Following a bench trial, Judge Cote today issued a 361-page ruling in favor of FHFA (the conservator to Freddie Mac and Fannie Mae) in a case accusing Nomura and RBS of misrepresenting the quality of mortgages underlying various securities. There had been 16 similar cases before Judge against various banks, all of which settled except this one. Judge Cote resolved various disputes between the parties as to how damages should be calculated, but did not specify the final judgment amount. She instead directed the FHFA, which had initially sought over $1 billion, to submit a proposed judgment following the formula in her opinion. The opinion begins:
The Federal Housing Finance Agency (or “FHFA,” as conservator for Fannie Mae and Freddie Mac) sued 18 banks in 2011 for misrepresenting the quality of mortgage bonds. All but Nomura and RBS have settled, for a total of around $18 billion. The trial against Nomura and RBS begins Monday before Judge Cote. It will be a bench trial. Coverage of the upcoming trial can be found from Reuters, American Lawyer ($), and Bloomberg. The defendants’ 115-page pretrial memorandum is here. There is not a pretrial memorandum from the FHFA available online. Our prior coverage of the FHFA cases is here
In an opinion dated Friday, Judge Cote granted partial summary judgment to the FHFA (the conservator for the two Government-Sponsored Enterprises, or “GSEs,” Fannie Mae and Freddie Mac), dismissing various banks’ affirmative defense that the GSEs had knowledge that the mortgage securities at issue were defective. The essence of her ruling was that, while the GSEs may have had generalized knowledge of problems with mortgage origination, there was no evidence that they had specific knowledge that the representations at issue were false:
In an opinion today, Judge Swain ruled Section 13 of the Securities Act, which states that no action may be brought “more than three years after the security was bona fide offered to the public” was not extended by the so-called “FDIC Extender Provision” of the Financial Institutions Reform, Recovery, and Enforcement Act (or “FIRREA”) because, she concluded, the FDIC Extender Provision applied only to statutes of limitations, which are generally triggered from the time a claim accrues (or can be brought), as opposed to statutes of repose, which set forth an absolute end date for suit, regardless of equitable considerations and regardless of whether the harm necessary to sue even arisen. Judge Swain’s ruling was based on the Supreme Court’s decision CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014), which rejected the application of a similar extender law in the context of federal environmental law. She went further and found that Waldburger “implicitly” overruled parts of a Second Circuit ruling in one of the FHFA cases, FHFA v. UBS, which, based on an extender law, found the claims at issue to be timely: “The analytical framework set out by the Supreme Court in Waldburger calls into question the Second Circuit’s analysis of the extender provision . . . in its UBS decision, implicitly overruling material aspects of the UBS decision’s rationale.” Judge Swain also disagreed with the Tenth Circuit, which, after having been instructed to reconsider a ruling based on Waldburger, maintained its original conclusion that the extender law would apply. If Judge Swain’s ruling carries the day with the Second Circuit, it would be welcome news to Nomura and RBS, which are in the midst of a trial against the FHFA involving a substantially identical issue. Alison Frankel has been covering these issues in depth, see here, here and here.
In an opinion Friday, Judge Scheindlin dismissed as time-barred a case alleging that certain mortgage-backed securities were not as represented. The plaintiff claimed that the statute of limitations did not begin to run until the defendant refused to repurchase or cure the defects, but Judge Scheindlin, relying largely on the First Department’s recent decision in ACE Sec. Corp. v. DB Structured Products (see here, starting at pg. 26), disagreed:
In the wide-ranging litigation against banks that sold mortgage-backed securities to two government-sponsored enterprises, Fannie Mae and Freddie Mac, Judge Cote issued a decision Monday largely denying a motion to dismiss brought by certain of the banks. The plaintiff Federal Housing Finance Agency (or “FHFA,” as conservator for Fannie Mae and Freddie Mac) claims that the banks’ offering documents falsely described the strength of the loans and the underwriting process. As evidence of fraud, FHFA pointed out that the ratings agencies substantially downgraded the securities after the banks sold them. The banks argued that this was simply “fraud by hindsight,” especially because of the intervening financial crisis. Judge Cote rejected that argument: