I had vowed to take a break from reporting on Bank of America for a day or two. Unfortunately for the BofA-weary, the nation's largest bank keeps making litigation news. I guess that's what happens when there are so many people clamoring for a piece of your hide.
Judge Mariana Pfaelzer of Los Angeles federal court ruled Wednesday that the Dutch pension fund Stichting Pensioenfonds ABP waited too long to file state and federal fraud claims based on Countrywide's alleged deceptions about the mortgage-backed securities it offered. In a 24-page opinion, Judge Pfaelzer dismissed half of ABP's claims under the Exchange Act of 1934 as barred by the five-year statute of repose. (The statute of repose is a sort of drop-dead expiration date for claims that, unlike the statute of limitations, can't be tolled.) The pension fund filed its 111-page fraud complaint on February 14, 2011, the judge said, so it can't make Exchange Act claims on any offerings it bought after February 14, 2006.
More significantly, though, Judge Pfaelzer analyzed when a reasonably prudent investor should have known of allegations that Countrywide was misrepresenting the quality of its mortgage-backed offerings. Federal securities fraud claims have a two-year statute of limitations. The Stichting ABP claims that Judge Pfaelzer didn't bar under the statute of repose-those involving MBS offerings after February 2006-were contained in the February 2011 complaint. For those claims to fall within the statute of limitations, Stichting's lawyers at Grant & Eisenhofer would have to show that the pension fund was not on notice of alleged fraud in Countrywide's mortgage business until February 2009.
Judge Pfaelzer found that was at least a year too late. This judge knows the history of Countrywide's mortgage practices-and the ensuing litigation involving those practices--at least as well as any other judge around. She presided over the securities class action that resulted in a $624 million settlement for Countrywide shareholders and is now overseeing an MBS investors' class action against the onetime mortgage giant. (As I've written, the judge eviscerated that class action in May, with rulings that cut the number of offerings in the case from more than 400 to about a dozen.)
With her deep knowledge of Countrywide and the suits against it, Judge Pfaelzer concluded that reports of dubious dealings at Countrywide began to emerge as early as 2007 and were the subject of litigation by early 2008. In fact, Judge Pfaelzer noted, Stichting ABP's lawyers cited one of the 2008 fraud against Countrywide in arguing to toll the statute of limitations on the pension fund's Securities Act of 1933 claims. "The gravamen of plaintiff's claim is that Countrywide wholly abandoned its underwriting standards," Judge Pfaelzer wrote. "The press and numerous widely-reported lawsuits had made exactly this allegation by the end of 2007."
Grant & Eisenhofer tried to distinguish between stock and bondholders, arguing that private cases filed before the 2009 Securities and Exchange Commission suit against Countrywide were all brought by equity investors, not MBS certificate holders. Judge Pfaelzer called that a false distinction.
"Countrywide had only one business: underwriting mortgages which it either held for its own portfolio or sold into the secondary market," she wrote. "The shareholder, debentureholder, and derivative suits against Countrywide all made the same allegation: Countrywide stock/debt decreased in value when the market realized that Countrywide had been misrepresenting the quality of the loans it was writing."
The judge also dismissed with prejudice Stichting ABP's state-law fraud claims, even though some of them have a three-year statute of limitations. She called that "a closer question," but nevertheless concluded that the fund was on notice as of February 2008. (Stichting ABP counsel Jay Eisenhofer didn't return my call.)
Pfaelzer's findings aren't binding on any other district court judge presiding over a Countrywide MBS fraud case, and there are still unanswered questions about whether the MBS class action tolls the statute. But the Stichting ABP opinion is definitely not good news for anyone who's still contemplating federal fraud claims in an MBS fraud suit against Countrywide. Plaintiffs are going to have come up with a very good explanation for why they waited until now to bring those claims.
Allstate has a more immediate problem. Its MBS case against Countrywide, which was filed in New York in December 2010, was transferred to Judge Pfaelzer in June. Given the judge's reasoning in Wednesday's opinion, Allstate is going to have a hard time showing that its Exchange Act claims aren't barred. Dexia and several other plaintiffs are also facing a motion to have their MBS suit against Countrywide, which is still in Manhattan federal court, transferred to Judge Pfaelzer. Even if the Dexia plaintiffs' federal securities fraud claims are tossed, however, they've also brought New York state common law fraud claims, which have a six-year statute of limitations. Daniel Brockett of Quinn Emanuel Urquhart & Sullivan, who represents Allstate, and David Wales of Bernstein Litowitz Berger & Grossmann, who represents the Dexia group, both declined my request for comment.
Goodwin Procter represents Countrywide in the Stichting ABP, Allstate, and Dexia cases. A Bank of America spokesman sent along this comment on Judge Pfaelzer's ruling: "We agree with the court's analysis and reasoning."
(Reporting by Alison Frankel)
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