(Diego M. Radzinschi)
The argument that the Federal Housing Finance Agency waited too long to sue Wall Street for selling shoddy mortgage-backed securities hasn’t panned out so well for the banks. Just ask the 15 banks that have already shelled out a combined $15 billion in settlements with the FHFA. But that doesn’t mean the remaining defendants are done trying.
Three holdout banks that have refused to settle with the FHFA—Nomura Holding Inc., HSBC North America Holdings Inc. and the Goldman Sachs Group Inc.—made a final plea Friday to defeat the agency’s claims that they misled Fannie Mae and Freddie Mac about the riskiness of billions of dollars in securities backed by home loans. The banks say that despite a series of rulings to the contrary, a recent U.S. Supreme Court decision in another case has finally vindicated their position that the FHFA’s claims are time-barred.
In a motion for summary judgment filed Friday, HSBC and Nomura argued that FHFA failed to sue them within the statute of repose that governs securities cases. Goldman, which is on a different case management schedule than HSBC and Nomura, made the same case in a seven-page motion of its own.
Sullivan & Cromwell represents both Nomura and Goldman Sachs. HSBC is represented by Mayer Brown and Boies, Schiller & Flexner. HSBC’s legal team includes famed courtroom advocate David Boies, which could signal that the bank is preparing to defend itself at trial.
If the banks’ latest pitch sounds familiar, it’s because a federal judge in Manhattan and the U.S. Court of Appeals for the Second Circuit have already considered the timeliness argument at length and soundly rejected it. The Second Circuit ruling was a tipping point in the FHFA litigation, helping the agency rack up a string of big settlements from 15 of the original 18 defendants.
The remaining banks now argue that a freshly issued Supreme Court decision involving environmental torts, CTS Corp v. Waldburger, shows that the Second Circuit got it wrong.
Under the Securities Act of 1933, investors who think they were duped must sue an issuer within a year of discovering the securities violation (this is the statute of limitation) and within three years of the date the security was offered (this is the statute of repose). In the Housing and Economic Recovery Act of 2008 (HERA), Congress extended the statute of limitations for the FHFA, Fannie and Freddie’s conservator, to sue banks that sold MBS to the government-sponsored entities. But HERA never explicitly stated that it was extending the three-year statute of repose.
After they were sued by FHFA in September 2011, the banks argued that Congress’ silence on the statute of repose in HERA means the time limits should apply, making the agency’s federal securities claims too stale. U.S. District Judge Denise Cote in Manhattan rejected that bid to short-circuit the litigation, but she allowed the banks to appeal her ruling directly to the Second Circuit. The appeals court affirmed Cote in April 2013, and the Supreme Court denied cert in October 2013. UBS AG, which spearheaded the joint defense effort, threw in the towel. JPMorgan Chase & Co. Inc., Bank of America Corporation and a dozen others have also settled.
In CTS v. Waldburger, the high court was weighing the scope of the statute commonly known as Superfund, which puts corporations on the hook for environmental cleanup costs. The Superfund law ushered in a long statute of limitations for victims of toxic exposure to sue, displacing relevant statutes of limitation under state law. Superfund was silent, however, about whether it also displaced a statute of repose that governs toxic exposure claims in North Carolina.
In a 7-2 decision, the high court ruled June 9 that if Congress wanted to displace the statute of repose, it would have done so explicitly. The FHFA’s opponents argue in Friday’s motion that CTS confirms that the agency’s claims are time-barred.
“HERA addresses only statutes of limitations and omits any reference to statutes of repose, a factor the Supreme Court found ‘instructive’ in determining that [the Superfund law] does not apply to the latter,” they wrote.
FHFA’s lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz Benson Torres & Friedman are likely to recycle a familiar argument on their own—namely, that Congress’ silence on the statute of repose in the Securities Act was simply an oversight. The legislative history of the Superfund law, on the other hand, seems to suggest that Congress knew about the North Carolina statute of repose and decided not to address it, as Reuters blogger Alison Frankel explained here.
FHFA lead counsel Philippe Selendy of Quinn Emanuel didn’t respond to a request for comment.