Plaintiffs lawyers at Cohen Milstein Sellers & Toll moved a step forward this week in a securities class action alleging that Credit Suisse duped investors into buying mortgage-backed securities (MBS) backed by shoddy home loans.
In a 21-page ruling that may hold promise for other MBS investors, U.S. District Judge Paul Crotty in Manhattan agreed to expand the certified class in the Credit Suisse case to include holders of $825 million in securities that weren’t purchased by any named plaintiff. Citing an influential 2012 decision by the U.S. Court of Appeals for the Second Circuit in NECA-IBEW Health & Welfare Fund v. Goldman Sachs, Crotty ruled that the class could encompass a 2007 MBS offering that involved the same mortgage originator and similar alleged conduct as those already in the case.
The Credit Suisse case and several like it were originally gutted on the grounds that investors didn’t have standing to sue over offerings in which they didn’t purchase certificates. Some of the cases also stumbled after judges found that the investors’ individual knowledge varied too much for class treatment.
The landscape changed after the Second Circuit issued its September 2012 ruling in NECA-IBEW v. Goldman and opened the door to a more expansive view of who could claim damages. The appeals court concluded that investors could, in fact, assert claims on offerings in which they didn’t purchase certificates as long as the offerings were backed by loans from the same set of originators as the certificates in which the plaintiffs had invested, and as long as the alleged conduct, in each case, was the same. Plaintiffs lawyers in several parallel cases—including the Credit Suisse class action—subsequently won permission to resuscitate their claims.
According to Cohen Milstein’s Joel Laitman, however, the Second Circuit “left open whether judges would have to make a different determination as to whether investors in different offerings could be certified together under Rule 23 requirements” governing class certification. Laitman, who’s spearheading the Credit Suisse case, said it wasn’t a foregone conclusion that the Goldman ruling would have the same effect on class status as it has on the threshold issue of standing.
In a brief decision last December, U.S. District Judge Harold Baer Jr. cited Goldman to broaden class certification in a pair of intertwined MBS cases against the Royal Bank of Scotland Group PLC and Residential Capital LLC. Laitman said that Monday’s ruling in the Credit Suisse case, New Jersey Carpenters Health Fund et al. v. DLJ Mortgage Capital Inc. et al., offers an even more detailed rationale for applying the plaintiffs-friendly Goldman test to class certification.
This week’s ruling enlarges the class to include purchasers of some $825 million in Home Equity Mortgage Trust (“HEMT”) 2007-2 certificates—more than doubling the face value of the certificates at issue in the case. Laitman, assisted by colleagues Christopher Lometti and Michael Eisenkraft, said the class expansion increases potential damages by well over $100 million, though the firm hadn’t yet completed a new damages analysis.
In opposing Laitman’s bid to expand the Credit Suisse class, the bank’s lawyers at Bingham McCutchen argued that the 2007 offering was a fundamentally different deal from two 2006 offerings already in the case, and that individual questions such as loss causation and investor knowledge would make the addition of the new group unmanageable for class treatment. Smith pointed to different warnings in the prospectuses: Where the 2006 offering cautioned of a “possible” decline in the real estate market, the 2007 offering warned of an “actual recent decline” in that market.
Crotty didn’t buy the defense arguments. “Plaintiffs have made a prima facie showing of predominance by citing evidence of the substantial factual and legal overlap between the two offerings: identical alleged misrepresentations, the same entities and employees involved in making the offerings, the same ‘wrongful course of conduct’ with regard to underwriting guidelines, and the overlap in mortgage originators (particularly New Century),” he wrote. “Defendants have not shown that individualized issues are likely to arise that would predominate over these common ones.” (Read the full 21-page decision here.)
Crotty also wrote that the fact that the two groups of investors were issued slightly different warnings wasn’t a bar to broader certification. “Knowledge about the housing market for the investors in the 2006–5 and 2007–2 Offerings may be different,” he wrote, “but they would not be individualized.”
Monday’s decision, coming three weeks after oral arguments on the certification motion, is more bad news for Credit Suisse, which has been facing intense scrutiny over its lax mortgage practices this month since emails surfaced in a parallel investor lawsuit in Massachusetts. The bank, unlike many others, has refused to settle major suits stemming from the mortgage crisis.
Bingham McCutchen’s Jeffrey Smith is leading the bank’s defense in the class action. Smith had not responded to a request for comment at press time.