If class actions are certified, banks may pay more to resolve mortgage backed securities class actions

Bank of America Corp., JPMorgan Chase & Co. and other banks may pay more to resolve claims over their alleged roles in the collapse of a $2.3 trillion mortgage-backed securities market if sophisticated investors are allowed to sue as a group with less savvy ones.

Class action status allows investors to pool financial and legal resources, giving them greater leverage to win larger settlements or verdicts.  The banks, however, have a court ruling on their side that may help fend off such blockbuster cases.  It says class status is barred because some investors are too sophisticated — in fact, because some of them are other banks, including JPMorgan.

“It is possible to be both an alleged perpetrator and victim at the same time,” said Jacob S. Frenkel, a former U.S. Securities and Exchange Commission lawyer now in private practice in Potomac, Maryland.  “It’s unprecedented that you have the most sophisticated institutions as victims, to be in a position where their losses are so great that they have sued.”

The ruling by U.S. District Judge Harold Baer Jr. in Manhattan, favoring defendants Royal Bank of Scotland Group Plc and Ally Financial Inc., held that investors may not sue as a class in part because some of them are being sued over the same claims.  Last month, that ruling was countered by two judges in Judge Baer’s courthouse, both of whom ruled that investors in home-loan backed securities may sue as a class.

Pools of home loans securitized into bonds were a central part of the housing bubble that, once burst, helped push the U.S. into the biggest recession since the 1930s.  Investors have filed class action, or group, lawsuits against at least 16 private issuers of securities backed by mortgages.

Mortgage-bond deals now involved in the class action suits originally held $204.6 billion of loans, an amount that’s fallen to $89 billion amid defaults, borrower refinancing and home sales, according to data compiled by Bloomberg.  Realized losses so far total $26.6 billion with an additional $33.8 billion of remaining loans at least 30 days delinquent.

The investors accuse the defendant financial companies of lying about the quality of the home loans underlying the securities they back, which have deteriorated in value.  The defendant banks argued the housing collapse, rather than any misrepresentation on their part, caused investor losses.

From its $2.3 trillion peak in 2007, the market for mortgage-backed securities has shrunk to $1.21 trillion as of June 30, 2011, according to the Federal Reserve.

The class actions involve some of the same securities over which the Federal Housing Finance Agency sued Bank of America, New York-based Citigroup Inc. and 15 other financial institutions on September 2nd.  Those complaints were filed on behalf of Fannie Mae and Freddie Mac, the mortgage-finance companies under government conservatorship. The securities at issue in those cases total $196 billion.

On August 22, 2011, U.S. District Judge Jed Rakoff in Manhattan issued an opinion explaining why he had earlier ruled that investors, including Mississippi’s public pension system, may sue Charlotte, North Carolina-based Bank of America’s Merrill Lynch unit as a group in a unified lawsuit.

A week earlier, U.S. District Judge Paul A. Crotty in the same court similarly held that investors including the New Jersey Carpenters Health Fund may also collectively pursue their claims against Credit Suisse Group AG (CSGN)’s DLJ Mortgage Capital.

Judge Rakoff and Judge Crotty weren’t swayed by bank arguments that securities buyers couldn’t band together because they were sophisticated investors who knew about deteriorating home-lending practices before the meltdown.  The plaintiffs knew that in part because some of them are also being sued over the same claims, the defendant banks argued.

The inability to sue as a group would mean many investors won’t pursue their claims, plaintiff’s lawyers said.

The three funds seeking to represent the class against Detroit-based Ally bought a total of $1.79 million of the $3.7 million in securities issued, they wrote in court papers.  The case has so far cost more than $3.5 million to litigate and may run to three times that if it goes to trial, showing the need for class action treatment, they wrote.

The securities lost as much as 99 percent of their value soon after they were issued, the investors wrote.

Judge Baer’s ruling in favor of defendant banks, if upheld, “could result in dozens of securities class actions erroneously being denied certification,” the investors wrote in their appeal in the Ally case.  The litigation “would likely be terminated without class certification.”

Class certification has also been a point of contention in cases filed in New York and Seattle over securities issued by IndyMac Bancorp Inc. and Washington Mutual Inc., now part of New York-based JPMorgan.

Investors including Mississippi’s pension system who are suing Goldman Sachs Group Inc. are scheduled to file their motion for class certification in November.

One bank, Wells Fargo & Co., agreed to settle litigation against it for $125 million two weeks before a scheduled class-certification hearing in July.  The case concerns $27.3 billion of certificates sold by the San Francisco-based bank.



Steve Larson
An experienced trial lawyer who handles both hourly and contingent fee cases, Steve has expertise in class actions, antitrust litigation, securities litigation, corporate disputes, intellectual property disputes, unfair competition claims, and disputes involving family wealth. Steve regularly represents individuals and businesses in federal and state court and has obtained class-wide recovery in multiple class actions. A veteran practitioner, Steve's clients value his creative approach to resolving complex litigation matters.


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