In what could be a troubling trend, judges in two cases filed by investors of residential mortgage-backed securities have certified class actions.
The first certification came on Aug. 16 in U.S. District Court for the Southern District of New York in a case against DLJ Mortgage Capital Inc. The lead plaintiff in the case, the New Jersey Carpenters Health Fund, alleges violations of the Securities Act of 1933.
The case revolves around $2.39 billion in private-label RMBS that the plaintiffs claim they acquired based on misleading offering documents. The securities plummeted in value after they were purchased.
The class includes investors in Home Equity Mortgage Trust, Series 2006-5.
“In determining whether class certification is appropriate, a district court must first ascertain whether the claims meet the preconditions of Rule 23(a) of numerosity, commonality, typicality, and adequacy,” U.S. District Judge Paul A. Crotty wrote in his decision. “It may then consider granting class certification where it finds [under Rule 23(b)(3)] that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy … [T]he preponderance of the evidence standard applies to evidence proffered to establish Rule 23’s requirements.”
Then, on Monday, U.S. District Judge Jed S. Rakoff certified a class action against Merrill Lynch & Co. Inc. that was filed by lead plaintiff Public Employees’ Retirement System of Mississippi — reaffirming a June 15 certification. That case was consolidated from four different cases all alleging violations of the Securities Act of 1933.
Merrill Lynch argued that the plaintiffs had failed to establish the requirements for class certification as outlined in Rule 23 of the Federal Rules of Civil Procedure.
“In particular, they argued that ‘critical issues concerning the existence and materiality of the alleged misstatements/omissions, loss causation, the expiration of the limitations period, and plaintiffs’ knowledge of the alleged misstatements … cannot be proved by generalized proof common to all class members,'” the ruling said.
But Rakoff disagreed with Merrill Lynch and concluded that the plaintiffs did satisfy all of the class certification requirements. He explained that securities lawsuits “are especially amenable to class action resolution,” and noted that the class action approach to the case will provided “an enormous savings in judicial resources.”
The class in the Merrill Lynch case includes investors in certain RMBS issued by Merrill Lynch in 2006 and 2007. Among the originators of loans in the securities are American Home Loan, First Franklin Mortgage, Ownit Mortgage and WMC.
The certifications contrast a decision earlier this year in the same court.
In January, certification was denied in a case filed against Residential Capital LLC.
The judge in that case, U.S. District Judge Harold Baer Jr., denied class certification because some investors were sophisticated and the question of the plaintiffs’ knowledge would need to be decided on a case-by-case basis, MBS attorney Eric Creizman explained.
“Plaintiffs have not met their burden of showing, by a preponderance of the evidence, that all the Rule 23 requirements have been satisfied,” Baer wrote in his decision. “Ultimately, the individualized issues presented by the putative class members in both the RALI and Harborview cases predominate, and class treatment is not superior.”
But the decision, which now sits before the Second Circuit Court of Appeals, was rejected by Judge Crotty and Judge Rakoff, according to Creizman.
The latest opinions are “a big problem for financial institution defendants,” Creizman said.
NEW JERSEY CARPENTERS HEALTH FUND, On Behalf of Itself and All Others Similarly Situated, Plaintiff, -against- DLJ MORTGAGE CAPITAL, INC., et al., Defendants.
Case 1:08-cv-05653-PAC (U.S. District Court for the Southern District of New York).
PUBLIC EMPLOYEES’ RETIREMENT SYSTEM OF MISSISSIPPI, et al.,Plaintiffs, -v- MERRILL LYNCH & CO., INC., et al., Defendants.
Case No. 08 Civ. 10841 (JSR) (U.S. District Court for the Southern District of New York).
NEW JERSEY CARPENTERS HEALTH FUND, NEW JERSEY CARPENTERS VACATION FUND And BOILERMAKER BLACKSMITH NATIONAL PENSION TRUST, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs – against – RESIDENTIAL CAPITAL, LLC, et al., Defendants.
Case No. 08 CV 8781 (HB) (U.S. District Court for the Southern District of New York).
