Every case between investors who bought mortgage-backed securities and the banks that issued and underwrote the instruments seems to break new ground. In just the last few weeks, OTC has looked at Bank of America's intriguing use of New York state trust laws as a vehicle for its $8.5 billion settlement with bond investors and Manhattan federal judge Jed Rakoff's certification of the first-ever class of mortgage-backed securities investors in a megabillion case against Merrill Lynch. Now comes word that Wells Fargo and a group of underwriters have agreed to a $125 million settlement of a class action brought by investors in 28 mortgage-backed securities offerings. This deal is believed to be the first MBS securities class action settlement.

The Wells Fargo settlement is vindication for the strategy of class counsel from Bernstein Litowitz Bernstein & Grossmann. Plaintiffs lawyers have brought MBS cases under a wide variety of theories: state-court securities claims, state-court breach-of-contract claims, and federal court fraud claims, among others. They've sued to force issuers to "put back" underlying mortgage loans that have gone into default; demanded banks buy back allegedly deficient mortgage-backed bonds; asserted damages for breaches of pooling and servicing agreements. I could go on, but you get the idea: There's no definitive roadmap for investors even to bring mortgage-backed securities cases, let alone to win them.

Bernstein Litowitz is, in the main, a securities class action firm, so it's not surprising that it has styled MBS cases against of host of defendants-including Goldman Sachs, Merrill Lynch, Morgan Stanley, and JPMorgan-as federal class actions. Bernstein Litowitz's suits center on Section 11 of the 1933 Securities Act, which governs offering statements. And although it's a good bet that Congress never dreamed of the complexities of mortgage-backed trust certificates when Section 11 was drafted, the law has certain provisions that make it a very smart vehicle for MBS claims. First of all, investors don't have to show that issuers intended to defraud the market. Section 11 instead holds issuers to a strict liability standard, meaning investors just have to show that an offering statement contained false representations about the securities. And second, Section 11 permits investors to go after underwriters as well, under a due diligence standard that requires a showing that the underwriters didn't exercise reasonable care.

Lawyers for the defendants in the Wells Fargo MBS class action-Munger, Tolles & Olson for Wells Fargo; Fried, Frank, Harris, Shriver & Jacobson for the underwriters-mounted the now-standard challenge to the investors' standing, arguing that the class can only bring claims based on offerings in which name plaintiffs had invested. San Francisco federal judge Susan Illston agreed, so the case was reduced from more than 50 offerings to 17, with the class appealing its standing to sue for another 11 offerings. Bernstein Litowitz's initial claims against the credit rating agencies were also dismissed. But last October Judge Lucy Koh (who had taken over the case) denied defense motions to toss most of the class's claims against Wells Fargo and the underwriters. At the time of the settlement, she hadn't ruled on summary judgment and class certification motions.

Lead lawyers for all of the parties told OTC they couldn't comment, and much of the discovery in the case was conducted under a protective order. Bernstein Litowitz and lawyers for other name plaintiffs, including Cohen Milstein Sellers & Toll and Labaton Sucharow, undoubtedly looked at some of the mortgages underlying the securities Wells Fargo offered. But because the class action centered on Section 11-and not allegations that the bank's trustee breached its contracts with investors-they didn't have to make the loan-by-loan analysis that investors in put-back cases face (unless they're permitted to take a sampling of loans).

There's no damages valuation in the public record, but considering that the settlement covers 28 offerings (the 17 that withstood Judge Koh's dismissal ruling and the 11 on appeal) with a face value of $35 billion, it's pretty much a certainty that the investors originally asked for a lot more than $125 million.

Nevertheless, it's a coup for Bernstein Litowitz to score an MBS settlement at all. It should be very interesting to see what impact the deal has on the firm's many similar cases against other issuers.

(Reporting by Alison Frankel)