Individual Defendants in FHFA Suits Lose Another Round
The banks targeted by the Federal Housing Finance Agency haven't had many victories in the litigation over some $200 billion in residential mortgage–backed securities they sold to Fannie Mae and Freddie Mac. The Manhattan federal judge adjudicating all but one of the cases has been unreceptive to their arguments (see here, here, and here), and the U.S. Court of Appeals for the Second Circuit hasn't helped them out either. This week individual defendants named in the cases that haven't yet settled were dealt another setback. On Tuesday, Manhattan U.S. District Court Judge Denise Cote slapped down a last-ditch motion on behalf of roughly 60 individuals who signed registration statements on the loss-generating RMBS.
Sullivan & Cromwell's Richard Klapper, who represents individual Goldman Sachs defendants as well as the bank itself, argued in a joint defense brief that the individual signers aren't liable because the allegedly false statements in the RMBS documents appeared in follow-on supplements that the defendants didn't sign. Under a 2005 change to a Securities and Exchange Commission rule applying Section 11 of the 1933 Securities Act, only those who sign a prospectus that included false statements can be held liable.
Judge Cote flatly rejected the argument. In her ruling, she concluded that the SEC didn't intend in its 2005 rule change to lift liability from an entire class of individuals simply because the wrongful statements were made on unsigned supplements. The signatories were still liable, she wrote, if supplements include different information from the original prospectus. In the case of RMBS offerings, the original, signed shelf statements only generally describe the parameters of the securities, she pointed out. Investors actually relied on the unsigned supplements, filed when the securities are marketed, for an analysis of the soundness of underlying assets, she wrote.
The judge also took a jab at the weakness of this argument. "The defendants have not argued that they, their counsel or any commentator had ever understood [this rule change] to alter individual liability under Section 11 in the manner they suggest here," she wrote. "The novelty of this argument may explain why the defendants did not include it in any of the dozen or so motions to dismiss they filed in these coordinated actions in 2012."
Previously, the individual defendants had lost an argument that the FHFA's claims were time-barred because the clock started ticking on the filing of the shelf statement.
The FHFA originally sued 17 FHFA banks along with individuals who worked there. It has since settled with General Electric Co., Citigroup Inc., UBS AG and JPMorgan Chase & Co.
Quinn Emanuel Urquhart & Sullivan's Philippe Selendy, who is representing FHFA, declined to comment, as did Sullivan & Cromwell.