A class action filed in New York over $3.4 billion in two mortgage-backed securities offerings ruled in favor of the banks that issued the MBS reaffirms that the law does not bend to political correctness.
“Together we stand” may be valid in life but not in a court of law. The U.S. District Court for the Southern District of New York denied class certification in a mortgage-backed securities lawsuit that alleged misstatements about residential mortgage loan origination practices in the offering documents for securities backed by those mortgage loans.
Issued by Judge Harold Baer Jr., the ruling is the first on class certification among multiple MBS actions pending in venues around the country, according to Simpson Thacher & Bartlett attorneys who represented the Royal Bank of Scotland and Residential Capital LLC. (The New Jersey Carpenters Vacation Fund et al v. The Royal Bank of Scotland Group Plc et al.)
Claimed under Sections 11, 12 and 15 of the Securities Act of 1933, the lawsuit sought certification of a class of investors who purchased $3.4 billion worth of securities in two offerings.
The judge denied “motions for class certification,” arguing that plaintiffs did not meet “their burden of showing, by a preponderance of the evidence.”
The class certification was denied on two grounds.
First, the court held that the knowledge of each individual investor regarding the underwriting guidelines and practices that were allegedly misstated in the offering documents is questionable and may derive from various factors including their respective levels of sophistication and the time that they made their purchases of the securities.
Another issue that led to the ruling was lack of homogeneity of the plaintiffs’ individual merits as part of a single lawsuit that did not deserve “class treatment.” The proposed class consisted of large, institutional and sophisticated investors likely to have competing interests and could pursue their own claims.
Hence, class action treatment would not be the best method for resolving investors’ claims.
In class action cases the court may have to consider the interest of separate class members as they related to the prosecution or defense of separate actions, the specifics of any litigation already commenced by or against class members, or whether it makes sense to concentrate the litigation in a particular forum.
These are some of the difficulties “likely to be encountered in the management of a class action,” the judge wrote.
He argued, “Class treatment is particularly appropriate where it allows large groups of claimants to bundle into a single action common claims that are too small to pursue individually.”
Class treatment is deemed appropriate in “negative value cases,” where the individual interest of each class member’s interest in the litigation is less than the cost to maintain an individual action, which was not the case with this lawsuit.
Moreover, addressing all claims as part of the same class would present obstacles to the management of the litigation since “the court would have to hear significant individualized evidence on, among other things, each purchaser's knowledge and damages.”
Finally, the class members would have significantly different characteristics given that in addition to pension funds, as proposed, the classes would include “hedge funds and mutual funds, which were deeply involved in and profited from residential mortgage-backed securities and other structured finance products.”
Therefore, while part of the same class treatment, individual class members would have competing interests that would affect the prosecution of the action.
