Judge Relies on Second Circuit Ruling to Reinstate MBS Claims Against Morgan Stanley
On Friday, a U.S. district court judge reinstated part of a purported class action that accuses a Morgan Stanley subsidiary of making false and misleading statements in its offering materials for mortgage-backed securities. The decision is the latest to follow a Second Circuit ruling last fall that expanded the right of plaintiffs to assert standing in MBS suits against banks.
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The right of plaintiffs to assert standing in bringing mortgage-backed securities class actions against banks was expanded by the U.S. Court of Appeals for the Second Circuit in a decision last fall that continues to be a thorn in the side for financial institutions. On Friday, a U.S. district court judge relied on the Second Circuit ruling to reinstate part of a purported class action against a Morgan Stanley subsidiary that accuses the bank of making false and misleading statements in its offering materials for 14 mortgage-backed securities.
In a previous ruling in August 2010, U.S. district judge Laura Swain in Manhattan dismissed claims relating to nine of the 14 MBS certificates after finding that the plaintiffs, led by the Carpenters Pension Fund of West Virginia and the Public Employees’ Retirement System of Mississippi, lacked standing because they had not actually purchased those nine certificates. But this past September, co-lead class counsel Bernstein Litowitz Berger & Grossman and Robbins Gellar Rudman and Dowd filed a motion asking Swain to reconsider her decision in light of the Second Circuit’s ruling in
NECA-IBEW Health & Welfare Fund v. Goldman Sachs.
The Goldman ruling allowed the plaintiffs in that case to proceed with their action even though they did not actually purchase the certificates in question. The Second Circuit held that because the plaintiffs had bought certificates backed by loans from the same originators as the ones in the litigation, the class claims involved the same set of concerns.
Swain followed Goldman’s logic in
her latest decision in the Morgan Stanley case. She granted the plaintiffs’ motion and held that the pension funds had standing to assert claims on all 14 certificates.
Morgan Stanley, which was represented by Davis Polk & Wardwell, had argued in
its motion against reconsideration that Goldman didn’t apply because Morgan Stanley only issued one certificate, and merely contributed loans to the other certificates that were then issued by a variety of other institutions. Swain, however, ruled that Morgan Stanley was interpreting Goldman too narrowly and that Morgan Stanley’s alleged misrepresentation regarding its compliance with its stated loan purchasing guidelines “implicates the same set of concerns at the conduct alleged to have caused injury to other members of the putative class.”
Swain’s decision is the latest decision in New York to go against the big banks since the Second Circuit handed down Goldman. In December, U.S. district judge Katherine Forrest of Manhattan
allowed a putative class action filed by a Chicago policemen’s pension fund to proceed against Bank of America and U.S. Bancorp over MBS losses that helped bring down Washington Mutual to proceed after rejecting the banks’ standing defense. As for the Second Circuit decision itself, Goldman Sachs
has appealed that ruling to the U.S. Supreme Court, and has even brought in heavyweights Ted Olson of Gibson, Dunn & Crutcher and Jonathan Schiller of Boies, Schiller & Flexner to handle its appeal. The justices have not announced whether they will hear the case.
Davis Polk partner James Rouhandeh, who represents Morgan Stanley, declined to comment. The plaintiffs’ co-lead counsel, David Stickney of Bernstein Litowitz and Arthur Leahy of Robbins Gellar, did not respond to a request for comment.
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