Investors who bought residential mortgage-backed securities comprised of shoddy mortgage loans from Goldman Sachs cannot adequately plead fraud against the bank because they failed to request and review the loan files themselves, Manhattan Supreme Court Justice Charles Ramos has held.
In dismissing the complaint in Phoenix Light SF Limited v. The Goldman Sachs Group, 652356/2013, Ramos has broken ranks from at least one other colleague on the issue of sufficiency of pleading a fraud claim by a sophisticated investor in RMBS actions.
Ramos held in his June 13 decision that investors German bank WestLB, Greyhawk Funding and Blue Heron Funding III who purchased $450 million of RMBS from Goldman between 2005 and 2007 only to suffer heavy losses, did not exercise due diligence at the time they purchased certificates.
The judge said the investors could have uncovered the bank’s alleged misrepresentations and omissions concerning the quality of the loans had they reviewed the loan files instead of relying on offering documents, which included investment-grade credit ratings and other favorable characteristics.
Although the 282-page complaint states such information was “peculiarly within defendant’s knowledge and control,” the judge held there was never any allegation that the investors “sought this pertinent information and that defendants denied access to it.”
“It does not matter if the failure to seek this information was because of blind faith in the process of origination and/or securitization, or if it was attributable to the desire to quickly get on board of what the investors thought was a profitable bandwagon,” Ramos said—“the obligation of a sophisticated investor to inquire cannot be merely excused.”
Under New York law, a fraud claim can only be maintained when a plaintiff sufficiently alleges a material misrepresentation of fact, knowledge of its falsity, intent to induce reliance, justifiable reliance and damages, according to his decision.
In an April 24, 2013 decision, Justice Shirley Kornreich declined to dismiss similar fraud claims against Deutsche Bank brought by some of these same investors in another RMBS suit, holding that the alleged misrepresentations in offering materials were the “proximate cause” of the investors’ losses.
“The nexus between what defendants knew about the mortgage loans, the information given to the ratings agencies, and the information given to plaintiffs demonstrates a scheme that, if true, is fraudulent on its face,” Kornreich stated in Phoenix Light SF Limited v. ACE Securities, 650422/2012.
Notably, plaintiff’s counsel in the Goldman action, the San Diego-anchored firm Robbins Geller Rudman & Dowd, has tried to get the case before Kornreich, according to court documents, in light of her April 24, 2013 ruling—which is being appealed.
The judge recused herself from the case in November 2012 when it was a much broader complaint against numerous defendant banks that created a conflict for the judge. After the case was transferred to Ramos, he dismissed it with leave to re-plead to obtain separate index numbers for actions against each group of defendants.
In that ruling – coincidentally also issued April 24, 2013 – Ramos said the combined action failed to plead claims with particularity and that allegations of purported fraud were “too vague,” among other things. There are now five other Phoenix Light cases pending before him.
On July 9, 2013, the Goldman case was re-assigned to Justice Marcy Friedman pursuant to a May 2013 administrative order assigning all new RMBS actions to one judge to create more uniformity in the law and prevent the kind of conflict that the statute of limitations in RMBS put-back actions had created in the past.
Goldman’s counsel, Sullivan & Cromwell, opposed the transfer, arguing that since the case was not newly filed, it should remain with Ramos.
Despite Robbins Geller’s explanation in an Oct. 25, 2013 letter to Justice Sherry Klein Heitler, the administrative judge for New York County, that this case featured common issues as Kornreich’s Phoenix Light v. Deutsche Bank case (which by then, had already been ruled upon on the motion to dismiss), the letter request to re-assign the case to Kornreich was denied, and it stayed with Ramos.
During this attempted assignment shuffle, the parties submitted their briefs on the motion to dismiss. Oral arguments were held on January 9.
Goldman Sachs sought to dismiss the claims of fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and rescission for lack of standing, time-barred reasons and failure to state a claim.
Ramos refused to dismiss the action based on issues of standing or statute of limitations’ arguments. But he did hold that as sophisticated investors, the plaintiffs had an affirmative duty to “protect themselves from misrepresentations made during business acquisitions by investigating the details of the transactions,” he wrote, quoting Global Mins. & Metals Corp. v. Holme, 35 AD3d 93 (1st Dept. 2006).
He dismissed the negligent misrepresentation claim on the basis that there was no special relationship between the parties to impose a particular duty by Goldman to relay correct information to the investors. He also dismissed the rescission claim.
Lead counsel for the plaintiffs is Samuel Rudman, a partner at Robbins Geller. Lead counsel for Goldman Sachs is Richard Klapper, a partner at Sullivan & Cromwell. The attorneys did not respond to requests for comment.