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Although we’ve written a lot about subprime litigation, only a few of these cases have been tested on appeal. Until last week, it appeared that plaintiffs had lost all three of their appellate efforts that have produced rulings. Now, an appellate court has revived a portion of a subprime securities suit that a lower court had dismissed. Kevin LaCroix at the D&O Diary, who has been carefully tracking this litigation, points out in a recent post that plaintiffs convinced the U.S. Court of Appeals for the First Circuit to give them another chance in Plumbers’ Union Local No. 12 Pentions Fund v. Nomura Asset Acceptance Corporation. In a 28-page ruling issued Jan. 20, the court held that plaintiffs could pursue their Section 11 claims against Nomura based on alleged misrepresentations about the lending guidelines of one of the banks that originated the mortgages. But in a boost to financial industry defendants, the court upheld the dismissal of claims against several banks, including Citigroup and Goldman Sachs, that underwrote securities that the plaintiffs did not buy. While many district courts have dismissed claims on these grounds, this may be the first appellate court to rule on this issue. “Each trust is backed by loans from a different mix of banks,” the court wrote. “No named plaintiff has a significant interest in establishing wrongdoing by the particular group of banks that financed a trsut from which the named plaintiffs made no purchases.” The plaintiffes had alleged that First National Bank of Nevada, which was one of the key mortgage originators for the mortgages in the investment trusts, routinely violated its lending guidelines and approved as many loans as possible, even scrubbing loan applications of potentially disqualifying material. Dismissing the case, Boston federal district court judge Richard Stearns held that Nomura had included enough cautionary language to preclude the plaintiffs’ claims. For instance, the offering documents stated that underwriting standards for some of these loans were generally less stringent than the standards established by Fannie Mae. Judge Michael Boudin, writing for a unanimous First Circuit panel, held that this warning and other general cautionary language weren’t enough to warrant a dismissal. “Neither being ‘less stringent’ than Fannie Mae nor saying that exceptions occur when borrowers demonstrate other ‘compensating factors’ reveals what plaintiffs allege, namely, a wholesale abandonment of underwriting standards,” he wrote. “While this case presents a judgment call, the sharp drop in the credit ratings after the sales and the specific allegations as to FNBN offer enough basis to warrant some initial discovery aimed at these precise allegations,” Boudin explained. The court also affirmed the dismissal of claims relating to statements about appraisal practices and the ratings assigned to the investment certificates. The plaintiffs’ appellate team was led by Eric Isaacson of Robbins Geller Rudman & Dowd. We have not been able to reach Isaacsson for comment. Nomura the issuer was represented by Stephen Poss of Godwin Procter. The underwriters were represented by William Paine of Wilmer Cutler Pickering Hale and Dorr. Poss and Paine declined to comment.

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