For investors, mortgage-backed securities class actions have, in
the main, been a disappointment, with settlements in a
half-dozen cases netting just pennies for every dollar of losses
sustained by noteholders. But even as the last dozen or so
pending MBS class actions plod toward a conclusion, the 2nd
Circuit Court of Appeals remains compelled by the class
certification issues the cases present.
In a one-page order Monday, a three-judge 2nd Circuit panel
agreed to hear Credit Suisse's interlocutory appeal of U.S.
District Judge Lewis Kaplan's grant of class certification to
investors in an IndyMac MBS offering. Credit Suisse, which was
IndyMac's underwriter, argued in a brief filed back in July that
Kaplan didn't take account of investors' varying knowledge of
IndyMac's underwriting standards when he certified a class of
all investors in the $650 million offering. Kaplan, according to
Credit Suisse's lawyers at Gibson, Dunn & Crutcher, improperly
shifted the burden on classwide predominance: Instead of
insisting that class counsel at Wolf Popper show that investors
uniformly relied on IndyMac's representations, the judge said
Credit Suisse hadn't shown sufficient evidence that individual
issues predominated over classwide reliance.
If the issue of classwide reliance in the MBS context sounds
familiar, that's because the 2nd Circuit has already addressed
it. In a non-precedential ruling last May, the appeals court
found that U.S. District Judge Harold Baer had not abused his
discretion when he refused to certify two classes of MBS
investors with claims against the Royal Bank of Scotland, the
GMAC subsidiary Residential Capital and ResCap underwriters.
That ruling, however, seemed to endorse the reasoning of other
district courts in Manhattan that had veered away from Baer and
certified MBS classes; indeed, Baer himself subsequently granted
revised class certification motions on remand of the cases that
had been the subject of the 2nd Circuit's decision.
Moreover, the 2nd Circuit followed up its MBS class cert
ruling with a decision in September that drastically expanded the operative thinking on standing for name plaintiffs in class
actions. Judges had been limiting classes to investors in
offerings that name plaintiffs bought into, but the appeals
court said that the key issue was investor reliance on
assurances about the quality of underlying loans. According to
the 2nd Circuit, name plaintiffs could assert claims on behalf
of investors in every offering based on mortgages originated by
the lenders in the offering in which it invested.
Goldman Sachs, the defendant in that case, has requested
U.S. Supreme Court review of the 2nd Circuit's decision, which
has already led to the expansion of at least one MBS class
action. But in the meantime, by agreeing to hear Credit Suisse's
appeal, the 2nd Circuit has shown that it is continuing to
grapple with defining a class of investors in structured finance
Remember, these complex instruments don't necessarily trade
in the sort of efficient, transparent market that's the
foundation of the Supreme Court's reliance ruling in Basic v.Levinson. Basic held that stock market investors can be presumed
to rely on misstatements by defendants, so class members don't
have to show individual reliance in order to win certification.
But investors in mortgage-backed (and other asset-backed)
securities are usually sophisticated institutions that, at least
according to MBS defendants, often negotiate individually with
issuers and underwriters. The Supreme Court is right now
revisiting Basic in Amgen v. Connecticut Retirement Plans.
It looks like the 2nd Circuit intends to establish an
alternative standard for class certification in cases involving
asset-backed securities. We'll know for sure if the appeals
court also agrees to hear Credit Suisse's request for
interlocutory review of Kaplan's certification ruling in a much
bigger class action involving 10 IndyMac MBS offerings. The lead
plaintiff in that case, represented by Berman DeValerio, has
moved to add another 40 or so offerings to the case, based on
the 2nd Circuit's ruling on standing, which could make this one
of the biggest remaining MBS class actions. If the appeals court
is serious about clarifying reliance in asset-backed securities
class actions, it should take the big IndyMac case as well.
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