Grais Review

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ABS/RMBS LitigAtion:2010 in Review In 2010, the courts made over 60 signifcant decisions in litigation about asset-backedsecurities, especially residential mortgage-backed securities. These came in threemain areas: securities-law claims against issuers and sellers o such securities; claimsby monoline insurers to put back loans in trusts that issued bonds that they had

guaranteed (or wrapped); and claims by investors against credit rating agenciesthat bestowed their highest ratings on securities that soon plummeted in value.

Investors and the monolines ared well in the frst two areas. Even applying thestringent Twombly-Iqbal pleading standard, over a dozen ederal courts were virtuallyunanimous in sustaining all or at least substantial parts o complaints that issuers andsellers o RMBS made untrue or misleading statements in the sale o those securities.The exception was the decision o the Court o Appeals or the Fi th Circuit in LoneStar Fund V (U.S.), L.P. v. Barclays Bank PLC , an outlier that virtually no other court

has been willing to ollow. The monolines advanced in the day-to-day, hand-to-hand combat that the banks have promised investors, winning an important rulingthat they can use sampling, rather than evidence about every loan, to prove theirputback cases. Investors did not persuade the courts, however, that rating agenciesare underwriters under the securities laws, leaving investors to pursue only moredi fcult common law claims.

In this essay, we summarize these and other signifcant decisions in ABS/RMBS litigationover the last year. We hope that this summary will be use ul to the growing community

o participants in and observers o this important area o law.

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table of contents

tABLe of contentS

SecuRitieS cLAiMS Page 01Allegedly Untrue or Misleading Statements Page 01Disclaimers and Warnings Page 06Sole Remedy De ense Page 09

cLAiMS By MonoLine inSuReRS Page 10

cLAiMS AgAinSt RAting AgencieS Page 13 First Amendment De ense and Non-Actionable Opinion Page 13

Claims under Section 11 o the Securities Act o 1933 Page 14

contRoL PeRSon And SucceSSoR LiABiLity Page 15 Control Persons Page 15Bank o America and Countrywide Page 17

PRoceduRAL iSSueS Page 18 Class Action Standing Page 18Statute o Limitations Page 21Choice o Law Page 25

No Action Clauses Page 27Sampling Page 28

WhAt to exPect in 2011 Page 29


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securities claiMs P 01

Allegedly Untrue or Misleading Statements

In strict-liability cases under the Securities Act o 1933, the courts consideredthree main categories o allegedly untrue or misleading statements in theo ering documents or RMBS: disregard o underwriting standards, incorrectappraisals and loan-to-value ratios, and misleading ratings. The courts wereunanimous in upholding claims based on the rst; mixed in their judgmentso the second; and almost unanimous in rejecting claims that ratings werebased on outdated methods or that the credit rating agencies had confictso interest.

d sr ar rwr s a ar s.On this point, 2010 began in September2009 with the anomalous decision o the ederal court in the District o Massachusetts in Plumbers Union Local No. 12 Pension Fund v. NomuraAsset Acceptance Corp. and ended in January 2011 with the reversal o thatdecision on this point by the Court o Appeals or the First Circuit. As the districtcourt summarized the complaint, the plainti s alleged that the registrationstatements alsely stated that the originators underwriting standards wereintended to insure that prospective borrowers were creditworthy [when in actthose standards] were never intended to lter out potentially risky borrowers.Rather, plainti s argue that the banks were hellbent on originating as many loansas possible with an eye to short-term pro t without any regard to the ability o the borrowers to repay. Noting that the registration statements warned thatthe underwriting standards o the originators were less stringent than those o Fannie Mae and Freddie Mac and that the limited documentation programs o the originators may not require veri cation o income, employment, or assets,the district court concluded: Plainti s argument that they were not on noticeo the originators so t underwriting practices begs credulity.

The next month, October 2009, the ederal court in the Southern District o New York decided the opposite, reaching a conclusion that a dozen courts

similarly would reach in 2010 and, with the reversal o the decision in Plumbersv. Nomura in January 2011, would become unanimous. In In re Dynex Capital a case about the securitization o manu actured-housing loans, the court ruledthat statements about underwriting standards o originators are misleadingto the extent that they claim that some standards were ollowed when in

act such requirements were regularly or routinely disregarded. In February

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Allegedly Untrue or MisleadingStatements

Disclaimers and Warnings

Sole Remedy De ense

cLAiMS By MonoLineinSuReRS

cLAiMS AgAinSt RAting

AgencieS

First Amendment De enseand Non-Actionable Opinion

Claims under Section 11 o the Securities Act o 1933

contRoL PeRSon AndSucceSSoR LiABiLity

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Bank o America and Countrywide

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Class Action Standing

Statute o Limitations

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WhAt to exPect in 2011

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2010, in a more widely publicized decision, In re Lehman Brothers Securitiesand ERISA Litigation, another judge o the same court upheld allegationsthat statements about underwriting standards were misleading i originatorssystematically disregarded or essentially abandoned those standards. The courtrejected the de ense that the o ering documents disclosed that originatorshad the discretion to make loans under exceptions to their stated standards;making loans under disclosed exceptions, the court held, is not the sameas systematically ailing to ollow or essentially abandoning the standards,including the standards or making exceptions. The court also rejected thede ense that SEC Regulation AB requires issuers and sellers o securities todisclose only what they know about an originators underwriting standards.The court held that, under the 1933 Act, the knowledge o issuers and sellersis immaterial; they are strictly liable or any untrue or misleading statement.

The principle decided in Dynex and Lehman Brothers that statementsabout underwriting standards are misleading i the originator systematicallydisregarded or essentially abandoned those standards was then ollowed in11 decisions o district courts and, in January 2011, by the First Circuit in itsreversal o Plumbers v. Nomura . Those decisions were Tsereteli v. Residential Asset Securitization Trust 2008-A8, New Jersey Carpenters Vacation Fund v.Royal Bank o Scotland Group, PLC, New Jersey Carpenters Health Fund v.DLJ Mortgage Capital, Inc., New Jersey Carpenters Health Fund v. Residential Capital, LLC, all in the Southern District o New York; In re Wells Fargo

Mortgage-Backed Certifcates Litigation in the Northern District o Cali orniaPublic Employees Retirement System v. Merrill Lynch & Co., In re IndyMac Mortgage-Backed Securities Litigation , both in the Southern District o New

York; Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass-Through Certifcates , in the Western District o Washington; City o Ann ArboEmployees Retirement System v. Citigroup Mortgage Loan Trust, Inc . andMassachusetts Bricklayers & Masons Funds v. Deutsche Alt-A Securities , in theEastern District o New York;Public Employees Retirement System v. GoldmanSachs Group, Inc . in the Southern District o New York (January 2011).

i rr appra sals a l a - -val ra s.The o ering documents inRMBS transactions state the loan-to-value ratio o the mortgage loans in thecollateral pool. The denominator in that ratio the value o the mortgagedproperty is o ten based on an appraisal done when the mortgage loan wasoriginated. Moreover, many o ering documents state that such appraisalswere conducted in compliance with the Uni orm Standards o Pro essionalAppraisal Practice. Many plainti s in securities cases allege either that the

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appraisals used to compute the LTVs were too high (and there ore the LTVs toolow) or that the appraisals were not done in compliance with USPAP or both.

Courts have ound two weaknesses in these allegations. The rst is that theevidence or the allegations is too general and the link between that evidenceand the actual loans in the collateral pools o the securities involved in the caseis correspondingly too weak. The district court in Plumbers v. Nomura was the

rst to dismiss allegations or this reason. There the evidence that appraisalswere infated was the congressional testimony o the Chair o the AppraisalInstitute (a trade group o appraisers) ( or which testimony the plainti s gaveno date) and a survey o appraisers conducted well a ter the securities o eringsinvolved in the case. The court dismissed those allegations, concluding thatthey o er nothing that suggests the testimony had any bearing on the two

Trusts at issue. That questionable appraisal practices were a common problemin the industry as a whole, without more, tells nothing about the Trustsunderlying loans. The First Circuit a rmed this ruling, holding that [o]n thisbasis, virtually every investor in mortgage-backed securities could subject amultiplicity o de endants to the most unrestrained o shing expeditions.The courts in Tsereteli , In re IndyMac, Boilermakers v. WaMu , and FootbridgeLimited Trust v. Countrywide Home Loans, Inc . (Southern District o New Yorkreached similar conclusions. Only in In re Wells Fargo did the court sustainsuch allegations.

The second weakness that courts have ound in allegations about infatedappraisals and understated LTVs is that appraised values are opinions, andan opinion is not actionable under the securities laws unless the giver o theopinion did not actually hold the opinion. This theory got its start in Tsereteli Even though neither side raised or brie ed the issue, the court raised it on itsown. The sum total o its analysis was:

[N]either an appraisal nor a judgment that a propertys value supports aparticular loan amount is a statement o act. Each is instead a subjectiveopinion based on the particular methods and assumptions the appraiseruses. A subjective opinion is actionable under the Securities Act only i the

amended complaint alleges that the speaker did not truly have the opinionat the time it was made public . The amended complaint is devoid o anysuch allegation. (Emphasis added.)

For the italicized sentence, the court cited the decision o the Supreme Courtin Virginia Bankshares, Inc. v. Sandberg (1991) and two lower-court decisionsthat relied on it, Shields v. CityTrust Bancorp in the Second Circuit (1994) and

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In re Global Crossing, Ltd. Securities Litigation in the Southern District o New York (2003). Those decisions indeed held that an opinion is actionable i thespeaker did not truly hold the opinion, but none o them held that an opinionis actionable only under those circumstances. Thus, those three decisionswould support the italicized sentence i the word only were deleted, butthen the sentence would not support the result in Tsereteli . Such is the dangero courts deciding questions without the bene t o the adversarial process.Another judge ollowed Tsereteli without analysis in New Jersey Carpentersv. DLJ , and the judge who decided Tsereteli ollowed it inIn re IndyMac. Thecourt in In re Wells Fargo sustained allegations about appraisals and LTVsand thus did not ollow Tsereteli , and the courts in Boilermakers v. WaMu andFootbridge v. Countrywide rejected those allegations on the grounds thatthey were too general, without reaching the question whether appraisals arenon-actionable opinions. Thus, only two judges (not including the panel o the First Circuit that decided Plumbers v. Nomura ) have actually endorsed thetheory that appraisals are opinions that are not actionable under the securitieslaws without an allegation that they were not sincerely held.

M sl a ra s.Many plainti s allege that it was misleading to disclosethe triple-A ratings o most residential mortgage-backed securities withoutalso disclosing that the rating agencies used outdated models in arriving atthose ratings, or lowered their rating criteria to generate more business, orhad conficts o interest with the investment banks that sponsored RMBS deals

and paid or the ratings. Federal courts have all but unanimously rejectedthese allegations.

The rst dismissal o these allegations came in Plumbers v. Nomura . Thecomplaint quoted statements by employees o the rating agencies, made a terthe subprime market collapsed in mid-2007, that they had lowered their ratingstandards on RMBS. The court wrote that [n]one o the purported commentsmade by S&P and Moodys employees in the wake o the collapse o thesub-prime mortgage market (in 2007) support the in erence that the ratingswere compromised as o the dates (in 2005 and 2006) when the registrationstatements and prospectus supplements became e ective. The court alsonoted that plainti s were duly cautioned that [t]he security ratings assigned tothe O ering Certi cates should be evaluated independently rom similar ratingson other types o securities. A security rating is not a recommendation to buy,sell or hold securities. Neither reason is persuasive, and when the First Circuita rmed this aspect o Plumbers v. Nomura , it did so on other grounds.

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The Southern District o New York considered similar allegations in LehmanBrothers. There the plainti s alleged that the amount o credit enhancement

or the certi cates was inadequate because the rating agencies usedobsolete methods to calculate it. The court held that the su ciency o creditenhancement was an opinion, not a statement o act, which would not beactionable unless plainti s alleged that the rating agencies did not actuallyhold that opinion. (The judge in Lehman Brothers also wrote Tsereteli .) Theplainti s also alleged that the o ering documents did not disclose the confictso interest that the rating agencies had with Lehman Brothers, which paidthem to rate RMBS certi cates. The court dismissed these allegations becauseconficts o interest between investment banks and rating agencies had beenpublic knowledge or years. The Southern District o New York reached thesame conclusions in Tsereteli, New Jersey Carpenters v. RBS, New Jersey Carpenters v. DLJ, New Jersey Carpenters v. ResCap , and In re IndyMac,as did the Western District o Washington in Boilermakers v. WaMu . Only inIn re Wells Fargo did the Northern District o Cali ornia sustain such allegationson the basis o statements by executives o the rating agencies that they wereaware when the ratings were issued that their methods were outdated.

When the First Circuit a rmed the holding o Plumbers v. Nomura aboutratings, it did so primarily because ratings are opinions. It wrote: An opinionmay still be misleading i it does not represent the actual belie o the personexpressing the opinion, lacks any basis or knowingly omits undisclosed

acts tending seriously to undermine the accuracy o the statement. Thisormulation is considerably broader than the statement in Tsereteli thatopinions are actionable only i the speaker did not actually holder the opinion.Moreover, the First Circuit wrote, there is liability without ault even or thosewho merely report the statements or opinions o others.

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Over the last year, two issues have dominated the discussion in courts aboutwhether statements o risk or disclosures in prospectus supplements aresu cient to absolve de endants o liability or untrue or misleading statementsor omissions. The rst issue is whether a plainti can su ciently allege that itsreliance on statements made by the de endants in the prospectus supplementwas reasonable, given the cautionary language and risk disclosures made toit. The second is whether a plainti can adequately allege economic loss or adecline in the value o its security where no secondary market exists in whichit can measure the current value o its holding and where it was warned o thepotential or lack o uture liquidity at the time o the o ering.

A q a war s.Three recent cases are instructive in determining thelegal e ect o disclaimers asserted by de endants as a shield rom liability o

untrue or misleading statements or omissions. All three courts agreed thatplainti s can overcome cautionary language i the language did not expresslywarn or did not directly relate to the risk that brought about plainti s loss. Inaddition, these courts, and others, agree that where disclosures or cautionarylanguage ails to make clear the magnitude o the risk at issue or the extentto which it may materialize, those disclosures or warnings are inadequate toshield de endants rom liability or the statements to which they relate.

In New Jersey Carpenters v. DLJ , in the Southern District o New York, the

plainti led various securities raud claims on the ground that the o eringdocuments on which it had relied contained numerous materially misleadingstatements and omissions regarding the administration o loan approvaloversight and control guidelines, the impaired quality o the underlying homeequity collateral, and the infation o investment ratings. The de endantsargued that they supplied ample cautionary language and risk disclosures inthe o ering documents so that any reasonable investor would have considereditsel su ciently warned o the potential risks associated with the investment.The de endants contended that their disclosures and warnings absolved themo liability under the bespeaks caution doctrine, which holds that alleged

misrepresentations in a stock o ering are immaterial as a matter o law i itcannot be said that any reasonable investor could consider them important inlight o adequate cautionary language set out in the same o ering.

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The court, however, noted that bespeaks caution applies only to orward-lookingstatements, and thus cannot immunize [d]e endants rom liability where theharm [has] already occurred. In addition, the court pointed out that in light o the fagrant violations o underwriting guidelines alleged in the complaint,the disclosures made by the de endants ailed to convey the severity o theinvestment risk a risk already present at the time o the o ering. The courtconcluded that the disclosures ailed to make clear the magnitude o the riskbeing assumed by the investor, and there ore, ailed to adequately apprise theinvestor o the attendant risks associated with investment.

Similarly, in New Jersey Carpenters v. RBS , the Southern District o New Yorkconsidered whether plainti s su ciently alleged that de endants hadomitted and mis-stated material in ormation regarding the systemic

disregard o underwriting guidelines, inadequate credit enhancementsbased on an outdated credit rating model, and conficts o interestinvolving the ratings agencies. The de endants argued that plainti s claimsregarding abandonment o underwriting guidelines could not be actionablebecause the disclosures de endants made were only to the best o their knowledge.

The court disagreed and held that not only were the disclosures inadequateto warn an investor that mortgage originators may abandon even the mostminimal o underwriting standards but that the disclosures could themselvesconstitute material misstatements. The court stated that risks associatedwith the underwriting guidelines were not otherwise adequately disclosedin the O ering Documents or su used with cautionary language to bespeakcaution... Disclosures that described lenient, but nonetheless existingguidelines about risky loan collateral, would not lead a reasonable investorto conclude that the mortgage originators could entirely disregard or ignorethose loan guidelines.

Plainti s also argued that the o ering documents were misleading by toutingcredit enhancements that were inadequate in light o the high rate o de aultsand delinquencies in the loan pools, and or ailing to disclose that the modelused by the ratings agencies to assign ratings to the securities was outdated.

The court determined that these disclosures were adequate. The court heldthat [t]he O ering Documents disclosed the risks o relying on credit ratings,the potential inadequacy o credit enhancement, and that a lack o historicaldata made uture predictions about value inherently di cult, and that thesedisclosures adequately warned the investor o exactly the risk[s] the plainti sclaim [were] not disclosed.



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Other courts considering this issue have reached the same result. Thus, thereappears to be a trend in recent RMBS litigation that de endants generally donot escape liability by enshrouding themselves in the warm cocoon o generaldisclaimers, disclosures, and warnings about attendant risks.

La k s ar mark .A disclaimer o ten made to the purchaser o anRMBS security is that the underwriter, seller, or sponsor makes no representationor promise that there is or will be a market or the security being o ered.The disclaimer typically warns the investor that in the event no such marketdevelops, a holder o the security may be unable to determine the value o it at any particular time and may be orced to hold the security inde nitelybecause o its lack o liquidity.

Courts recently have held that such disclaimers de eat an investors claim thatthe absence o a secondary market has either caused the value o its securityto decline or prevented the investor rom being able to estimate the valueo its security or the purposes o calculating its damages or quanti ying itseconomic loss. In NECA-IBEW Health & Wel are Fund v. Goldman, Sachs &Co., the Southern District o New York held that the investors in those cases hadbeen su ciently warned in the o ering materials related to those investmentso the possibility that their investments may su er rom a lack o liquidity.

Not all courts have so harshly dismissed plainti s claims o loss or injury wherethe air market value o the security at issue cannot be assessed because o the

lack o a secondary market. In Boilermakers v. WaMu , de endants there, too,urged dismissal on the ground that the plainti s ailed to allege an economicloss because they were unable to assess the air market value o their holdingsat the time the lawsuit commenced.

The Washington district court decided that [p]lainti s allegations o loss giverise to the in erence that the value o the security is much less than the purchaseprice. The mere act that [p]lainti s may have di culty substantiating the exactnature o their loss in an illiquid market does not necessitate dismissal.



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Sole Remedy Defense

Two thousand ten started out on a low note or investors when, on January 11,the Fi th Circuit a rmed the decision o the Northern District o Texas in LoneStar Fund V (U.S.), L.P. v. Barclays Bank PLC.The Northern District dismissedthe complaint in its entirety based on the repurchase provisions in the PSA.The Lone Star plainti s alleged that contrary to Barclays representations,the [mortgage pool or two trusts] had a substantial number o delinquentloans and the misrepresentations [that there were no delinquent loans inthe two trusts] constituted raud. The Fi th Circuit held that since the PSAsstated that Barclays would repurchase any loans that were delinquent andthat under the PSA, repurchase o delinquent loans was the sole remedyavailable to plainti s, Barclays did not represent that [the mortgage pools]

were absolutely ree rom delinquent loans and [c]onsequently, Barclaysmade no actionable misrepresentations.

De endants have tried to convince courts to apply the Lone Star holdingto almost all alleged misrepresentations, but they have been unsuccess ul:Courts interpreting Lone Star have limited its holding solely to representationsabout delinquent loans. In City o Ann Arbor Employees Retirement Systemv. Citigroup Mortgage Loan Trust, Inc., the Eastern District o New Yorkdistinguished Lone Star because the plainti s in City o Ann Arbor allegedwidespread misrepresentations regarding the nature o the underwritingpractices described in the o ering documents rather than that a limitednumber o loans were delinquent. The Eastern District o New York ollowedAnn Arbor in Massachusetts Bricklayers & Mason Funds v. Deutsche Alt-ASecurities. Similarly, in Boilermakers v. WaMu , the Western District oWashington held that unlike the scenario in Lone Star , Plainti s allegationare not simply based on a representation about the absence o delinquentloans. In act, the only case that applied Lone Stars sole remedy holding,Footbridge v. Countrywide, applied it only to allegations about delinquentloans and not to other alleged misstatements.



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A distinct category o lawsuits led in the wake o the mortgage-backed securitiesmarket meltdown is that brought by monoline insurance companies to recoverclaims payments. Since mid-2009, courts have issued signi cant decisionsin seven cases brought by monoline insurers. Six o the opinions MBIA vCountrywide, Financial Guaranty v. Countrywide, MBIA v. Residential Funding,MBIA v. GMAC, MBIA v. Credit Suisse,and Financial Guaranty v. Countrywide decided motions to dismiss. The remaining case, Ambac v. EMC , decided amotion to amend the complaint. The insurers led these lawsuits a ter payinghundreds o millions o dollars in claims because o a sharp increase in mortgageloan delinquencies and de aults, which the insurers alleged was the result o

alse and raudulent loan origination practices and mortgage loan data.

Monoline insurers entered into agreements with mortgage loan originators toprovide nancial guarantee insurance covering payments due to securities holders.I the trust that issued a particular security was unable to make payments to theholders o that security, the monoline insurer would make those payments to thetrust which would, in turn, make the required payments to the securities holders.

The mortgage loan originators made numerous representations, warranties, anddisclosures about the mortgages underlying each securitization. The disclosuresdescribed, or example, the underwriting guidelines that mortgage originatorswere to ollow and stated that those guidelines, in act, had been ollowed withrespect to the loans in the mortgage pools. The loan originators also providedinsurers with loan tapes and schedules that contained data about each mortgage,such as the loan-to-value ratio, the borrowers debt-to-income ratio, FICO creditscore, and intention to occupy the purchased property. In addition, the transactiondocuments typically included provisions requiring loan originators to indemni ythe insurers or breaches o representations and warranties and to repurchase orsubstitute particular mortgage loans ound to be materially de ective.

The monoline insurers primarily assert contract-based claims or common law

tort claims. Typically, the de endants are loan originators and their a liates.Sometimes, other participants in the securitization process ( or example,underwriters) are also sued.

c ra la ms.The insurers in all seven cases assert claims or breach o contract based on allegedly alse representations, warranties, and other contractprovisions. Some plainti s, such as those in MBIA v. Residential Funding

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Ambac v. EMC, and MBIA v. Credit Suisse, also allege that de endantsbreached their agreements by ailing to repurchase or replace particularde ective mortgage loans as they were obligated to do under the contracts.Finally, plainti s in six o the seven cases (all butAmbac v. EMC ) allege thatde endants breached the duty o good aith and air dealing, a provisiontypically implied in all contracts under state law.

In all six cases where de endants moved to dismiss claims, not one loanoriginator sought dismissal o any breach o contract claims asserted againstit. In three cases, de endants other than loan originators did seek dismissal o breach o contract claims.

In MBIA v. Credit Suisse, the sponsor, DLJ Mortgage Capital, sought dismissalo the breach o contract claims against it on the ground that MBIAs allegationslacked speci city because, as the Supreme Court o New York (New Yorks trial-level court) put it, MBIA did not identi y thousands o loan-level breaches.The court rejected DLJs argument, noting that such speci city was notrequired at the pleading stage and that, urther, MBIAs claim was based onthe pervasive and systemic nature o the breaches.

In MBIA v. Countrywide, Countrywide Financial Corp., the parent o theloan originator, and Countrywide Securities Corp., the underwriter o thesecuritizations, moved to dismiss the breach o contract claims on the groundthat they were not signatories to the contracts. The Supreme Court o New

York agreed and dismissed those claims.

The de endants in all six cases moved to dismiss claims alleging breach o the implied duty o good aith and air dealing. All de endants made thesame argument: these claims were duplicative o the plainti s other breacho contract claims and there ore should be dismissed. The Supreme Court o New York, in MBIA v. GMAC and Financial Guaranty v. Countrywide , agreed.

In contrast, the Supreme Court o New York in MBIA v. Countrywide and theCentral District o Cali ornia inFinancial Guaranty v. Countrywide did notdismiss the claims or breach o the implied duty o good aith. In MBIA v

Countrywide , the court allowed the claim to stand but only to the limitedextent that it asserts that corrective action [by Countrywide] ... would havepreserved MBIAs bene ts under the bargain, but that Countrywide Homedeliberately re used to take such action. In Financial Guaranty v. Countrywidethe court, without discussion, rejected Countrywides argument that the claim

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t r la ms. In every monoline case discussed here, the principal tort claimis or raud and/or raudulent inducement. In the six motions to dismiss,the de endants argued that the raud-based claims were duplicative o thecontract-based claims and/or that it was unreasonable or the insurers to relyon the de endants representations when deciding whether to insure thebonds. For the most part, the courts rejected both arguments.

In MBIA v. Countrywide, the court explained that a raud-based claim isduplicative o a contract-based claim only where a plainti alleges that thede endant had no intention o complying with its obligations under thecontract, but not where the plainti alleges that the misrepresentations weremade to induce the plainti to enter into the contract. Because MBIA allegedthat Countrywides misrepresentations were meant to induce MBIA to issue

the insurance policies, its claim or raud was not duplicative.

De endants in MBIA v. Countrywide also argued that, as a sophisticated party,the insurer could not have reasonably relied on the de endants representationsrelating to the mortgage loans. The court rejected that argument. The courtacknowledged that sophisticated parties do, in act, have a legal duty toinvestigate the risks they are assuming and to review data provided, butquestioned how much in ormation regarding the securitizations MBIA couldaccess. Because o its skepticism about the level o in ormation availableto MBIA, the court concluded that [e]ven assuming MBIA conducted a ullinquiry under the circumstances in relation to the bidding process, it is notconclusive that MBIA could have discovered the alleged raud.

In contrast, the court in Financial Guaranty v. Countrywide an outlier inseveral respects reached the opposite conclusion about the insurersreliance on the de endants representations, calling any allegation o reasonable reliance implausible on its ace. The court stated that[n]o reasonable insurer would rely upon generalized representations aboutquality underwriting and that, assuming the accuracy o plainti s allegationthat over 55% o the loans breached Countrywides representations, theonly plausible in erence is that United Guaranty ailed to conduct any audit

be ore closing the transactions. A similar conclusion was reached by theSupreme Court o New York in MBIA v. Residential Funding.

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In view o the importance o the rating agencies to the securitization process,and in particular, the fagrant inaccuracy o their ratings o structured nancesecurities, it is hardly surprising that plainti s continue their e orts to hold theagencies responsible or plainti s losses. Plainti s have had some successlimiting slightly the scope o First Amendment protection or ratings andreports issued by the agencies. Plainti s have had no luck in holding theagencies strictly liable as underwriters under Section 11 o the Securities Acto 1933.

First Amendment Defense and Non-Actionable Opinion

It remains well established that rating agencies generally enjoy heightenedFirst Amendment protection. In particular, a rating agency cannot be oundliable or its ratings or reports that are a matter o public concern unless theagency acted with actual malice (i.e., knowledge that the rating or reportwas alse or with reckless disregard or whether it was true or alse).

Ratings and reports that are publicly disseminated are matters o public concern.However, in Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc. , theSouthern District o New York held that ratings and reports disseminated to aselect group o investors are not o public concern, and there ore, not entitled

to exalted First Amendment protection. A Cali ornia Superior Court reacheda similar conclusion in Cali ornia Public Employees Retirement System v.Moodys Corp .

Closely related to the First Amendment de ense are the limits o state orederal law that requently are imposed on liability or statements o opinion.

The First Circuit in Plumbers Union Local No. 12 Pension Fund v. NomuraAsset Acceptance Corp . ormulated these limits as ollows. An opinion maystill be misleading i it does not represent the actual belie o the personexpressing the opinion, lacks any basis or knowingly omits undisclosed actstending seriously to undermine the accuracy o the statement. The ratingagencies have had considerable success in convincing the courts that theirratings and reports are statements o opinion.

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Claims Under Section 11 of the Securities Act of 1933

In an attempt to circumvent the heightened state o mind requirements thatrequently apply to claims against rating agencies, plainti s have alleged that

the agencies are strictly liable under Section 11 o the Securities Act o 1933.These e orts have been unavailing.

Section 11 enumerates the categories o persons and entities that may beheld liable under the statute. One category is underwriters. In attemptingto plead that the agencies are underwriters, plainti s have made allegationsrelating to the agencies extensive involvement in multiple steps necessaryto the distribution o the securities, such as participating in structuring thesecurities, assigning credit ratings, and participating in dra ting the prospectus

supplements. The courts have ound these allegations insu cient, however,principally because they do not assert that the agencies undertook activities(such as marketing the securities to the public, assisting in road shows orpurchasing the securities or resale) related to the distribution or sale o thesecurities. Courts reached this conclusion in In re Wells Fargo, a case romthe Northern District o Cali ornia, New Jersey Carpenters v. RBS , and PublicEmployees Retirement System o Mississippi v. Merrill Lynch & Co. Inc.both rom the Southern District o New York.

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Control Persons

State and ederal securities laws not only allow investors to sue the partiesthat actually committed the securities violation but also persons who havethe power to directly or indirectly control the primary violator. Control personliability can attach only i a primary claim can be made against the allegedlycontrolled entity.

Individual o cers and directors and parent corporations are requent targetso control person allegations. For example, in Public Employees Retirement

System o Mississippi v. Merrill Lynch & Co. Inc., investors sued Merrill LynchMortgage Investors, Inc., the issuer o the certi cates, or securities actviolations. In addition, the investors alleged control person liability againstindividual o cers and directors o Merrill Lynch Mortgage Investors, Inc., aswell as the corporate parent, Merrill Lynch & Co. The Southern District o New

York dismissed the claims against the individuals because the investors hadalleged only that the individuals had been o cers or directors o Merrill LynchMortgage Investors, Inc. during the relevant times. Thus, the court concludedthat the investors ailed to demonstrate any meaning ul culpable conductby the alleged controlling persons and noted that the mere recitation o theelements o control person liability was insu cient to state a claim.

The court also initially dismissed the investors control person claims againstthe parent company, Merrill Lynch & Co., because the allegations describedthe corporate a liation between the parent and subsidiary, Merrill LynchMortgage Investors, Inc., which does not alone demonstrate control. The courtinstructed the investors to augment their allegations with acts suggesting theexistence o greater control than that inherent in a typical parent-subsidiaryrelationship. Similar results were reached in Boilermakers National AnnuityTrust Fund v. WaMu Mortgage Pass Through Certifcates, Series AR1 , rom theWestern District o Washington.

In Public Employees Retirement System o Mississippi , the investors amendedtheir complaint to add new allegations about Merrill Lynch & Co., showingthat: (i) Merrill Lynch & Co. created Merrill Lynch Mortgage Investors, Inc.

or the sole purpose o issuing the securities; (ii) revenue rom Merrill LynchMortgage Investors, Inc.s securitizations inured exclusively to Merrill Lynch& Co.s bene t; (iii) statements in Merrill Lynch & Co.s SEC lings showed

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comprehensive involvement with the Merrill Lynch Mortgage Investors, Inc.soperations; (iv) Merrill Lynch & Co. directly participated in the issuance o thecerti cates, including prominently eaturing Merrill Lynch & Co. on the rontpage o each prospectus and prospectus supplement; and (v) Merrill Lynch &Co.s managing partner and director and senior counsel signed the relevantregistration statements.

De endants argued that these allegations were simply part and parcel o anyparent-subsidiary relationship. The court disagreed, stating that the amendedallegations showed a closer than typical connection between Merrill Lynch &Co. and Merrill Lynch Mortgage Investors, Inc.

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Will Bank Of America Pay For Te Tings Tat Countrywide Did?

With its extensive record o improper lending practices, it is not surprising thatinvestors have sued Countrywide or securities violations. In addition, manyinvestors are looking to another possible source o recovery or Countrywidesmisconduct, its parent Bank o America. In a series o complex transactionsBank o America acquired Countrywide in 2008. Bank o Americas CEO toldinvestors on November 16, 2010, that at the end o the day, well pay or thethings that Countrywide did.

Usually, however, a parent company is not responsible or the liabilities o itssubsidiaries. There ore, investors must rely on doctrines o successor liabilityto hold Bank o America responsible or Countrywides obligations. Several

plainti s have tried unsuccess ully to sue Bank o America as the successorto Countrywides liabilities. To call these attempts modest would be anoverstatement. In each case, the plainti s pleadings were patently inadequate,devoting only a ew conclusory statements to the issue. These cases includeRalston v. Mortgage Investors Group, Inc. and Pantoja v. Countrywide HomeLoans, Inc., both rom the Northern District o Cali ornia, and In ante v. Banko America Corp., rom the Southern District o Florida.

In contrast, in MBIA v. Countrywide Home Loans, Inc. , MBIA amended itscomplaint to charge Bank o America with successor liability or the obligationso Countrywide. Speci cally, MBIA relied on the doctrine o de acto merger.

In an ordinary asset sale, the buyer receives the assets but not the liabilitieso the seller. By contrast, in a merger, all assets and all liabilities go to thesurviving entity. MBIA alleged that Bank o America used a series o assetsales to achieve what in act was a merger (a combination o Countrywide andBank o America business operations).

Bank o America moved to dismiss the de acto merger allegations, arguingthat the corporate identities o Bank o America and Countrywide should berespected. The Supreme Court o New York rejected this argument and deniedthe motion to dismiss. The court ound that MBIAs allegations describing(i) the all-stock nature o the Countrywide acquisition, (ii) the rebranding o Countrywide operations, (iii) the redirection o Countrywide customers to theBank o America website, (iv) Bank o Americas assumption o Countrywideoperating debt, and (v) Bank o Americas own statement rom an SEC lingthat it had removed all o the assets and operations rom Countrywide weresu cient to plead de acto merger. At this juncture, it is di cult to predict thelikelihood o success o these claims on the merits.

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In 2010, standing continued to be a signi cant hurdle to plainti s in class actionlitigation. The issue o ten arose in individual suits as well.

Generally, standing has been addressed in the context o motions to dismiss,not motions to certi y a class. In several class actions where motions to dismisswere pending, plainti s urged that the issue be de erred until the court ruledon class certi cation. In 2010, this argument appears to have been rejected byevery court to consider it. For example, in Lehman Brothers , a putative class

action, de endants had led a motion to dismiss plainti s claims based in parton lack o standing. Plainti s argued that the issue should be de erred untilthe class certi cation stage. The Southern District o New York re used, notingthat standing is a threshold issue that cannot be de erred or dispensed withby styling a suit as a class action. The court dismissed the bulk o plainti sclaims or lack o standing.

Standing generally has been an issue in one o two ways: whether plainti hasmade su cient allegations to demonstrate that the constitutional requirements

or standing have been satis ed, and whether the statutory standing requiredto assert claims under Sections 11 and 12 o the Securities Act o 1933 has

been pleaded su ciently.

c s al s a .The issue o constitutional standing has arisenbecause plainti s have sought to assert claims based upon o erings o securities in which plainti s have not invested. For the most part, courts haveheld that plainti s asserting these claims did not and could not satis y theactual injury requirement o constitutional standing because plainti s couldnot allege that they su ered a loss as a result o purchasing the particularsecurities being o ered. In City o Ann Arbor Employees Retirement System v.Citigroup Mortgage Loan Trust Inc. , plainti s had invested in securities issuedby only two o sixteen trusts on which they based their claims. The EasternDistrict o New York dismissed or lack o standing all claims arising out othe ourteen trusts in which plainti s had not invested. Similar results werereached in Plumbers v. Nomura, rom the District o Massachusetts, and inNew Jersey Carpenters v. DLJ, New Jersey v. Residential Capital, and PublicEmployees Retirement System o Mississippi v. Merrill Lynch & Co., all romthe Southern District o New York.

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Some plainti s attempted to avoid this ate by arguing that the varioussecurities subject to suit were issued pursuant to common o ering documents(in particular, so-called shel registration statements). In 2010, most courtsrejected this argument or one or both o two reasons. First, plainti sclaims, as alleged, were not based upon misstatements or omissions oundin the common documentation but instead were based on misstatements oromissions contained in the supplemental documents (such as a prospectussupplement) disseminated or each particular o ering. Second, even i the alleged misrepresentations and omissions were ound in the commondocumentation, plainti s still did not demonstrate standing with respectto o erings o securities in which plainti s had not invested, because theystill could not allege that they had purchased the particular securities issuedpursuant to that particular o ering. Similar results were reached in Maine StateRetirement System v. Countrywide Financial Corp ., rom the Central Districto Cali ornia, andNew Jersey Carpenters v. RBS , rom the Southern Districto New York.

S a r s a .The statutory standing required or claims based onSection 11 o the Securities Act o 1933 is little di erent in substance romthe dictates o constitutional standing. Under Section 11, to have standing,a plainti must have purchased a security actually issued in the o ering owhich plainti claims there was an untrue or otherwise misleading registrationstatement. The courts have held that this orm o standing is not present with

respect to o erings o securities in which plainti s have not invested. Casesinclude In re Wells Fargo (Northern District o Cali ornia),In re IndyMac, KingCounty, Washington v. IKB Deutsche Industriebank AG (Southern District oNew York), and Boilermakers v. WaMu (Western District o Washington).

As with constitutional standing, plainti s have attempted to escape dismissal onthis basis through reliance on the common shel registration statement basedon which all o erings were made. But plainti s again have been thwarted by thesupplemental documents disseminated or each particular o ering, which in thecontext o Section 11 are deemed to be new registration statements.

A plainti can bring a claim under Section 12 only i it can allege that itpurchased the security at issue rom a statutory seller. A statutory seller isone who, in an initial pubic o ering, either trans erred title to the purchaseror success ully solicited the purchaser or nancial gain. For example, inTsereteli v. Residential Asset Securities Trust 2006-A8 , the Southern District oNew York ound that the plainti su ciently alleged that the underwriter was a

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statutory seller by asserting that the certi cates were sold pursuant to theO ering Documents and at a time when the underwriter was the only entitythat could have sold the certi cates.

Plainti s have been tripped up by this requirement in two ways. First, withrespect to securities they have not purchased, they sel -evidently cannotallege that they bought rom a statutory seller. Second, unless plainti s canshow that they purchased the security directly rom a statutory seller, there isno claim.

i rv s abl s s a .In an attempt to cure the standingproblem, parties have sought to intervene to assert claims based on securitiesin which they had invested and the original plainti s had not. Whether amotion to intervene will be granted depends in large measure on whetherthe statute o limitations already has expired with respect to the claims theintervenors propose to assert. For example, in In re Wells Fargo , the NorthernDistrict o Cali ornia dismissed the intervenors claims because the statute o limitations had expired be ore the new parties intervened.

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Statute of Limitations

This past year has seen important changes in how courts approach theapplication o the statute o limitations. The ultimate result o these changesis yet to be determined.

t S pr m c r s s Merck . The United States Supreme Courtsdecision in Merck & Co., Inc. v. Reynolds, decided this past April, could markthe end o de endant- riendly interpretations o the statute o limitations.

Merck involved claims by a group o investors that Merck & Co. knowinglymisrepresented the risk o heart attacks accompanying the use o Mercks painkiller, Vioxx, which lead to economic losses once the risks became apparent.Merck investors sued under Section 10 o the Securities Exchange Act o 1934.Under that statute, a plainti must bring a claim no later than two years a terthe discovery o the acts constituting the violation or ve years a ter suchviolation, whichever is earlier.

Merck argued that the statute o limitations began to run upon inquirynotice, that is, the point at which a plainti possesses a quantum o in ormation su ciently suggestive o wrongdoing that he should conduct

urther inquiry. Many courts previously had agreed with this interpretation,making their determination o inquiry notice dependent upon the stormwarnings present, that is, circumstances that suggested the existence o

a claim. These storm warnings included public in ormation such as newsarticles, nancial reports, ratings downgrades, and other in ormation availableto the reasonably diligent investor.

With the decision in Merck , the Supreme Court rejected this interpretation. Thecourt held that the statute o limitations begins to run only when the plainti actually discovers the acts constituting the violation, or when a hypotheticalreasonably diligent plainti would have discovered them. Elaborating, theCourt in Merck ound that the point where the acts would lead a reasonablydiligent plainti to investigate urther .. . is not necessarily the point at which theplainti would have already discovered acts ... constituting the violation.

Thus inquiry notice is not enough. A ter Merck , the statute o limitations doesnot begin when inquiry reasonably could have begun, but instead when inquiryreasonably could have ound evidence o an actual violation.

impa Merck . It is not yet clear how signi cantly the decision in Merckwill alter the limitations landscape. Be ore Merck , courts disagreed as to

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what constitutes enough in ormation to trigger the running o the statue o limitations. This likely will remain a critical inquiry, although, as describedabove, the ocus o that inquiry well may change.

Certain trends likely will remain. For example, courts o ten are hesitantto decide the limitations issue at the beginning o litigation, because it isnecessarily act dependent. Thus, a decision on the statute o limitations iso ten inappropriate on a motion to dismiss, which examines only whether thecomplaint makes legally su cient allegations.

For example, the Southern District o New York, in New Jersey Carpentersv. RBS , noted that the issue o limitations is rarely appropriate or resolutionon a motion to dismiss, although it can be done where the acts needed ordetermination ... can be gleaned rom the complaint and papers ... integralto the complaint.

In a case decided a ter Merck, Public Employees Retirement Systems oMississippi v. Merrill Lynch, the Southern District o New York ound thatsubstantial evidence regarding general problems with mortgage-backedsecurities, including news reports, government investigations, public hearingsand civil complaints, were insu cient to trigger the statute o limitations. Thein ormation did not re er to the de endant, Merrill Lynch, or to the bonds thatwere the subject o the claims, and thus did not provide the acts necessary toshow the violations alleged in the complaint.

The court noted that Merck supports its holding, stating that under theSupreme Courts decision, even i a plainti had inquiry notice su cient towarrant beginning to investigate, a plainti would not be barred by the statuteo limitations unless a reasonably diligent plainti similarly situated wouldhave actually discovered acts showing the violations alleged in the plainti scomplaint. The court stated that ratings downgrades on the speci c bondswere not su cient to start the statute o limitations, because the ratings didnot go below investment grade until less than one year be ore the ling o thecomplaint. The court also noted that even when the bonds were rated belowinvestment grade, the rating downgrades were not based upon the discoveryo a raud, but only on a perceived increase in risk. The Northern District o Cali ornia drew a similar conclusion in In re Wells Fargo.

In In re National Century Financial Enterprises, Inc., Investment Litigation , theSouthern District o Ohio also applied Merck , deciding a motion or summary

judgment in avor o plainti s. Applying the Supreme Courts decision to a



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state blue-sky claim, the court held that generalized, anonymous allegationsdo not trigger the limitations period because they would only encourageworried investors who hear market rumors to le premature suit.

Further, as the court explained, even though plainti s were sophisticatedinvestors, they were still outside parties without access to vital internalin ormation regarding the de endants alleged raud [g]iven [de endants]closeness to the situation and awareness o other warning signs, it is notcontradictory or the [plainti s] to argue that the anonymous allegationsshould have prompted the de endants to investigate the raud. The courtcon rmed that it was reasonable or plainti s to rely on the rating agencysa rmations o the credit worthiness o securities, especially in light o the

act that a ter the anonymous allegations came out, the de endants reassured

investors as to the quality o the securities.

Not all courts post- Merck , however, have been aith ul to the SupremeCourts decision. In In re Morgan Stanley Mortgage Pass-Through CertifcatesLitigation, the Southern District o New York used the inquiry notice standardrejected by Merck , stating that a plainti need not know all the details o theconduct or know about the entire raud being perpetrated to be on inquirynotice, but instead merely must be aware o the general raudulent scheme.Far rom nding that the in ormation triggering inquiry notice must be relatedto the raudulent behavior with respect to the speci c securities at issue, thecourt ound that the statute o limitations may be triggered even by smallratings downgrades.

The court also noted that plainti s were on inquiry notice because o monthlyreports received rom de endants showing a rise in the proportion o mortgageloans in the subject pool that were more than sixty days delinquent. Eventhough none o the reports or articles cited by the court spoke to the culpabilityo the de endant Morgan Stanley in the raud allegedly perpetrated upon theplainti s, the court ound that plainti s claims were not timely.

cla ms br a r s a l m a s as all r .In bothclass actions and individual cases, the past year has seen developments inattempts by plainti s to toll the statute o limitations using both common lawand statutory methods.

t ll r Am r a P p .In the class action context, plainti s have hadthe bene t o tolling under American Pipe & Construction Co. v. Utah. Inthat case, the Supreme Court held that the commencement o a class action

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suspends (or tolls) the running o the applicable statute o limitations as to allasserted members o the class. In Crown, Cork & Seal v. Parker , the SupremeCourt extended this protection to the individual claims o any person whocould have been a member o the class, not just those who already hadasserted their interests.

S a a Am r a P p .A number o decisions have addressedwhether a claim may be tolled under American Pipe where the originalnamed plainti s did not have standing to sue on the securities upon whichsubsequent plainti s or intervenors wished to sue. In general, the courtshave not permitted tolling in such situations. The issue is discussed more

ully in Class Action Standing above.

R la ba k la ms.There is another way in which plainti s may bringclaims against parties a ter the statute o limitations has run. Under FederalRule o Civil Procedure 15, an amended complaint may relate back to the

ling date o the original complaint or purposes o the statute o limitations.

Investors have had mixed results using the relating back rule to cure statuteo limitation problems in class actions. For example, in New Jersey Carpentersv. RBS , the Southern District o New York allowed a consolidated amendedcomplaint to relate back to the ling date o the original complaint, noting thatan amended pleading will relate back i adequate notice o the matters raised inthe amended pleadings has been given to the opposing party by the allegations

in the original complaint. The court ound that relating the amended complaintback to the ling date o the original complaint was appropriate because eventhough the amended complaint included trusts not mentioned in the originalcomplaint, the claims asserted were based upon the same core actual allegationso the original complaint.

A similar attempt, however, was unsuccess ul. In In re Morgan Stanley , two classactions, one rom West Virginia and one rom Mississippi, were consolidatedinto a single action. The plainti s rom the West Virginia action argued thattheir claims should relate back to the date o the ling o the original, pre-consolidation Mississippi complaint. Although noting that both complaintsarguably arise out o the same conduct, transaction or occurrence, theSouthern District o New York held that de endants did not have su cientnotice o the West Virginia claims, even though the claims o both parties werebased upon securities derived rom the same shel registration statement.

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Choice of Law

The Martin Act, the New York blue-sky law, can only be en orced by the New York State Attorney General; there is no private right o action. Because mostsecurities are created and sold out o New York, de endants argue that thelimited en orcement provision o the Martin Act prohibits claims under New

York common law and conficts with the laws o other states that have privaterights o action and thus that those other states laws do not apply. In 2010,courts rejected these arguments.

In Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc. , theFirst Department o the New York Supreme Court, Appellate Division, rejectedJ.P. Morgans argument that the Martin Act preempted Assureds claims or

breach o duciary duty and gross negligence. The First Department notedthat New York Federal District Courts have taken the position that the MartinAct preempts long-standing common-law causes o action but describedthis position as erroneous. The court held that the Martin Act does notpreempt otherwise validly pleaded causes o action including the two claimsbrought by Assured. In so holding, the court was persuaded by the amicusbrie o the New York Attorney General, which argued that common-lawcauses o action were not preempted by the Act because the Martin Actwas intended to supplement rather than supplant existing causes o actionand that statutory actions by the Attorney General and private common-lawactions both urther the same goal, namely, combating raud and deceptionin securities transactions. Assured Guaranty is a help ul decision or New

York based plainti s who have no statutory private right o action. I thoseplainti s can validly plead a common-law cause o action, they will likely bepermitted to proceed without the threat o preemption. (O course, it is anopen question how the ederal courts will apply Assured Guaranty .)

In Cali ornia Public Employees Retirement System v. Moodys Corp. , theCali ornia Superior Court held that the Martin Act did not prevent the plainti

rom suing under the Cali ornia Corporate Securities Act because there wasnot a true confict.

The state o New York cannot pass laws that govern who may availthemselves o Cali ornia laws in Cali ornia courts. Conversely, Cali ornmay not pass laws directing that New Yorks Attorney General not bringcharges in New York courts .... There ore, New York has no legitimateinterest in applying its law to the case.

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The court also stated that even i there had been a true confict, Cali orniasinterests predominated in the action. The court recognized that applyingNew York law would have severely impaired Cali ornias interest in allowingits citizens access to the courts. CalPERS will be use ul or plainti s suing securities that were created or sold out o New York. It rejects outright theargument that because the securities originated in New York, the (un avorable)law o New York must govern security claims.

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No Action Clauses

In Greenwich Financial Services Distressed Mortgage Fund 3, LLC v.Countrywide Financial Corporation 1, the Supreme Court o New York held thatno-action clauses o PSAs barred the plainti s class action suit on manyCountrywide trusts. Greenwich Financial sought a declaration that, under theterms o the PSAs, Countrywide was obligated to repurchase any loans thatit modi ed under its settlement o predatory lending suits brought by StateAttorneys General. Plainti s argued that the no-action clause did not apply

or two reasons. First, because the suit was or a declaratory judgment in aclass action, and there ore applied equally to all certi cateholders, plainti sargued that the suit did not all within the scope o the no-action clause,which was to prevent some certi cateholders rom getting priority over other

certi cateholders. Second, plainti s argued that, as dra ted, the no-actionclause applied only to suits or a breach o the PSA by the Servicer, not to suits

or breaches by the Seller. Thus, it could not apply to a breach o the Sellersobligation to repurchase loans that it modi ed. Relying on the language inthe PSA that the no-action clause barred any suit, action or proceeding, thecourt held that the plainti s arguments were unconvincing and dismissed thecase. Greenwich Financial Services will make it more di cult or plainti s to s

or breaches o PSAs i they do not abide by the terms o the no-action clause.The industry-standard no-action clause requires a certi cateholder who wantsto sue to gather 25% o the certi cateholders, o er the trustee a reasonable

indemnity, and wait 60 days or the trustee to commence a lawsuit.

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1 Grais & Ellsworth LLP represented the plainti s in Greenwich Financial Services.



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Sampling

As RMBS cases survive motions to dismiss, courts will have to decide howplainti s will be able to prove their claims at trial.

At the end o December, a New York trial court, in MBIA v. Countrywideapproved MBIAs proposal to sample 400 loans in each o 15 securitizationsto show that Countrywide must repurchase loans in the securitizations. Thecourt held that sampling o the loans in a mortgage pool was a valid way toprove raud or breaches o representations and warranties in the pool as awhole. Under New York law, scienti c evidence, such as sampling, must begenerally accepted to be admissible. The court held that MBIA had metthis burden. The case is noteworthy because under the PSA, in order to put

back a particular loan, MBIA will have to show that that loan breached therepresentations and warranties. In holding that MBIA can use a sample o 400loans to prove that the other loans in the pool breached the representationsand warranties, the court made MBIAs burden much lighter. The cost o proving both putback and securities claims will be much lower i other courts

ollow theMBIAdecision.

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Two thousand eleven will see more new cases led and more decisions onpreliminary motions. Courts will start adjudicating discovery disputes andmotions or summary judgment.

At the end o December 2010 and in January 2011 several new cases wereled by individual plainti s. These cases, such as Allstate Insurance Co. v.

Countrywide Financial Corp. , led on December 28 in New York state court,Dexia Holding, Inc. v. Countrywide Financial Corp. , led on January 24 in New

York state court, and State Treasurer o Michigan v. Countrywide Financial Corp. , led on January 26 in the Central District o Cali ornia, will ace motions

to dismiss in 2011. Many o these recently led cases allege claims that havenot been alleged be ore, such as common law raud. I courts decide that the

raud allegations can survive a motion to dismiss, more plainti s might bringsuit on those claims in 2011.

For non-class actions that were led in late 2009 and 2010, courts will continueto decide motions to dismiss. These actions by individual plainti s generallybring claims under state law. How state courts apply the decisions o ederalcourts in ederal securities class actions to individual actions based on statelaw will be interesting.

In 2011, the class actions that have survived motions to dismiss will acemotions or class certi cation. One such motion was already decided inJanuary 2011. In New Jersey Carpenters v. Residential Capital , the SouthernDistrict o New York denied a motion or class certi cation because therewere signi cant di erences in the knowledge o putative class members sothat individual, rather than class, issues predominated. The court also heldthat class adjudication was not superior to individual adjudication. Plainti s inother class actions will ace similar arguments rom de endants and will haveto argue that their suits meet the class action requirements in the FederalRules o Civil Procedure.

Discovery will start in cases that have survived motions to dismiss. The nextmajor hurdle or those cases will be motions or summary judgment. Courtswill likely not decide those motions until 2012. However at least one court hasset an aggressive schedule or discovery and motions or summary judgment.In Public Employees Retirement System o Mississippi v. Merrill Lynch & Co.the Southern District o New York set a deadline to complete discovery in

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September 2011 and to complete argument on motions or summary judgmentin October. It is likely that those deadlines will change, but the PERS scheduleshows that at least one court is willing to push RMBS cases orward quickly.

Finally, at least two appellate courts will address cases on appeal. TheCali ornia Court o Appeal will likely rule onLuther v. Countrywide FinancialCorp. , which presented an arcane issue o ederal preemption. The NinthCircuit will likely decide whether to uphold the decision on the motion todismiss in In re Wells Fargo .

To discuss any o these decisions urther, please contact any o our partners:

dav J. gra s 212.755.3550 [email protected]

Ka r c. ellsw r 212.755.3590 [email protected] B. h l 212.755.5693 [email protected]

ow L. c r l k 212.755.5690 [email protected]

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iMPoRtAnt deciSionS in 2010 ReLAted to ABS/RMBS

Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc.,269 F.R.D. 252 (S.D.N.Y. 2010).

Ambac Assurance Corp. v. EMC Mortgage Corp.,No. 08 Civ. 9464 (S.D.N.Y. Dec. 16, 2010).

Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc.,No. 603755/08, 2010 WL 4721590 (N.Y. Sup. Ct. Nov. 23, 2010).

Bankers Insurance Co. v. DLJ Mortgage Capital, Inc.,No. 09 CV 0419, 2010 WL 4867533 (M.D. Fla. Oct. 8, 2010).

Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass Through Certifcates,

No. C-09-00037, 2010 WL 3815796 (W.D. Wash. Sept. 28, 2010).Cali ornia Public Employees Retirement System v. Moodys Corp.,

No. CGC-09-490241 (Cal. Super. Ct. Jun. 6, 2010).

Cambridge Place Investment Management, Inc. v. Morgan Stanley & Co.,No. 10-11376-NMG (D. Mass. Dec. 28, 2010).

Cambridge Place Investment Management, Inc. v. Morgan Stanley & Co.,No 10-11376-NMG (D. Mass. Dec. 28, 2010).

City o Ann Arbor Employees Retirement System v. Citigroup Mortgage Loan Trust Inc.,703 F. Supp. 2d 253 (E.D.N.Y. 2010).

City o Ann Arbor Employees Retirement System v. Citigroup Mortgage Loan Trust Inc.,No. CV-08-1418 (E.D.N.Y. Dec. 23, 2010).

Epirus Capital Management LLC v. Citigroup, Inc.,No. 09-Civ-2594, 2010 WL 1779348 (S.D.N.Y. Mar. 29, 2010).

Federal Home Loan Bank o Pittsburgh v. J.P. Morgan Secur