RBS Settlement Caps Long Slog for Cohen Milstein
Cohen Milstein Sellers & Toll announced Wednesday that Royal Bank of Scotland would pay $275 million to resolve claims that it duped investors into buying securities backed by shoddy home loans. The firm says it's the third-largest class action settlement in a federal mortgage-backed securities case. For partner Joel Laitman, it's been a long time coming.
The Royal Bank of Scotland suit is just one of three financial crisis cases spearheaded by Laitman and his partner Christopher Lometti that were nearly extinguished by the courts, only to be brought back to life last year. Known as the "Harborview" case after the name of the securities offerings at issue, the RBS class action was among the first filed by MBS investors after the subprime mortgage market meltdown. As such, it's been a test case for key legal issues in the MBS wars, making for a roller coaster ride for the lawyers.
"It's been a journey," Laitman said.
Two of Cohen Milstein's pension funds clients, the New Jersey Carpenters Health Fund and the Boilermaker Blacksmith National Pension Trust, enlisted the firm to file the class action in 2008, alleging that RBS failed to inform them that the mortgage loans collateralizing the triple-A-rated Harborview securities didn't meet underwriting standards.
The next four years were filled with setbacks for the plaintiffs. The banks issued many billions of dollars of mortgage-backed securities in separate offerings under the aegis of "shelf" registration statements. But could you file a case on behalf of investors who purchased other securities offerings issued under the same statement, or even different shelf statements by the same bank? Bank defendants, including RBS, argued that you couldn't. In March 2010, U.S. District Judge Harold Baer in Manhattan agreed, ruling on a motion to dismiss that the two plaintiffs couldn't assert claims related to offerings that they didn't actually buy, and knocking the 15 original offerings in the complaint down to two. In a parallel case Cohen Milstein filed against Citigroup, UBS AG, and Residential Funding Securities Corporation (dubbed the RALI case), Baer hacked all but four of 59 offerings off the case on similar grounds.
The banks also argued in their opposition to class certification later that year that what investors knew about the offering differed from investor to investor, making both cases unsuitable for class treatment. In 2011 Judge Baer again sided with the banks, denying class certification on those grounds.
The two MBS class actions were effectively ended. But Laitman and Lometti fought back, persuading the U.S. Court of Appeals for the Second Circuit to review Baer's findings. The Second Circuit affirmed in May 2012, but acknowledged that its ruling was based on a limited record. On remand, Cohen Milstein won a bid for further discovery on the investor knowledge issue and marshaled new evidence. Baer reversed himself in April 2013, certifying a limited class of investors who purchased their securities within 10 trading days of the offerings.
With the cases still gutted, Laitman and his brethren in the plaintiffs bar got some very good news in September 2012, when the Second Circuit sided with MBS investors in an unrelated class action against Goldman Sachs. The court ruled that named plaintiffs could have standing in some situations to assert class claims regarding securities that they never purchased if the misstatement alleged was common to all of the offerings.
Baer and other judges took note. Last May, reversing his initial decision on standing, Baer ruled that Cohen Milstein could pursue securities fraud claims against RBS related to offerings with a combined face value of $25 billion. As in the case against Goldman, Baer ruled, the Harborview case also involved identical defendants, the same two shelf registration statements, and loans originated by common originators. And in December, Baer issued a combined order in the Harborview and RALI cases granting Cohen Milstein's motion to expand the number of offerings back to nearly their original size. (One defendant, Ally Financial Inc., settled two months later for $100 million as part of a bankruptcy case.)
Cohen Milstein's remaining MBS class actions are now on a fast track. The RALI class action against Citi and UBS is expected to go to trial in early 2015. Next Wednesday, Laitman will argue in another case against Credit Suisse that the judge should certify an additional offering on top of the one he certified in 2011.