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From Securities Regulation Daily, October 30, 2014

Loss causation defense cannot stave off Mass Mutual’s RMBS claims

By John M. Jascob, J.D.

The federal district court in Massachusetts has awarded partial summary judgment to Massachusetts Mutual Life Insurance Company (Mass Mutual) in eleven related actions brought by the insurer asserting misrepresentations  in the offering documents of residential mortgage-backed securities (RMBS). The court held that the defendant underwriters could not assert a lack of loss causation as an affirmative defense to Mass Mutual’s claims because the loss causation defense does not exist under the Massachusetts Uniform Securities Act (Act) (Massachusetts Mutual Life Insurance Co. v. Residential Funding Co., October 29, 2014, Mastroianni, M.).

Background. The actions arose out of the defendants’ sales of RMBS certificates to Mass Mutual that occurred between 2005 and 2007. Mass Mutual sought to to rescind the RMBS purchases under Section 410 of the Act, alleging that the defendants made material misrepresentations by stating that the loans were underwritten using prudent underwriting standards. In fact, Mass Mutual claimed, the loan originators engaged in “wholesale abandonment of underwriting standards” by systematically disregarding the stated loan underwriting guidelines.

After Mass Mutual moved for summary judgment, the defendants, a group which included affiliates of Goldman Sachs, JPMorgan Securities, and Merrill Lynch, asserted that the poor performance of the loans was due solely to the economic downturn. Although acknowledging that loss causation was not an element that Mass Mutual must prove, the defendants argued that they could assert loss causation as an affirmative defense.  Among other things, the defendants contended that an amendment to the federal Securities Act clarified that a loss causation defense was always available and that the Massachusetts statute should be interpreted in coordination with federal law.

Loss causation defense unavailable. The court held, however, that the defendants were barred from asserting a loss causation affirmative defense as a matter of law. The court looked in part to the Massachusetts Supreme Judicial Court’s decision in Marram v. Kobrick Offshore Fund, Ltd. (Mass. 2004). InMarram, the state high court found that the thrust of Section 410(a)(2) is both “redressive” and “preventive,” and that a tainted transaction is voidable “regardless of the actual cause of the investor’s loss.” This direct and specific language, especially when read in the context of the cases and secondary sources referenced by the Marram court, strongly indicated that a loss causation affirmative defense was not available under Section 410(a)(2).

Importantly, the court noted, Securities Act Section 12(2), on which the Massachusetts statute was modeled, was amended in 1995 by the Private Securities Litigation Reform Act (PSLRA) to specifically include a loss causation affirmative defense. The defendants had argued that the PSLRA merely “clarified” that a loss causation affirmative defense has always been available under Section 12(2), based on language in a Senate report stating that the federal law was being amended “to clarify that defendants may raise the absence of ‘loss causation’ as an affirmative defense.” The court was not persuaded, however. Even assuming that the Senate’s use of the word “clarify” was intended to signify a retrospective interpretation of the statute, rather than a prospective change, the court found that the views contained in a 1995 report shed no light on the intent of Congress in 1933. More fundamentally, if Section 12(2) had always included a loss causation affirmative defense, then there would have been no need for Congress to amend the statute.

While courts construing the Massachusetts securities laws should look to federal law for guidance, the court found it unreasonable to conclude that a provision explicitly contained in the federal statute but missing from the state statute should nonetheless govern the latter. And although the plain language of the Act does not prohibit a loss causation defense, the court agreed with Mass Mutual’s argument that the explicit inclusion of two affirmative defenses in Section 410(a)(2) implies that a loss causation defense is not available. Even if other courts have permitted affirmative defenses which were not explicitly contained in other states’ securities laws, that did nothing to explain why a loss causation defense should be available under Massachusetts law, the court stated.  

Finally, the defendants failed to show how preclusion of a loss causation defense was inconsistent with the purpose and history of the Massachusetts Uniform Securities Act. If anything, such preclusion seemed entirely consistent with the purpose and history of the statute, as explained in Marram. Accordingly, the court granted partial summary judgment to Mass Mutual.

The case is No. 11-30035-MGM.

Attorneys: Bernadette Harrigan, Massachusetts Mutual Life Insurance Co. and Curran M. Walker (Quinn Emanuel Urquhart & Sullivan, LLP) for Massachusetts Mutual Life Insurance Co. Erika H. Burk (Simpson Thatcher & Bartlett LLP) and Kathy B. Weinman (Collora LLP) for UBS Securities LLC, Deutshe Bank Securities, Inc. and Mortgage Asset Securitization Transactions, Inc. Christopher G. Lee (Simpson Thatcher & Bartlett LLP) for RBS Securities Inc. Lillian S. Grossbard (Cravath, Swaine & Moore LLP) for Credit Suisse Securities [USA] LLC. Jonathan Sablone (Nixon Peabody LLP) for DLJ Mortgage Capital, Inc.

Companies: Massachusetts Mutual Life Insurance Co.; UBS Securities LLC; Deutshe Bank Securities, Inc.; Mortgage Asset Securitization Transactions, Inc.; RBS Securities Inc.; Credit Suisse Securities [USA] LLC; DLJ Mortgage Capital, Inc.

MainStory: TopStory FraudManipulation MassachusettsNews

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