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Financial Services Law Insights and Observations


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  • Federal Court Dismisses Fannie Mae Shareholders' Subprime Suit Against Underwriters, Allows Claims to Proceed Against Fannie Mae, Officers


    On August 30, the U.S. District Court for the Southern District of New York ruled on multiple motions to dismiss filed in four consolidated cases pending against Fannie Mae, certain former officers, and several banks, related to Fannie Mae’s exposure to certain risky mortgages. In re Fannie Mae 2008 Secs. Litig., No. 09-2013, 2012 WL 3758537 (S.D.N.Y. Aug. 30, 2012). The main class of shareholders alleges that Fannie Mae and certain of its former officers violated federal securities laws by failing to adequately disclose the company’s exposure to subprime and Alt-A mortgages. Separately, institutional investors brought their own federal securities claims, as well as state statutory and common law fraud and negligence claims against Fannie Mae, certain officers, and certain of its underwriters related to the same alleged misrepresentations. Many of the same allegations are contained in SEC enforcement actions pending against a number of the same individual defendants. In a single opinion, the court dismissed certain of the claims but allowed others to proceed. The court allowed to proceed the federal securities claims brought by the main class and two other plaintiffs against Fannie Mae and certain of its officers with regard to Fannie Mae’s subprime mortgage disclosures and risk management controls, but dismissed all state law claims, including those against Fannie Mae, certain officers, and certain underwriters. The court also dismissed in full a suit that one underwriter faced alone because the plaintiffs failed to present evidence sufficient to show the underwriter intentionally provided investors allegedly false information it received from Fannie Mae.

    Fannie Mae RMBS Subprime

  • SEC Releases Dodd-Frank Financial Literacy Study


    On August 30, the SEC published a study of financial literacy. The Dodd-Frank Act required the SEC to examine (i) existing financial literacy among retail investors, (ii) methods to improve disclosures, (iii) information needed to make informed investment decisions, (iv) disclosure improvements related to expenses and conflicts of interest, (v) existing efforts to educate investors, and (vi) options for increasing investor financial literacy. The report’s findings reveal that currently investors lack knowledge of elementary financial concepts. The SEC staff reports that investors (i) prefer to receive disclosures before making a decision on whether to engage a financial intermediary, (ii) consider information about fees, conflicts of interest, and investment strategy essential, (iii) have mixed preferences on method of delivery for disclosures, but generally prefer that they be written in clear and concise language presented in summary and detailed form. The study concludes that transparency about conflicts of interest may be improved through the use of specific examples, among other things.

    SEC Investment Adviser Financial Literacy

  • SEC Announces First Award Under Whistleblower Program


    On August 21, the SEC announced the first award issued as part of a new whistleblower program mandated by the Dodd-Frank Act. The program is designed to encourage individuals to submit high-quality evidence of securities fraud. Under the program, if a whistleblower submits information that results in a successful SEC enforcement action in which more than $1 million in sanctions is ordered, the SEC will pay up to thirty percent of the money obtained. The SEC stated that it paid the maximum thirty percent, in this case $50,000 of the $150,000 collected thus far from the enforcement action. The SEC did not reveal the matter for which the whistleblower provided evidence of fraud and did not reveal the individual’s name, noting that the Dodd-Frank Act provisions require the SEC to protect any information that could reasonably be expected to reveal a whistleblower’s identity.

    SEC Whistleblower

  • Second Circuit Agrees to Hear Appeal of Challenge to FHFA MBS Suit


    On August 14, the U.S. Court of Appeals for the Second Circuit agreed to hear an interlocutory appeal on an expedited basis from a group of defendant financial institutions and individuals challenging a portion of a district court’s denial of their motion to dismiss claims brought by the FHFA. Fed. Hous. Fin. Agency v. UBS Americas, Inc., No. 12-3207 (2nd Cir. Aug. 14, 2012). The federal housing conservator contends that offering documents provided to Fannie Mae and Freddie Mac in connection with their purchase of billions of dollars of MBS included materially false statements or omitted material information. This case is the first of eighteen such suits the FHFA has filed in an attempt to recoup MBS losses sustained by Fannie Mae and Freddie Mac.


  • FDIC Files MBS Suits On Behalf of Failed Bank


    On August 10, the FDIC filed five actions that collectively seek to recover over $740 million from numerous financial institutions based on claims that the institutions violated federal and state securities laws in the offering of certain residential mortgage-backed securities to a now failed bank. As receiver for the failed bank, the FDIC alleges that the institutions omitted key facts and made numerous false statements of material fact about the securities, including about the credit quality of the mortgage loans that backed the securities. The material misstatements and omissions, according to the FDIC, contributed to substantial losses at the failed bank and subsequent costs to the Federal Deposit Insurance Fund. The suits, which were filed in the U.S. District Courts for the Central District of California (Case No. 12-06911) and the Southern District of New York (Case No. 12-6166), as well as the Circuit Court for Montgomery County, Alabama (Case Nos. 03-CV-2012-901035.00,03-CV-2012-901036.00,03-CV-2012-901037.00), are similar to others filed by the FDIC, the NCUA, and the FHFA.


  • Second Circuit Holds that Allegation of Actual Knowledge Not Necessary for SEC to State Claim Against Aiders and Abettors


    On August 8, the U.S. Court of Appeals for the Second Circuit overturned a district court holding that an individual must be a proximate cause of harm to be found liable as an aider and abettor of securities misconduct. SEC v. Apuzzo, No. 11-696, 2012 WL 3194303 (2nd Cir. Aug. 8, 2012). The SEC's civil enforcement action alleges that the individual defendant assisted another firm and its CFO (the primary violators) in carrying out fraudulent securities transactions. In his motion to dismiss, the defendant argued that the SEC did not adequately allege that he had actual knowledge of the violation or that he rendered substantial assistance to the primary violators. The district court dismissed the case, holding that to properly claim substantial assistance, the SEC must allege facts that support the conclusion that the defendant was a proximate cause of the violation. On appeal, the court invalidated the district court’s proximate cause test and held that to properly allege substantial assistance in support of securities misconduct, the SEC need only allege that the individual associated himself with the undertaking and willfully participated in efforts to make it succeed. After applying this lower threshold, the appeals court reversed and remanded the case, concluding that the SEC sufficiently pled that the defendant aided and abetted the primary violators.


  • Majority of NCUA MBS Claims Survive Motion to Dismiss


    On July 25, the U.S. District Court for the District of Kansas denied a motion to dismiss that sought to dispose of allegations that the defendant financial institutions misled investors in connection with the sale of certain mortgage-backed securities (MBS). Nat. Credit Union Admin. Bd. v. RBS Secs., Inc., No. 11-2340, 2012 WL 3028803 (D. Kan. Jul. 25, 2012). The NCUA brought the suit against several MBS-issuers on behalf of a failed credit union for which it had been appointed conservator, arguing that the MBS issuers’ documents used in offering the MBS contained material misstatements and omissions that led to substantial losses to the investor credit union and the NCUA Stabilization Fund. The facts and arguments are similar to those NCUA has presented in several cases around the country in an effort to recover MBS-related losses for failed institutions. Here, the MBS issuers argued that the NCUA complaint exceeded the statute of limitations, having been filed more than three years from the issuance of the securities. The issuers maintained that the failed institution should have been able to identify the issues within the statutory limit. The court disagreed and held that the federal extender statute applied, allowing NCUA to bring the case beyond the three year limit. Because the government could not have known the details of the offerings until after it became conservator, and given that ambiguous statutes of limitations should be construed in favor of the government, the court determined the NCUA claims were timely. The court also held that the NCUA presented evidence sufficient to maintain a plausible claim of misrepresentation, except with regard to certain credit enhancement language that the NCUA charged was untrue and material.


  • Senators Unveil Bill to Increase SEC Civil Penalties; House Members Propose Competing Bills to Enhance the SEC's Investment Adviser Oversight


    On July 23, Senators Reed (D-RI) and Grassley (R-IA) unveiled legislation to increase statutory limits on SEC civil monetary penalties to $1 million per violation for individuals, and $10 million per violation for entities. The bill, S. 3416, would also allow for the size of penalties to be linked to the scope of harm and associated investor losses, and provide substantially higher penalties for repeat offenders. The legislation follows a letter SEC Chairman Shapiro sent to Senators Reed and Crapo (R-ID) in November 2011, seeking reforms to the SEC’s authority to impose civil penalties.

    On July 24, Representatives Waters (D-CA), Frank (D-MA), and Capuano (D-MA) announced new legislation, H.R. 6204, that would provide the SEC with the authority to impose user fees on investment advisers for the purpose of funding an increase in the number and frequency of SEC examinations. This bill follows an earlier bill from Reps. Bachus (R-AL) and McCarthy (D-NY), H.R. 4624, which also seeks to improve oversight of investment advisers, but through the establishment of self-regulatory organizations overseen by the SEC that investment advisers with retail customers would be required to join.


  • Federal Court Allows Shareholder Suit Alleging Concealment of Mortgage-Related Risks to Proceed


    On July 11, the U.S. District Court for the Southern District of New York declined to dismiss the majority of the claims brought by a putative class alleging that a national bank, certain of its current and former officers and directors, multiple underwriters, and the bank’s third-party accounting auditor, deliberately concealed the bank’s reliance on an electronic registry system and its exposure to MBS loan repurchase claims. Pa. Pub. Sch. Employee’s Ret. Sys. v. Bank of Am. Corp. No. 11-733, 2012 WL 2847732 (S.D.N.Y. Jul. 11, 2012). In this case, a state retirement system alleges on behalf of similarly situated shareholders that the bank misrepresented that it had “good title” to loans even though multiple courts had blocked the bank’s attempts to foreclosure based on the bank’s use of an electronic registry system. The court, in declining to dismiss these claims, held that the use of the registry system “clouded” the bank’s ownership of many loans, thereby causing the bank to publish misleading shareholder information. The court also declined to dismiss allegations that the defendants misstated or omitted the bank’s exposure to repurchase claims. Further, claims that the bank misled investors about its internal controls also survived. Several other claims, including certain claims against the directors and officers were dismissed without prejudice, while other certain other claims against the defendants were dismissed with prejudice.

    RMBS Shareholders

  • SEC Announces Additional Senior Appointments


    On July 5, the SEC announced Norm Champ as the new Director of the SEC’s Division of Investment Management. Mr. Champ has been serving as Deputy Director of the SEC’s Office of Compliance Inspections and Examinations. Prior to joining the SEC in 2010, Mr. Champ was general counsel and a partner at investment management firm Chilton Investment Company. On July 9, the SEC announced that beginning August 6, 2012, Paula Drake will serve as Associate Director, Chief Counsel and Chief Compliance and Ethics Officer. Ms. Drake joins the SEC from Oechsle International Advisors, LLC, where she served as General Counsel and Chief Operating Officer.



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