Just a few months ago, the class action prospects for investors in mortgage-backed securities weren't looking particularly good. In January, Manhattan federal judge Harold Baer Jr.refused to certify two MBS classes, ruling that investors had varying amounts of sophistication and information so individual issues predominated. Then in May, Los Angeles, federal court judge Mariana Pfaelzer decimated a case against Countrywide, finding that the class could only bring claims if name plaintiffs bought into specific tranches of specific offerings. If you were an MBS noteholder without the resources of, say, frequent MBS plaintiffs Allstate or Dexia, your chances of recovering anything for the (alleged) lies sponsors told in offering statements were slim.
That's beginning to change. Last week Manhattan federal judge Paul Crotty certified a class of 103 MBS investors who bought notes offered by Credit Suisse's DLJ Mortgage Capital. In a 15-page opinion Judge Crotty brushed off the very defense arguments that had swayed Judge Baer. "Defendants' argument is ironic-the potential class includes unsophisticated investors and so the class should not be certified; in the alternative, the class should not be certified because the class includes very sophisticated investors," the judge wrote in a footnote addressing Baer's refusal to certify a class. "Defendants' view is apparently that, in order for a class to be certified, it must be like Baby Bear's porridge in the story of Goldilocks: just right. This suggestion is untenable." (Credit Suisse declined comment.)
Meanwhile, Manhattan federal judge Jed Rakoff on Monday released the opinion explaining his June 16 decision to certify a class of MBS noteholders suing Merrill Lynch. (Here's my previous story about the ruling, and here's the fascinating 62-page opinion, courtesy of my old friends at the Am Law Litigation Daily.) Unlike Judge Baer, Judge Rakoff focused on the common fact that all of the Merrill MBS class members relied on the same allegedly-false offering statements. He also expressly rejected arguments by Merrill's lawyers at Skadden, Arps, Slate, Meagher & Flom that class claims should be limited, a la Judge Pfaelzer's Countrywide ruling, to specific tranches in which name plaintiffs invested.
The judge noted that Skadden "felt obliged to petition for leave to appeal" before he had issued an opinion explaining his reasoning. In that petition, Merrill's lawyers pointed to the U.S. Supreme Court's ruling in Wal-Mart v. Dukes, which came down after Judge Rakoff's class certification order, to argue that common issues don't predominate. Rakoff disputed Skadden's reasoning. "The common questions presented by this case -- essentially, whether the offering documents were false or misleading in one or more respects -- are clearly susceptible to common answers," the judge wrote. "Not only do common questions exist in this case, but they in fact predominate over any questions affecting only individual members. Accordingly, the Court finds that Wal-Mart has little to no bearing on the issues before the court." (Scott Musoff of Skadden was out of the country and unavailable for comment; Jay Kasner declined to comment.)
The Merrill class, which includes about 1,600 investors, is represented by Bernstein Litowitz Berger & Grossmann, which scored the first-ever settlement of an MBS class action earlier this summer, in a case Wells Fargo settled before a ruling on class cert. Cohen Milstein Sellers & Toll represents the investors suing Credit Suisse. Judge Crotty's certification of that class was particularly gratifying to Joel Laitman of Cohen Milstein because the firm was on the losing side of the MBS class rulings by both Judge Baer and Judge Pfaelzer.
The more recent Crotty and Rakoff rulings, he told me, are going to have a ripple effect as other federal judges consider whether to certify several pending MBS investor classes. "These are certainly very good developments," Laitman said. "The courts recognized that all investors who relied on the prospectus should be in the class."
The rulings will also give Laitman ammunition before the U.S. Court of Appeals for the Second Circuit, which in April agreed to consider an interlocutory appeal of Judge Baer's denial of class certification. (Laitman's appellate briefs are here and here.) The Second Circuit's decision should determine, for once and for all, whether MBS class actions are viable. Defense briefs in the appeal are due in November.
(Reporting by Alison Frankel)
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