Second Circuit Reinstates MBS Class Action, Loosens Requirements for Pleading Damages

Class Action RMBS

On September 6, the U.S. Court of Appeals for the Second Circuit held that a plaintiff has class standing to assert the claims of purchasers of securities backed by mortgages originated by the same lenders that originated the mortgages backing the named plaintiff’s securities, even when the securities were purchased from different trusts. NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., No 11-2762, 2012 WL 3854431 (2nd Cir. Sep. 6, 2012). In this case, the plaintiff, an institutional purchaser of certain mortgage-backed securities, filed suit on behalf of a putative class alleging that the offering documents contained material misstatements regarding the mortgage loan originators’ underwriting guidelines, the property appraisals of the loans, and the risks associated with the certificates. The district court dismissed the case, holding the named plaintiff lacked standing to bring claims on behalf of proposed class members that purchased securities from trusts other than the trusts from which the plaintiff bought securities. The district court also held that the plaintiff failed to allege a cognizable loss because the plaintiff knew the certificates might not be liquid and therefore could not allege injury based on a hypothetical price. On appeal, after acknowledging that putative class members purchased certificates issued through seventeen separate offerings backed by separate pools of loans, the court held that the named plaintiff raises a “sufficiently similar set of concerns” to allow it to seek to represent proposed class members who purchased securities backed by loans made by common originators. In overturning the district court with regard to the plaintiff’s ability to plead a cognizable injury, the court reasoned that while it may be difficult to value illiquid assets, “the value of a security is not unascertainable simply because it trades in an illiquid market.” The court reversed in favor of the plaintiff and remanded the case for further proceedings.