Two of the thorniest issues in mortgage-backed securities litigation—plaintiffs’ standing and the time limits that govern their claims—have made a mess of a long-running case against Morgan Stanley. As the judge mulls whether to certify the case as a class action, Morgan Stanley and its lawyers at Davis Polk & Wardwell won a ruling this week that could help derail the case for good—or complicate matters even further.
In a 10-page order issued on Tuesday, U.S. District Judge Laura Taylor Swain in Manhattan reversed a previous decision and ruled that three of the four institutional investors leading the case didn’t bring suit within the relevant three-year statute of repose. The ruling may make it harder for plaintiffs counsel at Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd to certify a large class in the case, though the judge made it clear that they still have a chance.
The remaining plaintiff, Public Employees’ Retirement System of Mississippi (MISSPers), kicked off the litigation against Morgan Stanley in 2008. The pension fund sought to represent investors in more than a dozen MBS trusts sponsored by the bank between 2006 and 2008, even though it had only invested in one of them.
In 2010 Swain ruled that MissPERS only has standing to sue over the trust in which it invested. Because of that ruling, Bernstein Litowitz and Robbins Geller steadily added three more pension fund plaintiffs to the case in order to expand its scope.
Then, in 2012, the U.S. Court of Appeals for the Second Circuit ruled in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. that named plaintiffs can sue over MBS trusts they didn’t invest in, effectively reversing Swain. As a result, MissPERS filed an amended complaint alleging that Morgan Stanley misled investors in 13 MBS trusts. In other words, the case was back at square one, except with more lead plaintiffs.
With standing finally out of the way, the focus of the case shifted toward Section 13 of the Securities Act of 1933, which states that investors have to bring suit within a three- year statute of repose that starts running when securities are sold. (Statutes of repose are like statute of limitations, but stricter.) Swain ruled back in 2011 that the statute of repose had been tolled when MISSPers filed its original complaint, so the plaintiffs claims were all timely.
The Second Circuit reached the opposite conclusion on the tolling of statutes of repose, however, in a June 2013 ruling in In re IndyMac Mortgage-Backed Securities Litigation.On the basis of IndyMac, Morgan Stanley asked Swain to reverse her earlier ruling and dismiss all of the plaintiffs except MISSPers.
The judge complied in Tuesday’s ruling, narrowing the case just as briefing on class certification was winding down. With only one named plaintiff remaining, the plaintiffs lawyers will have to convince Swain that MISSPers is able to singlehandedly represent the interests of all investors, the vast majority of which bought Morgan Stanley securities that MISSPers never purchased.
To that end, Bernstein Litowitz and Robbins Geller can point to at least one ruling in which another judge in Manhattan applied the logic of the Second Circuit’s Goldman Sachs decision at the class certification stage. In March, U.S. District Judge Paul Crotty expanded a class action against Credit Suisse in order to allow the lead plaintiffs to assert claims over trusts in which they didn’t invest. If Swain follows suit, it’ll count as another big setback for MBS defendants. If she goes the other way, it’ll again be up to the Second Circuit to sort out who’s right.
Davis Polk’s James Rouhandeh, who represents Morgan Stanley, declined to comment. David Stickney of Bernstein Litowitz, who represents the plaintiffs, didn’t immediately return a call seeking comment.