Manhattan state supreme court judge Shirley Kornreich has
certainly done a lot of thinking about claims by the bond
insurers Ambac and MBIA that Credit Suisse committed fraud when
it contracted for insurance on some of its mortgage-backed
securities offerings. First she denied Credit Suisse's motion
to dismiss the fraud claims in MBIA's case. But then she
granted the bank's parallel motion in the Ambac case, and went back and reversed her original MBIA ruling. The judge concluded
that under New York law, the bond insurers' fraud claims
duplicated their breach of contract claims against Credit
Her reasoning turned out to be wrong, according to a state
appeals court. In a June 30 ruling, the first department
appellate division agreed with every other judge who's ruled on
the issue and concluded that the overlapping fraud and contract
claims in the bond insurer cases against MBS issuers are not
duplicative, so the fraud allegations need not be dismissed. I
noted at the time that the appellate ruling seemed to leave
Judge Kornreich little choice but to restore the MBIA and Ambac fraud claims against Credit Suisse.
That's what she did Thursday. (Here's the Ambac ruling and
here's MBIA.) But Judge Kornreich didn't stop there. She went
on to say that she-and not a jury-will decide the merits of
those fraud claims. And moreover, she doesn't seem to think
much of the merits.
To prove fraud, the judge wrote, the bond insurers will
have to show that Credit Suisse made misrepresentations and
that they relied on those misrepresentations. But as she
explains, Credit Suisse made all sorts of disclosures in the
MBS prospectuses Ambac and MBIA received. The bank admitted
weaknesses in the pool of mortgages underlying the securities
for which the insurers wrote policies: Many of the loans
featured no independent verification of the owners' income and
more than half included limited documentation. To grossly
oversimplify the judge's point, those disclosures (among other
clues) put the bond insurers on notice that the banks'
assurances about underwriting guidelines weren't to be
"It appears that Ambac's notice in this case went well
beyond mere 'hints' of falsehood," Judge Kornreich wrote in the
Ambac opinion. "Ambac had 'clear and direct' notice." It's hard
to read that language as anything but a de facto win for Credit
Suisse and its lawyers at Orrick, Herrington & Sutcliffe.
"We are gratified that the Court has reinstated our
fraudulent inducement claim against Credit Suisse," said a
spokesman for MBIA in an emailed statement. "We are confident
that as the case proceeds we will demonstrate conclusively that
Credit Suisse committed fraud and multiple breaches of contract
in its dealings with MBIA."
But the judge is permitting discovery to proceed on the
fraud claims. So in essence, she's throwing down a gauntlet for
MBIA and Ambac and their lawyers at Patterson Belknap Webb &
Tyler. She's not going to rule for them based only on evidence
that Credit Suisse violated underwriting guidelines. Patterson
is going to have to show more convincing proof of outright
deception by Credit Suisse.
If Erik Haas and his crew at Patterson can come up with
that, I plan to be the first one to let you know.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
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