U NITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
------x PUBLIC EMPLOYEES’ RETIREMENT : SYSTEM OF MISSISSIPPI, Individually and : On Behalf of All Others Similarly Situated, : : Plaintiff, : : v. : No. 09-CV-1110 (HB) : (Dispositive Motion) GOLDMAN SACHS GROUP, INC., : GOLDMAN SACHS MORTGAGE : COMPANY, GS MORTGAGE SECURITIES : CORP., GOLDMAN, SACHS & CO., INC., : MCGRAW-HILL COMPANIES, INC., : MOODY’S INVESTORS SERVICE, INC., : FITCH INC., DANIEL L. SPARKS, MARK : WEISS, JONATHAN S. SOBEL, GSAA : HOME EQUITY TRUST 2006-2, GSAA : HOME EQUITY TRUST 2006-3 and : GSAMP TRUST 2006-S2, : : Defendants. : ------x
MEMORANDUM OF LAW IN SUPPORT OF THE GOLDMAN SACHS DEFENDANTS’ MOTION TO DISMISS THE SECOND AMENDED COMPLAINT
Richard H. Klapper Michael T. Tomaino, Jr. Patrice A. Rouse Harsh N. Trivedi SULLIVAN & CROMWELL LLP 125 Broad Street New York, New York 10004 Telephone: (212) 558-4000 Facsimile: (212) 558-3588
Counsel for Defendants The Goldman Sachs Group, Inc., Goldman, Sachs & Co., Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Jonathan S. Sobel, Daniel L. Sparks and Mark Weiss November 2, 2009
TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ...... 1
ALLEGATIONS OF THE SECOND AMENDED COMPLAINT ...... 4
A. The Parties and Claims ...... 4
B. The Certificates Plaintiff Purchased ...... 5
C. Alleged Misrepresentations in the Offering Documents ...... 6
STANDARD ON THIS MOTION ...... 7
ARGUMENT ...... 7
I. PLAINTIFF LACKS STANDING TO SUE ...... 7
A. Plaintiff Lacks Standing to Assert Section 11 Claims as to Securities Offered by GSAA Home Equity Trusts 2006-2 and 2006-3 ...... 7
B. Plaintiff Lacks Standing to Assert Section 12(a)(2) Claims Even as to the GSAMP 2006-S2 Certificates that It Purchased ...... 10
II. PLAINTIFF DOES NOT PLEAD ANY COGNIZABLE ECONOMIC LOSS ...... 11
III. THE SECOND AMENDED COMPLAINT DOES NOT PLEAD ANY ACTIONABLE MISREPRESENTATIONS ...... 13
A. The Offering Documents Disclosed All the Information that Plaintiff Alleges Was Required ...... 15
1. The Offering Documents Disclosed the Originators’ Lending Practices ...... 15
2. The Offering Documents Disclosed the Involvement of Independent Mortgage Brokers and Appraisers ...... 16
3. The Offering Documents Disclosed the Calculation of Loan-to-Value Ratios ...... 16
4. The Offering Documents Disclosed the Calculation of Debt-to-Income Ratios ...... 17 -i-
5. The Offering Documents Disclosed Credit Enhancement Features ...... 18
6. The Offering Documents Disclosed the Certificates’ Ratings ...... 18
B. Plaintiff Does Not Adequately Allege Materiality or Violation of Any Duty to Disclose ...... 19
IV. PLAINTIFF’S CLAIMS ARE TIME-BARRED ...... 22
CONCLUSION ...... 25
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TABLE OF AUTHORITIES
Page(s) CASES
Ashcroft v. Iqbal, No. 07-1015, 2009 WL 1361536 (U.S. May 18, 2009) ...... 7
Basic Inc. v. Levinson, 485 U.S. 224 (1988) ...... 13
Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) ...... 7, 18
Conopco, Inc. v. Roll Int’l, 231 F.3d 82 (2d Cir. 2000) ...... 7
DeBenedictis v. Merrill Lynch & Co., 492 F.3d 209 (3d Cir. 2007) ...... 25
DeMaria v. Andersen, 318 F.3d 170 (2d Cir. 2003) ...... 9, 13
Dodds v. Cigna Sec., Inc., 12 F.3d 346 (2d Cir. 1993) ...... 22
ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) ...... 20
First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 2002) ...... 11-12
Garber v. Legg Mason, Inc., 537 F. Supp. 2d 597 (S.D.N.Y. 2008) ...... 20, 22
Gustafson v. Alloyd Co., 513 U.S. 561 (1995) ...... 10
GVA Market Neutral Master, Ltd. v. Veras Capital Partners Offshore Fund, Ltd., 580 F. Supp. 2d 321 (S.D.N.Y. 2008) ...... 25
Hoffman v. UBS-AG, 591 F. Supp. 2d 522 (S.D.N.Y. 2008) ...... 8
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Ingrassia v. County of Sullivan, 262 F. Supp. 2d 116 (S.D.N.Y. 2003) ...... 2, 24 In re Alstom SA Sec. Litig., 406 F. Supp. 2d 402 (S.D.N.Y. 2005) ...... 22-23
In re AOL Time Warner, Inc. Sec. & “ERISA” Litig., 381 F. Supp. 2d 192 (S.D.N.Y. 2004) ...... 7, 13
In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201 (9th Cir. 2002) ...... 13
In re Countrywide Fin. Corp. Sec. Litig., 588 F.3d 1132 (C.D. Cal. 2008) ...... 9
In re Dynex Capital, Inc. Sec. Litig.(“Dynex I”), No. 05-CV-1897, 2006 WL 314524 (S.D.N.Y. Feb. 10, 2006) ...... 9
In re Dynex Capital, Inc. Sec. Litig. (“Dynex II”), No. 05-CV-1897, 2009 WL 3380621 (S.D.N.Y. Oct. 19, 2009) ...... 9, 14
In re First Union Corp. Sec. Litig., 128 F. Supp. 2d 871 (W.D.N.C. 2001) ...... 12
In re Flag Telecom Hldgs., Ltd. Sec. Litig., 352 F. Supp. 2d 429 (S.D.N.Y. 2005) ...... 20
In re Flag Telecom Hldgs., Ltd. Sec. Litig., 308 F. Supp. 2d 249 (S.D.N.Y. 2004) ...... 13, 15, 21
In re Fuwei Films Sec. Litig., 634 F. Supp. 2d 419 (S.D.N.Y. 2009) ...... 9
In re Initial Pub. Offering Sec. Litig., 544 F. Supp. 2d 277 (S.D.N.Y. 2008) ...... 11, 13
In re Livent, Inc. Noteholders Sec. Litig., 151 F. Supp. 2d 371 (S.D.N.Y. 2001) ...... 11
In re Merrill Lynch & Co. Research Reports Sec. Litig., 272 F. Supp. 2d 243 (S.D.N.Y. 2003) ...... 11
In re Morgan Stanley Tech. Fund Sec. Litig., Nos. 02-CV-6153, 2009 WL 256005 (S.D.N.Y. Feb. 2, 2009) ...... 21
In re N2K Inc. Sec. Litig., 82 F. Supp. 2d 204 (S.D.N.Y. 1999) ...... 21
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In re Natural Gas Commodity Litig., 358 F. Supp. 2d 336 (S.D.N.Y. 2005) ...... 22
In re Openwave Sys. Sec. Litig., 528 F. Supp. 2d 236 (S.D.N.Y. 2007) ...... 22
In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F. Supp. 2d 579 (S.D.N.Y. 2006) ...... 8
In re Ultrafem Inc. Sec. Litig., 91 F. Supp. 2d 678 (S.D.N.Y. 2000) ...... 11
Korwek v. Hunt, 646 F. Supp. 953 (S.D.N.Y. 1986) ...... 25
NECA-IBEW Health & Welfare Fund v. Goldman, Sachs & Co., No. 08-CV-10783 (S.D.N.Y., Cedarbaum, J.) (hearing transcript, dated Sept. 17, 2009) ...... 2, 14
La. Mun. Police Employees Ret. Sys. v. Merrill Lynch & Co., Inc., No. 08-CV-9063 (S.D.N.Y., Rakoff, J.) (hearing transcript, dated Feb. 17, 2009) ...... 9
Luminent Mortg. Cap., Inc. v. Merrill Lynch & Co., No. 07-CV-5423, 2009 WL 2590087 (E.D. Pa. Aug. 20, 2009) ...... 12
Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2 (2d Cir. 1996) ...... 15
Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., No. 09-CV-10446, 2009 WL 3149775 (D. Mass. Sept. 30, 2009) ...... passim
Panther Partners, Inc. v. Ikanos Commc’ns, Inc., 538 F. Supp. 2d 662 (S.D.N.Y. 2008) ...... 13, 19, 21
Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) ...... 4, 22
Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26 (1976) ...... 8
Teamsters Loc. 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190 (2d Cir. 2008) ...... 9
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STATUTES AND RULES
Section 11 of the Securities Act of 1933 15 U.S.C. § 77k ...... 11
Section 12(a)(2) of the Securities Act of 1933 15 U.S.C. § 77l(a)(2) ...... 11
Section 13 of the Securities Act of 1933 15 U.S.C. § 77m ...... 22
Securities Act, Item 512 of Regulation SK 17 C.F.R. § 229.512 ...... 9
Securities Act, Section 1111 of Regulation AB 17 C.F.R. § 229.1111 ...... 21
Securities Act Rule 405 17 C.F.R. § 230.405 ...... 4
Securities Act Rule 436 17 C.F.R. § 230.436 ...... 19
FED. R. CIV. P. 12(b)(1) ...... 1, 7, 13
FED. R. CIV. P. 12(b)(6) ...... 1, 7
OTHER AUTHORITIES
Asset-Backed Securities, Securities Act Release No. 8518, Exchange Act Release No. 50, 905, 70 Fed. Reg. 1506 (Jan. 7, 2005) ...... 12, 21
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The Goldman Sachs Defendants1 respectfully submit this memorandum of law in support of their motion to dismiss the September 18, 2009 Second Amended Complaint (“SAC”) in this action pursuant to FED. R. CIV. P. 12(b)(1), for lack of standing, and 12(b)(6), for failure to state a claim and as barred by the statute of limitations.
PRELIMINARY STATEMENT This case is one of dozens of similar putative class actions that have been brought against issuers and underwriters of mortgage-backed securities in the wake of the unforeseen and unprecedented implosion of the housing and mortgage markets. With the benefit of perfect hindsight as to these extraordinary events, the plaintiff here, Public Employees’ Retirement System of
Mississippi (“Plaintiff”), purports to bring claims under Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933 (the “1933 Act”), belatedly challenging the sufficiency of disclosures relating to three offerings of mortgage pass-through certificates issued by three different trusts and backed by mortgage loan pools originated by companies that are neither parties nor affiliated with defendants.
The SAC is Plaintiff’s third attempt to plead a valid claim in this case. Plaintiff amended its initial complaint once as of right and then (in accordance with this Court’s rules) withdrew its amended complaint and filed the SAC, rather than respond to defendants’ motions to dismiss. The SAC, however, suffers from the same deficiencies as the prior complaints. Indeed, they are the same deficiencies that recently led another federal court, confronted with nearly identical allegations, to dismiss all claims against the defendants (including Goldman Sachs). Plumbers’
Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., No. 08-CV-10446, 2009 WL
1 The Goldman Sachs Defendants are The Goldman Sachs Group, Inc. (“GS Group”), Goldman, Sachs & Co. (“Goldman Sachs”), Goldman Sachs Mortgage Company (“GSMC”), GS Mortgage Securities Corp. (“GS Mortgage”), Daniel L. Sparks, Mark Weiss and Jonathan S. Sobel. GS Group and Goldman Sachs were misnamed in the SAC as “Goldman Sachs Group, Inc.” and “Goldman, Sachs & Co., Inc.,” respectively.
3149775 (D. Mass. Sept. 30, 2009). (Rouse Decl., Ex. A.)2 And in this District, Judge Cedarbaum recently dismissed another nearly identical complaint arising from other Goldman Sachs securitization offerings, for failure to state a claim (with leave to replead, which should not be granted here because Plaintiff has amended its complaint twice). NECA-IBEW Health & Welfare
Fund v. Goldman, Sachs & Co., No. 08-CV-10783 (S.D.N.Y., Cedarbaum, J.). (Rouse Decl., Ex. B.)
As a threshold matter, although the SAC challenges three separate offerings of certificates issued by three different trusts, Plaintiff purchased certificates issued by only one of those trusts: GSAMP Trust 2006-S2 (“GSAMP 2006-S2”). As numerous courts have held, a plaintiff lacks standing to assert claims with respect to securities it did not buy. Those claims should be dismissed on that basis alone. Moreover, Plaintiff has failed to establish its standing to assert a
Section 12(a)(2) claim even as to the certificates it allegedly purchased. Although Plaintiff now baldly alleges (for the first time) that it purchased its certificates “directly from [Goldman Sachs], as reflected in its certification, filed [with the initial complaint]” (SAC ¶ 11), the SAC alleges no facts to support this conclusory assertion. And the certification does not identify Goldman Sachs or anyone else as the entity from whom Plaintiff purchased its certificates. Plaintiff also fails to allege that it purchased its certificates in the initial public offering, which is a separate requirement for bringing a
Section 12(a)(2) claim.
Further, Plaintiff fails to plead a cognizable economic loss, an essential element of its
Sections 11 and 12(a)(2) claims. As disclosed in the offering documents, the certificates entitle holders to pass-through principal and interest payments from pools of non-traditional, second-lien
2 Cites to “Rouse Decl.” are to the accompanying Declaration of Patrice A. Rouse, which attaches decisions and transcripts from recent cases, the offering documents with respect to the certificates that Plaintiff purchased (in excerpted form, where noted, to eliminate unnecessary volume) and documents referred to in the SAC and publicly available materials concerning the subprime mortgage industry. It is well established that in ruling on a motion to dismiss, the Court may also consider “documents attached to the [c]omplaint as an exhibit or incorporated in it by reference, matters of which judicial notice may be taken, or documents either in the plaintiff’s possession or of which the plaintiff had knowledge and relied on in bringing suit.” Ingrassia v. County of Sullivan, 262 F. Supp. 2d 116, 119 (S.D.N.Y. 2003).
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mortgage loans originated under programs that required limited or no documentation of the borrowers’ income, assets or employment. Yet Plaintiff does not allege that there has been a single missed or late payment, let alone a default, on any of these certificates; indeed, it never alleges that certificateholders have failed to receive all the pass-through payments they bargained for.
More fundamentally, the SAC identifies no actionable misstatement or omission.
Plaintiff asserts that the offering documents understated the risk of borrower default — and hence the risk of diminished pass-through payments — by failing to describe accurately the mortgage originators’ underwriting guidelines for the inherently risky subprime loans held by the trusts and the methods employed by the third-party rating agencies that rated the certificates. But the SAC fails to identify any inaccurate information about the actual loans held by the trusts, which were made by originators unaffiliated with Goldman Sachs. Instead, Plaintiff borrows generalized allegations from other mortgage-backed securities lawsuits, which in turn collected snippets from various public reports criticizing originators and rating agencies (including many that had no involvement in the loans underlying Plaintiff’s certificates), and then postulates in wholly conclusory terms that these practices must have been employed here. Plaintiff pleads no facts to support these suppositions, and ignores the fact that the offering documents repeatedly disclosed that the underlying loans involved higher risk because they were not underwritten to the same standards as traditional loans. Moreover, even if the originators deviated in undisclosed ways from their underwriting guidelines in connection with the loans underlying Plaintiff’s certificates, SEC Regulation AB required the disclosure only of known deviations from originators’ underwriting guidelines. The SAC does not adequately allege that the Goldman Sachs Defendants knew of any such deviations — allegations that would require particularity under FED. R. CIV. P. 9(b) and the Private Securities Litigation Reform Act (“PSLRA”).
Finally, the applicable statute of limitations bars Plaintiff’s claims because Plaintiff’s allegations, as well as a sea of additional publicly available information (all of which the Court may
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properly consider on this motion), make clear that Plaintiff had inquiry notice of its purported claims for more than one year before it filed this action. The SAC is based entirely on generalized public information that, if sufficient to state a claim here, was also sufficient to trigger notice of the claim.3
ALLEGATIONS OF THE SECOND AMENDED COMPLAINT A. The Parties and Claims Plaintiff purports to represent a putative class of investors who purchased mortgage pass-through certificates issued by three separate trusts in three separate securities offerings. (SAC
¶¶ 39-40.) Plaintiff, however, claims to have purchased certificates issued by only one of those trusts: GSAMP 2006-S2. (Id. ¶ 11.) Plaintiff nevertheless challenges all three offerings, purporting to assert claims under: (i) Section 11 of the 1933 Act against Goldman Sachs, GS Mortgage, the three individual defendants (who are current or former officers of GS Mortgage) and the rating agency defendants (id. ¶¶ 157-72); (ii) Section 12(a)(2) of the 1933 Act against Goldman Sachs and
GS Mortgage (id. ¶¶ 173-81); and (iii) Section 15 of the 1933 Act against GS Group, GSMC, the three individual defendants and the rating agency defendants as “control persons” (id. ¶¶ 182-87).
Defendant GSMC was the sponsor of all three offerings, but originated none of the underlying mortgage loans. Instead, GSMC purchased the loans at arm’s length from third-party originators, and then pooled and conveyed those loans to the depositor, GS Mortgage. (Id. ¶¶ 3, 13,
25-26.) GS Mortgage then conveyed a loan pool to each of the trusts. (Id. ¶¶ 14, 25-26.) In exchange for the loan pool, each trust transferred certificates to GS Mortgage. (Id. ¶¶ 25-27.)
GS Mortgage then sold these certificates in separate offerings to investors through the underwriter,
Goldman Sachs. (Id. ¶¶ 15, 27, 29.) Consistent with the offering documents, Plaintiff does not allege
3 Plaintiff’s Section 15 “control person” claim fails because Plaintiff has not adequately pleaded an underlying Section 11 or 12(a)(2) violation, nor has it adequately pleaded facts supporting an inference that GS Group, GSMC or the individual defendants “controlled” any of the alleged primary violators. See Rombach v. Chang, 355 F.3d 164, 177-78 (2d Cir. 2004). To establish a Section 15 claim, Plaintiff must allege an underlying primary violation, id., and “the power to direct or cause the direction of the management and policies of” the alleged primary violator. 17 C.F.R. § 230.405.
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that GS Group (the publicly held parent of the Goldman Sachs organization and not a registered broker-dealer) played any role in the offerings at issue here. (See Rouse Decl., Exs. C, D, E.)
B. The Certificates Plaintiff Purchased Plaintiff conclusorily alleges that it purchased GSAMP 2006-S2 certificates; it does not allege that it purchased certificates from the other two challenged offerings (GSAA Home Equity
Trust 2006-2 and 2006-3). (SAC ¶ 11.) The materials pursuant to which Plaintiff’s GSAMP 2006-
S2 certificates were offered and issued consist of: (i) a registration statement filed with the SEC on
November 5, 2004 (which was subsequently amended on December 24, 2004);4 (ii) a base prospectus, dated November 17, 2005; (iii) a prospectus supplement, dated March 28, 2006; and
(iv) a free writing prospectus (providing individual loan-level data) filed contemporaneously with the prospectus supplement. (SAC ¶¶ 39-40; Rouse Decl., Ex. D.) The offering documents disclosed that the certificates are backed by specific alternative, second-lien loans owned by the issuing trust.
(SAC ¶¶ 68, 79, 94, 97, 103; Rouse Decl., Ex. D at S-1, S-29 – S-36.) As borrowers make their monthly mortgage payments, the trust “passes through” a portion of these payments to certificateholders based on the class. (SAC ¶¶ 3, 24, 28; Rouse Decl., Ex. D at S-7.) Plaintiff has never alleged that certificateholders failed to receive any payments to which they are entitled.
As Plaintiff acknowledges, the offering documents contained detailed descriptions about the certificates and the underlying loans. (SAC ¶ 42.) For example, the disclosures for
GSAMP 2006-S2 informed investors that New Century Mortgage Corporation (“New Century”) originated all the underlying loans using a variety of lending programs, including programs that did not require borrowers to provide evidence of their income, assets or employment, and that loans made
4 Plaintiff purports to represent a class of purchasers of Certificates that were offered pursuant to an August 17, 2005 registration statement. (SAC ¶ 1.) The specific offerings listed, however, were made pursuant to a November 5, 2004 registration statement.
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pursuant to these alternative programs posed a greater risk of default than traditional loans extended in accordance with more conservative standards. (Id. ¶¶ 53, 61, 62; Rouse Decl., Ex. D at S-14,
S-32 – S-36.) The GSAMP 2006-S2 offering documents also disclosed that not only were
“exceptions to the New Century Underwriting Guidelines [. . .] made where compensating factors exist[ed],” but that “[i]t [was] expected that a substantial portion of the mortgage loans [would] represent these exceptions.” (Rouse Decl., Ex. D at S-32 (emphasis added).) The GSAA Home
Equity Trusts 2006-2 and 2006-3 offering documents similarly disclosed the lending programs and associated risks for the originators of the loans held by those trusts.5 It could not have been clearer that all three trusts held subprime, second-lien loans that would be impacted by a downturn in the housing market or economy. (Id. at S-13 – S-16.)
C. Alleged Misrepresentations in the Offering Documents Despite these detailed disclosures, Plaintiff asserts that the offering documents failed to provide adequate information about the underwriting guidelines of non-Goldman Sachs affiliated originators, the risks associated with the certificates and the methodologies used by the rating agencies. (SAC ¶¶ 5-7, 54.) Not only do the offering documents refute these general allegations, but the SAC does not provide a single fact about the actual loans underlying any of the certificates, the actual underwriting practices used for those loans or the actual rating methodologies employed for those certificates. Instead, Plaintiff’s allegations are directed at the subprime industry as a whole, and are entirely drawn from public sources reflecting the widespread attention that the industry has been receiving for at least the past two years. Even then, Plaintiff never alleges that the loans at issue performed differently than similarly situated loans in the context of an unprecedented housing crash.
5 Relevant excerpts from the GSAA Home Equity Trust 2006-2 and 2006-3 prospectus supplements are attached to the Rouse Declaration as Exhibits E and F, respectively.
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STANDARD ON THIS MOTION When a plaintiff lacks standing to bring a particular claim, the court should dismiss that claim under FED. R. CIV. P. 12(b)(1) because a defect in standing deprives the court of subject matter jurisdiction. In re AOL Time Warner, Inc. Sec. & “ERISA” Litig., 381 F. Supp. 2d 192,
245-46 (S.D.N.Y. 2004). A complaint should also be dismissed pursuant to FED. R. CIV. P. 12(b)(6) for failure to state a claim if a plaintiff fails to plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56, 570 (2007). The possibility that a plaintiff might prove some facts in support of its claim is insufficient to survive a motion to dismiss. Id. at 570. “[A] formulaic recitation of the elements of a cause of action will not do.” Ashcroft v. Iqbal, No. 07-1015, 2009 WL 1361536, at *12 (U.S. May 18, 2009) (quotation marks omitted). Plaintiff must establish the elements of each claim through factual allegations sufficient “to raise a right to relief above the speculative level” to survive a motion to dismiss.
Twombly, 550 U.S. at 555. Furthermore, where “it is clear from the face of the complaint, and matters of which the court may take judicial notice,” that the plaintiff’s claims are time-barred, dismissal under Rule 12(b)(6) is proper. Conopco, Inc. v. Roll Int’l, 231 F.3d 82, 86 (2d Cir. 2000).
ARGUMENT I. PLAINTIFF LACKS STANDING TO SUE. To establish a claim under Section 11 or 12(a)(2) of the 1933 Act, a plaintiff must have standing. In re AOL, 381 F. Supp. at 245. “The burden to establish standing rests on the party asserting its existence.” Id. Accordingly, at this stage, a plaintiff must “clearly . . . allege facts demonstrating that [it] is a proper party to invoke judicial resolution of the dispute.” Id.
A. Plaintiff Lacks Standing to Assert Section 11 Claims as to Securities Offered by GSAA Home Equity Trusts 2006-2 and 2006-3. Although the SAC purports to challenge three separate offerings by three trusts,
Plaintiff claims to have purchased certificates issued by only one of these trusts: GSAMP 2006-S2.
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(SAC ¶ 11.) As the Plumbers’ Union court recently found when confronted with a similar effort to conflate separate and distinct securitization offerings under Section 11, the “overwhelming weight of authority” holds that a plaintiff lacks standing to assert a Section 11 claim with respect to certificates that it did not purchase. Plumbers’ Union, 2009 WL 3149775 at *3-4 (dismissing similar Section 11 claims for lack of standing because “the named plaintiffs are incompetent to allege an injury caused by the purchase of Certificates they themselves never purchased”) (collecting cases).
Section 11 embodies a congressionally mandated trade-off in which plaintiffs, in order to have standing to sue under Section 11 (which does not require proof of scienter), must have purchased the specific securities on which they base their claim. In re Salomon Smith Barney Mut.
Fund Fees Litig., 441 F. Supp. 2d 579, 607 (S.D.N.Y. 2006) (“With regard to the sixty-eight funds of which Plaintiffs own no shares, Plaintiffs do not have standing to assert any claim . . . .”). In addition, to assert a Section 11 claim on behalf of a class, at least one named plaintiff must have purchased securities traceable to the challenged offering. See Simon v. E. Ky. Welfare Rights Org.,
426 U.S. 26, 40 (1976).
Where (as here) no named plaintiff purchased securities issued in certain of the challenged offerings, the Section 11 claims based on those offerings must be dismissed for lack of standing. See Simon, 426 U.S. at 40 n.20 (“That a suit may be a class action . . . adds nothing to the question of standing, for even named plaintiffs who represent a class must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class . . . .”); Hoffman v. UBS-AG, 591 F. Supp. 2d 522, 530-31 (S.D.N.Y. 2008) (“Plaintiffs . . . cannot meet the injury requirement for claims relating to funds in which they have not purchased shares because they cannot claim to be personally injured by the violations relating to those funds.”).
Moreover, as Plumbers’ Union held, a plaintiff cannot establish Section 11 standing with respect to certificates that it did not purchase by arguing that the challenged offerings derived
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from the same shelf registration statement. (SAC ¶¶ 1, 39-43, 59.) A plaintiff’s purchase of certificates issued pursuant to a prospectus supplement that incorporates a base shelf registration statement does not confer standing with respect to certificates issued under other prospectus supplements stemming from that common base registration statement. An issuer of securities under a shelf registration is required to file supplements that add updated information about the offered securities. 17 C.F.R. § 229.512(a)(1). SEC regulations provide that “for the purpose of determining any liability under the [1933 Act], each . . . post-effective amendment [to a shelf registration statement, such as a prospectus supplement] shall be deemed to be a new registration statement relating to the securities offered therein.” 17 C.F.R. § 229.512(a)(2). Therefore, as held in Plumbers’
Union, each of the three offerings is subject to a separate “registration statement” consisting of the original shelf registration statement and prospectus, as well as the applicable prospectus supplement, which is replete with additional disclosures specific to the portfolios involved. See Plumbers’ Union,
2009 WL 3149775 at *3-4. Indeed, Plaintiff acknowledges that the certificates in question were sold
“pursuant to the Prospectus Supplements” applicable to those certificates.6 (SAC ¶ 43.)
6 Plaintiffs in similar cases involving multiple securitization offerings by multiple issuers have attempted to overcome their standing hurdle by pointing to In re Countrywide Fin. Corp. Sec. Litig., 588 F. Supp. 2d 1132 (C.D. Cal. 2008). Countrywide has been discredited by at least one judge in this District, was expressly limited to its narrow facts even by the Countrywide court and, in all events, involved offerings by the same issuer (Countrywide) through the same underwriters deriving from a common registration statement. (Rouse Decl., Ex. C (Transcript of Hearing in La. Mun. Police Employees Ret. Sys. v. Merrill Lynch & Co., Inc., No. 08-CV-9063 (S.D.N.Y., Rakoff, J.), dated Feb. 17, 2009) at pp. 21-22, 61.)! Nor are plaintiffs assisted by this Court’s recent holding that plaintiffs asserting claims under Section 10(b) and Rule 10b-5 of the Securities and Exchange Act of 1934 (“1934 Act”) may have “standing to proceed on behalf of purchasers” of classes of securities that plaintiffs did not purchase. In re Dynex Capital, Inc. Sec. Litig. (“Dynex II”), No. 05-CV-1897, 2009 WL 3380621, at *18 (S.D.N.Y. Oct. 19, 2009); see also In re Dynex Capital, Inc. Sec. Litig.(“Dynex I”), No. 05-CV-1897, 2006 WL 314524, at *12 (S.D.N.Y. Feb 10, 2006), vacated on other grounds sub nom Teamsters Loc. 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190 (2d Cir. 2008). Dynex is entirely inapposite here because, unlike in Dynex: (i) the certificates in the three distinct offerings here were issued by three different issuer-trusts; (ii) each of the three offerings here involved entirely different underlying pools of loans made by entirely different loan originators; and (iii) the offering documents here contained disclosures about the various originators’ different underwriting guidelines. Moreover, Dynex did not involve claims under Sections 11 and 12(a)(2) of the 1933 Act, which have unique statutory standing requirements. See DeMaria v. Andersen, 318 F.3d 170, 175 (2d Cir. 2003) (Section 11 standing); In re Fuwei Films Sec. Litig., 634 F. Supp. 2d 419, 445 (S.D.N.Y. 2009) (Section 12(a)(2) standing).
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Thus, Plaintiff has standing at most to assert a Section 11 claim relating to its GSAMP
2006-S2 certificates, and its other Section 11 claims should be dismissed.
B. Plaintiff Lacks Standing to Assert Section 12(a)(2) Claims Even as to the GSAMP 2006-S2 Certificates that It Purchased.
Plaintiff asserts Section 12(a)(2) claims against Goldman Sachs (as “underwriter”) and
GS Mortgage (as “depositor”). (SAC ¶ 174.) A plaintiff may maintain a Section 12(a)(2) claim only with respect to securities that it purchased (i) from the defendant being sued and (ii) in the public offering (i.e., not in the secondary market). Gustafson v. Alloyd Co., 513 U.S. 561 (1995). Here,
Plaintiff lacks Section 12(a)(2) standing because it does not adequately allege that it purchased any certificates, including the GSAMP 2006-S2 certificates — from Goldman Sachs or GS Mortgage, or in the public offering. See Plumbers’ Union, 2009 WL 3149775 at *4.
Since the Supreme Court’s decision in Gustafson, courts have consistently held that
Section 12(a)(2) applies only to direct purchases from sellers in public offerings. Unlike Plaintiff’s prior complaints here, the SAC now attempts to allege for the first time that Plaintiff purchased its
GSAMP 2006-S2 certificates from Goldman Sachs. Its actual allegation, however, asserts only that it made purchases “directly from [Goldman Sachs], as reflected in its certification, filed [with the initial complaint].” (SAC ¶ 11.) Plaintiff’s certification, however, says no such thing; it does not identify any entity (let alone Goldman Sachs) as the one from whom Plaintiff bought its certificates. Thus,
Plaintiff’s “direct purchase” allegation against Goldman Sachs lacks any factual predicate and is not borne out by the requisite certification. Plaintiff’s Section 12(a)(2) allegations against GS Mortgage are also deficient. The SAC merely alleges that GS Mortgage “promoted and sold certificates pursuant to the defective Prospectuses” (SAC ¶ 175), and that its “actions of solicitation consisted primarily of the preparation and dissemination of the Prospectuses” (id. ¶ 176). Thus, Plaintiff falls well short of alleging that it purchased certificates from GS Mortgage. See Plumbers’ Union, 2009
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WL 3149775 at *4 (“If plaintiffs did in fact purchase the Certificates directly from the defendants, they should have said so. An evasive circumlocution does not suffice as a substitute.”).
Additionally, Plaintiff nowhere alleges that it bought any certificates in the public offerings (as opposed to the secondary market). The absence of such an allegation is an independently sufficient ground for dismissal of its Section 12(a)(2) claim.7
II. PLAINTIFF DOES NOT PLEAD ANY COGNIZABLE ECONOMIC LOSS. The SAC should also be dismissed because Plaintiff still does not plead that it (or the putative class) has suffered any cognizable economic loss, an essential element of its claims for damages under Sections 11 and 12(a)(2) of the 1933 Act. See 15 U.S.C. §§ 77k(e), 77l(a)(2); In re
Initial Pub. Offering Sec. Litig., 544 F. Supp. 2d 277, 299 (S.D.N.Y. 2008) (“If a plaintiff has no conceivable damages under Section 11[(e)], [it] cannot state a claim upon which relief can be granted and [its] claims must be dismissed.”). Given the pass-through structure of the certificates, it is clear that investors have received precisely what they bargained for and suffered no such loss.
First, Plaintiff concedes that it (and other investors) purchased certificates based on the “absolute cash flow and timing of payments” from the certificates. (See SAC ¶ 7; see also id.
¶¶ 3, 30.) Plaintiff does not allege that there has been even a single late or missed payment, let alone any default, on any of the certificates. Nor has Plaintiff pleaded a single fact that suggests that the
“market value” or “price” of the certificates has declined. Instead, Plaintiff asserts that its
“[c]ertificates [are] exposed [to] [. . .] increased risk with respect to [the] absolute flow and the timing of payments.” (Id. ¶ 7.) Such allegations are pure speculation. See First Nationwide Bank v.
Gelt Funding Corp., 27 F.3d 763, 768 (2d Cir. 1994) (“[Plaintiff] does not allege actual injury by
7 See In re Merrill Lynch & Co. Research Reports Sec. Litig., 272 F. Supp. 2d 243, 255 (S.D.N.Y. 2003) (“Under Section 12(a)(2), only a defendant from whom the plaintiff purchased securities may be liable.”); In re Livent, Inc. Noteholders Sec. Litig., 151 F. Supp. 2d 371, 435 (S.D.N.Y. 2001) (same); In re Ultrafem Inc. Sec. Litig., 91 F. Supp. 2d 678, 693-94 (S.D.N.Y. 2000) (“Purchasers in . . . secondary market offerings do not have standing to bring actions under Section 12[(a)](2).”).
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simply claiming that it incurred additional risk of loss . . . . [W]e reject [its] novel theory that it was damaged simply by being undersecured when, with respect to those loans not yet foreclosed, the actual damages it will suffer, if any, are yet to be determined.”). Indeed, Plaintiff cannot allege a loss because it has received all the payments that it bargained for when it bought its certificates.
Second, to the extent that Plaintiff bases its alleged “loss” on the theory that a ratings decline is equivalent to a drop in the price of a stock, it completely ignores the fundamental difference between mortgage-backed securities and equity investments (such as stock). See Luminent
Mortg. Cap., Inc. v. Merrill Lynch & Co., No. 07-CV-5423, 2009 WL 2590087, at *1 (E.D. Pa.
Aug. 20, 2009) (“[M]ortgage-backed securities are long-term debt instruments that represent the income stream from the underlying pool of mortgage loans.”). As explained by the SEC, investors in asset-backed securities (“ABS”) differ from investors in corporate securities in that “ABS investors are generally interested in the characteristics and quality of the underlying assets, the standards for their servicing, the timing and receipt of cash flows from those assets and the structure for distribution of those cash flows.” Asset-Backed Securities, Securities Act Release No. 8518,
Exchange Act Release No. 50, 905, 70 Fed. Reg. 1506, 1508, 1510-11 (Jan. 7, 2005). In the case of stocks, investors hope that their shares will appreciate over time, and that they will profit upon resale from the difference between their original purchase price and the appreciated price. Id. By contrast, mortgage-backed securities are contractual rights to a portion of principal and interest payments from underlying loan pools, whose value is derived from the future cash flows generated by the loan pools.
Id.; In re First Union Corp. Sec. Litig., 128 F. Supp. 2d 871, 894 n.22 (W.D.N.C. 2001) (“Valuation of mortgage-backed securities such as those at issue here essentially is an exercise in estimating expected future cash flows.”).
Investors in mortgage-backed securities consequently can suffer “damages” only when they do not receive pass-through payments to which they are entitled. Plaintiff has not alleged any
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such failure. In similar situations, courts have routinely dismissed Sections 11 and 12(a)(2) claims for failure to plead an economic loss; this Court should do so here. See In re Initial Pub. Offering
Sec. Litig., 544 F. Supp. 2d at 299-300 (see supra p. 11); In re Broderbund/Learning Co. Sec. Litig.,
294 F.3d 1201, 1203-05 (9th Cir. 2002) (same).8
III. THE SECOND AMENDED COMPLAINT DOES NOT PLEAD ANY ACTIONABLE MISREPRESENTATIONS. Sections 11 and 12(a)(2) require that a plaintiff allege that (i) the offering documents contained a material misrepresentation and (ii) the defendants had a duty to disclose the allegedly misrepresented information. See Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988); Panther Partners,
Inc. v. Ikanos Commc’ns, Inc., 538 F. Supp. 2d 662, 668 (S.D.N.Y. 2008); In re Flag Telcom. Hldgs.,
Ltd. Sec. Litig, 308 F. Supp. 2d 249, 255 (S.D.N.Y. 2004). In evaluating whether an alleged misrepresentation was material, the offering documents must be read as a whole, focusing not “on whether particular statements, taken separately, were literally true, but whether defendants’ representations, taken together and in context, would have mis[led] a reasonable investor about the nature of the [securities].” DeMaria v. Andersen, 318 F.3d 170, 180 (2d Cir. 2003). Whether a duty to disclose existed depends “largely on the itemized disclosures required by the securities laws and the regulations promulgated thereunder.” Panther Partners, 538 F. Supp. 2d at 668.
Here, the offering documents disclosed in detail the allegedly misrepresented information, including a description of the loan originators’ underwriting guidelines, the fact that exceptions to those guidelines were permitted and that a “substantial portion of the mortgage loans” was expected to represent such exceptions. (See Rouse Decl., Ex. D at S-32, S-36; SAC ¶ 62.)
Moreover, even if Plaintiff had identified an inaccurate disclosure of the loan originators’ or
8 Plaintiff’s failure to plead a cognizable economic loss also warrants dismissal under FED. R. CIV. P. 12(b)(1) for lack of constitutional or statutory standing. See In re AOL, 381 F. Supp. 2d at 245-46.
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borrowers’ general practices, the SAC would still fail to state a claim because it does not allege facts establishing that the purported misrepresentations were material or in violation of a duty to disclose.9
Indeed, there are no allegations whatsoever about any of the actual loans held by the trusts issuing these certificates, and hence no allegations that the supposedly misrepresented underwriting practices affected any (no less a material number) of the loans held by the three trusts. Nor does the SAC allege any facts to support its naked declaration that Defendants “knew” of the unaffiliated originators’ supposed deviations from the disclosed guidelines. (SAC ¶¶ 164, 177.)
Confronted with nearly identical allegations, the Plumbers’ Union court dismissed the plaintiffs’ claims in that case because (i) disclosures (substantially similar to those here) revealed the information that plaintiffs alleged was missing, Plumbers’ Union, 2009 WL 3149775 at *4-9,
(ii) plaintiffs “failed to allege a sufficient factual basis to support their claims of [1933 Act] violations,” id. at *9, and (iii) plaintiffs “failed to offer any facts to support a finding that the misrepresentations were material,” id. at *7. The court further observed: “That questionable appraisal practices were a common problem in the industry as a whole, without more, tells nothing about the Trusts’ underlying loans. To permit a plaintiff, on such a skimpy foundation, to drag a defendant past the pleading threshold would be to invite litigation by hunch and to open [defendants] to the most unrestrained of fishing expeditions.” Id. at *6. Judge Cedarbaum expressed similar concerns in dismissing (albeit with leave to replead) a nearly identical complaint, arising from other
Goldman Sachs-sponsored securitizations, that was also based on general allegations about the subprime lending and securitization industries, and not the actual loans underlying the certificates at issue. (Rouse Decl., Ex. B at p. 29.) This Court should similarly dismiss Plaintiff’s claims.
9 Plaintiffs’ reliance here on generic news articles is in sharp contrast to the allegations in Dynex, which were supported by specific, factual statements from identifiable, confidential witnesses as well as actual reports released by defendants regarding the particular loans at issue. See Dynex II, 2009 WL 3380621 at *4, 7.
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A. The Offering Documents Disclosed All the Information that Plaintiff Alleges Was Required. The alleged misrepresentations and omissions underlying Plaintiff’s claims are refuted by the detailed disclosures in the offering documents, which show that investors were provided with all material information about the certificates and the inherently risky loan pools that backed them.
See Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 5, 9 (2d Cir. 1996) (dismissing claims where
“prospectuses warn[ed] investors of exactly the risk plaintiffs claim was not disclosed”); In re Flag
Telcom. Hldgs., 308 F. Supp. 2d at 255; Plumbers’ Union, 2009 WL 3149775 at *4-9.
1. The Offering Documents Disclosed the Originators’ Lending Practices. Plaintiff alleges that the offering documents failed to disclose that originators could issue loans pursuant to alternative lending programs that reduced or eliminated documentation and verification requirements. (SAC ¶¶ 5-6, 52, 63, 69, 74, 80, 95, 98, 104.) The SAC concedes, however, that the offering documents disclosed precisely this information. (Id. ¶ 62.) For example, the GSAMP 2006-S2 prospectus supplement disclosed that “the [underlying] mortgage loans [were] originated in accordance with New Century Underwriting Guidelines” (Rouse Decl., Ex. D at S-32), which included “full documentation, limited documentation and stated income documentation residential loan programs” (id. at S-33). It also disclosed that “[o]n a case-by-case basis, exceptions to the [guidelines were] made . . . [and] it [was] expected that a substantial portion of the mortgage loans [would] represent these exceptions.” (Id. at S-32.) Indeed, approximately 56.71% of the loans were issued pursuant to alternative lending programs. (Id. at A-2.) These and similar disclosures thus explained that originators (like New Century) could, and did, deviate from their standard underwriting guidelines.10 See Plumbers’ Union, 2009 WL 3149775 at *4-6 (dismissing similar
10 The offering documents also cautioned investors that New Century’s relaxed underwriting standards could affect the certificates’ risk and yield: “Less Stringent Underwriting Standards and the Resultant Potential for Delinquencies on the Mortgage Loans Could Lead to Losses on Your Certificates.” (Rouse Decl., Ex. D at S-14.) The offering documents (continued on next page)
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allegations because the offering documents described originators’ “permissive underwriting practices” in disclosures nearly identical to those here).
2. The Offering Documents Disclosed the Involvement of Independent Mortgage Brokers and Appraisers. Plaintiff alleges that the offering documents did not disclose sufficiently that originators’ appraisal procedures may have yielded inaccurate property values. (SAC ¶¶ 5-6, 92, 101,
106, 111-24.) As Plaintiff acknowledges, however, the offering documents fully disclosed that third- parties conducted the appraisals: “Mortgaged properties that are to secure mortgage loans generally are appraised by qualified independent appraisers.” (SAC ¶ 62; Rouse Decl., Ex. D at S-32; see also
Ex. E at S-51, Ex. F at S-48 – S-49.) A reasonable investor would have understood this to indicate that neither the Goldman Sachs Defendants nor any originator (like New Century) controlled the appraisal process and that third-party appraisers might deviate from standard guidelines (which was disclosed in cautionary language). See Plumbers’ Union, 2009 WL 3149775 at *6 (dismissing appraisal claims because industry-wide allegations provided “nothing about the Trusts’ underlying loans” and disclosures warned that third-party appraisers might deviate from standard guidelines).
3. The Offering Documents Disclosed the Calculation of Loan-to-Value Ratios. Plaintiff alleges that the offering documents did not disclose that originators could deviate from their standard loan-to-value (“LTV”) guidelines. (SAC ¶¶ 5-6, 106, 116-19, 124.)
These allegations are duplicative of, and derive entirely from, Plaintiff’s flawed appraisal allegations, because the offering documents made clear that one component of the LTV ratio was the “appraised value.” (Rouse Decl., Ex. D at S-32, Ex. E at S-43, Ex. F at S-43.) To construct its LTV theory,
Plaintiff starts with its unsupported assertion that appraisals were “inflated” (SAC ¶¶ 32, 124), adds
for GSAA Home Equity Trusts 2006-2 and 2006-3 contain substantially similar disclosures. (See Rouse Decl., Ex. E at S-20, S-50; Ex. F at S-20, S-48.)
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another layer of speculation by referring generally to “misleading” sales prices due to pressure and coercion (id. ¶ 120), and then extrapolates that a ratio of appraisal value to sales price must have misrepresented a borrower’s equity (id. ¶ 124). There is nothing new in these allegations; they involve multiple layers of speculation and are as flawed as the underlying appraisal allegations.
Moreover, Plaintiff’s theory is based on the erroneous premise that an “inflated” appraisal necessarily causes a misstated LTV ratio. (Id. ¶¶ 116-24.) The offering documents plainly defined LTV as the ratio between the principal balance of the mortgage loan and the lesser of (i) the selling price of the property or (ii) its appraised value at the time of sale. (Rouse Decl., Ex. D at
S-32 – S-33, Ex. E at S-43, Ex. F at S-43.) An “inflated” appraisal thus would not necessarily alter the LTV ratio for a mortgage loan, much less cause it to overstate a borrower’s equity. Indeed,
Plaintiff recognizes this. (SAC ¶ 116.) Plaintiff’s bootstrapped LTV ratio claim is therefore deficient. See Plumbers’ Union, 2009 WL 3149775 at *7 (dismissing a similar LTV claim “for the evident reason that it is dependent upon plaintiffs’ unsubstantiated allegations that the offering materials were misleading with regard to the appraisal methods utilized”).
4. The Offering Documents Disclosed the Calculation of Debt-to-Income Ratios. Plaintiff alleges that the offering documents did not disclose that originators could deviate from their standard debt-to-income guidelines. (SAC ¶¶ 5-6, 118.) Contrary to Plaintiff’s allegations, however, the offering documents expressly disclosed that originators (like New Century) could deviate from their guidelines concerning borrowers’ debt-to-income ratios. (Rouse Decl.,
Ex. D at S-36 (“[o]n a case-by-case basis, it may be determined that an applicant warrants a debt service-to-income ratio exception”), Ex. E at S-50, Ex. F at S-48.) The offering documents also disclosed that originators were not required to verify the “income” component of the debt-to-income
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ratio. (Id., Ex. D at S-33 (“an applicant may be qualified based upon monthly income as stated”), Ex.
E at S-51, Ex. F at S-52.) Thus, the offering documents disclosed what Plaintiff alleges was omitted.
5. The Offering Documents Disclosed Credit Enhancement Features. Plaintiff alleges that the offering documents misrepresented the level of credit enhancement protecting certain classes of certificateholders from losses on their certificates should borrowers default on the underlying loans. (SAC ¶¶ 6, 125-31.) Here again, instead of providing factual allegations that make this theory plausible, see Twombly, 550 U.S. at 555, Plaintiff resorts to utter speculation, alleging that because “many of the loan originators did not follow their underwriting and property appraisal standards,” the level of credit enhancement must have been inadequate. (Id. ¶ 131.) The only basis for this assertion, however, is Plaintiff’s underwriting and appraisal claims, which are themselves inadequate. (Id. ¶ 37 (“[i]f the assumed underwriting standards and appraisals are inaccurate, the stated credit enhancement parameters will be inaccurate”).) Furthermore, Plaintiff ignores several prominent warnings in the prospectus supplement that “The Credit Enhancement Features May Be Inadequate to Provide Protection for the Offered Certificates.” (Rouse Decl., Ex. D at S-20 (emphasis added), Ex. E at S-24, Ex. F at
S-24.) These and similar disclosures made clear that the initial overcollateralization amount, of
“approximately 2.40%,” could fluctuate and was not guaranteed. (See Rouse Decl., Ex. D at S-68.)
6. The Offering Documents Disclosed the Certificates’ Ratings. The SAC likewise falls short based on the alleged failure to disclose that the certificates’ ratings (i) could be inaccurate, (ii) were based on supposedly “outdated” models and
(iii) could be compromised by a purported conflict of interest between the rating agencies and the issuers.11 (SAC ¶¶ 5-6, 111, 132-50.) First, Plaintiff’s allegation is premised on the assertion that the
11 The Goldman Sachs Defendants incorporate by reference the arguments concerning ratings set forth in the motion to dismiss filed by the rating agency defendants.
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rating agencies’ models used inaccurate loan data, including allegedly inflated property values.
(Id. ¶¶ 6, 134, 141.) Plaintiff, however, never alleges that any of the actual loans held in the trusts were made in violation of any originator’s underwriting guidelines. Second, the offering documents accurately disclosed the ratings and warned that those ratings could change. (Rouse Decl., Ex. D at
S-28 (“The Ratings on Your Certificates Could Be Reduced or Withdrawn”), S-101 (“[a] security rating is not a recommendation . . . and may be subject to revision or withdrawal”), Ex. E at S-37,
Ex. F at S-36.) That the rating agencies later downgraded their initial ratings does not mean that the ratings were false when made. See Panther Partners, 538 F. Supp. 2d at 669 (“that what only became clear due to subsequent events was somehow known [to defendants] far earlier” is speculative, hindsight pleading that fails to satisfy Twombly). Third, the certificates’ ratings cannot give rise to liability, because they are not considered part of the offering documents. 17 C.F.R.
§ 230.436(g)(1). Plaintiff’s ratings disclosure claims should therefore be dismissed. See Plumbers’
Union, 2009 WL 3149775 at *8-9.
B. Plaintiff Does Not Adequately Allege Materiality or Violation of Any Duty to Disclose. Sections 11 and 12(a)(2) require a plaintiff to allege that (i) the offering documents contained a material misrepresentation and (ii) the defendants were under a duty to disclose the allegedly misrepresented information. See Panther Partners, 538 F. Supp. 2d at 668. Even if
Plaintiff had adequately alleged that the offering documents contained misrepresentations about subprime mortgage loans generally, or about originators’ general underwriting practices, the SAC would still fail to allege that any such misrepresentations were material, or that the Goldman Sachs
Defendants violated any duty to disclose, because no allegations tie these alleged industry-wide practices to any specific loans or certificates at issue here (much less establish a material impact on
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them). See Plumbers’ Union, 2009 WL 3149775 at *7 (dismissing similar claims because plaintiffs
“failed to offer any facts to support a finding that the misrepresentations were material”).
First, despite having access to publicly filed documents listing the characteristics of all the loans conveyed to the trusts, Plaintiff fails to allege that any of these particular loans
(i) violated any originators’ underwriting guidelines, (ii) had an inaccurate property appraisal, LTV ratio or debt-to-income ratio or (iii) contributed to inadequate credit enhancement or inaccurate ratings for the certificates.12 Furthermore, even assuming that some deviating loans were included in the loan pools, Plaintiff does not allege that the purported errors reached material levels, either in light of the huge number of mortgage loans held by the trusts (e.g., approximately 12,460 loans in the
GSAMP 2006-S2 trust (SAC ¶ 123)) or in comparison to how similarly situated loans performed in the housing meltdown. Without allegations to establish materiality, Plaintiff cannot state a claim.
See ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187,
206-07 (2d Cir. 2009) (dismissing Section 11 claim for lack of materiality). Plaintiff’s parroting of conclusory allegations found in public sources and reliance on unidentified hearsay about general market practices concerning other unrelated offerings does not state a claim. See Garber v. Legg
Mason, Inc., 537 F. Supp. 2d 597, 613 (S.D.N.Y. 2008) (dismissing 1933 Act claims as “too conclusory, as they offer no possibility at all of assessing materiality”).
Second, under the SEC regulations applicable to mortgage-backed securities, the
Goldman Sachs Defendants had a duty to disclose only known exceptions to an originator’s
12 Plaintiff cites information purporting to show delinquency rates for the underlying loans as of May 2009. (SAC ¶ 152.) These delinquency rates, more than three years after the certificates were initially offered, have no bearing on the accuracy of disclosures made during 2004-2006. See In re Flag Telecom Hldgs., Ltd. Sec. Litig., 352 F. Supp. 2d 429, 447 (S.D.N.Y. 2005) (“[T]o state a claim under § 11, a plaintiff must allege that the registration statement . . . contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein . . . . The truth of a statement . . . is adjudged by the facts as they existed when the registration statement became effective.” (internal citation and quotation marks omitted)).
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underwriting guidelines and the manner in which the loans were selected.13 Specifically,
Section 1111 of Regulation AB — which “comprehensively” “provid[es] tailored disclosure requirements and guidance for [1933 Act] filings involving asset-backed securities,” Asset-Backed
Securities, 70 Fed. Reg. at 1581 — addresses the “[i]nformation [r]egarding [p]ool [a]sset [t]ypes and
[s]election [c]riteria” that are required to be disclosed:
A description of the solicitation, credit-granting or underwriting criteria used to originate or purchase the pool assets, including, to the extent known, any changes in such criteria and the extent to which such policies and criteria are or could be overridden.
17 C.F.R. § 229.1111(a)(3) (emphasis added).
Plaintiff’s prior complaints expressly disclaimed allegations that the Goldman Sachs
Defendants knew (or recklessly disregarded) that any originator deviated from its guidelines (Am.
Compl. ¶ 48) — no doubt to avoid the heightened pleading strictures of FED. R. CIV. P. 9(b) and the
PSLRA. Now, in response to the Goldman Sachs Defendants’ Section 1111 arguments in their prior motion to dismiss, Plaintiff has dropped that disclaimer, but it still does not allege that the Goldman
Sachs Defendants knew that any originator deviated from its guidelines. Indeed, the SAC tries to fudge the issue by asserting that “Defendants knew, or in the exercise of reasonable care should have known, of the material misstatements and omissions contained in or [were] omitted from the Offering
Documents.” (SAC ¶¶ 164, 177.) Plaintiff cannot have it both ways.
Where an SEC regulation requires a defendant to disclose only known information, a plaintiff must allege facts supporting an inference that defendants actually knew about the purported
13 See In re N2K, Inc. Sec. Litig., 82 F. Supp. 2d 204, 207 (S.D.N.Y. 2000) (“The relevant SEC regulations answer the question as to what material facts are required to be stated in an issuer’s [offering documents].”), aff’d, 202 F.3d 81 (2d Cir. 2000); In re Morgan Stanley Tech. Fund Sec. Litig., No. 02-CV-6153, 2009 WL 256005, at *7 (S.D.N.Y. Feb. 2, 2009) (“[I]t is well established that there is no liability in the absence of a duty to disclose, even if the information would have been material.”); Panther Partners, 538 F. Supp. 2d at 668 (“[w]hether a duty to disclose exists [under Section 11] depends largely on the itemized disclosures required by the securities laws”); In re Flag Telecom Hldgs., 308 F. Supp. 2d at 255 (“When a plaintiff claims that the defendant failed to disclose information in a prospectus, the plaintiff must plead facts demonstrating [that] the defendant possessed the omitted information when the registration statement became effective and that the defendant had a duty to disclose that information.”).
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misrepresentations to state a disclosure violation claim. Garber, 537 F. Supp. 2d at 613 (dismissing
Section 11 claim where regulation required knowledge of known trends and plaintiff failed to make such allegations). Because Plaintiff does not do so, but rather resorts to conclusory allegations that contradict its prior admission that there was no such knowledge, the SAC should be dismissed.14
IV. PLAINTIFF’S CLAIMS ARE TIME-BARRED. Section 13 of the 1933 Act requires that claims based on Sections 11 and 12(a)(2) must be filed within “one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 77m.
Thus, the one-year period begins to run when a plaintiff has either actual notice or “inquiry notice” of the alleged misrepresentations. Dodds v. Cigna Sec., Inc., 12 F.3d 346, 349 (2d Cir. 1993). A plaintiff does not need “notice of the entire wrongdoing” to trigger its duty to investigate whether it has possible Sections 11 and 12(a)(2) claims. In re Alstom SA Sec. Litig., 406 F. Supp. 2d 402, 421
(S.D.N.Y. 2005). Instead, a plaintiff is on notice when “the exercise of reasonable diligence[ ] would have led to actual knowledge.” In re Openwave Sys. Sec. Litig., 528 F. Supp. 2d 236, 245 (S.D.N.Y.
2007). “Information that may be held to constitute inquiry notice includes any financial, legal, or other data, such as public disclosures in the media . . . that provide a plaintiff with sufficient storm warnings to alert a reasonable person to the probability that there may have been misleading statements or material omissions involved in the sale of the securities at issue,” as well as private lawsuits. In re Alstom, 406 F. Supp. 2d at 421. “When the facts from which knowledge may be
14 If Plaintiff’s half-hearted allegations purport to allege actual knowledge of deviations, then they trigger the requirement to plead that knowledge with particularity under FED. R. CIV. P. 9(b) and the PSLRA. See Rombach, 355 F.3d at 171; In re Natural Gas Commodity Litig., 358 F. Supp. 2d 336, 343 (S.D.N.Y. 2005) (“Rombach stands for the proposition that a complaint that sounds in fraud must comply with Rule 9(b) [. . .] even if the complaint does not allege a cause of action requiring proof of fraud.”). The SAC, however, does not come close to pleading that knowledge with particularity.
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imputed are clear from the pleadings and the papers and filings integral to the complaint, the question of inquiry notice may be properly resolved on a motion to dismiss.” Id.
Plaintiff filed this action on February 6, 2009. Plaintiff’s claims are barred because it was on inquiry notice (at a minimum) of the alleged misrepresentations challenged here well before
February 6, 2008, as a result of the collapse of the housing and mortgage markets that started in 2007.
First, in light of the market tsunami over the prior several months, the three major rating agencies collectively placed all classes of the GSAMP 2006-S2 certificates on “negative watch” and downgraded all of their ratings by December 2007: (i) Fitch, Inc. placed all classes of certificates on “negative watch” by August 16, 2007, and downgraded all but the most senior certificates by September 7, 2007; (ii) Moody’s Investors Service placed all but the most senior certificates on “negative watch” by June 15, 2007, and downgraded these classes by December 4,
2007; and (iii) Standard & Poor’s placed all the offered classes of certificates on “negative watch” by
November 16, 2007, and downgraded all their ratings by December 20, 2007.15 (Rouse Decl.,
Ex. G.) Accordingly, Plaintiff’s assertion that it could not have known until February 21, 2008 at the earliest that its certificates were performing poorly is plainly incorrect. (SAC ¶¶ 140, 151, 172.)
Second, the SAC’s allegations are predicated on public sources generally addressing the lending practices of New Century and the corresponding risk of investing in securities backed by
New Century-originated loans. But if these general sources are sufficient to state a claim, then surely they were also sufficient to place Plaintiff on notice of that claim. Specifically, these sources discussed how, by the spring of 2007, New Century had “become a symbol of excess in lending to subprime borrowers,” and that its collapse culminated in a highly publicized bankruptcy filing in
April 2007 “as defaults surged and accounting misdeeds surfaced.” (Rouse Decl., Ex. J (THE WALL
15 Similar ratings downgrades occurred for certificates issued by GSAA Home Equity Trusts 2006-2 and 2006-3 during this period. (Rouse Decl., Exs. H, I.)
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STREET JOURNAL article, dated Mar. 12, 2007).) Furthermore, many sources discussed problems with
New Century’s lending practices, such as the fact that “New Century rarely demanded reviews of the appraisals on which loans are based” (id.), provided a timeline of New Century’s demise, discussed a shareholder suit based on New Century’s lending practices that was filed in February 2007 and reported that the Ohio Attorney General and Department of Commerce investigated and entered into an injunction against New Century, arising in part out of New Century’s lending practices.16
As summarized in Appendix hereto, other public information available prior to
February 6, 2008 (some of which Plaintiff cites) also disclosed the issues on which Plaintiff bases its allegations. For example, Plaintiff cites the May 2007 Senate testimony of Alan Hummel (Chairman of the Appraisal Institute), in which he noted that there was a “terrible conflict of interest” where appraisers “experience systemic problems of coercion” and are “ordered to doctor their reports.”
(SAC ¶ 121.) Plaintiff also cites a 2007 study by the October Research Corp., which was reported in
The Washington Post and noted that “90% of appraisers reported that mortgage brokers and others pressured them to raise property valuations.” (Id. ¶ 122.) Appendix 1 further explains that:
! There were problems with subprime underwriting guidelines. The public record was saturated with articles, statements from government officials and lawsuits concerning industry-wide poor lending practices of originators and increasing instances of lending fraud. ! Government officials were concerned about subprime loan origination practices. Congress held many hearings on the mortgage crisis, and prominent figures made multiple public statements on how loose underwriting practices contributed to the subprime crisis. ! Regulators were investigating subprime mortgage originators. Several states publicly announced that they were investigating and securing injunctions against originators because of their underwriting practices.
16 Press Release, Office of the Ohio Attorney General, All Eyes on New Century; Attorney General Marc Dann Has Oversight of Foreclosures to Weed Out Predatory Lending Violations (Mar. 28, 2007). (Rouse Decl., Ex. K.) Attached as Appendix 1 is a chronology of publicly available information regarding the subprime industry, disclosing the very problems about which Plaintiff complains. The Court may consider this information to determine whether Plaintiff was on inquiry notice without converting this motion to dismiss into a motion for summary judgment. Ingrassia, 262 F. Supp. 2d at 119.
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! Subprime mortgage lenders were closing because their alternative loan programs had resulted in significant defaults. Many originators (including New Century) declared bankruptcy or closed most of their businesses because of buy-back obligations related to nonperforming loans they had originated and sold. ! It was widely reported that originators coerced appraisers to inflate property values. ! Many sources reported on the conflicts of interest and problems that rating agencies had when evaluating securitizations. These concerns led to the September 2007 Congressional hearings on the rating agencies’ practices.
This information clearly constituted notice of the very “problems” about which Plaintiff complains.
Because Plaintiff filed its action more than one year after this information put it on inquiry notice (at a minimum) of its potential claims, its claims are barred and should be dismissed.17
CONCLUSION For the foregoing reasons, Plaintiff’s SAC should be dismissed in its entirety, with prejudice.
Dated: November 2, 2009 Respectfully submitted,
/s/ Richard H. Klapper Richard H. Klapper Michael T. Tomaino, Jr. Patrice A. Rouse Harsh N. Trivedi SULLIVAN & CROMWELL LLP 125 Broad Street New York, New York 10004 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 Counsel for Defendants The Goldman Sachs Group, Inc., Goldman, Sachs & Co., Goldman Sachs Mortgage Company, GS Mortgage Securities Corp., Jonathan S. Sobel, Daniel L. Sparks and Mark Weiss
17 DeBenedictis v. Merrill Lynch & Co., 492 F.3d 209, 217-18 (3d Cir. 2007) (articles on industry practices trigger notice); GVA Market Neutral Master, Ltd. v. Veras Capital Partners Offshore Fund, Ltd., 580 F. Supp. 2d 321, 329 (S.D.N.Y. 2008) (government investigations trigger notice); Korwek v. Hunt, 646 F. Supp. 953, 958 (S.D.N.Y. 1986), aff’d, 827 F.2d 874 (2d Cir. 1987) (individual lawsuits, Congressional hearings and media coverage trigger notice).
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CERTIFICATE OF SERVICE
I hereby certify that on November 2, 2009 I caused a copy of the Goldman Sachs Defendants’ Notice of Motion to Dismiss the Second Amended Complaint, Memorandum of Law in Support of the Goldman Sachs Defendants’ Motion to Dismiss the Second Amended Complaint, and Declaration of Patrice A. Rouse to be electronically filed with the Clerk of the Court using the CM/ECF system, which will send notification of such filing to counsel of record in this matter who are registered on the CM/ECF system.
/s/ Patrice A. Rouse Patrice A. Rouse
Appendix 1
Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group, Inc., et al. No. 09-CV-1110 (HB)
CHRONOLOGY OF SELECTED PUBLIC REPORTS CONCERNING SUBPRIME MORTGAGE MATTERS FROM MAY 2005 THROUGH FEBRUARY 20081
DATE EVENT May 2005 ! Chicago Tribune reports that executives at American Mortgage Network, Inc. and GreenPoint Mortgage Funding, Inc., both originators of subprime loans, have characterized their subprime lending practices as a “free-for-all” and risky because it is unclear whether borrowers will be able to pay their mortgages. Lew Sichelman, Innovative Home Loans Stir Worries Among Critics, CHICAGO TRIBUNE, May 22, 2005. ! Nobel Prize-winning economist Paul Krugman explains that he sees “signs that America’s housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble.” Paul Krugman, Running Out of Bubbles, THE N.Y. TIMES, May 27, 2005. January ! The Los Angeles Times reports that Ameriquest Mortgage Co. reached a settlement of allegations that it “falsified loan documents and pressured 2006 appraisers to overstate home values.” E. Scott Reckard, Ameriquest Settles Claims, L.A. TIMES, Jan. 21, 2006. ! Form 424B5 Prospectus Supplement is filed on February 6, 2006 for GSAA Home Equity Trust 2006-2. (Rouse Decl., Ex. E.) February ! Form 424B5 Prospectus Supplement is filed on February 24, 2006 for GSAA Home Equity Trust 2006-3. (Rouse Decl., Ex. F.) 2006 March 2006 ! Grand Rapids Press reports that appraisal fraud is prevalent at Fifth Third Bank, an originator of subprime mortgage loans through its subsidiary Fifth Third Mortgage Co. Cami Reister, When Appraisals Don’t Add Up: Inflated Real Estate Values Put Homeowners, Lenders at Risk, GRAND RAPIDS PRESS, Mar. 12, 2006. ! Plaintiff allegedly purchases GSAMP Trust 2006-S2 Certificates on March 24, 2006. ! Form 424B5 Prospectus Supplement is filed on March 30, 2006 for GSAMP Trust 2006-S2. (Rouse Decl., Ex. D.) May 2006 ! The Boston Herald reports that “[d]emonstrators shouting ‘predatory lenders, criminal offenders’ barged into a New Century Mortgage Corp. office . . . .” Laura Crimaldi, Protesters Drive Home Message to “Predatory” Mortgage Company, THE BOSTON HERALD, May 24, 2006.
1 Plaintiff commenced this action on February 6, 2009. The media reports and other public information described in this Appendix demonstrate that Plaintiff was on inquiry notice (at a minimum) of the alleged misrepresentations challenged here well before February 6, 2008. Plaintiff’s claims are therefore barred by the one-year statute of limitations set forth in Section 13 of the Securities Act of 1933 Act. In order to reduce volume, the Goldman Sachs Defendants have not submitted copies of the media reports and other publicly available materials cited herein with their motion papers. The Goldman Sachs Defendants have collected and compiled these materials and will provide them upon request.
DATE EVENT July 2006 ! The New York Times describes the growing problem of mortgage fraud and “fraud for profit,” which involves the falsification of mortgage application documents by applicants or predatory lenders. Bob Tedeschi, Mortgages: The Growing Problem of Fraud, THE N.Y. TIMES, July 9, 2006. August ! Cedeno v. IndyMac Bancorp, Inc., No. 06-CV-6438 (S.D.N.Y. filed Aug. 25, 2006). This action is brought on behalf of borrowers who alleged 2006 that IndyMac Bancorp, Inc. “threatened and retaliated against appraisers” to obtain inflated values for residential properties. ! The Chicago Tribune reports that “[a]ppraisers, dependent on loan officers for their livelihoods, say they often feel pressure to come up with a number that will allow a home purchase or refinancing to proceed.” James R. Hagerty & Ruth Simon, Inflated Appraisals Affecting Sales, Refi’s, CHICAGO TRIBUNE, Aug. 27, 2006. September ! The New York Times reports that National City Corp. “was among the first to issue interest-only mortgages that allow borrowers to pay no 2006 principal in the early years of their loans.” Vikas Bajaj, Mortgages Grow Riskier, and Investors Are Attracted, THE N.Y. TIMES, Sept. 6, 2006. ! The Denver Post reports that “exotic” mortgage loan products “that require no proof of income,” including several offered by Wells Fargo Home Mortgage Inc., have resulted in increased foreclosures. Greg Griffin, David Olinger & Jeffrey A. Roberts, THE DENVER POST, Foreclosing on the American Dream, Sept. 17, 2006. December ! Sebring Capital, a wholesale residential mortgage lender, ceases operations. Greg Griffin, THE DENVER POST, Mortgage bank abruptly closes 2006 Sebring Capital Partners, a Texas-based subprime lender with a Denver-area office, falls prey to the rising rate of defaults in another sign of the industry’s trouble, Dec. 6, 2006. ! Lehman Brothers analyst report concludes that “mortgage collateral performance [will] deteriorate significantly in 2007.” LEHMAN BROS. MORTGAGE OUTLOOK FOR 2007: BRACING FOR A CREDIT DOWNTURN (Dec. 12, 2006). ! Ownit Mortgage Solutions, Inc. (“Ownit”), a mortgage lender partially owned by Merrill Lynch, files a voluntary petition for Chapter 11 bankruptcy in federal court in California. In re Ownit Mortgage Solutions, Inc., No. 06-12579 (Bankr. C.D. Cal. filed Dec. 28, 2006). See US Subprime Loan Defaults at Highest This Decade, REUTERS, Feb. 2, 2007 (“California’s Ownit Mortgage Solutions Inc., once the 16th largest subprime lender, in December filed for bankruptcy protection.”). January ! Moody’s issues report discussing the fact that “[m]ortgages backing securities issued in late 2005 and early 2006 have had sharply higher rates 2007 of foreclosure, real estate owned (REO) and loss than previously issued securities at similar, early points in their lives.” Joseph A. Rocco, Early Defaults Rise in Mortgage Securitizations, Moody’s Investors Service, Jan. 18, 2007. ! Moody’s issues report, noting that “[t]he change in landscape in 2006 for the sub-prime mortgage business was a result of the excesses of the past whereby favorable market conditions led lenders to loosen their origination guidelines and underwriting practices in an effort to capture market share.” Debash Chatterjee, et al., 2006 Review and 2007 Outlook: Home Equity ABS, Moody’s Investors Service, Jan. 22, 2007. ! The New York Times reports that “mortgage lenders became more generous last year, giving 100 percent financing and allowing borrowers to state their incomes with little or no documentation in an effort to bolster volume according to industry experts. The article also notes that banking regulators have increasingly voiced concerns about the loosening of lending practices by subprime lenders, and that late last year, some demanded that applicants be more closely vetted before being qualified for adjustable-rate and other risky loans.” Vikas Bajaj & Christine Haughney, Tremors at the Door, THE N.Y. TIMES, Jan. 26, 2007. February ! The Washington Post reports the results of a nationwide survey of 1,200 appraisers conducted by October Research Corp., which found that “90 2007 percent of appraisers reported that mortgage brokers, real estate agents, lenders and even consumers have put pressure on them to raise property valuations to enable deals to go through.” And “75 percent of appraisers reported ‘negative ramifications’ if they refused to cooperate and come in with a higher valuation.” Kenneth R. Harney, Appraisers Under Pressure to Inflate Values, THE WASHINGTON POST, Feb. 3, 2007.
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DATE EVENT ! The Realty Times reports that the same October Research Corp. survey “found that nine out of 10 appraisers said they’ve recently been intimidated or otherwise pressured to raise valuations on homes — a 64 percent increase in complaints since a similar survey in 2003.” Kenneth R. Harney, Appraisers Say Pressure on Them to Fudge Values is Up Sharply, REALTY TIMES, Feb. 5, 2007. ! Mortgage Lenders Network USA Inc. (“Mortgage Lenders Network”), a subprime mortgage lender, files a voluntary petition for Chapter 11 bankruptcy in federal court in Delaware. In re Mortgage Lenders Network USA, Inc., No. 07-10146 (Bankr. D. Del. filed Feb. 5, 2007). See Mortgage Lenders Network Files for Chapter 11, REUTERS, Feb. 5, 2007 (reporting that Mortgage Lenders Network became “one of the largest casualties among ‘subprime’ lenders as the U.S. housing market slows”). ! The chief executive of a credit union and non-profit loan fund testifies before Congress that “[s]ubprime lenders have indicated that the types of products they offer and how they underwrite them is largely investor-driven. Consider the frank acknowledgement by the chief executive of Ownit Mortgage Solutions[:] . . . ‘The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans . . . .’” Preserving the American Dream, Predatory Lending Practices and Home Foreclosures, Testimony of Martin Eakes, CEO, Center for Responsible Lending & Self-Help Credit Union, Before the U.S. Senate Comm. On Banking, Housing and Urban Affairs, Feb. 7, 2007, available at http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=2053fdd2-9832- 4731-802d-fa9c18772267&Witness_ID=c74995dd-1cb3-4636-a7c8-ef51e313989e (last visited Nov. 2, 2009). ! ResMAE Mortgage Corp. (“ResMAE”), a subprime mortgage lender, files a voluntary petition for Chapter 11 bankruptcy in federal court in Delaware. In re Liquidating Trust of ResMAE Mortgage Corp., No. 07-10177 (Bankr. D. Del. filed Feb. 12, 2007). See ResMAE Files Chap. 11, Credit Suisse to Buy Assets, REUTERS, Feb. 13, 2007 (reporting ResMAE’s Chapter 11 bankruptcy filings). ! The Washington Post asks “Could lax underwriting standards during the housing boom years — no verification of applicants’ incomes or assets, low or no down payments, and big mortgages to people already saddled with heavy consumer debt — finally be coming home to roost?” Kenneth R. Harney, Subprime Market’s Sinking Fortunes, THE WASHINGTON POST, Feb. 17, 2007. ! NovaStar Financial Inc., a subprime mortgage lender, reports $14.4 million quarterly loss related to subprime loans. Vikas Bajas & Julie Creswell, Home Lenders Hit by Higher Default Rates, THE N.Y. TIMES, Feb. 22, 2007. ! In re New Century Sec. Litig., No. 07-CV-00931 (C.D. Cal. filed Feb. 8, 2007). This class action, filed against New Century Financial Corp. (“New Century”) on behalf of purchasers of New Century shares, alleges violations of Sections 11 and 12(a) of the 1933 Securities Act and Sections 10(b) and 20(a) of the 1934 Securities Exchange Act. March 2007 ! The Wall Street Journal reports that problems in the subprime lending market are affecting GMAC Mortgage, LLC (“GMAC”) and attributes “[h]igher delinquencies on subprime mortgages” to “a sharp deterioration of underwriting standards last year.” Mike Spector, John D. Stoll & Lingling Wei, GM Delays Filing, Stoking Doubts — Move Raises Concerns Over Subprime Exposure, Overshadows Strong Sales, THE WALL STREET JOURNAL, Mar. 2, 2007. ! The Federal Deposit Insurance Corporation (“FDIC”) issues a cease and desist order against Fremont Investment & Loan and its parents, Fremont General Corp. and Fremont General Credit Corp. (collectively, “Fremont”), requiring Fremont to “correct its lending practices because it “had been operating without adequate subprime mortgage loan underwriting criteria and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default or other loss to the bank.” See Press Release, FDIC, FDIC Issues Cease and Desist Order Against Fremont Investment & Loan, Brea, California, and its Parents, Mar. 7, 2007, available at http://www.fdic.gov/news/news/press/2007/pr07022.html (last visited Nov. 2, 2009). ! Moody’s issues a report addressing the concerns of investors “about the rating stability and performance” of their subprime mortgage-backed securities, noting that “the truly poor performance has been largely concentrated in loans originated in 2006.” Debash Chatterjee, Challenging Times for the US Subprime Mortgage Market, Moody’s Investors Service, Mar. 7, 2007, available at http://www.americansecuritization.com/ uploadedFiles/Challenging%20Times%20for%20the%20US%20Subprime%20Mortgage%20Market.pdf (last visited Nov. 2, 2009). -3-
DATE EVENT ! The New York Times reports that mortgage lenders, “[l]ooking to expand their reach and their profits . . . were far too willing to lend, as evidenced by the creation of new types of mortgages” and that “[m]ortgages requiring little or no documentation became known colloquially as ‘liar loans.’” Gretchen Morgenson, Crisis Looms in Mortgages, THE N.Y. TIMES, Mar. 11, 2007. ! A Credit Suisse analyst report reveals that “a study by the Mortgage Asset Research Institute sampling 100 stated income (low . . . documentation) loans found that 60% of borrowers had ‘exaggerated’ their income by more than 50%.” CREDIT SUISSE, MORTGAGE LIQUIDITY DU JOUR: UNDERESTIMATED NO MORE (Mar. 12, 2007). ! The Wall Street Journal Reports that New Century had “become a symbol of excess in lending to subprime borrowers” and that the “company has imploded over the past few months as defaults surged and accounting misdeeds surfaced.” James Hagerty et al., Home Stretch: At a Mortgage Lender, Rapid Rise, Faster Fall, THE WALL STREET JOURNAL, Mar. 12, 2007. (Rouse Decl., Ex. J.) ! Reese v. IndyMac Financial Inc., No. 07-CV-01635 (C.D. Cal. filed Mar. 12, 2007). This class action against IndyMac Financial Inc. and its Chief Executive Officer alleges violations of Sections 10(b) and 20(a) of the 1934 Securities Exchange Act, and claims that IndyMac purchased mortgages from sellers that had not been properly vetted. ! Bloomberg reports mounting losses at GMAC LLC’s ResCap unit after “delinquencies on subprime loans rose to the highest in four years.” Jody Shenn & Bradley Keoun, GMAC Reports Fourth Quarter Loss at Its ResCap Unit (Update 3), BLOOMBERG, Mar. 13, 2007. ! The Cincinnati Enquirer reports that “New Century [Financial Corp.] provides a glaring and disturbing look at the problems associated with predatory lending.” John Newberry, Mortgage Lender is Restricted in Ohio, THE CINCINNATI ENQUIRER, Mar. 15, 2007 (internal quotation marks omitted). ! Atlas v. Accredited Home Lenders Holding Co., No. 07-CV-00488 (S.D. Cal. filed Mar. 16, 2007). This class action against Accredited — a mortgage company specializing in non-prime residential mortgage loans — and certain of its officers and directors alleges violations of Sections 10(b) and 20(a) of the 1934 Securities Exchange Act. ! The law firm of Bernstein Litowitz Berger & Grossmann LLP announces its leadership role in investigating sub-prime lending, explaining that the firm “is conducting an extensive investigation into the conduct of numerous subprime lenders,” which indicated that “many sub-prime lenders responded to the rising interest rates that increased competition among mortgage lenders in 2005 and 2006 by abandoning their underwriting standards and embarking on campaigns to aggressively market mortgages to clients who clearly lacked adequate financial resources.” Press Release, Bernstein Litowitz Berger & Grossmann LLP, BLB&G Investigating Collapse of Subprime Lending Institutions; Jerry Silk Discusses on CNBC’s Power Lunch, Mar. 19, 2007, available at http://www.blbglaw.com/news/media_mentions/00043 (last visited Nov. 2, 2009). ! CNNMoney refers to Alt-A loans as “liar loans” and identifies IndyMac Bancorp as “the biggest Alt-A lender.” Chris Isidore, “Liar Loans”: Mortgage Woes Beyond Subprime, CNNMoney.com, Mar. 19, 2007, available at http://money.cnn.com/2007/03/19/news/economy/ next_subprime/index.htm (last visited Nov. 2, 2009). ! Senator Chris Dodd testifies before a Congressional hearing that “Risky exotic and subprime mortgages — all characterized by high payment shocks — spread rapidly through the marketplace. Almost anyone, it seemed, could get a loan. As one analyst put it, underwriting standards became so lax that ‘if you could fog a mirror, you could get a loan.’” Senator Dodd Protects Homeownership, Preserves American Dream, Opening Statement of Chris Dodd, Senate Comm. On Banking, Housing, and Urban Affairs regarding Mortgage Market Turmoil: Causes and Consequences, Mar. 22, 2007, available at http://dodd.senate.gov/?q=node/3795 (last visited Nov. 2, 2009). ! The Ohio Attorney General and the Ohio Department of Commerce enter into a stipulated preliminary injunction against New Century, arising in part out of its predatory lending practices. Press Release, Office of the Attorney General, State of Ohio, All Eyes on New Century; Attorney General Marc Dann Has Oversight of Foreclosures to Weed Out Predatory Lending Violations, Mar. 28, 2007. (Rouse Decl., Ex. K.) -4-
DATE EVENT April 2007 ! The New York Times reports that subprime mortgage lender “NovaStar [Financial Inc.] . . . has become Exhibit A for anyone interested in understanding how loose the lending was among some upstart mortgage companies in the great real estate run-up of this decade. The company’s troubles also reveal how willingly investors, regulators and much of Wall Street overlooked mortgage companies’ questionable practices.” Gretchen Morgenson & Julie Creswell, Borrowing Trouble, THE N.Y. TIMES, Apr. 1, 2007. ! New Century, once the second-largest subprime mortgage lender in the U.S., files a voluntary petition for Chapter 11 bankruptcy in federal court in Delaware. In re New Century TRS Holdings, Inc., No. 07-10416 (Bankr. D. Del. filed Apr. 2, 2007). See Bradley Keoun & Steven Church, New Century, Biggest Subprime Casualty, Goes Bankrupt (Update 4), BLOOMBERG, Apr. 2, 2007 (reporting that New Century “became the largest subprime mortgage lender ever to fail”). ! The Washington Post reports the inevitability of New Century’s bankruptcy filing after its “credit lines were cut off, regulators barred it from making new loans in key states and investors sued.” Lender to Liquidate, THE WASHINGTON POST, Apr. 8, 2007. ! American Home Mortgage Investment Corp. (“American Home Mortgage”), a subprime mortgage lender, writes down $484 million in subprime mortgages. Vikas Bajaj, Defaults Rise in Next Level of Mortgages, THE N.Y. TIMES, Apr. 10, 2007. ! SouthStar Funding LLC (“SouthStar”), a subprime mortgage lender, files a voluntary petition for Chapter 7 bankruptcy protection in federal court in Georgia. In re SouthStar Funding, LLC, No. 07-65842 (Bankr. N.D. Ga. filed Apr. 11, 2007). See Mortgage Lender SouthStar in Chapter 7 Bankruptcy, REUTERS, Apr. 12, 2007 (reporting that SouthStar’s bankruptcy filing made it “at least the sixth U.S. mortgage lender to seek bankruptcy protection since December”). ! The Los Angeles Times reports that “New Century is under investigation by a federal grand jury and the Securities and Exchange Commission, and more than two dozen civil lawsuits have been filed against the company.” Kim Christensen, U.S. Seeks Trustee to Run New Century, LOS ANGELES TIMES, Apr. 18, 2007. ! The San Diego Union-Tribune reports that “the subprime mortgage issue is a high priority for Congress.” Emmet Pierce, Trend Called “Disturbing”: Many Subprime Loans, Foreclosures Occur in Minority Areas, SAN DIEGO UNION-TRIBUNE, Apr. 20, 2007. ! The Washington Post reports that the “four largest trade groups representing appraisers” “told regulators April 11 that subprime lenders experiencing high rates of foreclosures often have been guilty of ‘systematic inattention’ to the accuracy and the sources of the valuations backing the mortgages they funded.” Kenneth R. Harney, Appraisal Inflation, THE WASHINGTON POST, Apr. 21, 2007. ! The Chicago Tribune reports that appraisers “are asking federal regulators to crack down on lenders and loan officers who pressure appraisers to raise valuations to allow overpriced deals. Led by the 22,000-member Appraisal Institute, the groups told regulators on April 11 that subprime lenders experiencing high foreclosure rates often have been guilty of ‘systematic inattention’ to the accuracy and sources of the valuations backing the mortgages they funded.” Kenneth R. Harney, Fighting back: Appraisers Attack Inflated Numbers, Pressures, CHICAGO TRIBUNE, Apr. 22, 2007. ! Reuters reports that “[s]ubprime mortgage lenders created a surge in delinquencies in the past year by repeatedly breaking their own underwriting guidelines to capture business . . . .” Subprime Lenders Made Record Exceptions, REUTERS, Apr. 30, 2007. May 2007 ! The Baltimore Sun reports that “non-bank lenders and mortgage brokers began issuing large numbers of risky and exotic adjustable-rate loans with low teaser rates, as well as so-called ‘liar loans,’ which asked borrowers their income but rarely verified it.” Kevin G. Hall, Failure to Regulate Non-Bank Lenders Helped Cause Subprime Mess, BALTIMORE SUN, May 6, 2007. ! Countrywide Financial Corp., on behalf of itself and its subsidiaries Countrywide Home Loans, Inc. and Countrywide Bank FSB (collectively, “Countrywide”), submits a letter to the Office of Thrift Supervision conceding “that almost 60% of the borrowers who obtained subprime hybrid ARMS would not have qualified at the fully indexed rate.” Letter from Mary Jane M. Seebach, Countrywide, to Chief Counsel’s Office, Office of Thrift Supervision (May 7, 2007), available at http://files.ots.treas.gov/comments/0dbce609-691d-456b-9b30-867f922c1b65.pdf (last visited -5-
DATE EVENT Nov. 2, 2009). The letter was submitted in response to a request for comments from federal financial regulatory agencies regarding “a proposed Statement on Subprime Mortgage Lending to address certain risks and emerging issues relating to subprime mortgage lending practices, specifically, particular adjustable-rate mortgage (ARM) lending products.” Press Release, Board of Governors of the Federal Reserve System, Agencies Seek Comment on Subprime Mortgage Lending Statement, Mar. 2, 2007. See also Floyd Norris, Regulators Set Rules to Limit Subprime Mortgage Lending, THE N.Y. TIMES, June 30, 2007 (discussing the proposed rules and the abatement of the industry’s opposition previously expressed during the comment period). ! The Washington Post reports that “a detailed inquiry into the situation at New Century and other subprime lenders suggests that in the feeding frenzy for housing loans, basic quality controls were ignored . . . .” David Cho, Pressure at Mortgage Firm Led To Mass Approval of Bad Loans, THE WASHINGTON POST, May 7, 2007. ! The New York Times reports that “William D. Dallas, the founder and chief executive of Ownit [Mortgage Solutions], acknowledges loosening lending standards but says he did so reluctantly and under pressure from his investors, particularly Merrill Lynch, which wanted more loans to package into lucrative securities.” Vikas Bajaj, East Coast Money Lent Out West, THE N.Y. TIMES, May 8, 2007. See also The Role of the Secondary Market in Subprime Mortgage Lending, Testimony of Michael D. Calhoun, President and COO, Center for Responsible Lending, Before the U.S. House Subcomm. on Financial Institutions and Consumer Credit, May 8, 2007 (referring to the New York Times article and Mr. Dallas’ frank acknowledgement), available at http://www.house.gov/financialservices/hearing110/calhoun_testimony.pdf (last visited Nov. 2, 2009). ! The Financial Times reports that “[t]he potential for conflicts of interest in the agencies’ ‘issuer pays’ model has drawn fire before, but the scale of their dependence on investment banks for structured finance business gives them a significant incentive to look kindly on the products they are rating, critics say.” Richard Beales, et al., Failing Grades?, FINANCIAL TIMES, May 16, 2007. ! Bloomberg reports that “New York State is investigating Manhattan real estate practices, seeking information about whether brokers pressured appraisers to inflate property values as prices doubled in the last five years.” Sharon L. Crenson, New York State Subpoenas Appraiser, Broker in Probe (Update 3), BLOOMBERG, May 18, 2007. ! New Century announces that it will restate 2005 financials due to accounting errors related to repurchased subprime loans. See New Century Says Probably Overstated 2005 Earnings, REUTERS, May 24, 2007. ! Bloomberg reports that Wells Fargo frequently employed mortgage brokers that used aggressive subprime sales tactics. Seth Lubove & Daniel Taub, Subprime Fiasco Exposes Manipulation by Mortgage Brokerages, BLOOMBERG, May 30, 2007. June 2007 ! The International Herald Tribune reports that “[a]s foreclosures increase, the subprime-backed securities in CDOs begin to crumble.” Richard Tomlinson & David Evans, CDOs Mask Subprime Loan Losses, INTERNATIONAL HERALD TRIBUNE, June 1, 2007. ! The Economist reveals shortcomings in rating agency models for evaluating mortgage-backed securities, noting that “the models misread the level of correlation between different types of assets — a crucial variable — and ignored signs that risks were greater than historical data suggested.” Rating Agencies: Measuring the Measurers, THE ECONOMIST, June 2, 2007. ! Ben Bernanke states that “[s]ome of the increased difficulties now being experienced by subprime borrowers are likely the result of an earlier loosening of underwriting standards, as evidenced by the pronounced rise in 2006 in ‘early payment defaults’ — defaults occurring within a few months of mortgage origination.” Ben S. Bernanke, Speech to the 2007 International Monetary Conference, Cape Town, South Africa, June 5, 2007, available at http://www.federalreserve.gov/newsevents/speech/bernanke20070605a.htm (last visited Nov. 2, 2009). ! Bloomberg reports that “New York Attorney General Andrew Cuomo is asking home appraisers to declare in writing that they were improperly pressured by mortgage brokers and lenders to inflate estimates and that such practices damaged the market's integrity.” Sharon L. Crenson, Cuomo Expands Probe as Appraisers Attest to Pressure (Update 2), BLOOMBERG, June 20, 2007.
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DATE EVENT ! Bear Stearns pledges $3.2 billion to bail out Bear Stearns High-Grade Structured Credit Fund, a hedge fund that was heavily invested in subprime mortgages. Julie Creswell & Vikas Bajaj, $3.2 Billion Move by Bear Stearns to Rescue Fund, THE N.Y. TIMES, June 23, 2007. ! Alan Hummel, Chairman of the Appraisal Institute, testifies that “unscrupulous lenders and brokers” “can coerce, pressure, entice, or conspire with appraisers, virtually without consequences. As a result, many deem appraiser coercion the way to do business. Too many brokers and lenders unfortunately view the appraisal process as something to be manipulated.” Ending Mortgage Abuse: Safeguarding Homebuyers, Testimony of Alan Hummel, Chair of the Government Relations Committee Appraisal Institute and Senior Vice President and Chief Appraiser of Forsythe Appraisals, LLC, Before the U.S. Senate Subcomm. on Housing, Transportation and Community Development, June 26, 2007, available at http://banking.senate.gov/public/index.cfm?Fuseaction=Hearings.Hearing&Hearing_ID=827e024e-707e-4edb-b4b5-ffa285d19982 (last visited Nov. 2, 2009). ! Bloomberg reports that “[s]ome investors say the ratings companies are waiting too long before downgrading the mortgage bonds and the CDOs that contain them.” Mark Pittman, S&P, Moody’s Mask $200 Billion of Subprime Bond Risk (Update 1), BLOOMBERG, June 29, 2007. July 2007 ! Reuters reports that “Ohio’s attorney general is investigating the role of Wall Street rating agencies to determine whether they have any culpability in the subprime mortgage meltdown.” Ohio Atty Gen Probes Rating Agencies’ Subprime Role, REUTERS, July 6, 2007. ! Bloomberg reports that “[i]nvestors criticized S&P, Moody’s and Fitch Ratings because their ratings on bonds backed by mortgages to people with poor or limited credit don’t reflect the fastest default rate in a decade. Prices of some bonds backed by subprime mortgages have declined by more than 50 cents on the dollar in the past few months while their credit ratings haven’t changed.” Mark Pittman, Moody’s Lowers Ratings on Subprime Mortgage Bonds, S&P May Cut, BLOOMBERG, July 10, 2007. ! Several rating agencies (S&P, Moody’s, and Fitch) announce planned downgrades for several bonds backed by subprime mortgages. S&P will downgrade bonds worth $12 billion, while Moody’s will downgrade bonds worth $5.2 billion. See Vikas Bajaj, Rate Agencies Move Toward Downgrading Some Mortgage Bonds, THE N.Y. TIMES, July 11, 2007. ! N.A.A.C.P. v. Ameriquest Mortgage Co., No. SACV 07-0794 (C.D. Cal. filed July 11, 2007). This action was filed by the National Association for the Advancement of Colored People (“NAACP”) against a dozen mortgage lenders, “claiming that companies discriminated against blacks by steering them into higher-interest, sub-prime loans while giving more favorable loan terms to white borrowers.” NAACP Files Lawsuit Over Home Loans, L.A. TIMES, July 12, 2007; see also Alan Zibel, Subprime Mortgage Debacle Leading to a Cascade of Lawsuits, PITTSBURGH POST-GAZETTE, July 13, 2007 (citing this suit as one of the “numerous recent cases related to the troubled mortgage market”). ! Alliance Bancorp, Inc. (“Alliance Bancorp”), a subprime mortgage lender, files a voluntary petition for Chapter 7 bankruptcy in federal court in Delaware. In re Alliance Bancorp, No. 07-10942 (Bankr. D. Del. filed July 13, 2007). See Mortgage Lender Alliance Bancorp Files Chapter 7, REUTERS, July 16, 2007 (reporting that Alliance Bancorp has become “the latest residential mortgage lender to collapse in the U.S. housing downturn”). ! General Electric Co. announces that it has decided to sell its subprime mortgage lending business, WMC Mortgage Corp., because “the subprime market environment has had a negative impact on business.” The article also notes that “more than 50 subprime lenders” have ceased operations. See General Electric to Sell WMC Mortgage, a Subprime Loan Unit, THE N.Y. TIMES, July 13, 2007. ! Reuters reports that “[m]ortgage loan analysis company Clayton Holdings Inc. . . . has been subpoenaed by the New York State attorney general as part of an investigation into the subprime mortgage crisis . . . .” Patrick Rucker, Clayton Holdings Subpoenaed in Subprime Probe, REUTERS, July 16, 2007.
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DATE EVENT ! Ben Bernanke states that “the recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and, in some cases, by abusive lending practices and outright fraud.” Ben S. Bernanke, Semiannual Monetary Policy Report to the Congress, Before the Comm. on Financial Services, U.S. House of Representatives, July 18, 2007, available at http://www.federalreserve.gov/newsevents/ testimony/bernanke20070718a.htm (last visited Nov. 2, 2009). ! Bear Stearns closes two hedge funds (Enhanced Leverage Fund and High-Grade Fund) that were heavily invested in subprime mortgage loans after they lost over 90% of their value. See Tom Petruno, Bear Stearns: Two Funds Wiped Out — Mortgage-Backed Bonds in the Portfolios Have Been Sunk by Subprime Turmoil, L.A. TIMES, July 18, 2007. ! Wells Fargo & Co. announces that “it will close its nonprime wholesale lending business . . . citing turmoil in the market for riskier home loans.” See Wells Fargo Shuts Nonprime Mortgage Unit, Cuts Jobs, REUTERS, July 26, 2007. ! Forbes.com reports that “American Home Mortgage makes loans to home buyers with less-than-sterling credit histories and/or little or no documentation. American Home sells bundles of these mortgages converted into securities. In the second quarter, the company reported a high number of defaults on loans, which forced it to repurchase some of the loans, leading to huge losses.” Ruthie Acherman, AHM Infected by Subprime Problems, Forbes.com, July 26, 2007. ! Prudential Financial, Inc.’s Pru Alpha hedge fund reports large returns attributable to shorting (i.e., betting against) subprime mortgages through credit-default swaps and other instruments. See Prudential Wins Big by Betting Against Subprime, DERIVATIVES WEEK, July 27, 2007. ! Greenberg v. Am. Home Mortgage Investment Corp., No. 07-CV-03152 (E.D.N.Y. filed July 31, 2007). This class action, filed against American Home Mortgage and certain of its officers and directors, alleges violations of Sections 10(b) and 20(a) of the 1934 Securities Exchange Act. August ! Reuters reports that “Fitch’s actions extend a dizzying list of downgrades from rating companies that last month sent subprime bond indexes to 2007 record lows and caused seizures in markets for new securities that are dominated by Wall Street Firms. While investment banks such as Barclays have been instrumental in providing credit for home loans by making bonds, they are now being blamed for lax underwriting standards that are leading to a surge in defaults and a budding credit crunch.” Fitch Subprime Downgrades Hit Barclays, Merrill, REUTERS, Aug. 1, 2007. ! The Financial Times reports that Deutsche Bank began shorting (i.e., betting against) the subprime market in the first quarter of 2007. Ivar Simensen, How Bank’s Subprime Bet Proved to Be a Winner, FINANCIAL TIMES, Aug. 2, 2007. ! BusinessWeek reports that “when agencies decide on their ratings they don’t perform what’s known as due diligence — looking at the individual loans that make up the CDOs to make sure those loans are up to snuff.” Roben Farzad, Let the Blame Begin, BUSINESSWEEK, Aug. 6, 2007. ! American Home Mortgage files a voluntary petition for Chapter 11 bankruptcy in federal court in Delaware. In re American Home Mortgage, Inc., No. 07-11047 (Bankr. D. Del. filed Aug. 6, 2007). See American Home Mortgage Files for Bankruptcy, REUTERS, Aug. 6, 2007 (“American Home’s bankruptcy reflects how worries about loan defaults fueled by slumping U.S. housing prices have spread beyond subprime lenders . . . .”). ! The Financial Times reports that the Ohio Attorney General “is looking at brokers, appraisers, rating agencies and securitisers and plans to use several legal methods to hold bad actors accountable.” Brooke Masters & Saskia Scholtes, As Subprime Bites, US Investigators Look for Culprits, FINANCIAL TIMES, Aug. 8, 2007. ! Accredited Home Lenders Holding Co. posts a $60 million quarterly loss related to subprime. See Accredited Home Sees up to $60 Million Loss for Quarter, REUTERS, Aug. 10, 2007.
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DATE EVENT ! Aegis Mortgage Corp., a subprime mortgage lender, files a voluntary petition for Chapter 11 bankruptcy in federal court in Delaware. In re Aegis Mortgage Corporation, Inc., No. 07-11119 (Bankr. D. Del. filed Aug. 13, 2007). See also Aegis Mortgage Files for Chapter 11 Bankruptcy, REUTERS, Aug. 13, 2007 (reporting that Aegis filed for bankruptcy protection “a week after it shut down loan operations”). ! In re Countrywide Financial Corp. Sec. Litig., No. 07-CV-05295 (C.D. Cal. filed Aug. 14, 2007). This class action alleges violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, and details Countrywide’s underwriting practices, citing information from former Countrywide employees. ! The Wall Street Journal reports that rating agencies had recently announced that market changes “reduced the relevance of their statistical models and historical data.” Aaron Lucchetti & Serena Ng, Credit and Blame: How Rating Firms’ Calls Fueled Subprime Mess — Benign View of Loans Helped Create Bonds, Led to More Lending, THE WALL STREET JOURNAL, Aug. 15, 2007. ! Countrywide, “the nation’s largest mortgage lender,” draws down $11.5 billion from credit lines “amid a crisis in liquidity.” See Countrywide Taps $11.5 Billion Credit Line, ASSOCIATED PRESS, Aug. 16, 2007. ! Reuters reports that First Franklin Corporation’s “lawsuits against mortgage brokers show the San Jose, California-based lender has experienced the same problems as the rest of the industry. Court papers show First Franklin has been burned by lax underwriting, fraudulent home appraisals and borrowers exaggerating their incomes.” Tim McLaughlin, Merrill Lynch’s Painful Lesson in Subprime, REUTERS, Aug. 16, 2007. ! The New York Times reports that “[r]atings agencies’ models for creditworthiness may be outdated . . . .” James Kanter, Europeans Plan to Investigate Rating Agencies and Their Warnings, THE N.Y. TIMES, Aug. 17, 2007. ! BusinessWeek reports the increasing prevalence of inflated income from mortgage loan applicants and that “[f]raud like this has been made easier by the emergence of a new breed of mortgages called ‘stated-income’ loans, in which borrowers merely sign papers certifying their income, with banks verifying only the source of that income, not the amount.” Mara Der Hovanesian & Brian Grow, Did Big Lenders Cross the Line?, BUSINESSWEEK, Aug. 20, 2007. ! Capital One Financial Corp., (a subprime originator) announces that “it will cut 1,900 jobs and take $860 million in charges as it closes its GreenPoint Mortgage unit . . . .” See Capital One Slashes Jobs, Mortgage Industry Swoons, REUTERS, Aug. 20, 2007. ! RealtyTrac, which maintains a nationwide database of home foreclosures, announces that foreclosures were up 93% in July 2007 from July 2006. Paul Jackson, RealtyTrac: Foreclosures up 93% from July 2006, HOUSINGWIRE.com, Aug. 21, 2007. ! SMR Research announces the results of a study comparing the 163 largest U.S. mortgage lenders. SouthStar Funding LLC is identified as the “riskiest” of all subprime mortgage lenders. Press Release, SMR Research Corp., Mortgage Lender Insolvencies Due to Bad Credit Are Nearing an End, Study Finds, Aug. 22, 2007. ! Accredited Home Lenders Holding Co. announces that “it will shut most of its mortgage business to help survive turmoil in subprime lending.” See Accredited Home to Cut 1,600 Jobs; Halts Lending, REUTERS, Aug. 22, 2007. ! Bloomberg publishes a table tracking the “sales, shutdowns, bankruptcies and transactions” of over 100 home lenders, including “companies that may have offered subprime, prime or Alternative-A loans. The table reveals that SouthStar Funding LLC, Aegis Mortgage Corp., Mortgage Lenders Network, and American Home Mortgage, Inc. filed for bankruptcy while Ameriquest Mortgage Co., Wells Fargo, GreenPoint Mortgage Funding, Inc., and Accredited Home Lenders Holding Co. ceased all or part of their subprime lending. See Rick Green, Lehman Shuts Unit; Toll of Lenders Tops 100: Subprime Scorecard, BLOOMBERG, Aug. 23, 2007. ! The New York Times reports that Countrywide has been engaging in aggressive subprime lending practices (including making “no doc” loans). Gretchen Morgenson, Inside the Countrywide Lending Spree, THE N.Y. TIMES, Aug. 26, 2007.
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DATE EVENT ! The Wall Street Journal reports on the role of rating agencies in asset-backed securitizations, noting that “[s]ecuritization may be the only business in the world where the appraiser is hired by, paid by, and thus works for, the seller rather than the buyer.” Ethan Penner, Can the Financial Markets Make a Comeback?, THE WALL STREET JOURNAL, Aug. 27, 2007. ! S&P announces that it has downgraded 195 classes of securities backed by subprime mortgages. Press Release, Standard & Poor’s, 195 Subprime RMBS NIMS Classes Downgraded; Surveillance and New Issue Assumptions Revised, Aug. 27, 2007. ! Newsday.com reports the convictions of several former American Home Mortgage employees, detailing internal e-mails that stated “[a]t AHM, we pride ourselves on having a loan for virtually any borrower, regardless of whether or not they have the ability to verify their Income, Assets or Employment history.” Daniel Wagner, Ex-American Home Mortgage Manager Going to Prison, Newsday.com, Aug. 28, 2007. ! Ameriquest Mortgage Co. ceases operations. See Ameriquest, a Subprime Lender, Is Closing, THE N.Y. TIMES, Aug. 31, 2007. September ! Conde Nast Portfolio reports that “[t]he subprime-mortgage meltdown could — finally — end the credit ratings racket,” because “the deals the 2007 [rating] agencies helped build are falling apart, and the raters are emerging as one of the main reasons. The market for mortgage derivatives is seizing up. Losses on subprime mortgages are far greater than expected.” Jesse Eisinger, Overrated, PORTFOLIO, Sept. 2007. ! The Wall Street Journal reports that “[c]ritics point out that ratings firms’ financial fortunes are closely tied to the volume of securities deals — and that higher ratings often spur deals on by making securities easier to sell.” Aaron Lucchetti, Ratings Firms’ Practices Get Rated, THE WALL STREET JOURNAL, Sept. 7, 2007. ! Several hedge funds, including Paulson & Co., Balestra Capital Partners LP, Harbinger Capital Partners, Lahide Capital Mgmt., Sandler Capital Mgmt., and MKP Capital Mgmt., report significant profits from shorting (i.e., betting against) the ABX Index (which tracks a basket of subprime offerings). See Dane Hamilton, Big Hedge Winners See More Market Pain Ahead, REUTERS, Sept. 13, 2007. ! The New York Times describes the July 2007 lawsuit brought by the N.A.A.C.P. against, among others, Ameriquest Mortgage Co., Fremont Investment & Loan, Accredited Home, WMC Mortgage, Washington Mutual Bank (“Washington Mutual”), Option One Mortgage Corp. (“Option One”), Beach Mortgage Co., BNC Mortgage, Inc., Encore Credit Corp., First Franklin Financial Corp., and HSBC Finance Corp., accusing the “lenders of singling out African-Americans for costly subprime loans.” Bob Tedeschi, The N.A.A.C.P. v. 11 Lenders, THE N.Y. Times, Sept. 23, 2007. ! The Group Managing Director of Moody’s testifies before Congress, stating that “we do not conduct any ‘due diligence’ on these loans” and that “it should be noted that the quality of our opinions is directly tied to the quality of the information we receive from the originators and the investment banks. Regardless of the quantity of data we assess, if the data we receive is faulty — e.g., as a result of misrepresentation — the quality of our rating opinions will be jeopardized.” The Role and Impact of Credit Rating Agencies on the Subprime Credit Markets, Hearing Before the S. Comm. on Banking, Housing and Urban Affairs, 110th Congress, 5, 7 (Sept. 26, 2007) (Statement of Michael Kanef, Group Managing Director of Moody’s Investors Service), available at http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_ id=e9c1a464-a73b-417a-a384-41c15315f8c2 (last visited Nov. 2, 2009). October ! Commonwealth of Mass. v. Fremont Investment & Loan, No. 07-4374 (Mass. Superior Ct. filed Oct. 4, 2007). This action alleges that Fremont 2007 engaged in predatory lending under Massachusetts state law because Fremont was selling risky mortgage loans to unqualified borrowers. See News Release, Office of Massachusetts Attorney General Martha Coakley, Attorney General Files Lawsuit Against National Mortgage Lender Fremont Investment & Loan, Oct. 5, 2007. (Fremont later entered into a settlement with the Massachusetts Attorney General and filed for bankruptcy.) ! Moody’s downgrades $33.4 billion in securities backed by subprime mortgages. See Mark Pittman, Moody’s Downgrades $33.4 Billion of Subprime Bonds (Update 3), BLOOMBERG, Oct. 11, 2007.
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DATE EVENT ! Citigroup, JPMorgan Chase and Bank of America announce the creation of a new entity (“Master Liquidity Enhancement Conduit”) to raise $200 billion for the purchase of underperforming mortgage-backed securities. See Gillian Tett, Krishna Guna & David Wighton, Banks Agree to $75 Billion Mortgage Debt Fund, FINANCIAL TIMES, Oct. 14, 2007. ! Citigroup announces a 57% drop in its third-quarter profit after it was forced to write off $3.55 billion and to set aside $2.24 billion to cover anticipated mortgage losses. See Eric Dash, Citigroup Acknowledges Poor Risk Management, THE N.Y. TIMES, Oct. 16, 2007. ! Ben Bernanke states that “[t]he rate of serious delinquencies has risen notably for subprime mortgages with adjustable rates, reaching nearly 16 percent in August, roughly triple the recent low in mid-2005. Subprime mortgages originated in late 2005 and 2006 have performed especially poorly, in part because of a deterioration in underwriting standards.” Ben S. Bernanke, The Recent Financial Turmoil and its Economic and Policy Consequences, Oct. 15, 2007 (footnote omitted), available at http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm (last visited Nov. 2, 2009). ! Treasury Secretary Henry Paulson explains that “[a]s mortgage lenders and investors reached for higher returns this ‘demand’ pressure, coupled with our fragmented mortgage origination process, led to a decline in underwriting standards and a sharp increase in the issuance of riskier mortgage products. As demand for housing began to slow in 2004, originators, eager to maintain high mortgage origination volumes, further lowered their underwriting standards.” Henry M. Paulson, Jr., Remarks by Secretary Henry M. Paulson, Jr. on Current Housing and Mortgage Market Developments, Oct. 16, 2007, available at http://www.treas.gov/press/releases/hp612.htm (last visited Nov. 2, 2009). ! Senator Charles Schumer (D-NY) calls upon the SEC to investigate Countrywide Financial Corporation and its CEO, Angelo Mozilo. See Senator Schumer Urges SEC to Expand Countrywide Probe, REUTERS, Oct. 18, 2007. ! The New York Times reports on Washington Mutual’s efforts to tighten lending practices, “help borrowers avoid bad loans,” and “assert greater control over the independent brokers who market loans.” Bob Tedeschi, Beating Regulators to the Punch, THE N.Y. TIMES, Oct. 21, 2007. ! The Chairman of the FDIC testifies that “the uncertainty that now pervades the mortgage market . . . is directly attributable to underwriting practices that are unsafe, unsound, predatory and/or abusive.” Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corp. on Legislative Proposals on Reforming Mortgage Practices, Before the U.S. House Financial Services Comm., Oct. 24, 2007, available at http://www.fdic.gov/news/news/speeches/archives/2007/chairman/spoct2407_2.html (last visited Nov. 2, 2009). ! Morgan Stanley Mortgage Capital Holdings LLC v. Fremont Investment & Loan, No. 07-CV-09457 (S.D.N.Y. filed Oct. 23, 2007). This action alleges that “Fremont Investment & Loan breached a series of written agreements under which Morgan Stanley Mortgage Capital Inc. purchased hundreds of residential mortgages between May 1, 2005, and Dec. 28, 2006.” Fremont Arm is Sued by Unit of Morgan Stanley, THE WALL STREET JOURNAL, Oct. 25, 2007. ! Merrill Lynch announces writedown of $8 billion in subprime mortgages. Greg Morcroft, Merrill Swings to Loss on Huge Mortgage Hit, MARKETWATCH, Oct. 24, 2007. ! In re Countrywide Financial Corp. Derivative Litig., No. 07-CV-06923 (C.D. Cal. filed Oct. 24, 2007). This shareholder derivative action quotes “[i]nterviews of former Countrywide employees [which] confirm that the most consistent thing about Countrywide’s internal ‘standards’ was that they were ignored.” (See Compl. at ¶ 97.) ! “Moody’s, Standard & Poor’s and Fitch Ratings accelerated the size and pace of downgrades in the past three months after record defaults on subprime home loans started to yield losses in mortgage-backed securities.” See Jody Shenn & Shannon D. Harrington, Moody’s Cuts Ratings on CDOs Tied to Subprime Bonds (Update 4), BLOOMBERG, Oct. 26, 2007. ! The New York Times identifies a study finding that in Queens, New York, “the greatest number of mortgages that resulted in foreclosure notices were issued by three lenders: Fremont Investment and Loan, WMC Mortgage, and the New Century Financial Corporation.” Manny Fernandez, Study Links Lenders to Swift Foreclosures, THE N.Y. TIMES, Oct. 29, 2007. -11-
DATE EVENT November ! Luther v. Countrywide Home Loans Servicing LP, No. BC 380698 (Cal. Super. Ct. filed Nov. 14, 2007). This class action against certain 2007 entities involved in the securitization of subprime mortgage loans asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. ! SunTrust Banks, Inc., the parent of SunTrust Mortgage Inc. (collectively “SunTrust”), took a $161 million dollar write-down during the third quarter of 2007, which was attributed, in part, to rising rates of mortgage loan defaults and delinquencies. Carl Gutierrez, SunTrust’s Homely Projections, FORBES, Nov. 15, 2007, http://www.forbes.com/2007/11/15/suntrust-banks-financial-markets-equity-cx_cg_1115markets28.html (last visited Nov. 2, 2009). December ! National Mortgage News, a well known mortgage industry publication, discusses the possibility that the commercial mortgage-backed securities 2007 market is due for a correction. Poonkulali Thangavelu, CMBS Market Faces Correction, NATIONAL MORTGAGE NEWS, Dec. 3, 2007. ! The Wall Street Journal reports that “[m]any borrowers whose credit scores might have qualified them for more conventional loans say they were pushed into risky subprime loans. They say lenders or brokers aggressively marketed the loans, offering easier and faster approvals . . . .” Rick Brooks & Ruth Simon, Subprime Debacle Traps Even Very Credit Worthy, THE WALL STREET JOURNAL, Dec. 3, 2007. ! The Washington Post discusses New Century and Countrywide in an article regarding federal investigations designed “to uncover evidence of overvalued house appraisals, shoddy lending practices and alleged irregularities in the packaging and sale of groups of loans.” Carrie Johnson & Tomoeh Murakami Tse, FBI to Focus on Area Mortgage Loan Fraud, THE WASHINGTON POST, Dec. 6, 2007. ! The Orange County Register reports that “the end of local loan making by Bear [Stearns] marks another nail in the coffin of the once mighty subprime lending industry in Orange County. Firms such as New Century Financial of Irvine, Ameriquest Mortgage in Orange and Option One Mortgage in Irvine once dominated loan making to people with spotty credit. Those firms have all either filed for bankruptcy, shut down or sold operations.” Mathew Padilla, Bear Stearns Shuts Irvine Loan Office, THE ORANGE COUNTY REGISTER, Dec. 20, 2007. ! The Seattle Times reports that “[c]onsumer advocates note that dozens of large nonbank subprime lenders have gone bankrupt since 2006, including the two biggest players, New Century Financial and Ameriquest. Market forces punished those who weakened subprime lending standards well before regulators responded.” Kevin G. Hall, Sheriff Needed for New Fed Rules, THE SEATTLE TIMES, Dec. 20, 2007. January ! The New York Times reports that “[a]n investigation into the mortgage crisis by New York State prosecutors is now focusing on whether Wall 2008 Street banks withheld crucial information about the risks posed by investments linked to subprime loans.” Vikas Bajaj & Jenny Anderson, Inquiry Focuses on Withholding of Data on Loans, THE N.Y. TIMES, Jan. 12, 2008. ! Lone Star Fund V (US) LP v. Barclays Bank PLC and Barclays Capital Inc., No. 08-0261 (N.D. Tex. filed January 14, 2008). This class action against certain entities involved in the securitization of subprime mortgage loans asserts claims under Sections 11, 12(a)(2), and 15 of the 1933 Securities Act. ! The New York Times reports that Clayton Holdings, “[a] company that analyzed the quality of thousands of home loans for investment banks[,] has agreed to provide evidence to New York state prosecutors that the banks had detailed information about the risks posed by ill-fated subprime mortgages” and “whether that information, which could have prevented the collapse of securities backed by those loans, was deliberately withheld from investors.” Jenny Anderson & Vikas Bajaj, Loan Reviewer Aiding Inquiry Into Big Banks, THE N.Y. TIMES, Jan. 27, 2008. ! The Wall Street Journal reports that New York State prosecutors secured the help of Clayton Holdings, Inc. in their investigation of “whether investment banks disclosed enough to investors and to credit-rating firms about the securities after receiving reports by due-diligence firms that showed an increasing number of loans in recent years didn't conform to minimum lending standards.” Amir Efrati & Ruth Simon, Due- Diligence Firm to Aid New York Subprime Probe, THE WALL STREET JOURNAL, Jan. 28, 2008.
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DATE EVENT ! The Wall Street Journal and the Los Angeles Times report that the FBI is conducting 14 criminal investigations of mortgage lenders and the firms that converted the lenders’ high-risk mortgage loans into securities. See Evan Perez & Kara Scannell, FBI Launches Subprime Probe, THE WALL STREET JOURNAL, Jan. 30, 2008, and E. Scott Reckard, FBI is Pursuing 14 Probes of Lenders, L.A. TIMES, Jan. 30, 2008. ! Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., No. 08-10446-RGS (D. Mass. amended complaint filed June 30, 2008). This class action against certain entities involved in the securitization of subprime mortgage loans, originally filed in state court on January 31, 2008, asserts claims under Sections 11, 12(a)(2), and 15 of the 1933 Securities Act. See also Sherry Karabin, Wipeout: Subprime Crisis Spawning Wave of Litigation, LAW.COM IN-HOUSE COUNSEL, June 3, 2008, available at http://www.law.com/jsp/ihc/ PubArticleFriendlyIHC.jsp?id=1202421863173 (last visited Nov. 2, 2009). February ! Commonwealth of Mass. v. Fremont Investment & Loan, No. 07-4374 (Mass. Superior Ct. filed Feb. 25, 2008). The Suffolk Superior Court 2008 (Massachusetts) issues a preliminary injunction against Fremont, restricting Fremont’s ability to foreclose on loans. The court found that Fremont had engaged in unfair or deceptive loan origination practices.
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