A year ago, U.S. District Judge Harold Baer Jr. set an important
precedent for securities class-actions against mortgage-backed
securities issuers. Baer refused to certify classes in two cases
before him, one against the Royal Bank of Scotland, the other
against the GMAC subsidiary Residential Capital. The judge
concluded that the MBS investors had varying levels of knowledge
about the notes they were buying, so there were too many
individualized factual questions to bind them together as a
It shouldn't shock anyone that when Goldman Sachs was sued
by investors in a $622 million offering backed by New Century
mortgages, its lawyers at Sullivan & Cromwell looked straight to
Baer's class-certification analysis -- especially because Baer
is presiding over the Goldman class action. Sullivan & Cromwell
littered Goldman's opposition to class certification with
references to the judge's ruling in the ResCap and RBS cases.
Like the investors in those offerings, Goldman argued, its MBS
investors were sophisticated purchasers who made highly-informed
decisions based on their individualized information about the
mortgages underlying the notes.
This time around, though, Baer disagreed, drawing a
distinction between investors in the Goldman notes and the RBS
and ResCap offerings.
"In those cases where common issues failed to predominate
because of individual investor knowledge, certain putative class
members either participated in or had knowledge of the alleged
conduct," the judge wrote Friday in a 25-page opinion. "The
balance in those cases was not struck on the
likelihood of knowledge alone, and I am not persuaded
that the potential varying degrees of investor knowledge here
will create issues subject to individual proof sufficient to
overwhelm common issues."
Baer's Goldman ruling, as he notes, is in line with the two
most recent MBS class-certification rulings by his colleagues in
Manhattan federal court. Last June, U.S. Senior Judge Jed Rakoffgranted class certification to a class of Merrill Lynch MBS investors, despite Merrill's invocation of Baer's Residential
Capital ruling. (That case subsequently settled for $315 million.) And in August, U.S. District Judge Paul Crottycertified a class of investors suing DLJ Mortgage Capital over a
$2.4 billion MBS private placement. (Crotty had a tart comment
about DLJ's citation of Baer's Residential Capital ruling:
"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.
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.")
The plaintiffs' firm in the RBS and Residential Capital
cases, Cohen Milstein Sellers & Toll, has appealed Baer's MBS class-certification ruling to the U.S. Court of Appeals for the
Second Circuit. It will be interesting to see if the string of
rulings contrary to Baer's -- including Baer's own Goldman
opinion -- influences the appeals court.
Lead counsel for the MBS class suing Goldman is David Wales
of Bernstein Litowitz Berger& Grossmann. Both Wales and a
Goldman Sachs spokesperson declined Reuters' request for comment.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
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