revenues and inflating Deutsche Bank’s stock price by taking mortgages of substandard quality and pooling them into RMBS and CDOs. Those RMBS and CDOs were then sold to investors — generating short term profits, which, in turn, made the stock more attractive. Plaintiffs allege that defendants had specific knowledge of the poor quality of the mortgages underlying the RMBS and CDOs — and that they demonstrated this knowledge by authorizing Lippmann [a Deutsche Bank trader] to take and expand a multi-billion dollar short position on RMBS and CDOs (some number of which were structured and sold by Deutsche Bank). This short position only made sense — and only made money — as the value of the RMBS and CDOs declined. According to plaintiffs, defendants asked Lippmann to provide specific information supporting this short position (that is, why he expected CDOs to decline in value), and such information was provided. In addition, plaintiffs allege that despite knowing that MortgageIT was engaged in poor lending practices (which were packaged into RMBS and CDOs) they nonetheless repeatedly reassured investors that their credit and lending practices were conservative and being adhered to. According to plaintiffs, investors were misled by the scheme, misled by the specific misstatements and omissions, relied upon the total picture presented to them, and engaged in purchases of Deutsche Bank securities, causing loss. Plaintiffs have certainly set forth sufficient plausible allegations to support a claim for a fraudulent scheme against Deutsche Bank. The scheme is laid out with specificity. There is no doubt that the scheme related to material aspects of the bank’s operations. Scienter is adequately pled by multiple references to information available to senior management, specific questions asked by, and presentations made to senior management, all of which contradicted the public-facing statements regarding the value of CDOs Deutsche Bank continued to structure, price and market as the walls closed in. At the very least, the fact that information existed and was presented disproving the validity of the public statements made by Deutsche Bank supports plausible allegations of recklessness. Defendants argue that the alleged misstatements and omissions are merely non actionable statements of opinion . . . This Court disagrees. Here, plaintiffs allege that, at very time the market was beginning to experience the early effects of the sub-prime implosion, Deutsche Bank made statements that it had acted conservatively with respect to risk and that it had adhered to conservative lending standards. Plaintiffs allege that at the time of these statements, the same individuals who had made the statements had been provided information indicating the opposite.