In New York, US District Judge Deborah A. Batts has certified a class of investors to go ahead with fraud claims that they’ve brought against Wells Fargo (WFC), RBS Securities (RBS), and Deutsche Bank (DB). The banks underwrote $7.7B of NovaStar mortgage-backed securities. The lead plaintiff in the MBS fraud case is the New Jersey Carpenters Health Fund. Wells Fargo Advisors LLC was previously Wachovia Capital Markets.
The plaintiffs contend that the defendant banks lied in the securities’ offering documents. Judge Batts held that the fundamental question at issue is whether the bank did, in fact, make the allegedly misleading or materially false statements.
NovaStar issued six residential mortgage backed-securities that the banks underwrote in 2006. These RMBS collectively held over $7.7B in assets. By mid-2009, in the wake of the housing collapse, over half the mortgages backing the securities had defaulted. Investors sustained major losses.
The New Jersey Carpenters Health Fund, which sued not just the banks in 2008 but also subprime lender NovaStar and credit rating agencies Standard & Poor’s and Moody’s, had invested $100K in one of the securities. The credit raters are no longer defendants in the case as the claims against them from this mortgage-backed securities case were dismissed in 2011. Because NovaStar’s successor has filed for Chapter 11 bankruptcy protection, the case against the subprime lender has been stayed.
JudgeBatts at first dismissed the entire case in 2012, noting that the complaint did not bring up specific examples of underwriting fraud. She ruled that investor was given enough warning about the risks involving the mortgage market. The following year, however, the Second Circuit told the court to abide by its appellate ruling in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. The precedent set in that case is that when a bank puts out a number of securities with the same shelf registration statement, an investor that buys at least some of the securities is allowed to become a lead plaintiff if all the claims bring up the same issues.
Last year, Batts said that the plaintiffs would be allowed to file a third amended case. It is that MBS lawsuit that is the operative complaint now.
Batts rejected the defendants’ argument that because some of the entities are part of the class are sophisticated entities they should have detected any misrepresentations. The banks had sought to have the investors’ claims brought in separate cases rather than as a class-action. They argued that there were duplicate entities on the investor plaintiff list. Batts countered that even by eliminating these duplicates there would still be at least 72 unique class members. The lead plaintiff had originally asserted that there were 450 investors.
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US Judge Certifies Class Action Against NovaStar Banks, Reuters, November 4, 2016