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Will they hang together or separately? That’s the question before the U.S. District Court for the Southern District of New York, where 17 of the world’s biggest financial institutions are being sued by the Federal Housing Finance Agency for selling Fannie Mae and Freddie Mac $200 billion worth of sub-par mortgage-backed securities. On behalf of the court, Judge Lewis Kaplan asked the parties to come up with a plan for “the efficient and convenient handling of these cases,” which he noted “appear to bear substantial similarities.” The dueling proposals submitted yesterday give a preview of where key fights are likely to arise as the cases, which were filed on Sept. 2, move forward. The banks, represented by a veritable who’s who of 35 lawyers from nine elite firms, argued that the cases should be coordinated as much as possible, and asked the court to rule on a common motion to dismiss before considering individual motions to toss the suits. “Without significant steps to achieve coordination, up to 11 judges in this Court would be called upon to issue decisions on several fronts,” wrote lawyers representing plaintiffs including Goldman Sachs & Co.; Citigroup Inc.; Morgan Stanley; and Deutsche Bank A.G. “Duplication of effort would be inevitable. So, too, would differences in pace, progress and reasoning.” The government, represented by Quinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres & Friedman, took the opposite tack, arguing that the issues are so fact-specific that there’s little room for coordination. “Each case presents unique issues pertaining to distinct sets of securitizations, requiring the application of law to the particular allegations and surrounding facts, and cannot generally be addressed or resolved on an undifferentiated basis across actions,” they wrote. Government lawyers also said they plan to fight the recent removal of four cases that were originally filed in New York state court to the Southern District, directing particular ire at Countrywide Financial Corp. “Countrywide defendants stretch the doctrines upon which they rely beyond the breaking point,” they wrote, complaining that Countrywide has a “tactic” of removing state cases to federal court and then “seeking to sweep them” to multi-district litigation pending in the Central District of California. In a footnote, the other bank plaintiffs said that Countrywide believes “it is virtually certain that [its] action will be transferred” to the MDL, and therefore Countrywide was not part of the group’s proposal for consolidation. There were few points of agreement in the court papers filed yesterday. Both sides concede that all the cases involve alleged misstatements and omissions in registration statements and prospectuses for mortgage backed securities purchased by Fannie and Freddie. Among them: whether loan originators complied with underwriting guidelines, whether statistics on loan-to-value ratios and percent of properties that were owner-occupied were accurate, and whether credit ratings were misrepresented. The causes of action are also the same – namely, Sections 11 and 12 of the Securities Act of 1993. So what might be included in a common motion to dismiss? • The statute of limitations, “generally keyed off common or knowable dates,” according to the banks. But FHFA lawyers don’t see how that’s viable, noting that dates of actual securities offerings are different in each case, and that there were tolling agreements covering different date ranges in some – but not all – cases. • FHFA’s standing, including “the continued appointment of the acting director,” and whether FHFA “suffered cognizable injury,” the banks say. Government lawyers concede the issue of FHFA’s acting director may be common across the cases – but write that it’s “unclear…why this is pertinent.” As for the question of injury, they argue it varies based on each specific mortgage-backed security. • Whether any misrepresentations were material. No way, the government responds. “It is black letter law that materiality is a fact-specific question.” • Whether the losses were the result of “macroeconomic or other intervening causes,” instead of the alleged misrepresentations. But government lawyers say this would require considering the quality of the loans, the type of loans, the dates, the underwriting standards, the type of liens, the degree of subordination, and the degree of cross-collateralization – none of which are “conducive to being resolved through joint briefing.” • “Issues concerning the FHFA’s reliance, knowledge and sophistication.” Bank of America Corp. in public statements, as well as many onlookers, have argued that Fannie and Freddie were the most sophisticated investors around, and knew exactly what they were getting into. But the government lawyers assert that demonstrating this would “require an analysis of [Fannie and Freddie's] supposed knowledge concerning each defendant and each securitization at the time they entered into each transaction.” Again, they say that’s not something the banks can do in a common motion. According to the government, coordination should be limited to common deadlines (with motions to dismiss and opening briefs due Dec. 2), and uniform standards for discovery. If the court allows a common motion to dismiss, FHFA lawyers argue it should be filed at the same time as the individual motions to dismiss, “not as a starting point for the first of two stages of staggered briefing.” The bank lawyers responded, “The difference of months at most between serial briefing and simultaneous briefing is negligible in comparison to Plaintiff’s decision to wait at least four years (and as many as six years) after purchasing the securities at issue, and three years after Plaintiff’s conservatorship, to commence these cases.” Contact Jenna Greene at [email protected].

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