932 F. Supp. 2d 1095
C.D. Cal.2013Background
- FHFA sues as conservator of Fannie Mae and Freddie Mac over RMBS from Countrywide entities.
- Securitization involved Depositor Defendants, Underwriter Defendants, and securitized trusts issuing certificates.
- Offering Documents allegedly contained four types of misstatements relating to LTV, underwriting, credit ratings, and owner-occupancy data.
- Court applies New York choice-of-law for negligent misrepresentation; New York conduct-regulating standard applies.
- Court addresses whether FHFA plausibly pleads misstatements, reliance, scienter, and loss causation, and assesses several defendants' dismissal arguments.
- Court also considers who bears liability under Section 12(a)(2) and DC blue sky laws, and analyzes control-liability theories and Bank of America successor-liability claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether LTV misstatements are plausibly alleged | FHFA alleges AVM shows higher true LTVs than disclosed | Countrywide argues margin of error not disclosed defeats plausibility | Yes; misstatements plausibly pled despite missing margin-of-error disclosure |
| Whether underwriting guideline deviations were misstatements | FHFA alleges broad deviations from stated underwriting standards | Disclosures may immunize; deviations too small to constitute systemic abandonment | Yes; underwriting-abandonment allegations plausibly state misstatement at pleading stage |
| Whether credit ratings were based on false information | Defendants supplied false data to rating agencies inflating ratings | Allegations boilerplate; need stricter pleading | plausible; ratings misstatements supported by allegations of false data to agencies |
| Whether owner-occupancy data was actionable | Data misstated in Offering Documents as self-reported by borrowers | Countrywide merely republished borrower-supplied data; no misstatement | Not pled; owner-occupancy data not actionable misstatement at this stage |
| Whether negligent misrepresentation and aiding-and-abetting claims survive | FHFA alleges special relationship and knowledge of misstatements | No special relationship; negligence/abetting deficiencies | negligent misrepresentation and aiding-and-abetting claims dismissed; primary misstatements plausible but these claims fail |
Key Cases Cited
- Kaplan v. Rose, 49 F.3d 1363 (9th Cir. 1994) (elements of material misstatement standard under Section 11)
- In re Korean Air Lines Co., Ltd., 642 F.3d 685 (9th Cir. 2011) (choice-of-law rules; special relationship discussion in NY law context)
- Allstate Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d 1164 (C.D. Cal. 2011) (misrepresentations in underwriting; reliance and materiality at pleading stage; Rule 8/9(b) standards)
- UBS Ams., Inc. v. Bank of America, 858 F. Supp. 2d 306 (S.D.N.Y. 2012) (credit ratings claims; reliance on false information to agencies)
- In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326 (S.D.N.Y. 2011) (statements about underwriting and securitization; pleading standards)
- Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009) (pleading false statements for Section 11; required of 9(b) claims)
- Mass. Mut. Life Ins. Co. v. Res. Funding Co., LLC, 843 F. Supp. 2d 191 (D. Mass. 2012) (owner-occupancy/valuation claims; pleading standards and misstatement analysis)
- Pinter v. Dahl, 486 U.S. 622 (1988) (Section 12(a)(2) buyer-seller privity and 'offers or sells' framework)
- In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326 (S.D.N.Y. 2011) (pleading standards for misstatement claims under securities laws)