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Genesee Co V Thornburg Mortg\CV09-300 Docs 125-128-130

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Genesee Co V Thornburg Mortg\CV09-300 Docs 125-128-130 Case 1:09-cv-00300-JB-KBM Document 184 Filed 11/12/11 Page 1 of 273 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO GENESEE COUNTY EMPLOYEES’ RETIREMENT SYSTEM; MARYLAND-NATIONAL CAPITAL PARK & PLANNING COMMISSION EMPLOYEES’ RETIREMENT SYSTEM; MIDWEST OPERATING ENGINEERS PENSION TRUST FUND, Individually and On Behalf of All Others Similarly Situated, Plaintiffs, vs. No. CIV 09-0300 JB/KBM THORNBURG MORTGAGE SECURITIES TRUST 2006-3; THORNBURG MORTGAGE SECURITIES TRUST 2006-5; THORNBURG MORTGAGE SECURITIES TRUST 2007-4; GREENWICH CAPITAL ACCEPTANCE, INC.; STRUCTURED ASSET MORTGAGE INVESTMENTS II, INC.; CREDIT SUISSE SECURITIES LLC d/b/a CREDIT SUISSE SECURITIES (USA) LLC; RBS SECURITIES INC.; BANC OF AMERICA SECURITIES LLC; ROBERT J. MCGINNIS; CAROL P. MATHIS; JOSEPH N. WALSH, III; JOHN C. ANDERSON; JAMES M. ESPOSITO; JEFFREY L. VERSCHLEISER; MICHAEL B. NIERENBERG; JEFFREY MAYER; THOMAS F. MARANO; MOODY’S CORP.; MOODY’S INVESTORS SERVICES, INC.; MCGRAW-HILL COMPANIES, INC.; STANDARD & POOR’S RATING SERVICES; FITCH, INC.; and FITCH RATINGS, Defendants. MEMORANDUM OPINION AND AMENDED ORDER THIS MATTER comes before the Court on: (i) the Opposed Motion to Dismiss of Defendants Greenwich Capital Acceptance, Inc. (n/k/a RBS Acceptance Inc.), Structured Asset Mortgage Investments II, Inc., Credit Suisse Securities (USA) LLC, RBS Securities Inc. (f/k/a Greenwich Capital Markets, Inc.), Robert J. McGinnis, Carol P. Mathis, Joseph N. Walsh III, John C. Anderson, James M. Esposito, Jeffrey L. Verschleiser, Michael B. Nierenberg, Jeffrey Mayer, Case 1:09-cv-00300-JB-KBM Document 184 Filed 11/12/11 Page 2 of 273 Thomas F. Marano, filed July 11, 2011 (Doc. 125)(“Joint Motion”); (ii) Banc of America Securities LLC’s Joinder in the Motion to Dismiss of the Depositor Defendants, the Individual Defendants, Credit Suisse Securities (USA) LLC, and RBS Securities, Inc., filed February 11, 2011 (Doc. 130)(“Joinder in Motion”); and (iii) the Rating Agencies’ Motion to Dismiss with Prejudice the Amended Class Action Complaint, filed February 11, 2011 (Doc. 128)(“Rating Agency Defendants’ Motion”). The Court held a hearing on September 19, 2011. The primary issues are: (i) whether the Plaintiffs Maryland-National Capital Park & Planning Commission Employees’ Retirement System and Midwest Operating Engineers Pension Trust Fund have constitutional standing to pursue their claims; (ii) whether the Plaintiffs’ claims are time-barred by the applicable statutes of limitation or repose; (iii) whether the Plaintiffs have stated sufficient materiality allegations against the Defendants other than the Rating Agency Defendants;1 (iv) whether the Plaintiffs have alleged a section 12(a)(2) claim under the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa against the Defendants; (v) whether the Plaintiffs must plead reliance on the alleged misrepresentations in the offering documents for the 2006-5 offering; (vi) whether the Plaintiffs have stated a control-person claim against the Individual Defendants2 or Defendant RBS Securities, Inc.; (vii) whether lack of causation undercuts the Plaintiffs’ claims related to the 2006-5 offering; (viii) whether the Plaintiffs have stated claims under the New Mexico Securities Act, N.M.S.A. 1978, §§ 58-13B-1 through 58- 1The Court will refer to the following Defendants as the Rating Agency Defendants: (i) Defendant Moody’s Corp.; (ii) Defendant Moody’s Investors Services, Inc.; (iii) Defendant McGraw-Hill Companies, Inc.; (iv) Defendant Standard & Poor’s Rating Services; (v) Defendant Fitch, Inc.; and (vi) Defendant Fitch Ratings. 2The Court will refer to the following Defendants as the Individual Defendants: (i) Defendant Robert J. McGinnis; (ii) Defendant Carol P. Mathis; (iii) Defendant Joseph N. Walsh, III; (iv) Defendant John C. Anderson; (v) Defendant James M. Esposito; (vi) Defendant Jeffrey L. Verschleiser; (vii) Defendant Michael B. Nierenberg; (viii) Defendant Jeffrey Mayer; and (ix) Defendant Thomas F. Marano. -2- Case 1:09-cv-00300-JB-KBM Document 184 Filed 11/12/11 Page 3 of 273 13B-57, repealed by L. 2009, Ch. 82, § 703, effective Jan. 1, 2010, against any of the Defendants;3 (ix) whether the Plaintiffs have stated sufficient materiality allegations against the Rating Agency Defendants; (x) whether the First Amendment of the United States Constitution bars the Plaintiffs’ claims against the Rating Agency Defendants; and (xi) whether the Credit Rating Agency Reform Act of 2006 (“CRARA”), Pub. L. No. 109-291, 120 Stat. 1327, preempts any of the Plaintiffs’ New Mexico Securities Act claims against the Rating Agency Defendants. The Court will grant in part and deny in part both the Joint Motion and the Rating Agency Defendants’ Motion. The Court will allow the Plaintiffs leave to file a motion to amend their pleadings consistent with its discussion in the Memorandum Opinion and Amended Order. With respect to the issue of pleading their compliance with the applicable statute of limitations and statute of repose, the Court will grant the Plaintiffs leave to amend to cure this defect without requiring them to file a motion seeking leave to amend. The Plaintiffs have constitutional standing to pursue their claims against the Defendants. The Plaintiffs’ claims are not time-barred under federal securities law or under the New Mexico Securities Act. The Plaintiffs have sufficiently pled allegations about material misrepresentations or omissions against the Defendants other than the Rating Agency Defendants with respect to: (i) their abandonment of their loan underwriting guidelines; (ii) their improper appraisal practices regarding the 2006-5 offering; (iii) the inflated loan-to-value (“LTV”) ratios regarding the 2006-5 offering; and (iv) to the credit ratings regarding the 2006-5 and 2007-4 offerings. The Plaintiffs 3The current version of the New Mexico Securities Act appears at N.M.S.A. 1978, §§ 58- 13C-101 through 58-13C-701. The new version of the New Mexico Securities Act expressly contains a provision stating: “The predecessor act exclusively governs all actions or proceedings that are pending on the effective date of the New Mexico Uniform Securities Act or may be instituted on the basis of conduct occurring before the effective date of the New Mexico Uniform Securities Act . .” N.M.S.A. 1978, § 58-13C-701. -3- Case 1:09-cv-00300-JB-KBM Document 184 Filed 11/12/11 Page 4 of 273 have adequately alleged their section 12(a)(2) claims. The Plaintiffs have no obligation to plead reliance on the alleged misrepresentations related to the 2006-5 offering. The Plaintiffs have adequately stated a control-person claim. Lack of causation does not undercut the Plaintiffs’ claims related to the 2006-5 offering. While the Plaintiffs have not sufficiently alleged that their claims satisfy the jurisdictional provisions of the New Mexico Securities Act, they have sufficiently alleged that the Rating Agency Defendants can be liable under the New Mexico Securities Act. Against the Rating Agency Defendants, the Plaintiffs have sufficiently pled allegations about material misrepresentations or omissions with respect to Defendants McGraw-Hill Companies, Inc. and Standard & Poor’s Rating Services, but not against Defendants Fitch, Inc., Fitch Ratings, Moody’s Corp., or Moody’s Investors Services, Inc. The First Amendment does not bar the Plaintiffs’ claims against the Rating Agency Defendants. Lastly, CRARA preempts some of the theories on which the Plaintiffs base their claims under the New Mexico Securities Act against the Rating Agency Defendants. FACTUAL BACKGROUND The Court recites the factual background in this case in the light most favorable to the Plaintiffs. This dispute arises out of several investment offerings4 of mortgage-backed securities (“MBS”). The asserted class invested in these MBS and ultimately suffered significant losses on their investments. The Plaintiffs contend that the Defendants made a variety of misrepresentations relating to these investments that misled the asserted class as to the true risk of these investments. 4An “offering” is the “sale of an issue of securities.” Black’s Law Dictionary 1189 (9th ed. 2009). An “issue” in securities law is a “class or serious of securities that are simultaneously issued for sale.” Black’s Law Dictionary, supra, at 908. -4- Case 1:09-cv-00300-JB-KBM Document 184 Filed 11/12/11 Page 5 of 273 1. Non-Parties Thornburg Mortgage Securities Trust 2006-3, Thornburg Mortgage Securities Trust 2006-5, and Thornburg Mortgage Securities Trust 2007-4 are statutory trusts formed under Delaware law. See Amended Complaint for Violations of §§ 11, 12(a)(2) and 15 of the Securities Act of 1933 and §§ 58-13B-30(B) and 58-13B-40(A) of the New Mexico Securities Act of 1986 ¶ 21, at 13, filed December 10, 2010 (Doc. 103)(“Amended Complaint”).5 On March 22, 2011, the Plaintiffs voluntarily dismissed these statutory trusts from this action. See Plaintiffs’ Notice of Voluntary Dismissal Without Prejudice of Defendants Thornburg Mortgage Securities Trust 2006-3, Thornburg Mortgage Securities Trust 2006-5, and Thornburg Mortgage Securities Trust 2007-4 (Doc. 138). These statutory trusts are referred to collectively as the “Thornburg Trusts.” The Plaintiffs did not name Thornburg Mortgage Home Loans, Inc. (“Thornburg Mortgage Home Loans”) as a Defendant, but Thornburg Mortgage Home Loans originated many of the mortgage loans involved in this dispute. See Amended Complaint ¶ 3, at 7. 2. The Parties This action is brought by Lead Plaintiffs: (i) Maryland-National Capital Park & Planning
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