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Financial Services Law Insights and Observations

District court grants bank’s partial summary judgment in FDIC RMBS suit



On March 11, the U.S. District Court for the Southern District of New York granted partial summary judgment in favor of the securities arm of a large banking group (defendant) in an FDIC suit alleging securities violations in the offering, sale, or distribution of residential mortgage-backed security (RMBS) certificates to a now failed bank. As receiver for the failed bank, the FDIC filed suit in 2007 concerning, among other things, two senior certificates purchased by the failed bank. The FDIC alleged that the defendant omitted key facts and made numerous false statements of material fact to sell RMBS certificates to the failed bank and additionally performed due diligence on the underlying loans, thus participating in the distribution of the certificates. The agency further alleged that although the defendant “did not directly purchase or sell the senior certificates, [the defendant] is still an underwriter as defined under the Securities Act because of its ‘direct or indirect participation’ in the distribution of the senior certificates.”

The court sided with the defendant, finding that even though its “due diligence and review of prospectus supplements helped facilitate the securities offerings, those activities do not involve the purchase, offer, or sale of the securities and thus are not part of their distribution.” The court reasoned that the prospectus supplements of the senior class certificates specifically state that the defendant was only an underwriter for the subordinated class certificates and not for the senior class certificates purchased by the failed bank. Accordingly, the court granted the defendant’s motion for partial summary judgment, dismissing the two claims with respect to the senior certificates.