Earlier this month, Countrywide and Bank of America very, very
quietly settled securities fraud suits brought by five major
investors in mortgage-backed securities: the Irish company
Sealink, which holds the mortgage-backed assets of the German
bank Sachsen; the Franco-Belgian bank Dexia; the German regional
banks Landesbank Baden-Wuerttemberg and Bayerische Landesbank;
and the Minnesota financial services company Thrivent. Combined,
the investors had brought claims for hundreds of millions of
dollars for Countrywide's alleged deceptions about the quality
of the mortgages underlying the securities they bought.
If you're wondering what these particular investors, who
brought claims in four different suits, have in common, it's
this: All of them are represented by Bernstein Litowitz Berger &
Grossmann, which, as you know, has played a leading role in MBS
Technically, the dockets in the four cases, which are all
part of the Countrywide multidistrict litigation before U.S.
District Judge Mariana Pfaelzer, don't indicate that the suits
were settled. They ju s t reflect that on Oct. 19, Pfaelzer
granted joint motions for dismissal of the cases with prejudice.
In this circumstance, however, that's a sure sign of settlement.
(A BofA representative didn't respond to my email request for
comment; Bernstein partner Timothy DeLange declined to comment.)
We don't know how much BofA paid to make the cases go away,
unfortunately. But in my mind, these settlements are a milestone
in MBS litigation. Dozens of suits in which big MBS investors accuse MBS sponsors of securities fraud under state and federal
laws have been filed, including almost three dozen against
Countrywide alone. German regional banks that have lost billions
of dollars in MBS investments have been particularly prolific
plaintiffs since Sealink and Baden-Wuerttemberg first filed suits against BofA and JPMorgan last September, but they're not
alone. Several U.S. insurance companies, including AIG, have
asserted billions in securities fraud claims; and, of course,
there's the Godzilla of MBS securities litigation: the Federal
Housing Finance Agency, which has sued every MBS player for
fraud related to Fannie Mae and Freddie Mac's $200 billion
investments in mortgage-backed securities. (These securities
cases by individual investors are distinct from MBS class
actions, which have been a relative disappointment for MBS
holders and are in their twilight. They're also distinct from
investors' put-back, or breach of representation and warranty,
The AIG and FHFA securities cases certainly grabbed
headlines when they were filed, but like the other MBS
investors' securities suits, they've been m i red in motions
practice ever since. The banks have had occasional success in
getting cases dismissed on statute of limitations grounds,
though unless the 2nd Circuit Court of Appeals reverses U.S.
District Judge Denise Cote of Manhattan in UBS's pending appeal,
the FHFA suits will remain alive. Nevertheless, there hasn't
been a clear enough trend line in rulings on motions to dismiss
-- let alone summary judgment motions -- to predict the outcome
of the individual MBS investor cases.
There also haven't been publicly known settlements. I can't
say with certainty that the five Countrywide settlements are the
first securities fraud suits by individual MBS investors to be
resolved, but this apparently marks the first group settlement
of claims of hundreds of millions of dollars. It's significant
that some (though not all) of the cases Countrywide settled have
survived preliminary motions to dismiss before a judge who has
been quick to toss federal claims on timeliness grounds and has
been reluctant to find successor liability for Bank of America.
At the time they settled, all of the Countrywide cases still had
extant common-law fraud claims, though.
It's also notable that the settlements were negotiated by
Bernstein Litowitz, which had both the first and the biggest MBS
class action settlements. I have to assume that with the
leverage of five big plaintiffs, Bernstein was able to extract
decent money from Bank of America. I regard these settlements,
in other words, as a signal from Bank of America that investor
securities claims have value.
Given that Countrywide and BofA are probably more
experienced than any other bank in litigating MBS fraud suits,
that's got to be an ominous sign for all of the other banks
facing these claims.
(Reporting by Alison Frankel)
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