2nd Circuit Eases MBS Lawsuits by Reinstating Pension Fund’s Case Against Wells Fargo, Royal Bank of Scotland, Wachovia, & Others

The U.S. Court of Appeals for the Second Circuit has reinstated New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group PLC (RBS), which also includes defendants Wells Fargo Advisors (WFC), McGraw-Hill (MHP), and a number of others. The decision will ease class action mortgage-backed securities lawsuits by investors.

Holding that the plaintiff did not satisfy pleading requirements under the Securities Act of 1933 for lawsuits, a district court had thrown out the case, which was filed by the New Jersey pension fund. The 2nd circuit, however, reversed the ruling, finding that the allegations made (that an unusually high number of mortgages involving a security had defaulted, credit rater agencies downgraded the ratings of the security after modifying how they account for inadequate underwriting, and ex-employees of the relevant underwriter vouched that underwriting standards were being systematically ignored) make a plausible claim that the security’s offering documents incorrectly stated the applicable writing standards. This would be a Securities Act of 1933 violation.

Expected to benefit from the ruling are federal credit union regulators, including the National Credit Union Administration, which has submitted a number of MBS lawsuits against financial firms and banks. Last year, NCUA filed a $3.6 billion action against JP Morgan Chase (JPM) accusing the latter’s Bear Stearns & Co. unit of employing misleading documents to sell mortgage-backed securities to four corporate credit unions that went on to fail. The credit union agency contends that the mortgage in the pools collateralizing the RMBS (residential mortgage-backed securities) did not primarily adhere to underwriting standards noted in the offering statements and the securities were much riskier than what they were represented to be. NCUA has also sued a few of the defendants that the New Jersey Carpenters Health Fund is suing, as well as Goldman Sachs Group (GS) and Barclays.

Mortgage-Backed Securities Lawsuits
According to NERA Economic Consulting, about 850 mortgage-related cases have been submitted in the US since 2007. While the earlier lawsuits concentrated on the originators, with plaintiffs placing a lot of the blame on poor underwriting and bad loans, banks that created securities from residential mortgages and got investors to buy in also were eventually named as defendants. Meantime, trustees have come into the fray as either plaintiffs or defendants. For example, some have been sued for allegedly failing to make lenders buy back the faulty mortgages underlying the securities. Some mortgage bond investors have also been named as defendants in MBS cases.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our RMBS lawyers represent clients in the US, as well as investors abroad that were defrauded by a firm or financial representative based here. Your first MBS case consultation with our institutional investment fraud law firm is free.


New Jersey Carpenters v. Royal Bank of Scotland – Second Circuit, American Bar Association

Second Circuit Rules in Favor of Investors in Multibillion Dollar NovaStar MBS Class Action, Reuters/Businesswire, March 1, 2013

More Blog Posts:
Former Jeffries Director Charged with Securities Fraud Crimes and Sued By SEC Over Alleged Residential Mortgage-Backed Securities, Stockbroker Fraud Blog, February 1, 2013

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2012

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011