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From Securities Regulation Daily, April 9, 2013

Some Federal Claims Over Credit Suisse RMBS Role Go On; Other Federal, State Claims Tossed

By Mark S. Nelson, J.D.

Many federal securities claims and all state claims against Credit Suisse Securities (USA) LLC and others arising from allegedly failed residential mortgage-backed securities (RMBS) deals had to be dismissed on statute of limitations grounds, but the remaining viable federal claims may proceed, according to the federal court in Kansas. The case arose from the National Credit Union Administration’s (NCUA) becoming conservator for three federal credit unions that had invested in the RMBS deals (National Credit Union Administration Board v. Credit Suisse Securities (USA) LLC, April 8, 2013, Lungstrum, J.).

Venue and limitations. The court found venue in the Kansas district court proper because the defendants’ contacts with Kansas met the broad "transacting business" requirement.

By contrast, the limitations issues were more complex. The court held that federal claims involving 12 RMBS certificates had to be dismissed because they were brought more than three years after the NCUA became conservator. Tolling could not save these claims.

The remaining federal claims regarding 8 RMBS certificates may proceed because an extended limitations period displaced all other limitations periods (including Securities Act Section 13) when the NCUA became conservator for the failed credit unions. Although the court held that that the NCUA cannot invoke the parties’ tolling agreement to toll the extender law, the court also refused to deny tolling under the Supreme Court’s American Pipe opinion.

However, the court dismissed all California and Kansas law claims because the NCUA never claimed that American Pipe tolling saved these claims.

Materiality. Credit Suisse challenged the sufficiency of the NCUA’s complaint. Specifically, Credit Suisse argued that many allegations were immaterial or conclusory.

NCUA’s chief claim was that Credit Suisse and the other defendants allegedly misrepresented their fidelity to RMBS underwriting standards. Credit Suisse countered that the defendants had issued warnings to investors about nonconforming loans and other exceptions to the underwriting standards. The NCUA replied, however, that the plaintiffs were allegedly unaware of the scope of defendants’ departures from these standards.

Relying heavily on National Credit Union Administration Board v. RBS Securities, Inc. (DKan July 25, 2012), the court found that the NCUA’s allegations were plausible in the motion to dismiss context. The court also rejected Credit Suisse’s argument that the NCUA failed to allege a link between Credit Suisse and the mortgage originators. Again, relying on RBS Securities, Inc., the court found the complaint was not conclusory because the NCUA had alleged that at least one of six specific originators was involved in each of eight RBMS certificates.

Moreover, the court said that the NCUA’s claims about loan-to-value (LTV) ratios were plausible. Here, Credit Suisse had argued that it disclosed possible borrower fraud, that LTV ratios can change, and that appraisals are merely opinions. The NCUA had claimed that many appraisals based on LTV ratios were fact-based and still too high. In siding with the NCUA, the court rejected Credit Suisse’s argument that the NCUA must link alleged LTV wrongdoing to specific loans contained in the RMBS certificates.

Lastly, the court found that Credit Suisse could be liable for uncritically disseminating materials prepared by others regarding owner-occupancy rates. Credit Suisse had argued that its disclosures did not predict future owner-occupancy rates and that Footbridge Ltd. v. Countrywide Home Loans, Inc. (SDNY September 28, 2010) barred the NCUA’s claim because there can be no liability where the offering documents stated their reliance on borrowers’ representations.

The court here rejected Footbridge in favor of FHFA v. UBS Americas, Inc. (SDNY 2012), which refused to read scienter into the strict liability plan of the Securities Act. Reciting from UBS Americas, Inc., the court said it shared that court’s worries about blunting Securities Act liability when defendants can raise an affirmative defense based on their due diligence as to third parties’ materials.

The case is No. 12-2648-JWL.

Attorneys: David C. Frederick (Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC), George A. Zelcs (Korein Tillery, LLC) and Norman E. Siegel (Stueve Siegel Hanson, LLP) for National Credit Union Administration Board. James D. Oliver (Foulston Siefkin, LLP) and Lauren A. Moskowitz (Cravath, Swaine & Moore, LLP) for Credit Suisse Securities, LLC and Credit Suisse First Boston Mortgage Securities Corp. Elizabeth Raines (Hughes, Hubbard & Reed, LLP) for Indymac MBS, Inc.

Companies: Credit Suisse Securities, LLC; Credit Suisse First Boston Mortgage Securities Corp.; Indymac MBS, Inc.; U.S. Central Federal Credit Union; Western Corporate Federal Credit Union; Southwest Corporate Federal Credit Union

MainStory: TopStory KansasNews SecuritiesOfferings

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