In back to back discovery rulings last week, Manhattan Justice Shirley Kornreich put a lid on how much information plaintiffs could obtain from Credit Suisse and Goldman Sachs about their roles structuring residential mortgage loan securities in the run-up to the financial crisis.
With numerous fraud actions against financial houses having already cleared the motion to dismiss stage, the Commercial Division is beginning to weigh in on the scope of discovery, as the Kornreich rulings reflect.
In MBIA Insurance v. Credit Suisse, 603751/2009, the judge said she was not convinced that emails MBIA wanted Credit Suisse to produce would reveal “something materially worse than has already been produced that might tip the scales of this case in MBIA’s favor.”
“MBIA (or any plaintiff in complex litigation) cannot reasonably expect to uncover every single instance in which a Credit Suisse employee said something that makes its RMBS conduct, at a minimum, a public relations disaster,” she said.
MBIA, represented by Patterson Belknap Webb & Tyler and Kasowitz Benson Torres & Friedman, argued the documents were material and necessary to help prove claims that Credit Suisse fraudulently misrepresented its RMBS practices.
Credit Suisse, represented by Orrick, Herrington & Sutcliffe, countered that the request was overbroad, unduly burdensome and would incur significant extra costs.
A day later, Kornreich similarly denied an Australian hedge fund’s motion to compel Goldman Sachs and non-party Clayton Holdings to turn over emails and other internal communications about due diligence performed on mortgage loans between Jan. 1, 2005 and June 30, 2007.
In Basis Yield Alpha Fund v. Goldman Sachs, 652996/2011, Kornreich said that compelling the production of such reports would be “the first step down the road to countless tangential issues that will further delay and confuse this case.”
The judge also clarified the role of discovery in proving fraud, stating that while the so-called Clayton reports are “some of the most important discovery” in RMBS transactions, the same does not hold true for CDO transactions, which are RMBS derivatives.
Basis Yield Alpha Fund is suing Goldman over two collateralized debt obligations known as Point Pleasant 2007-1 and Timberwolf 2007-1, which led to alleged losses of $67 million for the hedge fund, now in the process of liquidation.
Basis Yield is represented by Lewis Baach. Goldman Sachs is represented by Boies, Schiller & Flexner.
Motions that are pending in Commercial Division cases indicate that other rulings on the scope of discovery are on the way.
For instance, U.S. Bank National Association, as plaintiff trustee for mortgage investors, has asked Justice Melvin Schweitzer to order Bank of America and Merrill Lynch to produce certain categories of documents in a breach of contract suit over a failure to repurchase defective mortgage loans.
According to motion papers, these categories of documents include the banks’ internal assessment of their loan repurchase obligations; expert reports from prior cases relating to Merrill’s RMBS practices between 2005 and 2006; and documents the banks had turned over in government investigations.
“The requests have been outstanding for months, yet defendants have failed to produce a single repurchase analysis or surveillance document,” the plaintiff’s June 27, 2014 motion in U.S. Bank National Association v. Merrill Lynch Mortgage Lending, 654403/2012, stated.
“The court should order immediate production of these documents,” Quinn Emanuel Urquhart & Sullivan argued in court papers.
Per a stipulation filed with the court, the banks’ response brief is due Wednesday.