In Re Lehman Bros. Mortgage-Backed Securities
650 F.3d 167
2d Cir.2011Background
- This is a consolidated appeal from three class-action complaints against rating agencies seeking § 11 and § 15 liability for misstatements in mortgage-backed securities offerings.
- Plaintiffs include Union Plaintiffs (Operating Engineers funds, New Jersey Carpenters Health Fund, Boilermakers-Blacksmith National Pension Trust), Wyoming State Treasurer and Wyoming Retirement System, and Vaszurele Limited.
- Plaintiffs allege that rating agencies (S&P, Moody's, Fitch) functioned as underwriters or control persons in Lehman/Indymac securitizations of mortgage pass-through certificates rated AAA.
- The securitizations involved sponsors, depositors, issuers, trusts, and various underwriters; certificates passed through tranches with credit enhancements, where AAA ratings were pivotal to sale.
- Rating agencies allegedly aided in structuring transactions by modeling and advising on loan pools and credit enhancements, thereby aiding distribution, which plaintiffs contend makes them underwriters or control persons.
- The district court dismissed the complaints, and the appeals challenge the underwriter and control-person theories and request leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are rating agencies underwriters under § 11(a)(5)? | Rating Agencies qualify as underwriters under 77b(a)(11). | Underwriter liability requires participation in the distribution; agencies did not purchase, offer, or sell for distribution. | No; agencies did not participate in distribution as required. |
| Do rating agencies qualify as control persons under § 15(a)? | Rating Agencies controlled primary violators via advice and direction in structuring deals. | Advice and guidance do not show the power to direct management/policies of violators. | No; allegations insufficient to show control. |
| Was the district court's denial of leave to amend an abuse of discretion? | Amendment could cure pleading deficiencies with new information from investigations. | Amendment would be futile; no new facts identified. | Not an abuse of discretion; denial affirmed. |
Key Cases Cited
- Pinter v. Dahl, 486 U.S. 622 (Supreme Court 1988) (participation not extending § 11 liability to collateral participants)
- SEC v. Kern, 425 F.3d 143 (2d Cir. 2005) (underwriter meaning tied to distribution steps; limits broad expansion)
- In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (2d Cir. 2010) (Section 11 pleading standards; stricter liability framework)
- SEC v. North Am. Research & Dev. Corp., 424 F.2d 63 (2d Cir. 1970) (participation in distribution context for underwriter liability)
- Harden v. Raffensperger, Hughes & Co., 65 F.3d 1392 (7th Cir. 1995) (qualified independent underwriter liability context)