Embed Size (px)
Citation preview
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
G
OO
DIN
, MA
CBR
IDE,
SQ
UER
I, D
AY
& L
AM
PREY
, LLP
A
TTO
RN
EYS
AT
LAW
SA
N F
RA
NC
ISC
O
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
GOODIN, MACBRIDE, SQUERI, DAY & LAMPREY, LLP ROBERT A. GOODIN, State Bar No. 061302 [email protected] FRANCINE T. RADFORD, State Bar No. 168269 [email protected] ANNE H. HARTMAN, State Bar No. 184556 [email protected] 505 Sansome Street, Suite 900 San Francisco, California 94111 Telephone: (415) 392-7900 Facsimile: (415) 398-4321 GRAIS & ELLSWORTH LLP DAVID J. GRAIS (admitted pro hac vice) [email protected] KATHRYN C. ELLSWORTH (admitted pro hac vice) [email protected] OWEN L. CYRULNIK (admitted pro hac vice) [email protected] 40 East 52nd Street New York, New York 10022 Telephone: (212) 755-0100 Facsimile: (212) 755-0052 Attorneys for Plaintiff Federal Home Loan Bank of San Francisco
IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA
IN AND FOR THE CITY AND COUNTY OF SAN FRANCISCO
FEDERAL HOME LOAN BANK OF SAN FRANCISCO,
Plaintiff, v.
DEUTSCHE BANK SECURITIES INC.; et al.,
Defendants.
No. CGC-10-497839 No. CGC-10-497840 PLAINTIFF’S MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO DEFENDANTS’ DEMURRERS TO, AND MOTIONS TO STRIKE, THE FIRST AMENDED COMPLAINTS Date: July 29, 2011 Time: 9:30 a.m. Dept.: 304 Hon. Richard A. Kramer
FEDERAL HOME LOAN BANK OF SAN FRANCISCO,
Plaintiff, v.
CREDIT SUISSE SECURITIES (USA) LLC, F/K/A CREDIT SUISSE FIRST BOSTON LLC; et al.,
Defendants.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
G
OO
DIN
, MA
CBR
IDE,
SQ
UER
I, D
AY
& L
AM
PREY
, LLP
A
TTO
RN
EYS
AT
LAW
SA
N F
RA
NC
ISC
O
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
TABLE OF CONTENTS
INTRODUCTION ......................................................................................................................... 1!
SUMMARY OF THE AMENDED COMPLAINTS .................................................................... 4!
I.! THE CLAIMS IN THE AMENDED COMPLAINTS ARE NOT BARRED BY ANY STATUTE OF LIMITATIONS OR REPOSE. ........................................................ 6!
A.! The Bank Did Not Discover And Could Not Have Discovered The Facts Necessary To State Its Claims More Than Two Years Before It Filed These Actions. .................................................................................................................. 6!
1.! Defendants Misstate The Standards For When The Statutes Of Limitations Begin To Run On All Of The Bank’s Claims. ....................... 6!
2.! The Facts That Defendants Rely On Do Not Establish That The Statute Of Limitations Began To Run Before March 15, 2008. .............. 15!
B.! The Statutes Of Limitations On Many Of The Bank’s Claims Were Tolled By The Filing Of Class Actions. .......................................................................... 29!
1.! The Filing Of A Class Action Automatically Tolls The Statute Of Limitations On Claims Of Members Of The Putative Class. .................. 29!
2.! None Of Defendants’ Arguments Defeats The Tolling Of The Statute Of Limitations. ............................................................................. 32!
3.! Statutes Of Repose May Be Tolled Under American Pipe. ..................... 44!
C.! The Statutes Of Limitations on the Bank’s Common Law Claims Are Even Longer Than Two Years. ..................................................................................... 46!
1.! Claims For Rescission Of Contract Are Governed By A Four-Year Statute Of Limitations. ............................................................................. 46!
2.! Claims For Negligent Misrepresentation Are Governed By A Three-Year Statute Of Limitations. ......................................................... 48!
D.! The Amended Complaints Adequately Plead That The Bank’s Claims Are Not Time-Barred. ................................................................................................. 49!
II.! THE AMENDED COMPLAINTS ALLEGE FOUR CATEGORIES OF ACTIONABLE UNTRUE OR MISLEADING STATEMENTS. .................................. 52!
A.! Understated Loan-To-Value Ratios ..................................................................... 52!
1.! The Amended Complaints Demonstrate In Three Ways That The LTVs That Defendants Stated In The Prospectus Supplements Were Untrue Or Misleading. ............................................................................. 53!
2.! Defendants Mischaracterize The Allegations In The Amended Complaints Based On The Computer Valuation Model. ......................... 54!
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-ii-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
B.! Overstated Number Of Primary Residences ........................................................ 55!
C.! Undisclosed Disregard Of Underwriting Standards ............................................ 56!
D.! Misleading Ratings .............................................................................................. 59!
III.! NONE OF DEFENDANTS’ EXCUSES FOR THEIR UNTRUE OR MISLEADING STATEMENTS DEFEATS THE AMENDED COMPLAINTS. .......... 60!
A.! Remedies For Breach of Contract Do Not Supplant The California Or Federal Securities Laws. ...................................................................................... 60!
B.! LTVs And Credit Ratings Are Not “Non-Actionable Opinions.” ....................... 66!
1.! Untrue Or Misleading Statements Give Rise to Liability Even If They Involve An Element of Judgment. .................................................. 66!
2.! California Courts, Including This Court, Have Held That Appraisals and Credit Ratings Are Actionable Under California Law. .................... 68!
3.! Defendants Ignore Binding California Authority And Rely On Only A Few Federal Decisions That Are Not Persuasive Authority For This Court. ............................................................................................... 73!
4.! Even If Defendants’ Untrue Or Misleading Statements Were Completely Subjective Opinions, The Bank Has Sufficiently Alleged That They Were False. ............................................................... 75!
C.! That Defendants Repeated Untrue Or Misleading Statements By Others Is No Excuse Under the California Corporate Securities Law Or The 1933 Act. ....................................................................................................................... 76!
D.! Defendants May Not And Did Not Disclaim Their Statutory Duty. ................... 78!
1.! The Effectiveness Of Disclaimers Is A Question Of Fact That Cannot Be Decided On Demurrer. ........................................................... 79!
2.! Untrue Or Misleading Statements Of Present Or Past Fact Can Never Be Cured By Cautionary Language, Nor Liability For Them Avoided By Disclaimers. ......................................................................... 80!
3.! The Disclaimers In The Prospectus Supplements Did Not Relate Clearly And Specifically To The Untrue Or Misleading Statements. ..... 81!
4.! LTVs, Appraised Values, And Undisclosed Additional Liens ................ 82!
5.! Primary Residences ................................................................................. 84!
6.! Underwriting Standards ........................................................................... 85!
7.! Credit Ratings .......................................................................................... 87!
IV.! THE AMENDED COMPLAINTS SUFFICIENTLY ALLEGE THAT DEFENDANTS’ UNTRUE OR MISLEADING STATEMENTS WERE MATERIAL. .................................................................................................................... 88!
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-iii-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
V.! THE COMPLAINTS ADEQUATELY ALLEGE RELIANCE FOR PURPOSES OF PLEADING NEGLIGENT MISREPRESENTATION. ............................................ 91!
VI.! THE AMENDED COMPLAINTS ADEQUATELY PLEAD A CLAIM FOR RESCISSION OF WRITTEN CONTRACT. .................................................................. 93!
VII.! THE AMENDED COMPLAINTS ADEQUATELY PLEAD A CLAIM UNDER SECTION 12(A)(2). ........................................................................................................ 96!
A.! Issuers May Be Liable Under Section 12(a)(2). .................................................. 96!
B.! The Bank Has Sufficiently Alleged That It Purchased Its Certificates Pursuant To Public Offerings. ............................................................................. 99!
VIII.! THE ALLEGATIONS OF CONTROL PERSON LIABILITY STATE A CLAIM FOR RELIEF UNDER SECTION 15 OF THE SECURITIES ACT. ............................. 99!
IX.! CONCLUSION .............................................................................................................. 101!
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-iv-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
TABLE OF AUTHORITIES
CASES!Abels v. Bank of America, No. C 11-0208 PJH, 2011 WL 1362074
(N.D. Cal. Apr. 11, 2011) ..................................................................................................... 46 Abu Dhabi Commercial Bank v. Morgan Stanley & Co.,
651 F. Supp. 2d 155 (S.D.N.Y. 2009) .................................................................................. 71 Addison v. State, 21 Cal. 3d 313 (1978) ............................................................................... 32, 40 Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143 (1987) ....................... 31 Albano v. Shea Homes Ltd. Partnership, 634 F.3d 524 (9th Cir. 2011) ..................................... 45 Alexander v. Evans, No. 88 Civ. 5309 (MJL),
1993 WL 427409 (S.D.N.Y. Oct. 15, 1993) ......................................................................... 92 American Airlines, Inc. v. County of San Mateo, 12 Cal. 4th 1110 (1996) ................................ 12 American Equity Investments Life Insurance Co. v. S.E.C.,
613 F.3d 166 (D.C. Cir. 2010) .............................................................................................. 98 American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) ..................................... passim Anschutz Corp. v. Merrill Lynch & Co., Inc., No. C 09-03780,
2011 WL 1134321 (N.D. Cal. Mar. 27, 2011) ............................................................... 71, 75 Apollo Capital Fund v. Roth Capital Partners, LLC, 158 Cal. App. 4th 226 (2007) ................. 75 Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503 (1994) ........................... 33 Arivella v. Lucent Technologies Inc., 623 F. Supp. 2d 164 (D. Mass. 2009) ............................. 45 Backe v. Novatel Wireless, Inc., 642 F. Supp. 2d 1169 (S.D. Cal. 2009) ...................... 67-68, 100 Bacon v. City of Los Angeles, 843 F.2d 372 (9th Cir. 1988) ...................................................... 32 Bangert v. Narmco Materials, Inc., 163 Cal. App. 3d 207 (1984) ............................................. 35 Barabino v. Citizens Automobile Finance, Inc., No. 2:10-cv-00035-MCE-KJN,
2010 WL 3911395 (E.D. Cal. Oct. 5, 2010) ......................................................................... 47 Barnebey v. E.F. Hutton & Co., 715 F. Supp. 1512 (1989) ................................................. 77, 80 Basch v. Ground Round, Inc., 139 F.3d 6 (1st Cir. 1998) .................................................... 42, 43 Becker v. McMillin Construction Co., 226 Cal. App. 3d 1493 (1991) ........................... 30, 34, 35 Bell v. Showa Denko, 899 S.W. 2d 749 (Tex. App. 1995) ......................................................... 37 Berry v. Valence Technology, Inc., 175 F.3d 699 (9th Cir. 1999) .............................................. 24 Berson v. Applied Signal Technologies Inc., 527 F.3d 982 (9th Cir. 2008) ............................... 83 Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992) ............................................................. passim Boam v. Trident Financial Corp., 6 Cal. App. 4th 738 (1992) .................................................. 48 Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass Through
Certificates, Series AR1, 748 F. Supp. 2d 1246 (W.D. Wash. 2010) ............................ passim Bojorquez v. Gutierrez, No. C 09-03684 SI,
2010 WL 2925154 (N.D. Cal. July 26, 2010) ...................................................................... 47 Bowden v. Robinson, 67 Cal. App. 3d 705 (1977) ..................................................................... 48
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-v-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Bright v. Central Pacific Mortgage Co., No. 97AS06021, 1999 WL 34806021 (Cal. Super. Ct. Nov 23, 1999) ............................................................ 69
Broberg v. Guardian Life Insurance Co. of America, 171 Cal. App. 4th 912 (2009) ................ 48 Buttitta v. Lawrence, 178 N.E. 390 (Ill. 1931) ........................................................................... 67 California Public Employees’ Retirement System v. Moody’s Corp., No. CGC-09-
490241, 2010 WL 2286924 (Cal. Super. Ct. May 24, 2010) (Kramer, J). ........................... 68 Careau & Co. v. Security Pacific Business Credit, Inc.,
222 Cal. App. 3d 1371 (1990) .............................................................................................. 56 Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837 (1984) ........................................................................................................ 97, 98 Childs v. California, 144 Cal. App. 3d 155 (1983) .................................................................... 77 Citiline Holdings, Inc. v. iStar Fin. Inc., 701 F. Supp. 2d 506 (S.D.N.Y. 2010) ....................... 97 City Capital Associates Ltd. Partnership v. Interco Inc.,
860 F.2d 60 (3d Cir. 1988) ................................................................................................... 98 City of Ann Arbor Employees’ Retirement System v. Citigroup Mortgage Loan
Trust Inc., No. CV 08- 01418, 2010 WL 6617866 (E.D.N.Y. Dec. 23, 2010) ........... 4, 63, 66 City of Pontiac General Employees’ Retirement System v. MBIA, Inc.,
637 F.3d 169 (2d Cir. 2011) ................................................................................................. 10 Clemens v. DaimlerChrysler Corp., 534 F.3d 1017 (9th Cir. 2008) .......................................... 35 Cleveland v. Internet Specialties West, Inc., 171 Cal. App. 4th 24 (2009) ........................... 22-23 Cohen v. S & S Contruction Co., 151 Cal. App. 3d 941 (1983) ................................................. 72 Collier v. City of Pasadena, 142 Cal. App. 3d 917 (1983) ......................................................... 32 Committee on Children’s Television v. General Foods Corp.,
35 Cal. 3d 197 (1983) ..................................................................................................... 56, 58 Consolidated Rail Corp. v. Portlight, Inc., 188 F.3d 93 (3d Cir. 1999) ..................................... 95 Crandall v. Parks, 152 Cal. 772 (1908) ...................................................................................... 72 Credit Suisse First Boston Corp. v. ARM Financial Group., Inc., No. 99 Civ.
12046 WHP, 2001 WL 300733 (S.D.N.Y. Mar. 28, 2001) .................................................. 82 Crocker-Anglo National Bank v. Kuchman, 224 Cal. App. 2d 490 (1964) ................................ 94 Crown Cork & Seal Co. v. Parker, 462 U.S. 345 (1983) ..................................................... 30, 34 Cullen v. Margiotta, 811 F.2d 698 (2d Cir. 1987) ...................................................................... 31 Davis v. McGuigan, 325 S.W.3d 149 (Tenn. 2010) ................................................................... 67 DDJ Management LLC v.Rhone Group LLC , 15 N.Y.3d 147 (2010) ....................................... 92 Degulis v. LXR Biotechnology, Inc., 928 F. Supp. 1301 (S.D.N.Y. 1996) ................................. 96 Deveny v. Entropin, Inc., 139 Cal. App. 4th 408 (2006) ...................................................... 14, 15 Doe v. City of Los Angeles, 42 Cal. 4th 531 (2007) ................................................................... 58 Donovan v. RRL Corp., 26 Cal. 4th 261 (2001) ......................................................................... 95 E-Fab, Inc. v. Accountants, Inc. Services, 153 Cal. App. 4th 1308 (2007) .................... 10, 47, 49 Eidson v. Washington, 32 P.3d 1039, 1050 (Wash. Ct. App. 2001) ........................................... 70 Eisenbaum v. Western Energy Resources., Inc., 218 Cal. App. 3d 314 (1990) ......................... 13
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-vi-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Employees’ Retirement System of Government of the Virgin Islands v. J.P. Morgan Chase & Co., No. 09 Civ. 3701(JGK), 2011 WL 1796426 (S.D.N.Y. May 10, 2011) ............................................................... passim
Erickson v. Kiddie, No. C-85-4798-MHP, 1986 WL 544 (N.D. Cal. 1986) .............................. 51 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) .................................................................... 80 Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968) ......................... 76-77 Europe and Overseas Commodity Traders, S.A. v. Banque Paribas London,
147 F.3d 118 (2d Cir. 1998) ................................................................................................. 98 Favila v. Katten Muchin Rosenman LLP, 188 Cal. App. 4th 189 (2010) .................................. 50 Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995) ....................................................................... 79 Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities, LLC,
No. GD09-016892, 2010 WL 5472006 (Pa. Com. Pl November 29, 2010). ................ passim Fifty Associates v. Prudential Insurance Co., 450 F.2d 1007 (9th Cir. 1971) ........................... 70 Footbridge Ltd. Trust v. Countrywide Financial Corp., No. 10 Civ. 367(PKC),
2011 WL 907121 (S.D.N.Y. Mar. 16, 2011). .................................................................. 44-45 Footbridge Ltd. v. Countrywide Home Loans, Inc., No. 09 Civ. 4050,
2010 WL 3790810 (S.D.N.Y. Sept. 28, 2010) .............................................................. passim Ford Motor Credit Co. v. Daugherty, No. CIV. S-04-2344 LKK/JFM,
2006 WL 1153806 (E.D. Cal. May 2, 2006) ........................................................................ 48 Fox v. Ethicon Endo-Surgery, Inc., 35 Cal. 4th 797 (2005) ............................................... 7, 8, 10 Fox v. Pollack, 181 Cal. App. 3d 954 (1986) ............................................................................. 88 Garber v. Legg Mason, Inc., 347 Fed. Appx. 665 (2d Cir. 2009) .............................................. 90 Geneva Towers Ltd. Partnership v. City and County of San Francisco,
29 Cal.4th 769 (2003) ............................................................................................................. 6 Genlyte Group, LLC v. Workers Compensation Appeals Board.,
158 Cal. App. 4th 705 (2008) .......................................................................................... 12-13 Grisham v. Philip Morris U.S.A., Inc., 40 Cal. 4th 623 (2007) ................................. 10, 11, 27-28 Gurfein v. Sovereign Group, 826 F. Supp. 890 (E.D. Pa. 1993) ................................................ 80 Gusenkov v. Washington Mutual Bank, FA, No. C 09-04747 SI,
2010 WL 725815 (N.D. Cal. Feb. 26, 2010) ........................................................................ 46 Gustafson v. Alloyd Co., 513 U.S. 561 (1995) ........................................................................... 91 Guthrie v. Times-Mirror Co., 51 Cal. App. 3d 879 (1975) ........................................................ 95 Haas v. Pittsburgh National Bank, 526 F.2d 1083 (3d Cir. 1975) ............................................. 43 Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969) ................................................................................ 85 Harazim v. Lynam, 267 Cal. App. 2d 127 (1968) ....................................................................... 73 Harris v. Miller, 196 Cal. 8 (1925) ........................................................................................ 72-73 Hatfield v. Halifax PLC, 564 F.3d 1177 (9th Cir. 2009) ..................................................... passim Hernandez v. City of El Monte, 138 F.3d 393 (9th Cir. 1998) ................................................... 32
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-vii-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Hildes v. Arthur Andersen, No. 08-cv-0008-BEN (RBB), 2010 WL 4811975 (S.D. Cal. Nov. 8, 2010) ........................................................................ 45
Hobart v. Hobart, 26 Cal. 2d 412 (1945) ................................................................................... 16 Hyatt Corp. v. Occidental Fire & Casualty Co. of North Carolina,
801 S.W.2d 382 (Mo. Ct App. 1991) ................................................................................... 37 Hydro-Mill Co. v. Hayward, Tilton & Rolapp Insurance Associates,
115 Cal. App. 4th 1145 (2004) ............................................................................................. 49 In re Activision Securities Litigation, No. C-83-4639(A) MHP,
1986 WL 15339 (N.D. Cal. Oct. 20, 1986) .......................................................................... 45 In re Adaptive Broadband Securities Litigation, No. C 01-1092,
2002 WL 989478 (N.D. Cal. Apr. 2, 2002) ........................................................................ 100 In re Cadence Design Systems, Inc. Securities Litigation,
692 F. Supp. 2d 1181(N.D. Cal. 2010). .............................................................................. 100 In re Convergent Technologies Securities Litigation, 948 F.2d 507 (9th Cir. 1991) ................. 82 In re Countrywide Financial Corp. Securities Litigation,
588 F. Supp. 2d 1132 (C.D. Cal. 2008) ........................................................................ 67, 100 In re Crazy Eddie Securities Litigation, 747 F. Supp. 850 (E.D.N.Y. 1990) ............................. 44 In re Cylink Securities Litigation, 178 F. Supp. 2d 1077 (N.D. Cal. 2001) ............................. 100 In re Daou Systems, Inc., 411 F.3d 1006 (9th Cir. 2005) ........................................................... 67 In re Electronic Data Systems Corp., 305 F. Supp. 2d 658 (E.D. Tex. 2004) ........................... 51 In re Elscint, Ltd. Securities Litigation, 674 F. Supp. 374 (D. Mass. 1987) .............................. 44 In re Enron Corp. Securities, Derivative & ERISA Litigation,
235 F. Supp. 2d 549 (S.D. Tex. 2002) ............................................................................. 84-85 In re Enron Corp. Securities, Derivative, & ERISA Litigation,
529 F. Supp. 2d 644 (S.D. Tex. 2006) .................................................................................. 43 In re Flag Telecom Holdings, Ltd. Securities Litigation,
352 F. Supp. 2d 429 (S.D.N.Y. 2005) ................................................................ 40, 41, 43, 81 In re Hanford Nuclear Reservation Litigation, 534 F.3d 986 (9th Cir. 2008) ........................... 30 In re IndyMac Mortgage-Backed Securities Litigation,
718 F. Supp. 2d 495 (S.D.N.Y. 2010) ........................................................................... passim In re IPO Securities Litigation, 358 F. Supp. 2d 189 (S.D.N.Y. 2004) ..................................... 85 In re IPO Securities Litigation, Nos. 21 MC 92SAS, 01 Civ. 9741, 01 Civ. 10899,
2004 WL 3015304 (S.D.N.Y. Dec. 27, 2004) ...................................................................... 43 In re Issuer Plaintiff IPO Antitrust Litigation, No. 00 Civ. 7804(LMM),
2002 WL 31132906, (S.D.N.Y. Sept. 25, 2002) .................................................................. 43 In re Lehman Bros. Securities & ERISA Litigation,
684 F. Supp. 2d 485 (SDNY 2010) ............................................................................ 4, 59, 87 In re Lehman Bros. Securities & ERISA Litigation, No. 09 MD 02017(LAK),
2011 WL 1453790 (S.D.N.Y. Apr. 13, 2011) ...................................................................... 44 In re National Australia Bank Securities Litigation, No. 03 Civ. 6537(BSJ),
2006 WL 3844463 (S.D.N.Y. Nov. 8, 2006) ........................................................................ 43
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-viii-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
In re National Golf Properties, Inc., No. CV 02-1383GHK(RZX), 2003 WL 23018761, (C.D. Cal. Mar. 19, 2003) ................................................................... 96
In re Noreen G., 181 Cal. App. 4th 1359 (2010) ........................................................................ 16 In re Phar-Mor, Inc. Securities Litigation, 848 F. Supp. 46 (W.D. Pa. 1993) ............... 77, 78, 80 In re Prudential Securities Ltd. Partnerships Litigation,
930 F. Supp. 68 (S.D.N.Y. 1996) ......................................................................................... 82 In re Raytheon Securities Litigation, 157 F. Supp. 2d 131 (D. Mass. 2001) .............................. 67 In re Sirrom Capital Corp. Securities Litigation,
84 F. Supp. 2d 933 (M.D. Tenn. 1999) ................................................................................. 96 In re Software Toolworks, Inc., 50 F.3d 615 (9th Cir. 1995) ..................................................... 77 In re Taxable Municipal Bond Securities Litigation, Civ. A. MDL No. 863,
1993 WL 591418 (E.D. La. Dec. 29, 1993) ......................................................................... 71 In re Twinlab Corp. Securities Litigation, 103 F. Supp. 2d 193(E.D.N.Y. 2000) ...................... 96 In re Urethane Antitrust Litigation, 663 F. Supp. 2d 1067 (D. Kan. 2009) ............................... 37 In re Wachovia Equity Securities Litigation, 753 F. Supp. 2d 326 (S.D.N.Y. 2011) ................. 74 In re Washington Mutual, Inc. Securities Litigation,
694 F. Supp. 2d 1192 (W.D. Wash. 2009) ........................................................................... 70 In re Wells Fargo Mortgage-Backed Certificates Litigation,
712 F. Supp. 2d 958 (N.D. Cal. 2010) ........................................................................... passim In re Wells Fargo Mortgage-Backed Certificates Litigation,
No. 09-cv-01376-LHK, 2010 WL 4117477 ......................................................................... 15 In re Wells Fargo Mortgage-Backed Certificates Litigation, No. 5:09-cv-01376-
LHK, 2010 U.S. Dist. LEXIS 106687 (N.D. Cal. Oct. 5, 2010) .......................................... 73 In re West Virginia Rezulin Litigation, 585 S.E.2d 52 (W. Va. 2003) ....................................... 37 In re WorldCom Securities Litigation, 346 F. Supp. 2d 628 (S.D.N.Y. 2004) ..................... 76, 84 In re WorldCom Securities Litigation, 496 F.3d 245 (2d Cir. 2007) .......................................... 30 In re Worlds of Wonder Securities Litigation, 694 F. Supp. 1427 (N.D. Cal. 1988) ............... 100 Institutional Investors Group v. Avaya, Inc., 564 F. 3d 242 (3d Cir. 2009). .............................. 81 Insurance Underwriters Clearing House, Inc. v. Natomas Co.,
184 Cal. App. 3d 1520 (1986) .............................................................................................. 89 Intelligraphics, Inc. v. Marvell Semiconductor, Inc., No. C07-02499 JCS,
2009 WL 330259 (N.D. Cal. Feb. 10, 2009) ........................................................................ 64 Iowa Public Employees’ Retirement System v. M.F. Global Ltd.,
620 F.3d 137 (2d Cir. 2010) ............................................................................................ 80-81 Johnson v. A. W. Chesterton Co., No. RG09457974,
2009 WL 6361070 (Cal. Sup. Ct. Sept. 11, 2009) ................................................................ 52 Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103 (1988) .................................................................. passim Joseph v. Wiles, 223 F.3d 1155(10th Cir. 2000) ........................................................................ 45 Korwek v. Hunt, 827 F.2d 874 (2d Cir. 1987) ............................................................................ 42 Kramas v. Security Gas & Oil Inc., 672 F.2d 766 (9th Cir. 1982) ............................................. 14 Kray Cabling Co. v. County of Contra Costa, 39 Cal. App. 4th 1588 (1995) ........................... 13
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-ix-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Kulberg v. Washington Mutual Bank, No. 10-CV-1214 W(BLM), 2011 WL 1431512 (S.D. Cal. Apr. 14, 2011) ....................................................................................... 46
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991) ........................ 44 Lazar v. Superior Court, 12 Cal. 4th 631 (1996) ........................................................................ 93 Lee v. Grand Rapids, 384 N.W.2d 165 (Mich. Ct. App. 1986) .................................................. 37 Levine v. Diamanthuset, Inc. 722 F. Supp. 579 (N.D. Cal. 1989) .............................................. 14 Lincoln National Life Insurance Co. v. Donaldson, Lufkin & Jenrette Securities
Corp. 9 F. Supp. 2d 994 (N.D. Ind. 1998) ............................................................................ 78 Livid Holdings v. Salomon Smith Barney, Inc., 416 F.3d 940 (9th Cir. 2005) ..................... 79, 81 Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383 (5th Cir. 2010) ......... passim Luther v. Countrywide Financial Corp., No. B222889,
2011 WL 1879242 (Cal. Ct. App. May 18, 2011). ............................................................... 38 M&T Bank Corp. v. Gemstone CDO VII, Ltd., No. 7064/08,
2009 WL 921381 (N.Y. Sup. Ct. Apr. 7, 2009) ................................................................... 71 Maestas v. Sofamor Danek Group, 33 S.W. 3d 805 (Tenn. 2000) ............................................. 37 Maine State Retirement System v. Countrywide Financial Corp., No. 2:10-CV-
0302 MRP, slip op. (C.D. Cal. May 5, 2011) ....................................................................... 97 Maine State Retirement System v. Countrywide Financial,
722 F. Supp. 2d 1157 (C.D. Cal. 2010) .................................................................... 15, 45, 46 Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011) ................................................. 89 MBIA Insurance Corp. v. Royal Bank of Canada., No. 12238/09,
2010 WL 3294302 (N.Y. Sup. Ct. Aug. 19, 2010) ............................................................... 71 McDonald v. Antelope Valley Community College District, 45 Cal. 4th 88 (2008) .............. 36-37 McKenzie v. Kaiser-Aetna, 55 Cal. App. 3d 84 (1976) .............................................................. 94 Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010) ................................................................. 8, 10 Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007) ........................... 92 Milkovich v. Lorain Journal Co., 497 U.S. 1 (1990) .................................................................. 66 Miller v. Federal Kemper Insurance Company.,
508 A.2d 1222 (Pa. Super. Ct. 1986) .................................................................................... 43 Miller v. Thane International, Inc., 519 F.3d 879 (9th Cir. 2008) ....................................... 83, 88 Mills v. Forestex Co., 108 Cal. App. 4th 625 (2003) ................................................................. 33 Mirkin v. Wasserman, 5 Cal. 4th 1082 (1993) ................................................................. 14-15, 48 Mitchell v. Frank R. Howard Memorial Hospital, 6 Cal. App. 4th 1396 (1992) ....................... 32 Mojica v. 4311 Wilshire, LLC, 131 Cal. App. 4th 1069 (2005) ................................................ 32 Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) ........................................... 98 Multifamily Captive Group, LLC v. Assurance Risk Managers, Inc.,
629 F. Supp. 2d 1135 (E.D. Cal. 2009) ................................................................................ 64 Murphy v. BDO Seidman, LLP, 113 Cal. App. 4th 687 (2003) .................................................. 93 National Cable & Telecommunications Association v. Brand X Internet Services,
545 U.S. 967 (2005) .............................................................................................................. 98
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-x-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Nelson v. Indevus Pharmaceuticals., Inc., 142 Cal. App. 4th 1202 (2006) .............................. 8, 9 Neu-Visions Sports, Inc. v. Soren/McAdam/Bartells, 86 Cal. App. 4th 303 (2000) ................... 70 New Jersey Carpenters Health Fund v. DLJ Mortgage Capital, Inc.,
No. 08 Civ. 5653(PAC), 2010 WL 1473288 (S.D.N.Y. Mar. 29, 2010) .... 4, 73-74, 82, 86-87 New Jersey Carpenters Health Fund v. Residential Capital, LLC,
No. 08 CV 8781 HB, 2011 WL 1630349 (S.D.N.Y. Apr. 28, 2011) ............................. 62, 64 New Jersey Carpenters Health Fund v. Residential Capital, LLC, No. 08-cv-8781
2010 WL 1257528 (SDNY Mar. 31, 2010) ...................................................................... 4, 88 New Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group PLC,
720 F. Supp. 2d 254 (SDNY 2010) ............................................................................ 4, 74, 86 No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West
Holding Corp., 320 F.3d 920 (9th Cir. 2003) ............................................................... 99, 100 Nunez v. Bank of America, N.A., No. C 11-0081,
2011 WL 1058545 (N.D. Cal. Mar. 23, 2011) ..................................................................... 46 OCM Principal Opportunities Fund v. CIBC World Markets Corp.,
157 Cal. App. 4th 835 (2007) ......................................................................................... 92, 93 Ogier v. Pacific Oil & Gas Development Corp., 132 Cal. App. 2d 496 (1955) ......................... 73 Oracle USA, Inc. v. XL Global Services, Inc., No. C 09-00537 MHP,
2009 WL 2084154 (N.D. Cal. July 13, 2009) ...................................................................... 64 P. Stoltz Family Partnership v. Daum, 355 F.3d 92 (2d Cir. 2004) ........................................... 81 Padgett v. Phariss, 54 Cal. App. 4th 1270 (1997) ................................................................. 70-71 People v. Figueroa, 41 Cal.3d 714 (1986) ................................................................................. 80 People v. Stoll, 49 Cal. 3d 1136 (1989) ...................................................................................... 16 People v. Woodhead, 43 Cal. 3d 1002 (1987) ............................................................................ 13 Pinter v. Dahl, 486 U.S. 622 (1988) ..................................................................................... 96, 98 Platt Electrical Supply, Inc. v. EOFF Electrical, Inc.,
522 F.3d 1049 (9th Cir. 2008) .............................................................................................. 49 Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.,
632 F.3d 762 (1st Cir. 2011) ................................................................................. 3, 26, 70, 87 Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.,
658 F. Supp. 2d 299 (D. Mass. 2009) ................................................................. 26, 42, 70, 89 Popoola v. MD-Individual Practice Ass’n, 230 F.R.D. 424 (D. Md. 2005) ............................... 43 Portwood v. Ford Motor Co., 701 N.E. 2d 1120 (Ill. 1998) ....................................................... 37 Powell v. Oak Ridge Orchards Co., 84 Cal. App. 714 (1927) ................................................... 73 Primavera Familienstiftung v. Askin, 130 F. Supp. 2d 450 (S.D.N.Y. 2001) ............................ 37 Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996) ...................................................................... 81 Public Employees’ Retirement System v. Goldman Sachs, No. 09 CV 1110(HB),
2011 WL 135821 (S.D.N.Y. Jan. 12, 2011) ............................................................ 3-4, 58, 82 Public Employees’ Retirement System of Mississippi v. Merrill Lynch & Co.,
714 F. Supp. 2d 475 (S.D.N.Y. 2010) .................................................................. 2, 25, 59, 86 Ravitch v. Price-Waterhouse, 793 A.2d 939 (Pa. Super. Court. 2002) ...................................... 37
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-xi-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Richard P. v. Vista Del Mar Childcare Service, 106 Cal. App. 3d 860 (1982) ......................... 75 Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979 (2004) .............................................. 64 Rochambeau v. Brent Exploration, Inc., 79 F.R.D. 381 (D. Colo. 1978) .................................. 14 Rojo v. Kliger, 52 Cal. 3d 65 (1990) ........................................................................................... 11 Rose v. Arkansas Valley Environmental & Utility Authority,
562 F. Supp. 1180 (W.D. Mo. 1983) ........................................................................ 41, 43, 44 Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App. 3d 200 (1983) ....................................... 33 Salameh v. Tarsadia Hotels, No. 09CV2739 DMS (CAB),
2010 WL 3339439 (S.D. Cal. Aug. 24, 2010) ...................................................................... 47 Salazar-Calderon v. Presidio Valley Farmers Association,
765 F.2d 1334 (5th Cir. 1985) .............................................................................................. 42 Saliter v. Pierce Bros. Mortuaries, 81 Cal. App. 3d 292 (1978) .......................................... 50, 52 Samuels v. Mix¸ 22 Cal. 4th 1 (1999) ................................................................................... 50, 51 San Francisco Unified School District v. W.R. Grace & Co.,
37 Cal. App. 4th 1318 (1995) ........................................................................................ passim SEC v. Dain Rauscher, Inc., 254 F.3d 852 (9th Cir. 2001) ........................................................ 85 SEC v. McNulty, 137 F.3d 732 (2d Cir.1998) ............................................................................. 98 SEC v. Tambone, 597 F.3d 436 (1st Cir. 2010) .......................................................................... 93 Shalala v. Guernsey Mem. Hosp., 514 U.S. 87 (1995) ............................................................... 67 Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir. 1992) ............................................ 89, 90 Shartsis Friese LLP v. JP Morgan Chase & Co., No. 08-1064 SC,
2009 WL 1286733 (N.D. Cal. May 6, 2009) ........................................................................ 48 Sime v. Malouf, 95 Cal. App. 2d 82 (1949) ................................................................................ 23 Sitrick v. Citigroup Global Markets, Inc., No. CV 05-3731 AHM (PJW),
2009 WL 1298148 (C.D. Cal. Apr. 30, 2009) ................................................................ 47, 48 Slayton v. American Express Co., 604 F.3d 758 (2d Cir. 2010) ................................................. 81 Small v. Fritz Companies, Inc., 30 Cal. 4th 167 (2003) ............................................................. 93 Soderberg v. McKinney, 44 Cal. App. 4th 1760 (1996) ........................................................ 68-69 Sound Appraisal v. Wells Fargo Bank, N.A., 717 F. Supp. 2d 940 (N.D. Cal. 2010) ................ 69 Stack v. Nolte, 29 Wn. 188 (1902) .............................................................................................. 67 Staub v. Eastman Kodak, 726 A.2d 955 (N.J. Super. Ct. 1999) ................................................. 37 Stevens v. Novartis Pharmaceuticals Corp., 247 P.3d 244 (Mont. 2010) ............................. 37-38 Sun v. Equitable Life Assurance Society of the United States, No. C 01-01553,
2001 WL 764486 (N.D. Cal. June 25, 2001) ........................................................................ 48 Sutco Construction Co. v. Modesto High School District,
208 Cal. App. 3d 1220 (1989) ......................................................................................... 11-12 Tain v. Hennessey, No. 03-CV-1481 IEG (NLS),
2009 WL 4544130 (S.D. Cal. Dec. 1, 2009) ........................................................................ 47 Thomas v. Gilliland, 95 Cal. App. 4th 427 (2002) ..................................................................... 32 Toombs v. Leone, 777 F.2d 465 (9th Cir. 1985) ......................................................................... 51
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-xii-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Torkie-Tork v. Wyeth, 739 F. Supp. 2d 887 (E.D. Va. 2010) ............................................... 37, 38 Tosti v. City of Los Angeles, 754 F.2d 1485 (9th Cir. 1985) ................................................ 30, 31 TSC Industries Inc. v. Northway, Inc., 426 U.S. 438 (1976). ................................................ 88-89 Tsereteli v. Residential Asset Securitization Trust 2006-A8,
692 F. Supp. 2d 387 (S.D.N.Y. 2010) ........................................................................... passim Twin City Fire Insurance Co. v. Philadelphia Life Insurance Co.,
795 F.2d 1417 (1986) ........................................................................................................... 95 Unruh-Haxton v. Regents of the University of California,
162 Cal. App. 4th 343 (2008) ................................................................................................. 9 Vaccariello v. Smith, 763 N.E.2d 160 (Ohio 2002) .................................................................... 37 Valenzuela v. Kraft, Inc., 801 F.2d 1170 (9th Cir. 1986) ........................................................... 40 Ventura County National Bank v. Macker, 49 Cal. App. 4th 1528 (1996) ................................ 49 Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) .................................................. 75 Wade v. Danek Medical, Inc., 182 F.3d 281 (4th Cir. 1999) ...................................................... 37 Warden v. Crown American Realty Trust, No. Civ.A. 96-25J,
1998 WL 725946 (W.D. Pa. Oct. 15, 1998) ......................................................................... 44 Wasatch Property Management v. Degrate, 35 Cal. 4th 1111 (2005) ....................................... 12 Welding, Inc. v. Bland County Service Authority, 541 S.E. 2d 909 (Va. 2001) ......................... 37 Western Filter Corp. v. Argan, Inc., 540 F.3d 947, 951-52 (9th Cir. 2008) ............................... 49 Wood v. Kalbaugh, 39 Cal. App. 3d 926 (1974) ........................................................................ 94
STATUTES!15 U.S.C. § 77k ............................................................................................................... 51, 76, 77 15 U.S.C. § 77l ......................................................................................................... 51, 76, 77, 96 15 U.S.C. § 77m ................................................................................................................... 15, 51 15 U.S.C. § 77n ........................................................................................................................... 65 15 U.S.C. § 77o ........................................................................................................................... 99 15 U.S.C. § 77s ...................................................................................................................... 97-98 CAL. BUS. & PROF CODE § 11302 ............................................................................................... 69 CAL. BUS. & PROF CODE § 11319 ............................................................................................... 69 CAL. CIV. PROC. CODE § 1689 ..................................................................................................... 94 CAL. CIV. PROC. CODE § 337 .................................................................................................. 7, 46 CAL. CIV. PROC. CODE § 338 ....................................................................................... 7, 15, 47, 49 CAL. CIV. PROC. CODE § 339 ...................................................................................................... 49 CAL. CIV. PROC. CODE §340.6 .................................................................................................... 50 CAL. COM. CODE § 2725(2) ......................................................................................................... 12 CAL. CORP. CODE § 25401 ........................................................................................ 48, 49, 76, 88 CAL. CORP. CODE § 25501 ................................................................................................... passim CAL. CORP. CODE § 25506 ................................................................................................... passim
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-xiii-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
CAL. CORP. CODE § 25506.1 ........................................................................................... 12, 13, 15 CAL. CORP. CODE § 25507 .......................................................................................................... 13 CAL. CORP. CODE § 25701 .......................................................................................................... 65
REGULATIONS!17 C.F.R. § 229.1100-1123 ........................................................................................................ 89 17 C.F.R. § 230.159A ............................................................................................................ 96-98 17 C.F.R. § 230.405 .................................................................................................................... 99 CAL. CODE REGS., tit. 10, § 3721 ................................................................................................ 70
OTHER AUTHORITIES!2 HARRY D. MILLER & MARVIN B. STARR, CALIFORNIA REAL ESTATE § 4:96 (3d
ed. 2010) ............................................................................................................................... 70 BLACK’S LAW DICTIONARY (9th ed. 2009). ................................................................................ 96 RESTATEMENT (SECOND) OF CONTRACTS § 152 ......................................................................... 95 RESTATEMENT (SECOND) OF CONTRACTS § 154 ......................................................................... 95 RESTATEMENT (SECOND) OF CONTRACTS § 164 ......................................................................... 95 Securities Offering Reform, Securities Act Release No. 52056 (July 29, 2005),
2005 WL 1692642 ........................................................................................................... 97-98 WITKIN, SUMMARY OF CALIFORNIA LAW, CONTRACTS,
§ 933 (10th ed. 2005) ............................................................................................................ 94
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
G
OO
DIN
, MA
CBR
IDE,
SQ
UER
I, D
AY
& L
AM
PREY
, LLP
A
TTO
RN
EYS
AT
LAW
SA
N F
RA
NC
ISC
O
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
INTRODUCTION
Defendants created and sold the Federal Home Loan Bank of San Francisco more than $19
billion of triple-A-rated certificates in 116 different securitizations of “Alt-A,” not subprime,
residential mortgage loans. The sole source of payment on the certificates is the cash flow from
the mortgage loans that back them. In the offering document (a prospectus supplement filed with
the SEC) for each of the 116 securitizations, defendants made hundreds of detailed statements
about the specific mortgage loans in that securitization. The Bank had no access to information
about those individual loans when it purchased each certificate. Instead, it relied on defendants’
many statements about those loans to decide whether (and at what price) to purchase a particular
certificate.
According to the detailed allegations of the Amended Complaints, which must be taken as
true for purposes of these demurrers, many of the material statements that the defendants made
about the mortgage loans that backed each of the Bank’s certificates were untrue or misleading.
Faced with allegations that they made hundreds of material untrue or misleading statements and
with statutes that make them strictly liable without proof of anything else, defendants nevertheless
try to persuade the Court that, as a matter of law, they are not responsible for a single one of their
untrue or misleading statements.
Defendants argue first that all of the Bank’s claims are time-barred as a matter of law
because any reasonable investor would have suspected by March 15, 2008 (two years before the
Bank filed these actions), that defendants sold the Bank each certificate by means of hundreds of
untrue or misleading statements. For this argument, defendants rely only on the filing of a class
action complaint by an unrelated party, which was not reported in any business or general
newspaper or magazine; five newspaper articles out of thousands published during the same time
period; and a few selectively excerpted snippets from an introductory letter to the Bank’s 2007
Annual Report. In this argument, defendants:
Misstate the standards for when the statutes of limitations begin to run, such as by
incorrectly attributing to the California Supreme Court the obviously unjust rule that “suspicion
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-2-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
alone is enough” to trigger the statute of limitations, so the statute could expire before a plaintiff
had learned enough facts even to plead its cause of action in a complaint;
Obscure the recognized and important distinction between higher quality Alt-A
mortgage loans and lower quality subprime loans by scrupulously excising the word “subprime”
from their quotations of the five newspaper articles and the introductory letter to the Bank’s 2007
Annual Report;
Omit that every one of the Bank’s certificates continued to be rated triple-A until
more than four months after March 15, 2008, and to be rated investment grade until nine months
thereafter. Two prominent federal judges – Judge Illston in San Francisco and Judge Rakoff in
New York City1 – have recently held that it is necessarily a question of fact whether the statute of
limitations began to run before a security was downgraded below investment grade; and
Offer no persuasive argument why the statutes of limitations on many of the
Bank’s claims were not tolled under the doctrines of American Pipe2 and equitable tolling by the
filing of class actions that covered those claims and included the Bank in the putative class.
Defendants’ other arguments are variations on a single theme: that, despite their writing
and filing with the SEC prospectus supplements in which they made hundreds of statements about
the mortgage loans that were to be the sole source of payment on the certificates that they were
trying to sell the Bank, the Bank should have paid no attention whatsoever to any one of those
statements. They argue that:
Under a decision of the Fifth Circuit that only one court has followed and many
have rejected, defendants are not responsible for their statements because a different party (the
seller of the mortgage loans into the transaction) made certain Representations and Warranties
about those loans in a contract to which the Bank is not a party. (See Point III.A.)
1 In re Wells Fargo Mortgage-Backed Certificates Litigation, 712 F. Supp. 2d 958, 967-68 (N.D. Cal.
2010) (Illston, J.); Public Employees’ Retirement System of Mississippi v. Merrill Lynch & Co., 714 F. Supp. 2d 475, 479-80 (S.D.N.Y. 2010) (Rakoff, J.).
2 American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-3-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Defendants did not make even a single statement of fact about the mortgage loans;
all of their statements were opinions, which cannot be true or false and, therefore, should not have
mattered to investors. (See Point III.B.)
Defendants did not themselves make even a single statement about the mortgage
loans; they merely repeated statements of others without vouching for their accuracy, so
reasonable investors should have paid those statements no attention. (See Point III.C.)
Every statement about the mortgage loans was qualified by the disclaimer that the
statement “might” be incorrect, so reasonable investors would have disregarded or at least
discounted every such statement. (See Point III.D.)
Not a single statement that defendants made about the mortgage loans was
material because no reasonable investor would “attach importance” to any one of those
statements. (See Point IV.)
It was not reasonable for investors to rely on any of defendants’ statements about
the mortgage loans because it is never reasonable to rely on statements that are mere opinions or
that “might” be untrue. (See Point V.)
In all, hundreds of pages of briefing in one joint and 10 separate briefs are devoted to the
implausible argument that the Court should decide – at the outset of these actions and as a matter
of law – that defendants are not responsible for a single one of the hundreds of untrue or
misleading statements that they made about the mortgage loans that backed each of the
certificates that they sold the Bank. The Court should reject this attempt to eviscerate the
California and federal securities laws and California common law.
Thirteen federal courts have decided motions to dismiss complaints in similar actions
based on residential mortgage-backed securities. In all of those cases, without exception, the
courts held that the plaintiff stated a valid claim for relief.3 The only state court that has
3 Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 773 (1st Cir. 2011); Employees’ Retirement System of Government of the Virgin Islands v. J.P. Morgan Chase & Co., No. 09 Civ. 3701(JGK), 2011 WL 1796426, at *8 (S.D.N.Y. May 10, 2011); Public Employees’ Retirement System v. Goldman Sachs, No. 09 CV 1110(HB), 2011 WL 135821, at *10 (S.D.N.Y. Jan. 12,
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-4-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
considered such a motion reached the same conclusion. The Court of Common Pleas of Allegheny
County, Pennsylvania, denied motions (made by some of the same banks that are defendants in
these actions) to dismiss a very similar action by the Federal Home Loan Bank of Pittsburgh.4
This was the first time that a state court has ruled on a motion to dismiss a complaint about
mortgage-backed securities under a state securities statute like the California Securities Law, and
under a state pleading standard. The court rejected many of the same arguments that defendants
make here and denied entirely the motions to dismiss of the underwriter and issuer defendants.
The Bank respectfully urges this Court to do the same.
SUMMARY OF THE AMENDED COMPLAINTS
Congress created the Federal Home Loan Bank of San Francisco to assist home buyers by
lowering their borrowing costs. It does so primarily by offering competitively priced funds for
housing and community lenders. The Bank is owned by its 380 members. Most of those members
are community banks and credit unions, and all have headquarters in California, Arizona, or
Nevada. The Bank has a federal charter, but is not an agency of the United States Government and
does not receive any financial support from taxpayers. As Congress has directed, the Bank has
also provided hundreds of millions of dollars for grants and below market-rate loans to support its
members in creating affordable housing and supporting economic development for families of
modest means.
2011); City of Ann Arbor Employees' Retirement System v. Citigroup Mortgage Loan Trust Inc., CV 08-1418, 2010 WL 6617866, at *6-7 (E.D.N.Y. Dec. 23, 2010); Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass Through Certificates, Series AR1, 748 F. Supp. 2d 1246, 1255 (W.D. Wash. 2010); New Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group, PLC, 720 F. Supp. 2d 254, 271 (S.D.N.Y. 2010); In re IndyMac Mortgage-Backed Securities Litigation, 718 F. Supp. 2d 495, 509 (S.D.N.Y. 2010); Public Employees’ Retirement System, 714 F. Supp. 2d at 483; In re Wells Fargo Mortgage-Backed Certificates Litigation, 712 F. Supp. 2d 958, 971 (N.D. Cal. 2010); New Jersey Carpenters Health Fund v. Residential Capital, LLC, 08 CV 8781(HB), 2010 WL 1257528, at * 1 (S.D.N.Y. Mar. 31, 2010); New Jersey Carpenters Health Fund v. DLJ Mortgage Capital, Inc., 08 CIV 5653 PAC, 2010 WL 1473288, at *7 (S.D.N.Y. Mar. 29, 2010); Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 392-93 (S.D.N.Y. 2010); In re Lehman Bros. Securities & ERISA Litigation, 684 F. Supp. 2d 485, 493 (S.D.N.Y. 2010).
4 Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities, LLC, No. GD09-016892, 2010 WL 5472006 (Pa. Ct. C.P. Nov. 29, 2010).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-5-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Defendants are issuers and underwriters of residential mortgage-backed securities.5 They
bundled mortgage loans into “collateral pools” and sold “certificates” that entitle their holders to a
stated part of the cash flow from payments that the borrowers would make on their loans. Those
mortgage loans are the sole source of payment to owners of the certificates. If borrowers become
delinquent in their mortgage payments, there is less cash to pay the owners of the certificates, so
the safety of the certificates depends on the credit quality of the mortgage loans that back them.
The certificates that have the first call on cash from the mortgage loans were rated triple-A,
denoting the safest possible investment.
Defendants solicited the Bank to invest in such triple-A-rated certificates. In offering
documents called “prospectus supplements,” which they filed with the SEC and sent to the Bank,
defendants made many statements about the credit quality of the mortgage loans that they had
bundled into the collateral pools. For example, defendants made statements about how much
equity the borrowers had in their homes (the more equity, the less likely borrowers are to default);
the procedures followed to appraise the value of the borrowers’ homes; how many of the homes
were the primary residences of the borrowers (borrowers are much less likely to default on a
mortgage loan on the home in which they actually live than on a second home or investment
property); and the underwriting standards of the lenders that made the loans. Many of these
statements turned out to have been untrue or misleading when the defendants made them. Many
borrowers actually had much less equity in their homes than defendants stated; many appraisals
did not follow the required procedures; many fewer homes were primary residences than
defendants stated; and many lenders disregarded their underwriting standards.
The Bank brought this action to rescind its purchases of these certificates.
5 Although some defendants are referred to as “depositors” in the prospectus supplements filed with the
SEC for these securities, under SEC Regulation AB, depositors have the same legal responsibility as issuers of securities. See, e.g., Credit Suisse Am. Compl. (referred to as CS) ¶ 37 (“The obligor of the certificates in a securitization is the trust that purchases the loans in the collateral pool. Because a trust has few assets other than the loans that it purchased, it may not be able to satisfy the liabilities of an issuer of securities (the certificates). The law therefore treats the depositor as the issuer of a residential mortgage-backed certificate.”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-6-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
I. THE CLAIMS IN THE AMENDED COMPLAINTS ARE NOT BARRED BY ANY STATUTE OF LIMITATIONS OR REPOSE.
A. The Bank Did Not Discover And Could Not Have Discovered The Facts Necessary To State Its Claims More Than Two Years Before It Filed These Actions.
All of the Bank’s claims are subject to statutes of limitations of at least two years.6 Thus,
to demur to any claim by asserting the statute of limitations, defendants must prove as a matter of
law that the limitation period began to run before March 15, 2008, two years before the Bank filed
these actions. That is a virtually insurmountable obstacle for defendants on a demurrer, because
the defense of the statute of limitations is nearly always an intensely factual inquiry.7 But even if
the Court were to overlook the inherently factual nature of defendants’ arguments, still they have
fallen far short of establishing that any of the Bank’s claims is time-barred.
Defendants argue that “it is clear from the face of the Complaints and from judicially
noticeable facts that . . . . Plaintiff discovered, or readily could have discovered, the facts giving
rise to its alleged claims well before March 15, 2008.” (Joint Br. 14-15.) This argument is
mistaken for two principal reasons. First, defendants misstate the standards for when the statutes
of limitations begin to run. (See Point I.A.1, below.) Second, under the correct standards, the facts
that defendants rely on certainly did not start the running of the limitation period on any of the
Bank’s claims before March 15, 2008. (See Point I.A.2.)
1. Defendants Misstate The Standards For When The Statutes Of Limitations Begin To Run On All Of The Bank’s Claims.
Defendants argue that all of the Bank’s claims are time-barred because “it is clear from the
face of the Complaints and from judicially noticeable facts that Plaintiff has not exercised
reasonable diligence in bringing its claims.” (Joint Br. 14.) But, even on the Bank’s claims that
6 The federal Securities Act of 1933 has a statute of limitations of one year, but the limitation period on
all of the Bank’s claims under the 1933 Act was tolled for at least one year by the pendency of class actions. (See Point I.B, on pages 26-43.) Moreover, the statute of limitations on the Bank’s claims for negligent misrepresentation is three years and on its claims for rescission of a written contract, four years. (See Point I.C, on pages 43-46.)
7 “A demurrer based on a statute of limitations will not lie where the action may be, but is not necessarily, barred. In order for the bar . . . to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows that the action may be barred.” Geneva Towers Ltd. Partnership v. City and County of San Francisco, 29 Cal.4th 769, 781 (2003).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-7-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
are subject to the “discovery rule” or “inquiry notice,” the running of the statute of limitations
does not depend only on whether the Bank exercised “reasonable diligence.” To demur to those
claims, defendants must establish, as a matter of law, that the Bank had actual knowledge of some
facts about its claims; that knowledge of those facts would have caused a reasonable plaintiff to
suspect that it had a claim; and that a reasonable investigation would have revealed enough of the
facts of the claim to plead a valid complaint before March 15, 2008. Defendants must satisfy an
even higher standard to demur to the Bank’s claims under the Corporate Securities Law. They
must prove, again as a matter of law, that the Bank itself was actually aware of enough facts to
plead a valid claim under that statute.
a. Defendants misstate the standard for when statutes of limitations begin to run based on “inquiry notice.”
The statutes of limitations on the Bank’s claims (except its claims under the Corporate
Securities Law8) begin to run when the Bank either discovered, or through reasonable
investigation would have discovered, that defendants’ statements about the securities that they
sold the Bank were materially untrue or misleading. See CAL. CIV. PROC. CODE §§ 337, 338.
Courts often refer to this standard as the “discovery rule” or “inquiry notice.” See Fox v. Ethicon
Endo-Surgery, Inc., 35 Cal. 4th 797, 807-08 (2005).
Defendants argue that “the Supreme Court of California has made clear that suspicion
alone is enough to trigger the statute of limitations under California law.” (Joint Br. 20; emphasis
in original.) But the Supreme Court has decided no such thing. Defendants rely on the following
passage from the Supreme Court’s opinion in Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1111
(1988), from which they excised the words printed in bold:
A plaintiff need not be aware of the specific “facts” necessary to establish the claim; that is a process contemplated by pretrial discovery. Once the plaintiff has a suspicion of wrongdoing, and therefore an incentive to sue, she must decide whether to file suit or sit on her rights. So long as a suspicion exists, it is clear that the plaintiff must go find the facts; she cannot wait for the facts to find her.
8 As discussed in Point I.A.1, the statute of limitations on the Bank’s claims under the Corporate
Securities Law did not begin to run until the Bank had actual knowledge of all facts necessary to constitute a violation.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-8-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Defendants conclude from this passage that suspicion alone is enough to trigger the statute of
limitations because a plaintiff need not be aware of the facts necessary to establish its claim. To
support defendants’ reading of Jolly, however, the phrase “specific ‘facts’ necessary to establish
the claim” would have to be synonymous with “specific ‘facts’ necessary to plead the claim.” But
the phrase that defendants excised makes clear that, by “specific ‘facts’ necessary to establish the
claim,” the Supreme Court was denoting the facts necessary to prove the claim at trial, a different
point altogether.
Moreover, passages in Jolly before and after the one that defendants quoted belie their
argument that “suspicion alone is enough.” Shortly before the passage that defendants quoted, the
Supreme Court wrote that “[t]he discovery rule provides that the accrual date of a cause of action
is delayed until the plaintiff is aware of her injury and its negligent cause.” 44 Cal. 3d at 1109
(emphasis added). And shortly after the passage that defendants quoted, the Court wrote: “a
suspicion of wrongdoing, coupled with a knowledge of the harm and its cause, will commence the
limitations period.” Id. at 1112 (emphasis of “suspicion” in original; other emphasis added). No
one who reads the opinion in Jolly as a whole and without excision could think that the Supreme
Court really decided that “suspicion alone is enough.”9
There are actually three requirements necessary to trigger a statute of limitations based on
inquiry notice, and suspicion is only one of them.10 They are that (1) the plaintiff had actual
knowledge of some specific facts about the misconduct of defendants;11 (2) those facts would
have led a reasonable person to become suspicious and to investigate whether he or she had a
9 Defendants also quote a sentence from Fox, 35 Cal. 4th at 807 “A plaintiff has reason to discover a cause of action when he or she ‘has reason at least to suspect a factual basis for its elements.’” In the very next sentence, however, the Supreme Court continued: “Under the discovery rule, suspicion of one or more of the elements of a cause of action, coupled with knowledge of any remaining elements, will generally trigger the statute of limitations period.” Id. (emphasis added).
10 The statute of limitations on the Bank’s claims under the 1933 Act are governed by federal law. The United States Supreme Court recently held that the statute of limitations does not begin to run until a reasonable investigation would have uncovered all of the facts that “constitute” the violation. Merck & Co. v. Reynolds, 130 S. Ct. 1784, 1798 (2010). That standard is practically identical to the standard that California courts apply to establish inquiry notice.
11 See, e.g., Nelson v. Indevus Pharmaceuticals, Inc., 142 Cal. App. 4th 1202, 1206 (2006) (“[P]laintiff’s duty to investigate does not begin until the plaintiff actually has a reason to investigate.” (emphasis added)).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-9-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
claim;12 and (3) a reasonable investigation would have uncovered enough facts of the plaintiff’s
claim that, if pleaded in a complaint, those facts would have been sufficient at least to withstand
demurrer.13
The first requirement – knowledge of facts that would lead a reasonable person to become
suspicious – is satisfied only by the actual knowledge of the specific plaintiff. The required
knowledge may not be “constructive” or be “imputed” to the plaintiff.
Our Supreme Court has never held that under the discovery rule, the suspicion necessary to trigger the statute may be imputed to a plaintiff, and we do not believe that to be the law. When the cases are read in whole, rather than in isolated quotes, it is clear that a plaintiff’s duty to investigate does not begin until the plaintiff actually has a reason to investigate . . . . The statute of limitations does not begin to run when some members of the public have a suspicion of wrongdoing, but only once the plaintiff has a suspicion of wrongdoing.
Nelson v. Indevus Pharmaceuticals, Inc., 142 Cal. App. 4th 1202, 1206 (2006) (internal citations
omitted and emphasis added).
The Bank has not found a single California decision that the facts that give rise to the
initial suspicion of wrongdoing may be imputed to the plaintiff based on “constructive”
knowledge. The law requires actual knowledge by the particular plaintiff of facts that would give
rise to suspicion. See id.
This first component of the inquiry notice standard is especially difficult for defendants to
establish on demurrer, when there is no evidence of what facts the plaintiff actually knew when.
For example, the Court of Appeal in Unruh-Haxton v. Regents of the University of California, 162
Cal. App. 4th 343, 365 (2008), held that “a hearing on demurrer cannot be turned into a contested
evidentiary hearing. Because constructive suspicion is not enough to trigger the statute of
limitations, the fact the scandal was publicized is irrelevant unless the plaintiff admits to having
knowledge of the publicity.”
12 See, e.g., Unruh-Haxton v. Regents of the University of California, 162 Cal. App. 4th 343, 360-61 (2008) (“If a person becomes aware of facts which would make a reasonably prudent person suspicious, he or she has a duty to investigate further and is charged with knowledge of matters which would have been revealed by such an investigation.”).
13 See, e.g., Grisham v. Philip Morris U.S.A., Inc., 40 Cal. 4th 623, 645 (2007) (“[A] plaintiff need not file a cause of action before he or she has reason at least to suspect a factual basis for its elements. It would directly contravene the interest of the courts and of litigants against the filing of potentially meritless claims.”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-10-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Moreover, defendants’ assertion that “suspicion alone is enough to trigger the statute of
limitations under California law” ignores the third necessary condition of inquiry notice.
Defendants must show that a reasonable investigation would have uncovered facts about their
untrue or misleading statements that would have been sufficient at least to plead a complaint that
would have survived demurrer. The California Supreme Court has held definitively that the
statute of limitations will never begin to run before a plaintiff by reasonable investigation could
have gathered the facts necessary to state a valid claim. See Fox, 35 Cal. 4th at 808-09 (“If such
an investigation would have disclosed a factual basis for a cause of action, the statute of
limitations begins to run on that cause of action when the investigation would have brought such
information to light.”); see also E-Fab, Inc. v. Accountants, Inc. Services, 153 Cal. App. 4th 1308,
1322 (2007). The Court of Appeal elaborated on this rule in Grisham v. Philip Morris U.S.A., Inc.
It would be contrary to public policy to require plaintiffs to file a lawsuit at a time when the evidence available to them failed to indicate a cause of action . . . . [T]hey would run the risk of sanctions for filing a cause of action without any factual support. Indeed, it would be difficult to describe a cause of action filed by a plaintiff, before that plaintiff reasonably suspects that the cause of action is a meritorious one, as anything but frivolous. At best, the plaintiff’s cause of action would be subject to demurrer for failure to specify supporting facts.
40 Cal. 4th 623, 644-45 (2007).14
14 Defendants may argue (but have not argued in their opening briefs) that if a plaintiff fails to conduct
any investigation, then the statute of limitations starts to run from the moment of suspicion, rather than from the time when a reasonable investigation would have uncovered the facts of the violation. That is a now-defunct rule that originated in the lower federal courts, but that the Supreme Court recently repudiated in Merck. In particular, the Supreme Court rejected the argument that if “the actual plaintiff is not diligent, … the law should not effectively excuse a plaintiff’s failure to conduct a further investigation by placing that non-diligent plaintiff and a reasonably diligent plaintiff in the same position.” Merck, 130 S. Ct. at 1796. see also, e.g., City of Pontiac General Employees’ Retirement System v. MBIA, Inc., 637 F.3d 169, 173-74 (2d Cir. 2011) (“Prior to Merck, the law of our Circuit had provided that a plaintiff was on ‘inquiry notice’ when public information would lead a reasonable investor to investigate the possibility of fraud. If at that point, the plaintiff fails to initiate such an investigation, our Circuit deemed the statute of limitations to start running on the day the plaintiff should have begun investigating. Merck overruled this analysis . . . . In other words, the limitations period commences not when a reasonable investor would have begun investigating, but when such a reasonable investor conducting such a timely investigation would have uncovered the facts constituting a violation.”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-11-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
b. The statute of limitations on the Bank’s claims under the Corporate Securities Law did not start to run until the Bank had actual knowledge of all facts necessary to constitute a violation.
Defendants must satisfy an even higher standard to demur to the Bank’s claims under the
Corporate Securities Law. Section 25501 permits an investor that purchased securities based on
material untrue or misleading statements to rescind the transaction. Section 25506 is the statute of
limitations on such claims.
[N]o action shall be maintained to enforce any liability created under Section . . . 25501 . . . unless brought before . . . the expiration of two years after the discovery by the plaintiff of the facts constituting the violation . . .
The plain meaning of section 25506 is that the statute of limitations starts to run only after
the plaintiff actually discovers the facts constituting the defendant’s violation. In other words,
unlike the inquiry notice standard discussed above, section 25506 does not assume that a plaintiff
has constructive knowledge of facts that would have been uncovered by reasonable investigation.
The sole trigger of the statute of limitations is the facts that the plaintiff itself actually knew.
Defendants cannot possibly establish on demurrer that the Bank actually discovered the facts of
their alleged violations of the Corporate Securities Law before March 15, 2008. Indeed,
defendants do not even try to do so.
Instead, defendants appear to argue (see Joint Br. 12) that section 25506 should not be
read literally; that although the Legislature wrote “two years after discovery by the plaintiff,” the
Legislature really meant to write “two years after a reasonable plaintiff could have discovered
through a reasonably diligent investigation.” There are two reasons why the Court should reject
defendants’ proposed interpretation of section 25506.
First, their interpretation disregards the plain language of the statute, and it is settled law
that the plain, unambiguous words of a statute always take precedence over any other method of
statutory interpretation. See Rojo v. Kliger, 52 Cal. 3d 65, 79 (1990) (“Where statutory language
is clear, a court need not and should not rely upon artificial canons of construction.”); Sutco
Construction Co. v. Modesto High School District, 208 Cal. App. 3d 1220, 1228 (1989) (“Where
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-12-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
the statute is clear, the ‘plain meaning’ rule applies. The Legislature is presumed to have meant
what it said, and the plain meaning of the language governs.”).
Second, even if the plain language of section 25506 were somehow unclear, the intent of
the Legislature is clear from the context of that section. In the very next section of the Corporate
Securities Law, section 25506.1, the Legislature wrote that the statute of limitations on certain
other claims under that Law begins to run “after such discovery should have been made by the
exercise of reasonable diligence.” Id (emphasis added). Thus, the Legislature knew exactly how
to provide that the statute of limitations begins to run when a reasonable plaintiff could have
discovered the violation. Sections 25506 and 25506.1 appear back-to-back in the Corporate
Securities Law. If the Legislature had intended the statute of limitations in section 25506 to
begin from the date on which a reasonably diligent investigation would have uncovered the facts
of the claim, then the Legislature would have said so, just as it did in section 25506.115
Conversely, if the Legislature thought that the language of 25506 started the limitation period
based on the results of a hypothetical reasonable investigation, then the Legislature would have
used that same language in section 25506.1.
The California Supreme Court has held that it is a “settled axiom that when the drafters
of a statute have employed a term in one place and omitted it in another, it should not be
inferred where it has been excluded.” People v. Woodhead, 43 Cal. 3d 1002, 1010 (1987); see
also Wasatch Property Management v. Degrate, 35 Cal. 4th 1111, 1118 (2005) (“[W]hen the
Legislature has carefully employed a term in one place and has excluded it in another, it should
not be implied where excluded.” (internal quotation marks omitted) ); American Airlines, Inc. v.
County of San Mateo, 12 Cal. 4th 1110, 1137-38 (1996) (“[W]e generally do not construe
different terms within a statute to embody the same meaning.”); Genlyte Group, LLC v. Workers
Compensation Appeals Board., 158 Cal. App. 4th 705, 719 (2008) (“We are reluctant to
15 Section 25506.1 was enacted after section 25506. But when section 25506 was enacted, there were already other statutes that start the limitations period from the time when a plaintiff discovered or should have discovered the facts of a violation. See, e.g., CAL. COM. CODE § 2725(2) (1967) (“[T]he cause of action accrues when the breach is or should have been discovered.”). Thus, it is clear that even before it enacted section 25506, the Legislature knew how to write a statute that began the running of the statute of limitations when a reasonable plaintiff would have discovered the facts of a claim.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-13-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
conclude that the Legislature’s use of different terms, at different times in the statutory scheme
is meaningless.”). Defendants’ interpretation of section 25506 would offend this settled canon
of statutory interpretation and make meaningless the obvious difference between these two
adjacent sections of the statute. See Woodhead, 43 Cal. 3d at 1010.16
Only two published decisions of California courts have considered whether to interpret
the text of section 25506 as it is written or to graft onto it the concept of inquiry notice. In the
first decision, the Court of Appeal for the Fourth District construed the statute of limitations in
section 25507, which is substantively identical to section 25506.17 For precisely the reasons
discussed above, the court held that the words of the statute mean what they say, and thus that
the statute of limitations begins to run only when the particular plaintiff actually discovers the
facts constituting the violation.
The critical focus here is found in the language of section 25507, subdivision (a), which requires “discovery . . . of the facts.” The statute requires [plaintiff’s] actual knowledge of the facts before the one-year statute commences to run. By its plain language, the statute requires actual knowledge, not just “inquiry notice.” This conclusion is buttressed by a comparison of the language of section 25506.1 which establishes a statute of limitations for fraud liability imposed upon certain persons who “expertise” a prospectus. This latter section expressly mandates a one-year limitation “after such discovery should have been made by the exercise of reasonable diligence.” Here the statute of limitations requires the party wronged to have actual notice of the illegality before the one year begins to run. This is the significant and controlling distinction in the statutory language.
Eisenbaum v. Western Energy Resources., Inc., 218 Cal. App. 3d 314 (1990). Because section
25506 is word-for-word identical to section 25507 in all relevant ways, the reasoning of
Eisenbaum applies directly to the statute of limitations on the Bank’s claims under the
Corporate Securities Law.
16 Indeed, “[w]here the same word or phrase might have been used in the same connection in different
portions of a statute but a different word or phrase having different meaning is used instead, the construction employing that different meaning is to be favored.” Kray Cabling Co. v. County of Contra Costa, 39 Cal. App. 4th 1588, 1593 (1995) (internal quotation marks omitted and emphasis added).
17 See CAL. CORP. CODE § 25507(a) (“No action shall be maintained to enforce any liability created under Section 25503 (or Section 25504 or Section 25504.1 insofar as they relate to that section) unless brought before the expiration of two years after the violation upon which it is based or the expiration of one year after the discovery by the plaintiff of the facts constituting such violation, whichever shall first expire.” (emphasis added)).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-14-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
The second California court that considered the meaning of section 25506 was a different
panel of the Court of Appeal for the Fourth District. In Deveny v. Entropin, Inc., 139 Cal. App.
4th 408 (2006), the court held that section 25506 does not require actual knowledge to trigger the
statute of limitations, but requires instead only inquiry notice. Deveny is not binding on this Court,
and, for at least two reasons, the Bank respectfully submits that it was wrongly decided.
First, Deveny relied heavily on three federal decisions that interpreted section 25506. Two
of them do not support the result in Deveny at all. Each contains only a sentence or two about
section 25506, and both suggest that the statute of limitations starts to run only when the plaintiff
actually discovers the facts that constitute the violation. Indeed, neither even uses the phrases
“inquiry notice” or “reasonable diligence” in discussing section 25506.18 And in the third federal
decision, the sum total discussion of section 25506 was just this:
The limitations period under 15 U.S.C. § 77m [on claims under the Securities Act of 1933] does not begin to run until plaintiff discovers the facts constituting the violation or in the exercise of reasonable diligence should have discovered them. The same principle applies under CAL. CORP. CODE § 338(4) and, in view of the similarity in language, we think also under CAL. CORP. CODE § 25506.
Kramas v. Security Gas & Oil Inc., 672 F.2d 766, 770 (9th Cir. 1982). An interpretation of a
California statute by a federal court, especially one as summary as this, neither binds California
courts nor takes precedence over the plain meaning of the statute.
Second, Deveny also relied on the fact that other statutes of limitations in California that
use the word “discovered” have been interpreted to require only “inquiry notice.” The court
reasoned that the Legislature is assumed to have been aware of earlier judicial interpretations of
the word “discovered” and must therefore have assumed that section 25506 would be interpreted
similarly.19 139 Cal. App. 4th at 422-23. But the meaning of section 25506 can be discerned more
18 In Rochambeau v. Brent Exploration, Inc., 79 F.R.D. 381, 387 (D. Colo. 1978), the single sentence about section 25506 suggests that actual notice is required: “Since plaintiff has alleged that he discovered the facts constituting the violation within one year prior to the date of commencement of this action, a question of fact exists as to the California statute of limitations issue.” Id. (emphasis added). The same is true of Levine v. Diamanthuset, Inc. 722 F. Supp. 579, (N.D. Cal. 1989), which also suggests that actual notice is required: “As to defendant Smith, the statute of limitations bars actions brought more than one year after the plaintiff’s discovery of the facts . . . .” Id. (emphasis added).
19 Many of the statutes that the Deveny court was referring to are codifications of the common law. Those statutes are subject to different principles of interpretation, which focus less on the plain language of the statute and more on the underlying common law that the statute was attempting to embody. See, e.g., Mirkin v.
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-15-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
accurately from its plain language and from the obvious difference between the words that the
Legislature used in that section and in section 25506.1, than from judicial interpretations of
entirely different statutes, which the Legislature may have been aware of. Neither the court in
Deveny nor the defendants here have given any convincing reason to ignore the plain language of
section 25506 and instead to imply an inquiry notice standard where none exists. The Bank
therefore respectfully urges the Court to decide that the statute of limitations on the Bank’s claims
under the Corporate Securities Law did not start to run until the Bank actually discovered the facts
constituting the defendants’ violations, as section 25506 provides. Because defendants have not
even tried to satisfy that standard, their demurrers to the Bank’s claims under section 25501
should be overruled.
2. The Facts That Defendants Rely On Do Not Establish That The Statute Of Limitations Began To Run Before March 15, 2008.
Defendants rely on three categories of facts to establish that the Bank was on inquiry
notice of its claims before March 15, 2008. First, defendants point to a class action, Luther v.
Countrywide, which was filed in Superior Court in Los Angeles on November 14, 2007.20 (Joint
Br. 15-17.) Defendants argue that “the allegations in Luther are substantially similar, and at
Wasserman, 5 Cal. 4th 1082, 1092 (1993) (“Provisions of the Civil Code that are substantially the same as the common law, such as the provisions that codify common law torts, must be construed as continuations thereof, and not as new enactments.”) The Corporate Securities Law is not a codification of the common law. To the contrary, the express purpose of that Law is to “afford the victims of securities fraud a remedy without the formidable task of proving common law fraud.” Id. Thus, the plain language of section 25501 is the best evidence of its meaning.
20 Defendants appear to be arguing that the mere filing of a complaint that involved some of the same certificates that the Bank purchased somehow automatically began the running of the statute of limitations on all of the Bank’s potential claims on all of its residential mortgaged-backed securities. (Joint Br. 17.) But there is no rule in California or anywhere else that the statute of limitations is automatically triggered by the filing of a complaint. Defendants argue quite misleadingly that the court in Maine State Retirement System v. Countrywide Financial Corporation, 722 F. Supp 2d 1157, 1165 (C.D. Cal. 2010) held that “the date the Luther complaint was filed is the date of discovery for plaintiffs.” (Joint Br. 17.) Defendants omit, however, that Maine State was a continuation of the Luther case by the same lawyers and the same plaintiff who had filed Luther. In other words, Maine State stands for the proposition that if a plaintiff actually filed a lawsuit, the statute of limitations on his own claims begins to run on the date of that filing. Similarly, in In re Wells Fargo Mortgage-Backed Certificates Litigation, No. 09-cv-01376-LHK, 2010 WL 4117477, at *7 (N.D. Cal. Oct. 19, 2010), the court ruled that the statute of limitations for a class action began to run when that same class action was first filed. Both cases are vastly different from the rule that defendants are proposing, that is, that the statute of limitations for an entirely different plaintiff begins to run automatically when an unrelated party files a complaint.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-16-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
times almost identical, to the allegations in the Complaints.”21 (Id. at 15.) Second, defendants
rely on four snippets from the Bank’s 2007 Annual Report, which was issued on March 28,
2008 (13 days after March 15). (Id. at 18.) Third, defendants refer to five articles among
thousands about mortgage loans that were published before March 15, 2008.22 (Id. at 21-22.)
These “facts” do not establish any – let alone all – of the three necessary conditions of inquiry
notice.
a. Defendants cannot establish as a matter of law that the Bank had actual knowledge of any facts about their alleged untrue or misleading statements about the securities that they sold the Bank.
The first condition of inquiry notice turns on the actual knowledge of the plaintiff. (See
Point I.A.1, above.) Because it is rarely possible to establish what a plaintiff actually knew solely
from the allegations in its complaint, the courts rarely sustain demurrers based on inquiry notice. [W]hen the facts are susceptible to opposing inferences, whether a party has notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact and whether by prosecuting such inquiry, he might have learned such fact are themselves questions of fact to be determined by the jury or the trial court.”
Hobart v. Hobart, 26 Cal. 2d 412 (1945). None of the three categories of “facts” that defendants
rely on could possibly establish on a demurrer that the Bank was actually aware of any facts that
could have triggered the statute of limitations.
First, nothing in the amended complaints or defendants’ briefs even suggests – much less
proves as a matter of law – that the Bank knew about the Luther class action before March 15,
21 Ironically, defendants argue that the mere filing of Luther was a significant enough event to begin the running of the statute of limitations on the Bank’s claims on all of its securities, but then argue elsewhere that the Luther class action did not toll the statute of limitations on any of the Bank’s claims because it was dismissed for lack of subject matter jurisdiction and was, therefore, a nullity.
22 Defendants ask the Court to take judicial notice of these articles. Defendants concede, however, that “references to public information in news reports and other lawsuits are submitted only to show that the information they contain was in the public domain, which make them subject to judicial notice.” (Joint Br. 21.) As discussed in detail in Part I.A.2.b, to determine whether the statute of limitations began to run, the Court must consider whether the substance of these articles would have aroused suspicion in a reasonable investor and whether the contents of these articles would have provided a sufficient factual basis for a reasonable plaintiff to file a complaint. The mere fact that these articles were published is irrelevant to the Court’s analysis and the Court, therefore, should reject defendants’ request for judicial notice. See People v. Stoll, 49 Cal. 3d 1136, 1144 n.5 (1989) (“[t]he material has no bearing on the limited legal question at hand”); In re Noreen G., 181 Cal. App. 4th 1359, 1389 (2010) (“[t]he existence of the newspaper article is irrelevant, and the truth of its contents is not judicially noticeable”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-17-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
2008. On the contrary, it is quite likely that the Bank (and most other investors) knew nothing
about the filing of Luther because it received virtually no attention in the media. From the date on
which Luther was filed in November 2007 through March 15, 2008, there was not a single
mention of Luther in the San Francisco Chronicle, The Wall Street Journal, The New York Times,
The Washington Post, Financial Times, Business Week, Fortune, Forbes, or any other general or
business publication that the Bank has been able to find.
Second, defendants argue that “Plaintiff’s own SEC filings demonstrate that it had
abundant knowledge of the relevant facts by 2007 – long before the March 2008 cutoff date.”
(Joint Br. 18.) There are several errors in this argument. Although defendants use the words “SEC
filings” in the plural, they refer in their briefs to only one such document, the Bank’s 2007 Annual
Report. (See Hibbard Decl. Ex. B, FHLB 2007 Annual Report.) Moreover, even that document is
not an “SEC filing.” Defendants quote only from a “letter to members” that served as an
introduction to the 2007 Bank’s Annual Report. That letter was not part of the Bank’s 10-K that
was filed with the SEC. Finally, defendants relegate to a footnote (Joint Br. 18 n.31) the most
important point about this Annual Report: it was issued on March 28, 2008, less than two years
before the Bank filed these two actions. Thus, even if the statements that defendants cite were
relevant to the statute of limitations, still the “letter to members” in the 2007 Annual Report
cannot establish as a matter of law that the Bank actually knew anything by March 15, 2008,
because this Annual Report was not issued until 13 days later.
Defendants argue that “like all annual reports, [the Bank’s 2007 Annual Report] is
retrospective in nature and recounts the conditions and circumstances of 2007.” (Joint Br. 18
n.31.) Certainly many statements in annual reports recount information about the full year being
reported on. But those are not the statements that defendants rely on here. Instead, all of
defendants’ quotations are from a “letter to members” that was drafted at the very end of the
process of preparing the 2007 Annual Report and was subject to change until it was issued. The
letter also stated clearly that “as we write this letter in early 2008, the credit crunch continues and
the U.S. economy is still struggling with the fallout from the subprime debacle” and that “we have
enough perspective on what happened in the subprime mortgage market to begin to draw some
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-18-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
powerful lessons.” FHLB 2007 Annual Report, 2-3 (emphasis added). That these statements were
made “as we write this letter in early 2008” and that the Bank was then just “begin[ning]” to draw
lessons belie defendants’ assertion that the comments were “retrospective in nature.”
Third, defendants rely on newspaper articles to establish that “Plaintiff is charged with full
knowledge of the public information that became widely available at least as early as 2007,
through media reports and other sources, regarding the same facts it alleges were misstated or
omitted in the RMBS offering documents.” (Joint Br. 19.) According to the Factiva database,
more than 13,000 articles about “mortgages” or “mortgage loans” were published between
November 13, 2006 (the earliest date of the articles that defendants rely on) and March 15, 2008.
Of those, defendants selected short excerpts of only five to establish that the statute of limitations
began to run by March 15, 2008, based on inquiry notice. (See Appendix C to Defendants’ Joint
Memorandum.) Defendants offer no evidence – nor could they at the demurrer stage – that the
Bank was aware of any of these five articles. Although it may be reasonable to assume that the
Bank was aware of some information published in the general and financial press, it is not
reasonable (and especially not on a demurrer with no evidence whatsoever) to assume that the
Bank read every word of all 13,000 articles that were published during this period. Defendants
cannot establish as a matter of law on demurrer that the Bank had actual knowledge of the five
particular articles out of 13,000. No court has held that the “actual knowledge” requirement of
inquiry notice can be satisfied by the conjecture that the plaintiff must have read every one of
thousands of newspaper articles. Thus, the five articles that defendants rely on cannot satisfy the
first requirement of inquiry notice under California law.
b. Even if the Bank had actual knowledge of any of the “facts” that defendants rely on, those facts would not have caused a reasonable investor to suspect that it had a claim.
Even if defendants were somehow able to demonstrate without evidence that the Bank was
actually aware of specific facts about their alleged misconduct, the second condition of inquiry
notice requires defendants to establish that those specific facts would have caused a reasonable
investor to suspect that it had a claim against defendants on the securities that they sold the Bank.
(See Point I.A.1.) For at least two reasons, the facts that defendants rely on do not satisfy this
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-19-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
requirement. First, defendants ignore the crucial difference between securities backed by
subprime mortgage loans – which the Bank was careful to avoid – and those backed by Alt-A
mortgage loans, which had an entirely different risk profile and are the securities involved in these
actions. Second, on March 15, 2008, and for several months thereafter, all of the securities that the
Bank is suing on continued to carry the highest possible, triple-A ratings that they held when they
were issued and when the Bank purchased them. Indeed, none of those securities was downgraded
below investment grade until a full nine months after March 15, 2008.
i. The facts that defendants rely on refer exclusively to subprime, not Alt-A, mortgages.
The Bank is suing solely on securities that were backed by Alt-A mortgage loans.
Mortgage-backed securities are generally divided into two categories: agency (that is, those issued
by government-sponsored enterprises like Fannie Mae and Freddie Mac) and non-agency (also
called “private label”). Mortgage loans securitized by Fannie Mae and Freddie Mac were almost
exclusively “prime” quality loans. Private label mortgage-backed securities were divided into
three categories: jumbo prime (loans made to prime (that is, “A”) borrowers but that were too
large to be purchased by Fannie Mae or Freddie Mac); Alt-A (also referred to as “Alternative A”);
and subprime (“B” and “C” borrowers).
Alt-A mortgage loans generally were made to creditworthy borrowers with high incomes
and good credit scores.
Typically, Alt-A mortgages are underwritten to borrowers of good credit quality—that is, those who would otherwise qualify for a prime loan in terms of their credit history . . . . On the other hand, subprime originations are primarily to borrowers with incomplete or impaired credit histories. Therefore, while the criterion for selection into a particular pool is not consistent across lenders, the credit quality for Alt-A pools is characteristically better than that for subprime pools.
Rajdeep Sengupta, Alt-A: The Forgotten Segment of the Mortgage Market, FED. RESERVE BANK
OF ST. LOUIS REVIEW, Jan./Feb. 2010, 92(1), p. 56.23 Thus, securities backed by Alt-A mortgage
loans had a very different risk profile than securities backed by subprime loans.
23 This difference in credit quality between Alt-A and subprime loans is well documented in scholarly and industry publications. See, e.g., Raymond H. Brescia, Capital in Chaos: The Subprime Mortgage Crisis and the Social Capital Response, 56 CLEV. ST. L. REV. 271, 287-88 (2008) (defining Alt-A borrowers as borrowers with good credit but high debt-to-income ratios or lesser ability to document income than prime borrowers, and
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-20-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Defendants ignore this crucial difference between subprime and Alt-A mortgage loans.
Although the Bank is not suing on (and did not purchase) any subprime-backed securities,
virtually all of the facts that defendants rely on in their demurrers relate exclusively to subprime
mortgage loans and securitizations.
Defendants went out of their way to obscure the fact that the four snippets they quote from
the Bank’s Annual Report were addressed exclusively to subprime mortgages. All four quotations
are taken from a two-page section of the Annual Report entitled “The Subprime Debacle.” (See
Hibbard Decl. Ex. B, FHLB 2007 Annual Report, 1-3.) The word “subprime” appears no less than
10 times in that two-page section. Defendants, however, excised from the quotations in their brief
all but one occurrence of “subprime.” For example, below are two of the four statements that
defendants quote from the Annual Report. The italicized part is the snippet that defendants
selected in order to excise the word “subprime” in the immediately surrounding text.
• “The Subprime Debacle: Many interrelated factors led to the problems in the subprime mortgage market. The housing boom in recent years prompted many mortgage originators to reach out to borrowers with lower credit scores and to make loans with little or no income documentation.” Id. at 1.
• “In many instances subprime borrowers were qualified for adjustable rate mortgages at the initial teaser rates, resulting in mortgages that could easily become unaffordable once interest rates began to reset at fully indexed rates.” Id.
Not only do these statements refer specifically to subprime mortgages, but also they focus
on the precise point that most distinguishes Alt-A from subprime, the creditworthiness of the
borrowers. Read in their entirety, these statements say nothing about the Alt-A securitizations that
the Bank is suing on, and they certainly say nothing that would have caused a reasonable investor
subprime borrowers as borrowers with poor credit histories, low credit scores, high debt-to-income ratios, or high loan-to-value ratios who are ineligible for Alt-A loans); Adam B. Ashcraft & Til Schuerman, Understanding the Securitization of Subprime Mortgage Credit 2, Staff Report No. 318 at 2 (Fed. Reserve Bank of N.Y.) 2008 (“[T]he Alt-A asset class involves loans to borrowers with good credit but include more aggressive underwriting than the conforming or Jumbo classes (i.e. no documentation of income, high leverage); and the Subprime asset class involves loans to borrowers with poor credit history.”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-21-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
to suspect that the offering documents for those securities contained numerous untrue or
misleading statements about the Alt-A mortgage loans that backed them.
Similarly, four of the five articles that defendants rely on to establish that the statute of
limitations began to run before March 15, 2008, also expressly refer solely to the subprime
mortgage market.24
• Defendants cite an article in Business Week on November 13, 2006 (Appendix C to Defendants’ Joint Memorandum), which discussed the lender Accredited Home Lenders Holding Co. The article states that “Wall Street is no longer paying top dollar for so-called subprime loans made to people with less-than-pristine credit — the bulk of Accredited’s business.” Defendants quote a part of the article that refers to “underwriting abuses,” but omit the parts that state that these “abuses” were in the subprime mortgage industry. (Hibbard Decl. Ex. P, Mara Der Hovanesian, Mortgage Lenders Feel the Chill, BUSINESSWEEK, Nov. 13, 2006.)
• The second article, published in The Wall Street Journal on December 5, 2006, was entitled “More Borrowers With Risky Loans Are Falling Behind –Subprime Mortgages Surged As Housing Market Soared; Now Delinquencies Mount.” (Appendix C to Defendants’ Joint Memorandum.) As the headline suggests, the article focuses exclusively on the subprime market. The word “subprime” appears 23 times in the three-page article, but defendants manage not to quote that word even once. “Alt-A” does not appear in the article. (Hibbard Decl. Ex. O, Ruth Simon & James R. Hagerty, More Borrowers With Risky Loans Are Falling Behind — Subprime Mortgages Surged As Housing Market Soared; Now, Delinquencies Mount, THE WALL ST. J., DEC. 5, 2006, at A1.)
• Defendants also rely on an article in The Washington Post on April 27, 2007. (Appendix C to Defendants’ Joint Memorandum.) This article also focuses exclusively on problems with appraisals in the subprime market. For example, the article notes that “subprime lenders experiencing high rates of foreclosure often have been guilty of ‘systemic inattention’ to the
24 The fifth article, published on March 18, 2007, in The San Francisco Chronicle, does not expressly
distinguish between subprime and Alt-A, but it is irrelevant for other reasons. (See Point I.A.2.) The Bear Stearns Defendants refer to several additional media reports in their individual brief. (JP Morgan Br. 4-5; JP Morgan Req. for Jud. Notice Exs. 21-36.) All but two of these articles also refer solely to subprime mortgages. Of the two articles that mention Alt-A mortgages, the first focuses on the financial difficulties of American Home Mortgage Investment - an originator of prime and Alt-A loans. (See JP Morgan Ex. 24.) As discussed below, however, defendants were still securitizing loans originated by American Home until well after it filed for bankruptcy. (See n. 26, below.) Thus, the fact that American Home was experiencing financial difficulties cannot possibly establish as a matter of law that the statute of limitations had begun to run. The second article is a Moody’s report stating that, although early defaults in Alt-A loans were increasing, they remained “much lower than those observed on subprime loans.” (JP Morgan Ex. 29.) This simply underscores the crucial difference between subprime and Alt-A.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-22-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
accuracy and the sources of valuations backing the mortgages they funded.” (Hibbard Decl. Ex. R, Kenneth R. Harney, Appraisal Inflation, THE WASH. POST, APR. 21, 2007.) The article also quotes the president of an organization called “Affiliated Appraisers,” who stated that “you can throw a dart at just about any large subprime lender, and something like this [scheme] is going to stick.” Id. Again, there is not a single mention of “Alt-A” in the story.
• Finally, defendants argue that on August 26, 2007, “The New York Times reported on departures from underwriting standards and ‘lax’ approval guidelines on loans that were packaged into mortgage-backed securities and sold to investors.” (Appendix C to Defendants’ Joint Memorandum.) Defendants omit, however, that the article was focused on Countrywide’s subprime unit, and that the point of the article was that Countrywide purposely guided borrowers away from more conventional loans into riskier, subprime loans that generated more profit for Countrywide. The word “subprime” appears 22 times in the four-page article. This is the article that defendants cite that actually uses the word “Alt-A,” and it does so solely to point out that subprime loans are riskier – and therefore more lucrative for Countrywide – than Alt-A. “The company’s incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan’s value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A.”
A reasonable investor who read these articles may have begun to suspect that problems in
the subprime mortgage market were leading to substantial losses, or even that some statements
about securitizations of subprime loans were untrue or misleading. But one certainly cannot
conclude as a matter of law that a reasonable investor would have suspected the same of
securitizations of Alt-A mortgage loans. Moreover, the absence of any mention of Alt-A
securitizations is not unique to the few articles that defendants quoted in their briefs. It is also true
generally of all news articles published before March 15, 2008. Defendants rely on articles from
five sources: The New York Times, The Wall Street Journal, The San Francisco Chronicle, The
Washington Post, and Newsweek. Between January 1, 2006, and March 15, 2008, the word
“subprime” appeared in 5,422 articles in those five sources, but the word “Alt-A” appeared there
in only 175 articles, a ratio of 31:1. Even the most diligent investor easily could have missed any
public information about Alt-A loans in the sea of news about subprime mortgages. See Cleveland
v. Internet Specialties West, Inc., 171 Cal. App. 4th 24, 33 (2009) (“Circumstances that are
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-23-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
dubious or equivocal are not sufficient to take the place of actual notice . . . . The circumstances
must be such that further inquiry is not merely suggested, but becomes an imperative duty, and
failure to make it constitutes a negligent omission.” (quoting Sime v. Malouf, 95 Cal. App. 2d 82,
106-07 (1949))).
In summary, with their total focus on the subprime market (and the near-total focus of all
of the news on the subprime market), the facts that defendants rely on do not nearly prove that any
reasonable investor in Alt-A-backed securities would have been aware of facts underlying its
claim by March 15, 2008.
ii. All of the Bank’s securities carried triple-A ratings until at least July 31, 2008, and investment-grade ratings until at least December 16, 2008.
A reasonable investor that owned the Bank’s securities would have been even less likely
to suspect a possible claim by March 15, 2008, because every one of those securities continued to
hold the same triple-A rating that the national credit rating agencies gave them when they were
issued. Indeed, the earliest date on which any of the Bank’s securities was downgraded at all was
July 31, 2008, more than four months after defendants argue that any reasonable investor would
have discovered that it had a claim against the defendants. And the earliest date on which any of
those securities was downgraded below investment grade25 was December 16, 2008. Even more
telling, some of these same defendants were still issuing new securitizations of Alt-A loans long
after March 15, 2008, and those new securities were still receiving triple-A ratings from the credit
rating agencies.26 For example, Countrywide continued to issue or underwrite triple-A rated Alt-
25 BBB is the lowest investment-grade rating from Standard & Poors and Baa the lowest from
Moody’s. 26 Similarly, defendants argue that the Bank should have been on notice of its claims before March 15,
2008, because American Home Mortgage, one of the originators of the mortgage loans in the securitizations that the Bank purchased, “experienced a 44 percent decrease in first quarter [2007] profits” and filed for bankruptcy protection in August 2007. (Joint Br. 21.) Defendants omit to mention, however, that nine months after the American Home bankruptcy, in May 2008, Bank of America was still securitizing loans originated by American Home. See BAFC 2008-1 Pros. Sup. S-32 available at http://www.sec.gov/Archives/edgar/data/934377/ 000137943408000019/form424b5.htm (51.29% of loans originated by American Home). The same is true for Greenpoint. Deutsche Bank claims that Greenpoint started to experience difficulties in July 2007, (Deutsche Bank Br. 1) but fails to note that Greenpoint loans were still being securitized, and those securities sold to the Bank, at the end of August 2007. (See CS, Sched. 32.)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-24-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
A-backed securities until May 1, 2008, and Bank of America until May 29, 2008.27 Thus, a few
newspaper articles and an unreported class action complaint surely were not enough to overcome
the fact that the Bank’s securities continued to hold the highest possible rating. See Berry v.
Valence Technology, Inc., 175 F.3d 699, 705 (9th Cir. 1999) (“Since the market did not react
adversely to the Forbes article, a reasonable investor can hardly be expected to have suspected
fraud.”).
Two courts recently have adopted this precise reasoning to deny motions to dismiss based
on the statute of limitations. Judge Illston held that it is at least a question of fact whether the
statute of limitations can begin to run on claims about a mortgage-backed security that still holds
an investment grade rating. In re Wells Fargo Mortgage-Backed Certificates Litigation, 712 F.
Supp. 2d 958 (N.D. Cal. 2010). The claims in Wells Fargo were subject to the one-year statute of
limitations under the 1933 Act. The ratings of the securities had been downgraded more than a
year before the plaintiffs filed suit, but not below investment grade. The plaintiffs argued that
“they were not placed on notice of their ratings-related claims until the Certificates were
downgraded to below-investment-grade ratings.” Id. at 967-68. Judge Illston held that, because
the bonds still held an investment-grade rating one year before the plaintiffs filed suit, it was a
question of fact whether a reasonable plaintiff would have been on notice to investigate a possible
claim before then. Id. at 968. This reasoning applies even more directly in the actions before this
Court because the Bank’s certificates were not only still rated investment-grade on March 15,
2008, they had not been downgraded even a single notch from their original triple-A.
The second recent decision was issued by Judge Rakoff of the United States District Court
for the Southern District of New York. Judge Rakoff likewise held that a court cannot conclude as
a matter of law on a motion to dismiss that an investor whose securities had not yet been
downgraded below investment grade should have suspected that it had a claim for violations of
the securities laws.
27 See, e.g., BAFC 2008-1, underwritten by Bank of America and issued on May 29, 2008; CWALT
2008-HY1, underwritten by Countrywide and issued on May 1, 2008.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-25-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Tellingly, the certificates at issue were not downgraded below investment grade until April 2008, that is, after the March 27, 2008 limitation date, and, even then, the downgrade was not premised on the discovery of fraud but only on a perceived increase in risk . . . . Where there are plausible inferences to be drawn in either direction, the issue of “whether a plaintiff had sufficient facts to place it on inquiry notice is ‘often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6).’” The competing materials referenced above show that this is such a case, and the Court therefore denies defendants’ motion to dismiss on the basis of statute of limitations.
Public Employees’ Retirement System of Mississippi v. Merrill Lynch & Co., 714 F. Supp. 2d 475,
479-80 (S.D.N.Y. 2010). This Court should apply the same rule in these actions and overrule the
demurrers.
c. A reasonable investigation could not have uncovered before March 15, 2008, the trust-specific and loan-specific facts that are alleged in the amended complaints.
Defendants also fail to satisfy the third necessary condition of inquiry notice, to prove that
a reasonable investigation would have uncovered facts sufficient to allege the Bank’s claims. (See
Point I.A.1.) Defendants argue that “it is implausible that Plaintiff would not have discovered [by
March 15, 2008] the facts underpinning its Complaints in light of the information in the public
domain and Plaintiff’s central role in the mortgage industry.” (Joint Br. 22.) Defendants are
wrong, however, because the “facts underpinning” the Bank’s claims were not available to any
investor before March 15, 2008.
The essence of the Bank’s claims is that defendants made material untrue or misleading
statements in the offering documents by which they solicited the Bank to purchase the 136
certificates involved in these actions. To state a viable claim in good faith, the Bank could not
have relied solely on general reports that subprime mortgage loans were inherently risky or that
borrowers were buying houses that they could not afford, or even that the performance of
securitized mortgage loans in general was deteriorating. The Bank needed a plausible basis to
believe – and then to allege – that defendants had made materially untrue or misleading
statements about the specific loans that backed the specific certificates that the Bank purchased
from them. Indeed, as late as September 30, 2009, more than 18 months after defendants say the
statute of limitations started to run, a federal court in Massachusetts dismissed the complaint in an
action about mortgage-backed securities precisely because the plaintiff had not alleged any facts
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-26-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
about the loans in the specific transactions that it was suing on. See Plumbers’ Union Local No.
12 Pension Fund v. Nomura Asset Acceptance Corp., 658 F. Supp. 2d 299, 307-08 (D. Mass.
2009) (“That questionable appraisal practices were a common problem in the industry as a whole,
without more, tells nothing about the Trusts’ underlying loans. To permit a plaintiff, on such a
skimpy foundation, to drag a defendant past the pleading threshold would be to invite litigation by
hunch and to open [defendants] to the most unrestrained of fishing expeditions.”), reversed in part
on other grounds 632 F.3d 762 (1st Cir. 2011).
None of the “facts” that defendants rely on to establish inquiry notice would have given
the Bank any information about the loans that backed any of the certificates that it is suing on.
The first “fact” that defendants refer to is the filing of the class action complaint in Luther. But
that complaint did not contain any facts at all, just allegations. Defendants themselves argue that
“references to investigations and unproven allegations are immaterial as a matter of law.” (Joint
Br. 47.) And defendant Countrywide (which is a defendant in both these actions and in Luther)
argued in its motion to dismiss the Luther action that
this type of circular argument – that the allegations of one complaint are confirmed by the allegations of another – is entirely insufficient to support Plaintiffs’ claim. As one federal court explained in rejecting similar circular allegations, “if this Court were to accept Plaintiffs’ view of pleading, two plaintiffs could file separate actions each relying on the allegations in the other’s complaint and both would state a claim for fraud. Clearly, Rule 11’s requirements do not allow this type of pleading loophole.
Countrywide Defendants’ Memorandum of Points and Authorities in Support of Demurrer at 32,
Luther v. Countrywide, Case No. BC380698 (Los Angeles County Super. Ct., filed March 9,
2009, attached as Exhibit 1 to the Declaration of A. Hartman in Support of Plaintiff’s Opposition
to Defendants’ Demurrers and Motions to Strike. Nor do the second and third categories of
“facts” that defendants rely on, the statements from the Bank’s 2007 Annual Report and the
newspaper articles in Appendix C to their joint brief, provide any specific information about the
loans that back the certificates that the Bank is suing on.28
28 Defendants argue that the Bank had access during 2007 to information about early payment defaults. “Plaintiff had ready access during 2007 and earlier to the very information – ‘early payment defaults’ on mortgage loans – that it now claims is ‘strong evidence that the originator departed from its underwriting standards in making the loan.’” (Joint Br. 19.) Defendants cannot credibly suggest, however, that the existence
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-27-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Defendants cannot credibly argue that allegations like those in Luther or comments about
subprime mortgages in the Bank’s Annual Report and five newspaper articles would have been
sufficient for the Bank to state a claim. Indeed, every defendant in this action has also been sued
in similar actions by other investors in mortgage-backed securities. In each case, defendants have
argued strenuously that a complaint that does not include information about the specific loans that
back the certificates at issue is not sufficient to state a claim. For example, defendant Countrywide
argued in Luther and in Maine State, the continuation of Luther in federal court, that “Rule 11
prohibits Plaintiffs from substituting adequate pleading of facts with generalized criticisms about
how Countrywide supposedly originated loans . . . . Fundamentally, Plaintiffs have not pleaded
any facts showing that any loan that actually made its way into any of the pools underlying the
MBS sold in this case was originated improperly, much less that the description of the loans in the
Offering Documents at issue was materially false.”29 Each of the defendants in these actions has
made virtually identical arguments in moving to dismiss complaints in actions based on mortgage-
backed securities.30
Thus, defendants themselves concede that a plaintiff cannot state a valid claim based on
mortgage-backed securities until it can make specific allegations about the loans that back the
certificates that it purchased. Under California law, then, the statute of limitations cannot begin to
run until that specific information could have been obtained by reasonable investigation. See Point
I.A.1; Grisham, 40 Cal. 4th at 644-45 (“It would be contrary to public policy to require plaintiffs
of EPDs is sufficient to dismiss the Amended Complaints as time-barred as a matter of law, because only a few pages later in the very same brief, defendants argue that early payment defaults are irrelevant. “Plaintiff’s assumption that EPDs were caused by departures in underwriting standards is a textbook example of the logical fallacy of post hoc, ergo proptor hoc, which assumes that a later event was caused by a prior event simply because it occurred after the prior event.” (Joint Br. 46.)
29 Countrywide Defs.’ Mem. Law. in Support of Mot. Dismiss at 58-59, Maine State Retirement System v. Countrywide Financial Corp., 2:10-00302 (C.D. Cal., filed Aug. 16, 2010), Hartman Dec. Ex. 2.
30 See, e.g., WaMu Defs.’ Mem. Law. in Support of Mot. Dismiss at 13-14, Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass Through Certificates, No. C09-0037 (W.D. Wash., filed Jan. 28, 2010), Hartman Dec. Ex. 3; Defs.’ ABN Amro, Inc. and J.P. Morgan Securities, Inc. Mem. Law. in Support of Mot. Dismiss at 20, Public Employees’ Retirement System of Mississippi v. Merrill Lynch & Co., 08-10841 (S.D.N.Y., filed June 17, 2009), Hartman Dec. Ex. 4; Defs.’ Mem. Law. in Support of Mot. Dismiss at 2, Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 08-10446 (D. Mass., filed March 11, 2009), Hartman Dec. Ex. 5.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-28-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
to file a lawsuit at a time when the evidence available to them failed to indicate a cause of
action.”).
The Bank and its sister Federal Home Loan Bank of Seattle were the first plaintiffs in any
action based on mortgage-backed securities to develop and then allege evidence that the
defendants made material untrue or misleading statements about the specific loans that back the
securities that they purchased. This trust-specific and loan-specific evidence that the Banks
developed was not available to any investor before March 15, 2008. It took the Bank many
months, the cooperation of the leading vendor of mortgage data, and millions of dollars in
consulting fees for loan-specific data to test the accuracy of the statements that defendants made
in their offering documents.31 The newly-developed data included:
• Automated-Valuation Model. The Bank used the market-leading computer model to determine the actual values of the properties in each securitization when the mortgage loans on those properties closed. For every securitization, the values that the model provided were substantially lower than the values used to calculate the all-important loan-to-value ratios that defendants gave the Bank. (CS ¶ 56.)
• Subsequent Sales. The Bank examined the sale prices of properties that were sold after the securitizations closed. Even when adjusted for declines in house prices in the areas in which those properties were located, the properties sold for significantly less than the value attributed to those properties in the loan-to-value ratios that defendants gave the Bank. (CS ¶¶ 63-64.)
• Undisclosed Additional Liens. The Bank found that many properties in each securitization had additional liens that were in the public records when the securitization closed, but that defendants did not disclose to the Bank. Those additional liens substantially eroded the borrower’s equity in the property and therefore increased the likelihood of default. (CS ¶¶ 66-71.)
• Owner Occupancy. The Bank also used loan level data to demonstrate in four different ways that many of the properties that defendants stated to be the primary residences of their owners most likely were not. (Borrowers are much less likely to default on mortgages on their primary residences than on investment properties or second homes.) First, the data disclosed
31 The Bank’s initial complaints did not include detailed allegations about this data, because the Bank was still in the process of completing and refining the analysis. But the initial complaints referred to the data that the Bank had gathered, and the initial analysis of the data played an important role in permitting the Bank to determine that it had a viable claim against defendants.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-29-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
that certain borrowers instructed local tax authorities to send the bill for the real-estate taxes on the property to an address other than the property itself. (CS ¶ 92.) Second, certain borrowers failed to designate the property as their “homestead,” which grants special benefits for a primary residence, even though they had the legal right to do so if the property actually was their primary residence. (Id. ¶ 93.) Third, certain borrowers owned three or more properties, thus making it more likely than not that any one property was not a primary residence. (Id. ¶ 91.) And finally, certain properties went directly into foreclosure even though their owners were not late in their mortgage payments. The most likely explanation for such an unusual occurrence is that the properties were investment properties and the borrowers simply informed the servicer of the mortgage loans that they did not intend to make further mortgage payments. (Id. ¶ 95.)
In summary, under California law, the statute of limitations on the Bank’s claims cannot
have begun to run by March 15, 2008, unless the Bank could have discovered the specific facts
that it needed to state a claim against defendants. Defendants have not pointed to any information
that could have been uncovered through reasonable investigation that would have satisfied that
requirement. Thus, defendants have failed to establish as a matter of law that the Bank was on
inquiry notice by March 15, 2008, and their demurrers should be overruled.
B. The Statutes Of Limitations On Many Of The Bank’s Claims Were Tolled By The Filing Of Class Actions.
1. The Filing Of A Class Action Automatically Tolls The Statute Of Limitations On Claims Of Members Of The Putative Class.
Even if defendants could establish on a demurrer that the statute of limitations on the
Bank’s claims began running by March 15, 2008, still the Bank’s claims on many of its securities
(and all of its claims under the 1933 Act) would be timely because the statutes of limitations on
them were tolled by the filing of six class actions, five in the United States District Court for the
Southern District of New York and Luther in Superior Court for Los Angeles County.32 (CS ¶ 43;
32 Those actions are: New Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group,
PLC, No. 08-CV-05093 (S.D.N.Y., filed May 14, 2008); Massachusetts Bricklayers & Masons Trust Funds v. Deutsche Alt-A Securities, Inc., No. 08-CV-3178 (E.D.N.Y., filed June 27, 2008); New Jersey Carpenters Health Fund v. Bear Stearns Mortgage Funding Trust 2006-AR1, No. 08-CV-08093 (S.D.N.Y., filed Aug. 20, 2008); New Jersey Carpenters Health Fund v. Residential Capital, LLC, No. 08-CV-8781 (S.D.N.Y., filed Sept. 22, 2008); In re IndyMac Mortgage-Backed Securities Litigation, No. 09-CV-04583 (S.D.N.Y., filed May 14, 2009); and Luther v. Countrywide Financial Corp., No. BC380698 (Cal. Super. Ct. L.A. Cty., filed Nov. 11, 2007).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-30-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Deutsche Bank Am. Compl. ¶ 42.) A list of the securities in both actions to which class-action
tolling applies is attached as Appendix A.
The United States Supreme Court held in American Pipe & Construction Co. v. Utah, 414
U.S. 538, 554 (1974), that “the commencement of a class action suspends the applicable statute of
limitations as to all asserted members of the class who would have been parties had the suit been
permitted to continue as a class action.” Although American Pipe concerned a class member that
sought to intervene in the class action, seven years later the Supreme Court extended the rule to
individual actions filed by members of the putative class.33 See Crown Cork & Seal Co. v. Parker,
462 U.S. 345, 354 (1983).34
California courts have adopted the “two major policy considerations” of American Pipe
and apply them to toll the statute of limitations when it would be consistent with those policies to
do so.35 Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1121 (1988). “The first [policy] was the
protection of the class action device.” Id. Class actions are “designed to avoid, rather than
encourage, unnecessary filing of repetitious papers and motions.” American Pipe, 514 U.S. at 550.
If the claims of members of the putative class were not tolled, then “[p]otential class members
would be induced to file protective motions to intervene or to join in the event that a class was
later found unsuitable.” Id. at 553. American Pipe tolling permits members of the putative class to
remain part of the class without fear of the statute of limitations expiring. The second policy of
33 Members of the putative class enjoy the benefit of tolling even if they did not actually rely on the filing of the class action to protect their rights and even if they did not know that there was a class action pending. See American Pipe, 414 U.S. at 551 (“We think no different a standard should apply to those members of the class who did not rely upon the commencement of the class action (or who were even unaware that such a suit existed) and thus cannot claim that they refrained from bringing timely motions for individual intervention or joinder because of a belief that their interests would be represented in the class suit.”); Tosti v. City of Los Angeles, 754 F.2d 1485, 1489 (9th Cir. 1985) (“Application of the tolling rule is not limited to those class members who can prove reliance upon the pendency of the class action.”).
34 Tolling applies whether a member of the putative class chooses to file an individual action before or after the motion for class certification is decided in the class action. In re Hanford Nuclear Reservation Litigation, 534 F.3d 986, 1009 (9th Cir. 2008); see also In re WorldCom Securities Litigation, 496 F.3d 245, 254 (2d Cir. 2007) (holding that American Pipe tolling applies to members of class who file individual suits before class certification is decided).
35 See, e.g., San Francisco Unified School District v. W.R. Grace & Co., 37 Cal. App. 4th 1318 (1995); Becker v. McMillin Construction Co., 226 Cal. App. 3d 1493 (1991); see also Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1123-24 (1988) (declining to toll the limitations period because the class action did not provide sufficient notice of the plaintiff’s claim).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-31-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
American Pipe is to serve the principal purpose of the statute of limitations, that is, to give
defendants timely notice of the extent of their potential liability. Id. at 554-55. Thus, the few cases
in which California courts have declined to apply class-action tolling were mostly mass tort
actions, in which damages are unique to each individual and it is virtually impossible for a
defendant to ascertain the full extent of its potential liability based solely on the filing of a class
action.36 See, e.g., Jolly, 44 Cal. 3d at 1123. Precisely the opposite is true in these cases. Each of
the class actions that the Bank relies on listed the specific securitizations covered by the action.
Defendants could have calculated immediately and precisely the damages suffered by the
members of the putative class, particularly because the statute itself provides a formula for
calculating damages.37
In addition to American Pipe tolling, California courts also apply the related but distinct
doctrine of equitable tolling38 to claims of individual members of a putative class. See Hatfield v.
Halifax PLC, 564 F.3d 1177, 1184-85 (9th Cir. 2009). California courts consider three factors in
deciding whether to apply equitable tolling: (1) timely notice to the defendant of the extent of its
potential liability by the filing of the first action; (2) lack of prejudice to the defendant in
gathering evidence against the second claim; and (3) good faith and reasonable conduct by the
36 For the same reasons, mass torts are rarely certified as class actions. See, e.g., Jolly, 44 Cal. 3d at
1123. 37 American Pipe tolling applies not only to the precise claims asserted in the class action but also to
other claims that are substantially similar. Tosti, 754 F.2d at 1489 (“We find no persuasive authority for a rule which would require that the individual suit must be identical in every respect to the class suit for the statute to be tolled. Such a rule would be illogical because one of the primary reasons a member will opt out of a class suit is that she has strong individual claims against the defendant that she believes will not be redressed by the overall class settlement.”). As long as the claim of the individual plaintiff is similar enough to the claims in the class action that the defendant reasonably is on notice of its potential liability, then California courts will apply American Pipe tolling. See, e.g., San Francisco Unified School District, 37 Cal. App. 4th at 1339 (“The federal class action for asbestos-in-building cases appears to raise the same issues that [plaintiff’s] case does . . . . “); see also Cullen v. Margiotta, 811 F.2d 698, 720 (2d Cir. 1987) (“American Pipe tolling is properly extended to claims of absent class members that involve the same evidence, memories, and witnesses as were involved in the initial putative class action.”), overruled on other grounds by Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143 (1987).
38 Although California courts sometimes have treated the two doctrines as interchangeable, “they are not congruent.” Hatfield v. Halifax, PLC, 564 F.3d 1177, 1188 (9th Cir. 2009).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-32-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
plaintiff in filing the second claim.39 Hatfield, 564 F.3d at 1185; Collier v. City of Pasadena, 142
Cal. App. 3d 917, 924 (1983).
It is undisputed that the Bank was a member of the putative class in each of the six class
actions. Thus, under American Pipe and the California doctrine of equitable tolling, the statute of
limitations on the Bank’s individual claims on the securities in those class actions was tolled from
the time when the class actions were filed.
2. None Of Defendants’ Arguments Defeats The Tolling Of The Statute Of Limitations.
Defendants make four arguments why the statute of limitations has not been tolled on any
of the Bank’s claims. None is persuasive.
a. The Bank pleaded with sufficient particularity that its claims were subject to class-action tolling.
Defendants argue that the Bank is not entitled to American Pipe tolling on any of its
claims because “the Complaints lack any facts indicating (or even suggesting) how or why the
statutes of limitations were tolled by the filing of any of these class actions.” (Joint Br. 23.) But
the Bank alleged that it “is a putative member of the proposed classes in [various class actions
identified by name and docket number], the pendency of which actions has tolled the running of
the statute of limitations on the causes of action alleged in this Complaint.” (Deutsche Am.
Compl. ¶ 42; CS ¶ 43.) Under California law, that allegation is sufficient to plead that the statute
of limitations on the Bank’s claims has been tolled.
39 “Good faith” in the context of equitable tolling means that the plaintiff must not have acted
improperly or in bad faith. Provided that the first two elements of equitable tolling are satisfied, California courts will not deviate from the “general policy which favors relieving plaintiff from the bar of a limitations statute” unless it is clear from the face of the complaint that the plaintiff has acted in bad faith. See Addison v. California, 21 Cal. 3d 313, 319 (1978); Collier v. City of Pasadena, 142 Cal. App. 3d 917, 926 (1983). Courts typically find bad faith only where the plaintiff has engaged in dilatory conduct or “trifl[ed] with the courts or the other party.” Mojica v. 4311 Wilshire, LLC, 131 Cal. App. 4th 1069,1074 (2005) ; see also, e.g., Thomas v. Gilliland, 95 Cal. App. 4th 427, 433-434 (2002) (plaintiff dismissed and refiled to get more convenient trial date); Mitchell v. Frank R. Howard Memorial Hospital, 6 Cal. App. 4th 1396, 1407-08 (1992) (plaintiff engaged in the “procedural tactic of moving the case from one forum to another in the hopes of obtaining more favorable rulings”); Hernandez v. City of El Monte, 138 F.3d 393, 402 (9th Cir. 1998) (plaintiff acted in bad faith by “judge shopping”); Bacon v. City of Los Angeles, 843 F.2d 372, 375 (9th Cir. 1988) (plaintiff’s “string[ing] out state proceedings until forced to the brink of trial and then abandon[ing] those proceedings to initiate federal proceedings on precisely the same claim” constituted bad faith). Obviously, there are no such circumstances here. The Bank has acted in good faith and is entitled to equitable tolling under California law.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-33-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
When a plaintiff relies on a theory of fraudulent concealment, delayed accrual, equitable tolling, or estoppel to save a cause of action that otherwise appears on its face to be time-barred, he or she must specifically plead facts which, if proved, would support the theory.
Mills v. Forestex Co., 108 Cal. App. 4th 625, 641 (2003).
The Bank alleged the only facts that are necessary to invoke American Pipe tolling: that
class actions were filed, that they cover the securities on which the Bank is suing, and that the
Bank is a member of the putative classes. (Deutsche Am. Compl. ¶ 42; CS ¶ 43.) If proven, those
facts are sufficient to show that the statute of limitations was tolled. See, e.g., Jolly, 44 Cal.3d at
1119.
Defendants appear to argue that the Bank should have identified the particular securities
on which its claims were tolled by each of the class actions. (Joint Br. 23.) This argument is
wrong for two reasons. First, the purpose of a complaint is not to “connect every dot” for
defendants. See Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App. 3d 200, 223 (1983) (a
“requirement that [a] complaint allege the specification of details . . . conflicts with California’s
liberal pleading rules”), abrogated on other grounds by Applied Equipment Corp. v. Litton Saudi
Arabia Ltd., 7 Cal. 4th 503 (1994). Second, defendants cannot credibly argue that the Bank’s
amended complaints did not put them on notice of the securities on which the statute of
limitations was tolled by each of the class actions. The class-action complaints are publicly
available, and a number of the defendants here are also defendants in one or more of those class
actions. Indeed, defendants managed to create two detailed appendices (Appendices D & E to
their joint memorandum) that compare the Bank’s securities to those purchased by the plaintiffs in
the class actions. (Joint Br. 23.)
b. California courts apply American Pipe and equitable tolling to class actions filed in both state and federal courts.
Defendants argue that American Pipe tolling applies only to class actions filed in federal
court (yet they also argue that there is no tolling based on federal class actions because such
tolling would be “cross-jurisdictional” and California does not permit cross-jurisdictional tolling).
In fact, California courts permit tolling of the statute of limitations based on the filing of any class
action – state or federal – as long as the policies of American Pipe or equitable tolling are served.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-34-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
i. California permits Tolling based on class actions filed in state court.
Defendants argue that American Pipe is “an outgrowth of Rule 23” of the Federal Rules of
Civil Procedure and permits tolling within the “federal court system” to serve the “administration
of justice in federal courts.” (Joint Br. 23-24.) Defendants then jump to the extraordinary
conclusion that California courts therefore are somehow prohibited from applying American Pipe-
type tolling based on the filing of a class action in state court. “As an outgrowth of federal Rule
23, therefore, American Pipe neither requires nor permits tolling in the context of state-court class
actions, particularly where the later-filed individual action is also filed in state court.” (Joint Br.
24 (emphasis added).)
This argument makes no sense. The Bank is not arguing that the Supreme Court’s decision
in American Pipe is binding on state courts. Of course each state has its own rules of civil
procedure and may decide whether or not to adopt the concept of American Pipe tolling. But
California courts (including the Supreme Court) have made clear repeatedly that California has
indeed adopted the principles of American Pipe. See, e.g., Jolly, 44 Cal. 3d at 1119-21. In other
words, California courts have agreed with the United States Supreme Court that the efficiency and
judicial economy of class actions – both federal and state – are protected by the tolling of the
statute of limitations on claims of members of the putative class. This is precisely what the
California Supreme Court held in Jolly; although California courts are “not bound by the United
States Supreme Court decisions” in American Pipe and Crown Cork & Seal, they nevertheless
apply American Pipe tolling where its “two major policy considerations” are satisfied. Id. at 1122.
Defendants have given no reason whatsoever why California courts are somehow prohibited from
applying American Pipe tolling to class actions filed in California courts.40
40 For the same reasons, defendants’ argument that “foisting American Pipe tolling onto the state court system would also violate the federal Rules Enabling Act” is absurd. (Joint Br. 24 n.35.) First, defendants completely ignore that California courts already routinely apply American Pipe tolling (with no consideration of the Rules Enabling Act). See, e.g., San Francisco Unified School District v. W.R. Grace & Co., 37 Cal. App. 4th 1318, 1336-37 (1995); Becker v. McMillin Construction Co., 226 Cal. App. 3d 1493, 1498 (1991) (concluding that tolling was appropriate during pendency of class certification proceedings under rule of American Pipe). Moreover, the Bank is not arguing – nor did American Pipe hold – that California state courts are bound by Rule 23 of the Federal Rules of Civil Procedure. To the contrary, American Pipe tolling applies in California state courts solely because the California Supreme Court chose to adopt it.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-35-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Not surprisingly, no California court has ever held that American Pipe or equitable tolling
may not be applied to class actions filed in the California courts. And defendants simply ignore at
least two published decisions in which the Courts of Appeal have permitted the tolling of the
statute of limitations based on class actions filed in California courts. See, e.g., Bangert v. Narmco
Materials, Inc., 163 Cal. App. 3d 207, 212-13 (1984); Becker v. McMillin Construction Co., 226
Cal. App. 3d 1493, 1498-1501 (1991). The Court should adopt the same rule in these actions and
toll the statute of limitations on the Bank’s claims on securities that were part of the Luther class
action filed in Los Angeles County Superior Court.
ii. California permits “cross-jurisdictional” tolling based on federal class actions.
Defendants argue that “the five federal class actions filed in New York district courts
cannot toll Plaintiff’s claims . . . because, like the majority of states, California does not recognize
‘cross-jurisdictional’ tolling – i.e., tolling based on class actions filed outside of California.” (Joint
Br. 25.) Again defendants are mistaken. For at least three reasons, it is clear that California courts
do indeed permit tolling based on class actions filed in federal courts outside California.41
First, defendants’ sole basis for arguing that California courts do not apply cross-
jurisdictional tolling is a statement by the Ninth Circuit in Clemens v. DaimlerChrysler Corp., 534
F.3d 1017, 1025 (9th Cir. 2008), that “the weight of authority and California’s interest in
managing its own judicial system counsel us not to import the doctrine of cross-jurisdictional
tolling as a matter of state procedure.” The Ninth Circuit, however, did not (nor could it) hold that
California courts may not apply cross-jurisdictional tolling. It held simply that it was not
appropriate for the federal courts to “import the doctrine” of cross-jurisdictional tolling into
California law before the California Supreme Court had an opportunity to consider it. Id. More
important, however, defendants omit that the Ninth Circuit effectively reversed itself one year
later in Hatfield, 564 F.3d at 1187. In Hatfield, the Ninth Circuit held that a class action filed in
41 The question of cross-jurisdictional tolling is relevant only to whether American Pipe tolling applies
to the Bank’s claims under California law. The statute of limitations on the Bank’s claims under the 1933 Act is governed by federal law and, therefore, is not “cross-jurisdictional” with respect to class actions pending in federal court.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-36-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
state court in New Jersey tolled the statute of limitations on claims of a California resident who
was a member of the putative class and later filed an individual action in federal court in
California. To avoid expressly overruling its holding in Clemens, the Ninth Circuit did not apply
American Pipe tolling but relied instead on the functionally equivalent California doctrine of
equitable tolling. “In light of California’s endorsement of class actions generally, we see no
reason why, in an equitable tolling situation, California would require each individual California
resident who is a member of the [cross-jurisdictional class action] to file individually and burden
the courts with numerous suits.” Id at, 1186.
Like the plaintiff in Hatfield, the Bank is a resident of California.42 Thus, contrary to
defendants’ argument, the most recent decision of the Ninth Circuit actually supports the Bank’s
position that the statutes of limitations on its claims under California law were tolled by the filing
of the federal class actions in New York.
Second, the Court need not look to the Ninth Circuit to determine how California courts
would rule, because California courts themselves already have expressly adopted cross-
jurisdictional tolling. In San Francisco Unified School District v. W.R. Grace & Co., the Court of
Appeal for the First District held that American Pipe tolling applies to toll the statute of
limitations on claims of a plaintiff who opted out of a federal class action in Pennsylvania. 37 Cal.
App. 4th 1318, 1340 (1995). The court held that the fact that the class action was filed in federal
court, rather than state court, makes it more likely that American Pipe tolling will apply:
“Contrary to [Defendant’s] argument, we believe that the fact that the class action was filed in
federal court makes it more likely that the United States Supreme Court cases [American Pipe and
its progeny] apply.” Id. at 1339 (emphasis added). The SFUSD decision is binding precedent for
this Court. Moreover, although the California Supreme Court did not review SFUSD, it has
recognized that the Court of Appeal in SFUSD applied cross-jurisdictional tolling based on
American Pipe and has cited the decision in SFUSD with approval. See McDonald v. Antelope
Valley Community College District, 45 Cal. 4th 88, 111-12(2008) (“[I]n San Francisco Unified
42 The Bank’s principal place of business is in California. Its headquarters is located in San Francisco and may not be changed without the approval of the federal government. 12 U.S.C. § 1423.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-37-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
School Dist. v. W.R. Grace & Co., the plaintiff was part of a federal class action but voluntarily
opted out and filed its own state action. Notwithstanding this voluntary withdrawal, the Court of
Appeal concluded the usual tolling factors were met and tolled the limitations period for the time
during which the plaintiff was a member of the federal proceeding”).
Third, the policies of American Pipe and equitable tolling apply just as squarely to class
actions filed in other jurisdictions as they do to class actions filed in California. Denying tolling to
California residents, like the Bank, that are members of putative classes in actions filed in other
jurisdictions would just encourage them to file unnecessary protective lawsuits in California
courts. Moreover, a class action provides just as much notice to defendants of their potential
liability no matter where it is filed. Defendants argue that “the majority of states” does not
recognize cross-jurisdictional tolling. (Joint Br. 25.) But, in addition to California, only 10 state
courts have ruled on cross-jurisdictional tolling.43 Six of them have permitted it44 and only four
have not.45 The most recent state court to consider the question is the Supreme Court of Montana
in Stevens v. Novartis Pharmaceuticals Corp., 247 P.3d 244 (Mont. 2010). After surveying other
state and federal decisions, the Montana Supreme Court decided to adopt cross-jurisdictional
tolling.
We suspect that a greater burden on the court system will be imposed by not adopting the [cross-jurisdictional tolling] rule, as plaintiffs would be required to
43 In addition to these state court decisions, several federal courts have considered whether state courts
would adopt cross-jurisdictional tolling. These decisions have also been divided. Compare In re Urethane Antitrust Litigation, 663 F. Supp. 2d 1067, 1082 (D. Kan. 2009) (“[I]n the absence of Indiana authority recognizing the doctrine, the Court declines to import a new tolling rule into that state’s limitations law.”), with Primavera Familienstiftung v. Askin, 130 F. Supp. 2d 450, 515-16 (S.D.N.Y. 2001) (concluding that Connecticut would recognize cross-jurisdictional class action tolling). The Fourth Circuit’s prediction in Wade v. Danek Medical, Inc., 182 F.3d 281, 287-88 (4th Cir. 1999) – a case that defendants rely on (Joint Br. 25) – that Virginia would not endorse cross-jurisdictional tolling was proved wrong. In Welding, Inc. v. Bland County Service Authority, the Virginia Supreme Court held that Virginia law does permit cross-jurisdictional tolling. 541 S.E. 2d 909, 912-13 (Va. 2001); see also Torkie-Tork v. Wyeth, 739 F. Supp. 2d 887, 893-94 (E.D. Va. 2010) (holding that Wade’s prediction of Virginia law was no longer good law).
44 See Stevens v. Novartis Pharmaceuticals Corp., 247 P.3d 244 (Mont. 2010); In re West Virginia Rezulin Litigation, 585 S.E.2d 52 (W. Va. 2003); Vaccariello v. Smith, 763 N.E.2d 160 (Ohio 2002); Hyatt Corp. v. Occidental Fire & Casualty Co. of North Carolina, 801 S.W.2d 382 (Mo. Ct App. 1991); Staub v. Eastman Kodak, 726 A.2d 955 (N.J. Super. 1999); Lee v. Grand Rapids, 384 N.W.2d 165 (Mich. App. 1986).
45 See Ravitch v. Price-Waterhouse, 793 A.2d 939 (Pa. Super. Ct. 2002); Maestas v. Sofamor Danek Group, 33 S.W. 3d 805 (Tenn. 2000); Portwood v. Ford Motor Co., 701 N.E. 2d 1120 (Ill. 1998); Bell v. Showa Denko, 899 S.W. 2d 749 (Tex. App. 1995).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-38-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
file protective individual suits in Montana courts to avoid limitations defenses, while otherwise relying on a pending class action suit filed elsewhere. This directly conflicts with the rationale underlying the class action tolling rule: to promote judicial economy by encouraging individual plaintiffs to defer to class action suits to protect their claims. We see no reason why jurisdictional boundaries should operate as a bar to the application of this policy. Where, as here, the defendants are already on fair notice of the claims against them through a timely class action suit, the policies underlying the limitations period are not subverted.
Id. at 256.
In short, the weight of authority is that California permits the tolling of the statute of
limitations on a claim under California law based on the filing of a class action in federal court.
That rule finds support in (1) the only published decision on the point by a California court; (2)
the decision of the Ninth Circuit in Hatfield; (3) the policies of class action tolling; and (4) the
decisions of a majority of other state courts that have considered the question. The Court,
therefore, should apply cross-jurisdictional tolling to toll the statute of limitations on the Bank’s
claims on securities covered by the five federal class actions in New York.
c. The state court in Luther did not lack subject matter jurisdiction.
Defendants argue that “even if American Pipe applied to state court actions, Luther would
not toll the statute of limitations for Plaintiff’s claims because the court in Luther determined that
it lacked subject matter jurisdiction and dismissed the case.” (Joint Br. 24.) This argument no
longer applies. On May 18, 2011, the Court of Appeal for the Second District reversed the
decision of the Superior Court, held that there is subject matter jurisdiction of Luther, and
remanded the case to the Superior Court for further proceedings. Luther v. Countrywide Financial
Corp., No. B222889, 2011 WL 1879242, at *4-5 (Cal. Ct. App. May 18, 2011). Thus, it is now
(presumably) undisputed that the Superior Court always had subject matter jurisdiction of Luther,
so the statutes of limitations on the Bank’s claims were tolled when Luther was first filed in
November 2007.
d. Class action tolling is not retroactively revoked if part of a class action is dismissed for lack of standing.
In each of the six class actions that the Bank relies on for tolling, the complaint stated that
it was filed on behalf of all investors in certain securitizations that were covered by the same SEC
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-39-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
registration statements. Each complaint also listed the covered securities. Under the doctrines of
American Pipe and equitable tolling, the filing of those class actions immediately tolled the statute
of limitations on the Bank’s claims based on the securities that were covered by the class action
complaints. (See Point I.B.1.)
Defendants do not dispute that the class action complaints initially included all 48 of the
securities that are listed in Appendix A. Many months after the class actions were filed,46
however, the claims on some of the securities were dismissed on the ground that no named
plaintiff had purchased those particular securities and therefore that no named plaintiff had
standing to assert claims based on them. Defendants argue that the Bank is not entitled to any
tolling of the statute of limitations on claims about the securities that were ultimately excluded
from the class actions. (Joint Br. 25-26.) In effect, defendants are arguing that the tolling that
began on the day on which each class action was filed should be retroactively revoked.
There are three reasons why this argument is unpersuasive.
i. The purpose of American Pipe is to permit tolling under precisely these circumstances.
One of the two primary policies of American Pipe tolling is to protect the efficiency of the
class action device by permitting members of the putative class who want to remain in the class to
do so, rather than to have to file opt-out actions to protect themselves from the statute of
limitations. Thus, by definition, American Pipe tolling was designed to apply to cases in which
the class action (or part of it) was dismissed or class certification was denied. The claims of all
class members in such cases are tolled from the day on which the class action is filed until the day
46 New Jersey Carpenters Health Fund v. Residential Capital, LLC, No. 08-CV-8781 (S.D.N.Y.), was filed on September 22, 2008, and certain certificates were dismissed for lack of standing on March 31, 2010, 18 months later. New Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group, PLC, No. 08-CV-05093 (S.D.N.Y.), was filed on June 3, 2008, and certain certificates were dismissed for lack of standing on March 26, 2010, 21 months later. Massachusetts Bricklayers & Masons Trust Funds v. Deutsche Alt-A Securities, Inc., No. 08-CV-3178 (E.D.N.Y.), was filed on June 27, 2008, and certain certificates were dismissed for lack of standing on April 6, 2010, 21 months later. In re IndyMac Mortgage-Backed Securities Litigation, No. 09-CV-04583 (S.D.N.Y.), was filed on May 14, 2009, and certain certificates were dismissed for lack of standing on June 21, 2010, 13 months later. The Bank also relies on New Jersey Carpenters Health Fund v. Bear Stearns Mortgage Funding Trust 2006-AR1, No. 08-CV-08093 (S.D.N.Y.), which was filed on August 20, 2008, but the motion to dismiss is still pending in that case, so no certificates have been dismissed. Similarly, no decision regarding standing has been reached in Luther v. Countrywide Financial Corporation, No. BC 380698 (Cal. Super. Ct. L.A. Cty.), filed on November 14, 2007.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-40-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
on which the action or a claim is dismissed or class certification is denied. In re Flag Telecom
Holdings, Ltd. Securities Litigation, 352 F. Supp. 2d 429, 455-56 (S.D.N.Y. 2005) (plaintiff’s
claim under Section 12(a)(2) of 1933 Act was tolled from filing of first proposed class action
complaint until the date on which the complaint was dismissed).
There is nothing unique about the dismissal of part of a class-action complaint for lack of
standing that somehow defeats American Pipe tolling. The two policies of American Pipe plainly
apply to claims that once were part of a class action but later were dismissed for lack of standing.
Even if a part of a class-action complaint may ultimately be dismissed on standing grounds, still it
is more efficient to encourage class members to remain in the class until such a decision is made
than to force them to file unwanted opt-out actions. And no matter why a claim may be dismissed,
still the complaints give defendants the same degree of notice of their potential liability to all
members of the class as originally defined. Neither logic nor any decision of a California court
suggests that those courts would decline to apply American Pipe or equitable tolling under these
circumstances.47
To the contrary, defendants’ proposed rule that American Pipe tolling – disappears
retroactively if a part of a class-action complaint is dismissed for lack of standing would
undermine the primary purpose of American Pipe. See Flag Telecom, 352 F. Supp. 2d at 455 n.20
(“[T]he failure to apply the American Pipe rule to cases where a class action complaint was
dismissed for lack of standing undermines the policies underlying Rule 23 and is inconsistent with
the Court’s reasoning in American Pipe.”). Rational class members would be forced to file
protective individual actions in case claims of the named plaintiffs would be dismissed for lack of
standing. That is precisely what American Pipe and the California courts that adopted it were
trying to avoid.
47 In fact, California federal and state courts have permitted tolling based on class actions that were dismissed for lack of subject matter jurisdiction and lack of personal jurisdiction, both of which are conceptually similar to a dismissal for lack of standing. See, e.g., Valenzuela v. Kraft, Inc., 801 F.2d 1170, 1175 (9th Cir. 1986) (“The purpose of the statute, the notice to defendant, and the diligence demonstrated by the plaintiff determine the availability of tolling, not the presence or absence of subject matter jurisdiction.”); Addison v. State, 21 Cal. 3d 313, 315 (1978) (action filed in federal court, which was dismissed for lack of subject matter jurisdiction, equitably tolled statute of limitations for purposes of later-filed state court action); Hatfield, 564 F.3d at 1186;
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-41-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
ii. It was not evident from the face of the class-action complaints that the plaintiffs lacked standing.
As courts have recognized, it is unreasonable to expect every member of a putative class
to have the information and resources necessary to predict the outcome of a potential motion to
dismiss for lack of standing. See Rose v. Arkansas Valley Environmental & Utility Authority, 562
F. Supp. 1180, 1193 (W.D. Mo. 1983) (“Standing questions are ones with which both skilled
counsel and skilled courts sometimes experience considerable difficulty, even after extensive
discovery and when intimately acquainted with the facts, as vividly demonstrated by the history of
the present litigation itself.”). That is particularly important here, because it was not evident on
the face of the class-action complaints that the named plaintiffs did not have standing to pursue
claims on all of the securities that were listed in those complaints. To the contrary, the class action
complaints alleged that the lead plaintiffs did have standing because all of the securities in each
complaint were issued under the same master prospectus.48 See Consolidated Am. Compl. ¶ 253,
New Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group, PLC, No. 08-CV-
05093 (S.D.N.Y, filed May 19, 2009), Hartman Dec. Ex. 6 (“Plaintiffs bring this action as a class
action [on] behalf of a class consisting of all persons or entities who acquired the Certificates
issued by the Issuers . . . pursuant and/or traceable to the false and misleading Registration
Statements and who were damaged thereby”).
When the class actions that the Bank relies on for tolling were first filed, no court had yet
ruled on whether a lead plaintiff has standing to represent a class of all purchasers of securities
that were issued pursuant to the same prospectus. Defendants argue that “[e]very court to address
the issue in an RMBS class action has concluded that a plaintiff lacks standing to represent
investors in RMBS that the named plaintiffs did not themselves buy.” (Joint Br. 26 n.37.) That
48See, e.g., Memorandum of Law in Opposition to the RBS Defendants’ Motion to Dismiss Plaintiffs’
Consolidated First Amended Securities Class Action Complaint, N.J. Carpenters Vacation Fund v. The Royal Bank of Scotland Group, PLC, No. 08-CV-05093, 6 (S.D.N.Y. filed Sept. 21, 2009) (“[O]nce it has been pled that Plaintiffs purchased Certificates pursuant to a Registration Statement, their standing is sufficiently stated and the issue of whether Plaintiffs may represent purchasers on all the Offerings is a matter resolved at the class certification stage. In any event, however, Plaintiffs have standing to represent investors in all the Certificate Offerings because the claims arise from common alleged omissions and misstatements in the Registration Statement and identical misstatements in the Prospectus Supplements.”) Hartman Dec. Ex. 7.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-42-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
may be correct, but is so only in hindsight. The very first decision to address that question in the
context of mortgage-backed securities was Nomura, 658 F. Supp. 2d at 303, which was not
decided until September 30, 2009. No reasonable investor could have predicted with any degree
of certainty on March 15, 2008, which securities (if any) would be dismissed from a class action.
That is precisely why the doctrine of American Pipe exists, to permit a potential individual
plaintiff like the Bank to rely on the tolling effect of a class action rather than to have to file its
own protective lawsuit.
iii. The cases that defendants rely on do not apply to the Bank’s actions, and defendants ignore the dozens of California cases that have applied tolling based on class actions that were dismissed for lack of standing.
Defendants argue that “[i]t is well settled that American Pipe tolls only those claims that
named plaintiffs have standing to assert on behalf of the putative class.” (Joint Br. 26.) But
defendants are referring to a line of cases that has nothing to do with these actions. To prevent a
very specific type of abuse that applies only to class actions, but not to individual actions like
these, courts have declined to apply American Pipe tolling to subsequent class actions based on
earlier-filed class actions that were dismissed for lack of standing. Plaintiffs may not stack one class action on top of another and continue to toll the statute of limitations indefinitely. Permitting such tactics would allow lawyers to file successive putative class actions with the hope of attracting more potential plaintiffs and perpetually tolling the statute of limitations as to all such potential litigants, regardless of how many times a court declines to certify the class.
Basch v. Ground Round, Inc., 139 F.3d 6, 11 (1st Cir. 1998) (emphasis added). Courts have held
repeatedly that the potential abuse of “stacking” one class action on top of another outweighs the
benefits of American Pipe. See, e.g., Korwek v. Hunt, 827 F.2d 874, 879 (2d Cir. 1987) (“The
Supreme Court . . . certainly did not intend to afford plaintiffs the opportunity to argue and
reargue the question of class certification by filing new but repetitive complaints.”); Salazar-
Calderon v. Presidio Valley Farmers Ass’n, 765 F.2d 1334, 1351 (5th Cir. 1985) (“Plaintiffs have
no authority for their contention that putative class members may piggyback one class action onto
another and thus toll the statute of limitations indefinitely . . . .”). Virtually every decision that has
followed this rule has stated expressly that it applies to class actions because of the unique
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-43-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
potential for abuse.49 And all three of the cases that defendants rely on (Joint Br. 26) were class
actions and therefore subject to this unique rule.
More important, defendants ignore that literally dozens of courts in California and
elsewhere have held expressly that American Pipe tolling applies to individual actions even if the
earlier class action is dismissed for lack of standing.50 Indeed, several courts have specifically
noted that, even where American Pipe tolling does not apply to claims in a later class action, still
49 Defendants may argue that courts are somehow prohibited from applying American Pipe tolling
based on class actions that were dismissed for lack of standing because federal courts are constitutionally prohibited from hearing cases that do not satisfy the “case or controversy” requirement of Article III of the United States Constitution. This argument is mistaken for two reasons. First, the requirements of Article III are not relevant to this Court’s analysis of American Pipe or equitable tolling. Second, in any event, the class actions that the Bank is relying on for tolling were not completely dismissed for lack of standing. The cases were merely narrowed. Thus, there always was a “case or controversy” before the federal court that satisfied the requirements of Article III. See, e.g., Rose, 562 F. Supp. at 1193 (“[I]t can hardly be said that a suit commenced by one who lacks standing is in any literal sense a ‘nonexistent’ suit. It may be a defective suit, subject to a motion to dismiss . . . , but it is for all that no less the judicial assertion of a claim, functioning to give a defendant notice of whatever causes of action are asserted therein.”).
50 See, e.g., Haas v. Pittsburgh National Bank, 526 F.2d 1083, 1097-98 (3d Cir. 1975 (filing of class action complaint by named plaintiffs who were later determined to lack standing tolled statute of limitations so that claims of later-added plaintiffs were timely); In re National Australia Bank Securities Litigation, No. 03 Civ. 6537(BSJ), 2006 WL 3844463, at *4-5 (S.D.N.Y. Nov. 8, 2006) (filing of class action tolled limitations period despite dismissal of lead plaintiff’s claims for lack of standing); In re Enron Corp. Securities, Derivative, & ERISA Litigation, 529 F. Supp. 2d 644, 709-10 (S.D. Tex. 2006) (rejecting argument that, because no named plaintiff had standing to assert section 12(a)(2) claims, American Pipe tolling did not apply to allow intervention of new plaintiff with standing); In re Flag Telecom, 352 F. Supp. 2d at 456 (applying American Pipe tolling to allow amendment to add plaintiff with standing to assert claims, reasoning that later-named plaintiff “should not be punished simply because he failed to anticipate that plaintiff’s § 12(a)(2) claims would be dismissed because none of the named plaintiffs in the action had standing to sue on those claims”); Popoola v. MD-Individual Practice Ass’n, 230 F.R.D. 424, 428-30 (D. Md. 2005) (rejecting argument that, without a named plaintiff with standing to sue, the statute of limitations cannot be tolled); In re IPO Securities Litigation, Nos. 21 MC 92SAS, 01 Civ. 9741, 01 Civ. 10899, 2004 WL 3015304, at *4-6 (S.D.N.Y. Dec. 27, 2004) (rejecting argument that American Pipe tolling can never be applied to cases in which the original lead plaintiff lacks standing; concluding that applying tolling rule in case where class counsel mistakenly believed that lead plaintiff had standing, and no prejudice to defendants would result from allowing substitution of qualified lead plaintiffs, best satisfied the goals of American Pipe); In re Issuer Plaintiff IPO Antitrust Litigation, No. 00 Civ. 7804(LMM), 2002 WL 31132906, at *3-4 (S.D.N.Y. Sept. 25, 2002) (filing of class action tolled limitations period for purposes of subsequently filed class action even though original action was dismissed, before any decision was made on certification, for lack of standing of named plaintiffs); Rose, 562 F. Supp. at 1193 (rejecting argument that dismissal of class action because named plaintiff lacks standing prevents application of American Pipe tolling, and focusing instead on the “the extent and character of the notice of the later individual claims which the defendant actually received from the class action”); Miller v. Federal Kemper Insurance Company, 508 A.2d 1222, 1228-30 (Pa. Super. Ct. 1986) (commencement of class action by representative plaintiff who lacks standing tolls statute of limitations for putative class members who later file their own actions, so long as the original action provided defendant with adequate notice of the substantive nature of their claims and the number and generic identities of the potential plaintiffs who might assert them).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-44-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
the individual members of the putative class in the underlying case would be entitled to American
Pipe tolling if they were to file their own individual actions.51
At bottom, defendants do not cite a single case in which a court has refused to apply
American Pipe tolling to an individual action based on a previously filed class action that was
dismissed in whole or in part for lack of standing. Thus, because these are individual actions, the
statutes of limitations on the Bank’s claims were tolled for all securities that were covered by the
class actions when they were originally filed.
3. Statutes Of Repose May Be Tolled Under American Pipe.
Defendants argue that, even if the statutes of limitations on the Bank’s claims were tolled,
American Pipe tolling does not apply to the three-year statute of repose on claims under the 1933
Act. (Joint Br. 28-29.) Defendants omit that the majority of courts that have considered this
question – and all courts in California – have held that American Pipe tolling does indeed apply to
statutes of repose. See, e.g., Albano v. Shea Homes Ltd. Partnership, 634 F.3d 524, 535 (9th Cir.
2011).
The crux of the debate is the interpretation of the decision of the United States Supreme
Court in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991). The
Supreme Court held that general principles of equitable tolling do not apply to statutes of repose,
which were intended as absolute bars on litigation. Lampf, however, was not addressing American
Pipe tolling in particular, and since Lampf, courts have been divided on whether American Pipe
tolling applies to statutes of repose. Defendants cite two federal decisions52 from the Southern
51 See, e.g., Warden v. Crown American Realty Trust, No. CIV.A. 96-25J, 1998 WL 725946, at *4-5, *7 (W.D. Pa. Oct. 15, 1998) (noting that statute of limitations was tolled during pendency of class action claims, and thus proposed intervenor – although he could not use intervention to “breathe life into a nonexistent lawsuit” that had been dismissed for lack of named plaintiffs’ standing – could bring a separate suit to recover on his individual claims); In re Crazy Eddie Securities Litigation, 747 F. Supp. 850, 856-57 (E.D.N.Y. 1990) (where claims in class action complaint were dismissed for lack of named plaintiffs’ standing, that action nevertheless tolled the statute of limitations so that a new plaintiff could assert individual claims in a separate action, although it did not toll the limitations period with respect to that plaintiff’s attempt to bring a subsequent class action); see also In re Elscint, Ltd. Securities Litigation, 674 F. Supp. 374, 376 (D. Mass. 1987) (where certification had been tentatively denied based on lack of standing of representative plaintiffs, defendants acknowledged that proposed intervenors should be permitted to assert individual claims, just not allowed to represent a class).
52 In re Lehman Bros. Securities & ERISA Litigation, No. 09 MD 02017(LAK), 2011 WL 1453790, at *3 (S.D.N.Y. Apr. 13, 2011); Footbridge Ltd. Trust v. Countrywide Financial Corp., No. 10 Civ. 367(PKC),
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-45-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
District of New York (Joint Br. at 28-29) that declined to apply American Pipe tolling to statutes
of repose. But the majority of courts has held that American Pipe tolling is a unique form of
tolling that does apply even to statutes of repose. The Ninth Circuit, for example, noted that “[t]he
majority of the lower federal courts that have addressed the issue have held that American Pipe
tolling is not equitable, but legal.” Albano, 634 F.3d at 535.53 In other words, American Pipe
tolling “does not involve ‘tolling’ at all.” Id. at 536. Rather, under American Pipe, the plaintiff
“has effectively been a party to an action against [the] defendants since a class action covering
him was requested.” Id. (quoting Joseph v. Wiles, 223 F.3d 1155, 1168 (10th Cir. 2000)). Thus,
American Pipe tolling is consistent with the primary purpose of statutes of repose, providing
defendants with timely notice of the claims against them, because the filing of the class action
gives them notice of those claims and the extent of their potential liability. See id. at 536-37
(quoting Arivella v. Lucent Technologies, Inc., 623 F. Supp. 2d 164, 177 (D. Mass. 2009)).
Federal district courts in California have followed the majority view and permitted
American Pipe tolling of statutes of repose. In Maine State Retirement System v. Countrywide
Financial Corporation (which defendants rely on elsewhere in their brief (see Joint Br. 29)) Judge
Pfaelzer recently held that American Pipe tolling does apply to the three-year statute of repose in
section 13 of the 1933 Act. 722 F. Supp. 2d 1157, 1166 (C.D. Cal. 2010); see also Hildes v.
Arthur Andersen, No. 08-cv-0008-BEN (RBB), 2010 WL 4811975, at *3 (S.D. Cal. Nov. 8,
2010); In re Activision Securities Litigation, No. C-83-4639(A) MHP, 1986 WL 15339, at *3-5
(N.D. Cal. Oct. 20, 1986).
Thus, defendants have given no reason why the Court should not follow the majority view
and apply American Pipe tolling to the statute of repose on the Bank’s claims under the 1933 Act.
2011 WL 907121, at *5-6 (S.D.N.Y. Mar. 16, 2011).
53 The Ninth Circuit in Albano was deciding the statute of limitations under Arizona law. Although the Ninth Circuit concluded that “the weight of authority favors the view” that American Pipe tolling applies to statutes of repose, it chose to certify the question to the Supreme Court of Arizona for a definitive ruling. 634 F. 3d at 540.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-46-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
C. The Statutes Of Limitations on the Bank’s Common Law Claims Are Even Longer Than Two Years.
Defendants state that the Bank’s claims for common law rescission and negligent
misrepresentation are subject to a two-year statute of limitations. (Joint Br. 12.) Defendants are
wrong on both counts. Claims for rescission of contract are governed by a four-year statute of
limitations, and claims for negligent misrepresentation by a three-year statute.
1. Claims For Rescission Of Contract Are Governed By A Four-Year Statute Of Limitations.
Defendants argue that the Bank’s rescission claim is barred by a two-year limitations
period. (Joint Br. 12 n.24.) Defendants are mistaken. Section 337 of the Code of Civil Procedure
provides a four-year limitation period for actions “founded upon an instrument in writing,” and,
under subsection (3), specifically for claims seeking “rescission of a contract in writing . . .
[w]here the ground for rescission is fraud or mistake.” CAL. CIV. PROC. CODE § 337.54 The Bank
seeks rescission of “an instrument in writing,” the written contract pursuant to which the Bank
purchased each certificate, on the ground of mutual mistake. (See, e.g., CS ¶ 167.) The Bank’s
rescission claims thus fall squarely within the ambit of section 337(3) and its four-year limitations
period. See, e.g., Kulberg v. Washington Mutual Bank, No. 10-CV-1214 W(BLM), 2011 WL
1431512, at *7 (S.D. Cal. Apr. 14, 2011) (applying four-year limitations period of section 337 to
claim for rescission of mortgage loan due to fraud); Abels v. Bank of America, No. C 11-0208
PJH, 2011 WL 1362074, at *2 (N.D. Cal. Apr. 11, 2011) (applying four-year limitations period of
section 337 to claim for rescission of mortgage loan due to mutual mistake); Nunez v. Bank of
America, N.A., No. C 11-0081, 2011 WL 1058545, at *2 (N.D. Cal. Mar. 23, 2011) (applying
four-year limitations period of section 337 to claim for rescission of mortgage loan due to material
omissions); Gusenkov v. Washington Mutual Bank, FA, No. C 09-04747 SI, 2010 WL 725815, at
*4 (N.D. Cal. Feb. 26, 2010) (applying four-year limitations period of section 337 to claim for
rescission of mortgage loan due to fraud).
54 Section 337(3) reads in full: “An action based upon the rescission of a contract in writing. The time begins to run from the date upon which the facts that entitle the aggrieved party to rescind occurred. Where the ground for rescission is fraud or mistake, the time does not begin to run until the discovery by the aggrieved party of the facts constituting the fraud or mistake. Where the ground for rescission is misrepresentation under Section 359 of the Insurance Code, the time does not begin to run until the representation becomes false.”
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-47-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
The four-year period starts when the plaintiff discovers the facts of its claim. See, e.g.,
Barabino v. Citizens Automobile Finance, Inc., No. 2:10-cv-00035-MCE-KJN, 2010 WL
3911395, at *2 (E.D. Cal. Oct. 5, 2010); Bojorquez v. Gutierrez, No. C 09-03684 SI, 2010 WL
2925154, at *6 (N.D. Cal. July 26, 2010).55 Defendants do not even try to argue that the Bank
could have discovered the facts underlying its rescission claim four years before filing its
complaints. Instead, defendants rely on a single federal decision, Sitrick v. Citigroup Global
Markets, Inc., No. CV 05-3731 AHM (PJW), 2009 WL 1298148 (C.D. Cal. Apr. 30, 2009), to
argue that the statute of limitations on the Bank’s rescission claims should be two years. But
Sitrick actually held the opposite. “[T]he statute of limitations for a claim based on rescission of a
contract in writing is four years.” Id. at *12. Defendants note correctly that in Sitrick the court
dismissed the plaintiff’s rescission claim, but not on statute of limitations grounds. Instead, the
court held that the rescission claim was based solely on the plaintiff’s claims for negligent
misrepresentation and fraud, both of which had been dismissed for “fail[ure] to show a genuine
issue of material fact.” Because the claim for rescission was derivative of the claims for negligent
misrepresentation and fraud, and because those claims were governed by shorter statutes of
limitations, the court held that the claim for rescission must also be dismissed. Id. at *18.
Defendants have given no reason why the Bank’s claims for rescission should not be
judged on their own merits, nor why the statute of limitations should be anything other than the
four years expressly provided by statute.
55 Section 338 includes a general three-year limitations period that applies to claims based on fraud and
mistake that are not based on a written instrument or do not seek rescission. CAL. CIV. PROC. CODE § 338(d) See, e.g., Salameh v. Tarsadia Hotels, No. 09CV2739 DMS (CAB), 2010 WL 3339439, at *4 (S.D. Cal. Aug. 24, 2010 (holding that section 338 is a “catch-all statute of limitations” that applies where “[t]here is no specific statute of limitations addressing th[e] claim” at issue). Because section 337(3) is more specifically directed to the Bank’s claim for rescission of a written instrument due to mistake, its four-year limitations period should apply. See, e.g., E-Fab, Inc. v. Accountants, Inc. Services, 153 Cal. App. 4th 1308, 1316 (2007) (“Where more than one statute might apply to a particular claim, a specific limitations provision prevails over a more general provision.”); Tain v. Hennessey, No. 03-CV-1481 IEG (NLS), 2009 WL 4544130, at *8 (S.D. Cal. Dec. 1, 2009) (applying “the four-year period set forth in Section 337(3) of the Code of Civil Procedure . . . [b]ecause this statute is more specific than the general statute of limitations” of section 338). In any event, the Bank’s rescission claim is timely under a three-year limitations period, and defendants do not contend otherwise.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-48-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
2. Claims For Negligent Misrepresentation Are Governed By A Three-Year Statute Of Limitations.
Section 338(d) of the California Code of Civil Procedure provides a three-year statute of
limitations for “[a]n action for relief on the ground of fraud or mistake.” The California Supreme
Court has held expressly that negligent misrepresentation is a form of deceit, which in turn is a
species of fraud. See Bily v. Arthur Young & Co., 3 Cal. 4th 370, 407 (1992) (“Negligent
misrepresentation is a separate and distinct tort, a species of the tort of deceit.”). Courts therefore
routinely apply section 338(d) to claims for negligent misrepresentation. See, e.g., Broberg v.
Guardian Life Insurance Co. of America, 171 Cal. App. 4th 912, 920 (2009); Shartsis Friese LLP
v. JP Morgan Chase & Co., No. 08-1064 SC, 2009 WL 1286733, at *2 n.1 (N.D. Cal. May 6,
2009); Ford Motor Credit Co. v. Daugherty, No. CIV. S-04-2344 LKK/JFM, 2006 WL 1153806,
at *5 (E.D. Cal. May 2, 2006); Sun v. Equitable Life Assurance Society of the United States, No. C
01-01553, 2001 WL 764486, at *5 (N.D. Cal. June 25, 2001).
Moreover, several courts have noted that sections 25401 and 25501 of the California
Corporations Code have a shorter statute of limitations than common law claims, including
negligent misrepresentation. “[T]he shorter limitations period in the Corporations Code was
specifically intended to counterbalance the tremendous advantage that a presumption of reliance
affords to plaintiffs.” Mirkin v. Wasserman, 5 Cal. 4th 1082, 1105 (1993); see also Boam v.
Trident Financial Corp., 6 Cal. App. 4th 738, 744 (1992) (“Because it has eased the requirements
for victims to recover successfully, the Legislature has also imposed certain restrictions on them,
such as shortening the statute of limitations for bringing a statutory action . . . .”). Because the
statute of limitations under section 25501 of the Corporations Code is two years, negligent
misrepresentation must have a longer, three-year statute.
The Court of Appeal in Bowden v. Robinson, 67 Cal. App. 3d 705, 716 (1977), expressly
compared the statute of limitations on a securities claim based on common law negligent
misrepresentation and the same securities claim under the Corporations Code. The court held that
“[w]hile the Legislature [in CAL. CORP. CODE § 25506] has, therefore, shortened the statute of
limitations from that available under common law negligent misrepresentation (i.e., three years
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-49-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
from discovery under CODE CIV. PROC., § 338), they have also greatly eased the requirements for
a victim to successfully recover. (CORP. CODE, § 25401).” Id.
Defendants ignore this authority and simply assert, without citation, that the Bank’s
negligent misrepresentation claim is subject to a two-year statute of limitations. (Joint Br. 12.) In
their individual brief, the JP Morgan defendants cite one case, Ventura County National Bank v.
Macker, 49 Cal. App. 4th 1528 (1996). Ventura does not apply to the Bank’s actions, however,
because it was a professional negligence case, and the courts have traditionally applied a two-year
statute of limitations to claims for professional negligence under section 339 of the Code of Civil
Procedure. See, e.g., Hydro-Mill Co. v. Hayward, Tilton & Rolapp Insurance Associates, 115 Cal.
App. 4th 1145, 1158-59 (2004).56
The Bank’s negligent misrepresentation claims in these actions are not based on
professional negligence but on untrue or misleading statements that defendants made in offering
documents that they sent to the Bank. Such claims are subject to a three-year statute of limitations
under section 338 of the Code of Civil Procedure. Defendants do not argue that the Bank was on
inquiry notice of its claims by March 15, 2007, three years before it sued. Defendants’ demurrers
to these claims therefore should be overruled.
D. The Amended Complaints Adequately Plead That The Bank’s Claims Are Not Time-Barred.
Defendants argue that “[t]he demurrers must be sustained with respect to all the state and
federal claims because Plaintiff fails to plead compliance with the applicable statutes of
limitations.” (Joint Br. 13.) There are two reasons why this argument is incorrect. The Bank was
not required to plead “compliance with the applicable statute of limitations” for its claims under
the Corporate Securities Law. And, in any event, the Amended Complaints do adequately allege
that the Bank’s claims were filed before the expiration of the statute of limitations.
56 The Bank is aware that a few isolated cases have applied (without comment or discussion) a two-year statute of limitations to claims for negligent misrepresentation. See, e.g., Platt Electrical Supply, Inc. v. EOFF Electrical, Inc., 522 F.3d 1049, 1054 (9th Cir. 2008) (citing Ventura); Western Filter Corp. v. Argan, Inc., 540 F.3d 947, 951-52 (9th Cir. 2008) (citing Hydro-Mill); E-Fab, Inc. v. Accountants, Inc. Services, 153 Cal. App. 4th 1308, 1316 (2007) (citing Ventura). The Bank respectfully submits, however, that under the Supreme Court’s holding in Bily, the proper statute of limitations in the Bank’s actions is the three years provided by section 338(d).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-50-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
First, defendants argue that, to take advantage of the “discovery rule,” the Bank must
affirmatively plead “the time and manner of discovery” and “the inability to have made earlier
discovery despite reasonable diligence.” (Joint Br. 13.) But this rule does not apply to the Bank’s
claims under the Corporate Securities Law. Rather, it applies solely to claims under the common
law, as to which the discovery rule acts as “a judicially recognized exception to the strict
operation of the statute of limitations.”57 Saliter v. Pierce Bros. Mortuaries, 81 Cal. App. 3d 292,
296 (1978) (emphasis added). Thus, because the discovery rule “operates to enlarge a plaintiff’s
time to file suit, [it] must be affirmatively pleaded by the plaintiff.” See Favila v. Katten Muchin
Rosenman LLP, 188 Cal. App. 4th 189, 224 (2010) (emphasis added).
In contrast, the only statute of limitations under section 25506 of the Corporate Securities
Law is two years from the plaintiff’s discovery of the facts that constitute the violation or five
years from the date of the violation. Thus the discovery rule is not an exception to or enlargement
of the statute of limitations. It is the statute of limitations. The California Supreme Court held
definitively in Samuels v. Mix¸ 22 Cal. 4th 1 (1999), that the pleading requirements of the
common law discovery rule do not apply to statutes like the Corporate Securities Law.58
That the alternate limitations provision happens to use the verbal cognates of the noun “discovery” cannot be deemed to effect an incorporation of the “discovery rule,” complete and in its entirety. Unlike the discovery rule, which is ‘treated as an exception’ to the statute of limitations, section 340.6(a)’s alternate limitations provision is indeed a statute of limitations. And unlike the discovery rule, which runs in favor of the plaintiff by enlarging his or her time without a set limit, the alternate limitations provision of section 340.6(a) runs in favor of the defendant by cutting off the plaintiff’s time definitely.
The alternate limitations provision, moreover, is potentially available only to the defendant, and only to reduce the limitations period of four years down to as little as one. Accordingly, whether or not the alternate limitations provision is actually available in any given case is for the defendant to prove. For, if the defendant has
57 The Bank’s claims for negligent misrepresentation and rescission may be subject to the ordinary
discovery rule. For the reasons discussed below, however, the Bank adequately pleaded its compliance with the statute of limitations.
58 The Supreme Court in Samuels was considering an analogous statute, Code of Civil Procedure section 340.6, which provides that: “(a) An action against an attorney for a wrongful act or omission, other than for actual fraud, arising in the performance of professional services shall be commenced within one year after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the facts constituting the wrongful act or omission, or four years from the date of the wrongful act or omission, whichever occurs first.”
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-51-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
the burden of proof on the basic limitations provision, which can only prescribe a longer period, a fortiori he has the burden of proof on the alternate limitations provision, which can only prescribe a shorter one.
Id. at 10-11 (citations omitted).
Under Samuels, the common law discovery rule on which defendants rely does not apply
to the Bank’s claims under the Corporate Securities Law.59 The defendants, not the Bank, bear
“the burden of proving, under the traditional allocation of the burden of proof, that [the Bank]
discovered or should have discovered the facts alleged to constitute defendant’s wrongdoing more
than [two years] prior to filing this action.” Id. at 8-9 (internal quotations omitted). Defendants
cite no case, and the Bank has found none, in which a California state court applied affirmative
pleading requirements to Section 25506.60
Second, the Bank has adequately pleaded its compliance with the statutes of limitations on
its common law claims. The Bank pleaded expressly in the Amended Complaints that “despite
having exercised reasonable diligence, the Bank did not and could not reasonably have discovered
earlier the untrue and misleading statements in the prospectus supplements and other documents.”
(CS ¶ 126.) Defendants argue that this allegation is purely conclusory, that the Amended
Complaints “do not include any facts whatsoever demonstrating or even suggesting Plaintiff’s
compliance with the statutes of limitations.” (Joint Br. 14.) But defendants ignore that the rest of
the allegations in the Amended Complaints plead in great detail many facts that the Bank could
not have discovered before March 15, 2008. In particular, the Amended Complaints include
59 The same rule should apply to the Bank’s claims under the 1933 Act, because (like the Corporations
Code) there is no statute of limitations other than the discovery rule. Section 13 of the Securities Act of 1933 states that “no action shall be maintained to enforce any liability created under section 77k or 77l(a)(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 77m. The Bank is aware that the Ninth Circuit in Toombs v. Leone, 777 F.2d 465, 468 (9th Cir. 1985), held that under the 1933 Act a plaintiff must “affirmatively plead sufficient facts in his complaint to demonstrate conformity with the statute of limitations.” The Bank respectfully submits, however, that this statement in Toombs is wrong. See In re Electronic Data Systems Corp., 305 F. Supp. 2d 658, 677 (E.D. Tex. 2004) (rejecting Toombs and noting that the Toombs decision “illustrates how confusion on plaintiffs’ pleading burdens arose”).
60 Defendants cite one federal case that applied the burden of affirmatively pleading the “discovery rule” in a case under the Corporations Code. Erickson v. Kiddie, No. C-85-4798-MHP, 1986 WL 544, at *9 (N.D. Cal. 1986). But a lone district court opinion is not persuasive authority in light of the later binding precedent of the California Supreme Court in Samuels.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-52-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
detailed allegations about the specific loans that back the certificates that the Bank is suing on.
That information was not available until shortly before the Bank filed its lawsuit. (See Point
I.A.2.) These are the “specific facts which allow a legitimate inference that the delay was
reasonable.” Saliter, 81 Cal. App. 3d at 299-300 n.2. There is no requirement that a complaint
include a narrative of why it complies with the statutes of limitations.61 The Bank was required to
plead the facts underlying its complaint that it could not have discovered before March 15, 2008.
The Amended Complaints do that with specificity. Therefore, to the extent that the Bank had an
obligation to plead compliance with statutes of limitations, it has carried that burden.
II. THE AMENDED COMPLAINTS ALLEGE FOUR CATEGORIES OF ACTIONABLE UNTRUE OR MISLEADING STATEMENTS.
The Amended Complaints allege that defendants made numerous material untrue or
misleading statements. Those statements are of four types: (1) untrue and misleading statements
about the loan-to-value ratios of the mortgage loans in each securitization; (2) untrue statements
about the number of primary residences in each securitization; (3) misleading statements about the
origination of the mortgage loans in each securitization because defendants failed to disclose that
the originators regularly disregarded their own underwriting standards; and (4) misleading
statements about the credit ratings of the certificates that defendants sold the Bank because
defendants stated that those certificates were rated triple-A but failed to state that the rating
agencies did not have accurate information about the mortgage loans when they arrived at those
ratings.
A. Understated Loan-To-Value Ratios
“The loan-to-value ratio of a mortgage loan, or LTV, is the ratio of the amount of the
mortgage loan to the lower of the appraised value or the sale price of the mortgaged property
61 To the contrary, compliance with the statutes of limitations is not an element of the Bank’s claims
and does not have to be pleaded. See, e.g., Johnson v. A. W. Chesterton Co., No. RG09457974, 2009 WL 6361070 (Cal. Sup. Ct. Sept. 11, 2009) (“Plaintiffs were not required to allege facts showing that their claims are not barred by the applicable statute of limitations. Compliance with the statute of limitations is not an element of any of Plaintiffs’ claims.”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-53-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
when the loan was made.” (CS ¶ 47.)62 The LTV is a “crucial” measure of the risk of a loan, and
the LTVs of the loans in a securitization are a crucial measure of the risk of the certificates backed
by those loans. (Id.) In each prospectus supplement, the defendants stated the weighted-average
LTV of all loans in each pool and included detailed tables that stated the LTVs of the loans across
different characteristics such as principal balance and interest rate. (See, e.g., id. ¶ 52.)
1. The Amended Complaints Demonstrate In Three Ways That The LTVs That Defendants Stated In The Prospectus Supplements Were Untrue Or Misleading.
The Amended Complaints demonstrate in three ways that the LTVs in the prospectus
supplements were inaccurate. First, they were inaccurate because the value of the property (the
denominator in the LTV) was often overstated. (CS ¶ 55.) The Bank used the market-leading
computer model, which draws sales of comparable properties from a huge database of
transactions, to determine the actual values of properties when the mortgage loans on those
properties closed. For every securitization, the values that the model provided were substantially
lower than the values used to calculate the LTVs that defendants gave the Bank. The Amended
Complaints allege that in all 116 securitizations in which the Bank purchased certificates, the
LTVs on 125,000 loans (out of a total of 417,000) were computed using values inflated by 5% or
more.63 The Bank also examined the sale prices of properties that were sold some time after the
securitizations closed. Even when adjusted for declines in house prices in the areas in which those
properties were located, the properties sold for significantly less than the value attributed to them
in the LTVs that were given in the prospectus supplements. (See, e.g., id. ¶¶ 63-65.)
Second, the LTVs were misleading also because defendants did not disclose that many of
the properties were encumbered by liens in addition to the first mortgage loans that were in the
collateral pools of the securitizations. These additional, undisclosed liens reduced the borrowers’
equity and made it substantially more likely that they would default on their mortgage loans. (See,
62 For brevity, the Bank will refer whenever possible to the Credit Suisse Amended Complaint (which it abbreviates as CS). Although paragraph numbers may be different, the allegations that the Bank refers to throughout this memorandum appear in both of the Amended Complaints.
63 The Amended Complaints also allege that far fewer loans had LTVs computed using values that were 95% or less of the value determined by the AVM. See CS ¶ 62.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-54-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
e.g., id. ¶¶ 66-72.) The Amended Complaints allege that there were 34,000 loans with undisclosed
additional liens in the securitizations in which the Bank purchased certificates and that those
undisclosed liens had an aggregate principal balance of almost $2.5 billion.
Finally, the LTVs were misleading because the defendants did not disclose that many of
the appraisals used to calculate the LTVs were not made in accordance with the disclosed
procedures and, in particular, were not conducted by unbiased appraisers. Rather, the Amended
Complaints allege that many appraisers were biased because they were under pressure to “hit the
bid” (that is, to appraise the property at a value high enough to enable the loan to close). (Id. ¶
74.) For the same reasons, the statements in the prospectus supplements that the appraisals
complied with the Uniform Standards of Professional Appraisal Practice or with Fannie Mae and
Freddie Mac standards, all of which require that appraisers be independent and not biased, were
untrue. (Id. ¶ 75.)
2. Defendants Mischaracterize The Allegations In The Amended Complaints Based On The Computer Valuation Model.64
Defendants mischaracterize in at least three ways the allegations in the Amended
Complaints that are based on the computer model described above. First, defendants suggest that
the Bank is arguing that the LTVs should have been calculated by using a computer model. Thus,
for example, they argue that “[i]nvestors knew . . . that LTV ratios were computed using
appraisals, not AVMs [automated valuation models].” (Joint Br. 35.) But the Bank does not allege
that a computer model should have been used to calculate the LTVs in the prospectus
supplements. Rather, the purpose of the computer model is to support the Bank’s allegations that
the values that were actually used to calculate LTVs (however those values were determined)
were too high, and thus that the LTVs were untrue or misleading.
Second, defendants argue that the computer model is “based on post hoc assumptions and
data collected long after the actual appraisals were conducted.” (Joint Br. 38.) But the Bank
specifically alleges that the computer model was run as of the date on which each mortgage loan
64 Defendants also argue that LTVs and appraisals are non-actionable opinions. This argument is wrong
for the reasons discussed in Point III.B, below.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-55-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
closed, that is, that the model used sales of comparable properties that took place only before, not
after, the sale of the property that the model was valuing. (CS ¶ 57.) (It is true that there is some
lag between a sale of a comparable property and the loading of that sale into the database, but that
lag does not mean that the output of the model is post hoc. The actual sale of the comparable
property took place before the closing of the loan on which the disclosed LTV was inaccurate. It
does not matter how long it then took to load that sale into the database.) Moreover, defendants’
demurrers cannot be sustained just because they dispute factual allegations in the Amended
Complaints.
Third, defendants argue that the Amended Complaints fail to allege that the LTVs of the
loans in the particular trusts in which the Bank purchased its certificates were inflated. “Plaintiff
fails to show that the alleged inflation [of the values used to calculate the LTVs that defendants
disclosed to the Bank] affected the loans underlying the RMBS Certificates purchased by
Plaintiff.” (Joint Br. 39 (emphasis added).) This argument completely misunderstands the
Amended Complaints. The Bank had the computer model run on exactly the same homes that
secure 224,000 of the 417,000 mortgage loans that back the certificates that defendants sold the
Bank. And the Bank had the model run as of exactly the same dates on which each of those
224,000 mortgage loans closed. (There were not enough comparable sales to determine the
value of the remaining properties.)
B. Overstated Number Of Primary Residences
“Mortgages on primary residences are less likely to default than mortgages on non-owner-
occupied residences and therefore are less risky.” (CS ¶ 86.) In each prospectus supplement, the
defendants made statements about the number of loans in the pool that were secured by primary
residences. The Amended Complaints allege that these numbers were overstated. (See, e.g., id.
¶¶ 88-89.)
The Amended Complaints demonstrate in four ways that many of the properties that
defendants stated to be primary residences most likely were not. First, certain borrowers
instructed local tax authorities to send the bill for the taxes on the property to an address other
than the property itself. (Id. ¶ 92.) Second, certain borrowers failed to designate the property as a
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-56-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
homestead (a tax status that grants special benefits for a primary residence), even though they had
the legal right to do so. (Id. ¶ 93.) Third, certain borrowers owned three or more properties, thus
making it more likely than not that any one property was not their primary residence. (Id. ¶ 94.)
And finally, certain properties went directly into foreclosure even though their owners were not
late in their mortgage payments. The most likely explanation for such an unusual occurrence is
that the properties were investment properties and the borrowers simply informed the servicer of
the mortgage loans that they did not intend to make further mortgage payments. (Id. ¶ 95.)
Defendants argue that these allegations are insufficient to prove that the statements in the
prospectus supplements about primary residences were untrue.65 (Joint Br. 43.) In particular,
defendants argue that the Amended Complaints do not state “when borrowers purportedly
established or changed tax addresses, made homestead designations, or bought additional
properties.” (Joint Br. 42-43.) But again defendants are missing the point. The purpose of these
allegations is not to prove the Bank’s claims; the Bank will do that at trial. The point is to present
specific facts that support a reasonable inference that defendants’ statements about the number of
principal residences in the collateral pools were untrue or misleading. See Committee on
Children’s Television v. General Foods Corp., 35 Cal. 3d 197, 212 (1983) (“[T]he complaint
should set forth the ultimate facts constituting the cause of action, not the evidence by which
plaintiff proposes to prove those facts.”); Careau & Co. v. Security Pacific Business Credit, Inc.,
222 Cal. App. 3d 1371, 1390 (1990) (holding that plaintiffs are not required to “plead the
evidence by which he hopes to prove such ultimate facts”).
C. Undisclosed Disregard Of Underwriting Standards
“An originator’s underwriting standards, and the extent to which the originator departs
from its standards, are important indicators of the risk of the mortgage loans made by that
originator.” (CS ¶ 98.) In each securitization, defendants described the underwriting standards of
the originators of the mortgage loans. Defendants stated that (1) exceptions to those underwriting
65 Defendants also argue that the statements regarding principal residences in the prospectus supplements are not actionable because (1) they were based on the “representations of the borrowers at the time of origination”; and (2) the “offering documents warned of losses arising from origination fraud.” (Joint Br. 40-41.) Both arguments are addressed in Points III.C and III.D, below.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-57-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
standards would be made only if the borrowers demonstrated compensating factors, and (2) the
originators assessed the capacity of the excepted borrowers to repay the loans. (See, e.g., id. ¶ 99.)
But these statements were untrue or misleading because defendants failed to state that (1) the
originators were extensively disregarding their stated underwriting standards, (2) the originators
were making extensive exceptions even when borrowers did not demonstrate compensating
factors, (3) the originators were failing to document the compensating factors, if there were any,
(4) the originators were making loans that the borrowers could not repay, and (5) the originators
were not following quality assurance practices necessary to detect and prevent fraud intended to
circumvent their underwriting standards. (See, e.g., id. ¶ 100.)
The Amended Complaints allege that, for many of the originators, the number of loans
that became 60 or more days delinquent within six months of closing increased between 2004 and
2007, even though characteristics like LTV and credit score (FICO) stayed the same. (See, e.g.,
CS Exs. A-H (plotting default rates against weighted average FICO scores and LTV).) “Because
an [early payment default] occurs so soon after the mortgage loan was made, it is much more
likely that the default occurred because the borrower could not afford the payments in the first
place (and thus that the underwriting standards were not followed), than because of changed
external circumstance.” (Id. ¶ 103.) The Amended Complaints also allege that delinquencies in
many trusts were higher than several standard benchmarks, which strongly suggests that the
originators disregarded their underwriting standards in making the loans. (Id. ¶¶ 104-08.)66
Defendants argue that these allegations are insufficient because the Bank does not “allege
any contemporaneous facts to support its claim that the statements concerning underwriting
standards were materially misleading.”67 (Joint Br. 46.) For example, defendants argue that
dramatic increases in early payment defaults and delinquencies could have been caused by
66 The Amended Complaints also refer to extensive evidence from investigations by the government
that both Countrywide and IndyMac departed extensively from their underwriting standards when originating loans for securitization. See CS ¶¶ 109-15.
67 Defendants also argue that the statements in the prospectus supplements regarding underwriting standards are non-actionable because the prospectus supplements disclosed the possibility that originators would depart from those standards. This argument is mistaken for the reasons discussed below in Point III.D.6.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-58-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
“macroeconomic factors” and that delinquencies are not necessarily evidence of poor
underwriting. (Joint Br. 46.)
But the Bank is not required to adduce “contemporaneous” facts or definitive evidence to
plead a cause of action in a complaint. See Committee on Children’s Television, 35 Cal. 3d at 212.
A plaintiff is required to recite only “the essential facts of his case with reasonable precision and
with particularity sufficient to acquaint a defendant with the nature, source and extent of his cause
of action.” Doe v. City of Los Angeles, 42 Cal. 4th 531, 550 (2007). Moreover, it is defendants or
their affiliates that have the loan files in which the disregard of underwriting standards is
documented. When the “defendant has superior knowledge of the facts,” plaintiff need only plead
the facts that “lead[] [the plaintiff] to believe that the allegations are true.” Id.
The Amended Complaints easily satisfy this standard. The Amended Complaints cite, in
detail, each of the allegedly untrue or misleading statements about each of the 136 certificates.
(See CS Sched. 1, Item 99.) The Bank alleges that these representations were untrue or misleading
because the loan originators “were departing extensively from those underwriting standards; . . .
were making extensive exceptions to those underwriting standards when no compensating factors
were present; . . . were making wholesale, rather than case-by-case, exceptions to those
underwriting standards; [and] were making mortgage loans that borrowers could not repay.” (CS ¶
100.) To establish a plausible basis for those allegations, the Amended Complaints marshal the
facts described in detail above.
Courts have held unanimously that “[a]llegations that loan originators ‘abandoned the
underwriting standards that [they] professed to follow and ignored whether borrowers ever would
be able to repay their loans’” are sufficient to establish that the statements in the prospectus
supplements about underwriting standards were untrue and misleading. Employees’ Retirement
System of Government of the Virgin Islands v. J.P. Morgan Chase & Co., No. 09 Civ. 3701(JGK),
2011 WL 1796426, at *8 (S.D.N.Y. May 10, 2011); see also Public Employees’ Retirement
System v. Goldman Sachs, No. 09 CV 1110(HB), 2011 WL 135821, at *10 (S.D.N.Y. Jan. 12,
2011) (offering documents “contained material misstatements as to whether the originators
applied underwriting standards that took into account each loan applicant’s ability to repay”);
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-59-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Public Employees’ Retirement System v. Merrill Lynch & Co., 714 F. Supp. 2d 475, 483
(S.D.N.Y. 2010) (“alleged repeated deviation from established underwriting standards is enough
to render misleading the assertion . . . that underwriting guidelines were generally followed”); In
re Lehman Bros. Securities & ERISA Litigation, 684 F. Supp. 2d 485, 493 (S.D.N.Y. 2010)
(denying motion to dismiss where complaint alleged that “loan originators did not comply with
the disclosed underwriting guidelines that were designed to ensure a borrower’s ability to repay”);
In re IndyMac Mortgage-Backed Securities Litigation 718 F. Supp. 2d 495, 509 (S.D.N.Y. 2010)
(denying motion to dismiss where the “crux of plaintiffs’ claims . . . is that IndyMac Bank ignored
even those watered-down underwriting standards, including the standards for granting exceptions
to the guidelines”); In re Wells Fargo Mortgage-Backed Certificates Litigation, 712 F. Supp. 2d
958, 971 (N.D. Cal. 2010) (allegation “that variance from the stated standards was essentially
defendants’ norm” was sufficient to state a claim); Tsereteli v. Residential Asset Securitization
Trust 2006-A8, 692 F. Supp. 2d 387, 392-93 (S.D.N.Y. 2010) (allegations of “widespread
abandonment of underwriting guidelines” was sufficient to state a claim).
D. Misleading Ratings
Each of the certificates that the Bank purchased was rated triple-A, the highest possible
rating from Standard & Poors, Moody’s, and Fitch, and these ratings were disclosed in the
prospectus supplements. (See, e.g., CS ¶ 117.) “The ratings were important to the decision of any
reasonable investor whether to purchase the certificates.” (Id. ¶ 118.) But the statement of these
ratings was misleading because the rating agencies did not have accurate information about the
loans in the collateral pool of each securitization, and the defendants never disclosed that. As
described in the Amended Complaints, “[i]f the LTVs of the mortgage loans in the collateral pool
of a securitization are incorrect, the ratings of the certificates sold in that securitization will also
be incorrect.” (Id. ¶ 49.) Similarly, if the rating agencies had known that the number of loans
actually secured by primary residences was overstated, or that the originators did not follow their
underwriting standards, then the ratings of the certificates that the defendants sold the Bank would
have been lower. (Id. ¶ 119.) Defendants’ statement of each rating of the certificates that the Bank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-60-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
purchased was misleading because the defendants did not disclose that rating agencies did not and
could not take into account the true facts about the mortgage loans in rating the certificates.68
III. NONE OF DEFENDANTS’ EXCUSES FOR THEIR UNTRUE OR MISLEADING STATEMENTS DEFEATS THE AMENDED COMPLAINTS.
A. Remedies For Breach of Contract Do Not Supplant The California Or Federal Securities Laws.
In the pooling and servicing agreement (or PSA) that governs a securitization, the seller of
the mortgage loans to the securitization trust makes certain “representations and warranties” to the
trustee about each loan (e.g., that the loan is not delinquent and that it was made in compliance
with predatory lending laws). The section of the PSA that contains the representations and
warranties also includes a “repurchase or substitute” provision. If a representation or warranty
turns out to have been untrue of a particular loan, then the trust may require the seller of the loan
either to repurchase it at full value or to replace it with a new loan that does comply with the
representations and warranties. Most prospectus supplements have a section that summarizes
certain terms of the PSA, including the representations and warranties.
Two federal courts have held that the “repurchase or substitute” provision is the sole
remedy for a breach of the representations and warranties in the PSA. Lone Star Fund V (U.S.),
L.P. v. Barclays Bank PLC, 594 F.3d 383, 384 (5th Cir. 2010); Footbridge Ltd. v. Countrywide
Home Loans, Inc., No. 09 Civ. 4050, 2010 WL 3790810, at *16 (S.D.N.Y. Sept. 28, 2010). The
plaintiffs in both actions sued under the federal securities laws, alleging that a representation in
the “representations and warranties” section of the PSA – that no mortgage loan was delinquent
when the securitization closed – proved to be untrue of a number of the loans. Lone Star, 594 F.3d
at 388; Footbridge, 2010 WL 3790810, at *16. The courts held that the representations and
warranties themselves cannot be the basis of a claim under the securities laws. The “repurchase or
substitute” provisions “changed the nature” of the representations and warranties in the PSAs
from an “absolute” statement about each loan into a promise to repurchase or replace any
68 Defendants argue that credit ratings are non-actionable because they are statements of opinion, mere
repetitions of statements of third parties, and because the risks associated with credit ratings were adequately disclosed. Defendants are wrong for the reasons discussed in Point IV, below.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-61-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
mortgage loan that turned out to be other than as represented and warranted. Lone Star, 594 F.3d
at 390; Footbridge, 2010 WL 3790810, at *16.
Lone Star and Footbridge do not apply to these actions because none of the Bank’s claims
is based on a representation or warranty in the PSAs. The Bank is suing based on different
statements (descriptions of the mortgage loans in the aggregate, rather than representations and
warranties about each loan separately), by different parties (issuers and underwriters of the
certificates that the Bank purchased, rather than the sellers of mortgage loans to the trusts), in
different documents (prospectus supplements, rather than PSAs). Nevertheless, defendants argue
that the “repurchase or substitute” provisions in the PSAs somehow make non-actionable all of
the hundreds of statements that defendants made in each prospectus supplement about the
mortgage loans in the aggregate. (See Joint Br. 31 (“such ‘cure, repurchase or substitute’
provisions render statements regarding the quality or integrity of the underlying loans non-
actionable”)). There are at least six reasons why the Court should not apply the decisions in Lone
Star and Footbridge to the Bank’s claims in these actions.
First, in both Lone Star and Footbridge, the only claims that the courts dismissed were
based solely on a statement in the “representations and warranties” section of the PSA. In Lone
Star, the claim was based on only one alleged untrue or misleading statement.
Barclays will make representations and warranties with respect to each mortgage loan . . . as of the closing date, including, but not limited to: (1) As of the servicing transfer date . . . no payment required under the mortgage loan is 30 days or more Delinquent nor has any payment under the mortgage loan been 30 days or more Delinquent at any time since the origination of the mortgage loan.
965 F.3d at 388. The plaintiff in Footbridge was suing on an almost identical representation and
warranty. See Footbridge, 2010 WL 3790810, at *16. Moreover, plaintiffs in both cases
specifically alleged that their claims were based on the representations and warranties in the
PSAs.69
Precisely the opposite is true in these actions. None of the alleged untrue or misleading
statements cited in the Amended Complaints was in the “representations and warranties” section
69 See, e.g., Am. Compl. ¶¶ 24-25, 51, 71, 90, 102, 109, Lone Star, 2010 WL 3790810; Am. Compl. ¶¶ 85, 123, 133, 142, Footbridge, 2010 WL 3790810.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-62-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
(or any other section) of the PSAs.70 Nor does the Bank allege that its claims are based in any
other way on any statement in the PSAs. The Bank’s claims are based solely on statements in the
prospectus supplements about the mortgage loans in the aggregate. It is absurd to argue that the
Bank cannot sue defendants for untrue or misleading statements in a prospectus supplement filed
with the SEC because there is a contract to which the Bank is not a party that provides a different
remedy against a different defendant for a different violation.
Second, for precisely these reasons, every court that has considered defendants’ argument
– that Lone Star should be extended to statements outside the confines of the representations and
warranties section of the PSA – has soundly rejected it. See, e.g., New Jersey Carpenters Health
Fund v. Residential Capital, LLC, No. 08 CV 8781 HB, 2011 WL 1630349, at *6 (S.D.N.Y. Apr.
28, 2011) (“The overwhelming majority of courts in this Circuit have rejected [applying] the Lone
Star approach” to allegations that are not based on contractual representations and warranties.).
For example, in Boilermakers National Annuity Trust Fund v. WaMu Mortgage Pass Through
Certificates, Series AR1, 748 F. Supp. 2d 1246 (W.D. Wash. 2010), the plaintiffs alleged that the
defendants sold them mortgage-backed securities based on untrue or misleading statements about
LTVs, appraisals, and underwriting standards, just as the Bank alleges here. Id. at 1254 (citing
Lone Star), the defendants argued that the “repurchase or substitute” provision “changed the
nature of the issuer’s representations” so that all of their statements about the mortgage loans were
non-actionable.71 Id. at 1256. The court disagreed. “Unlike the scenario in Lone Star, Plaintiffs[‘]
allegations are not simply based on a representation about the absence of delinquent loans. As set
70 Defendants may argue that the representations and warranties for each trust include a representation
that all of the mortgage loans were accurately described on the mortgage loan schedules that were transmitted to the issuers of the securities. That is irrelevant for two reasons. First, even if defendants were correct, the mere fact that a representation exists does not mean that the Bank has to sue for its breach. The Bank is free to sue (and it has sued) based solely on the untrue or misleading statements in the prospectus supplements about the mortgage loans. Second, the Bank is suing based solely on the prospectus supplements, and in the vast majority of the securitizations that the Bank purchased, even if such a representation existed about the accuracy of the mortgage loan schedules, there was no reference to that representation in the prospectus supplements. Appendix B lists the 76 prospectus supplements (out of 116 that the Bank is suing on) that make no mention of a representation about the description of the loans on a mortgage loan schedule.
71 WaMu Defs.’ Mot. Dismiss at 24-25, Boilermakers, No. C09-00037 (MJP), 2010 WL 1902273, 33-34 (S.D.N.Y., filed Apr. 27, 2010), Hartman Dec. Ex. 8.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-63-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
forth above, Plaintiffs allege misstatements and omissions regarding underwriting guidelines. The
purchase and sale agreements thus cannot shield Defendants from liability at the pleadings stage.”
Boilermakers, 748 F. Supp. 2d at 1256.
The court in City of Ann Arbor Employees’ Retirement System v. Citigroup Mortgage
Loan Trust Inc., No. CV 08- 01418, 2010 WL 6617866 (E.D.N.Y. Dec. 23, 2010), reached the
same conclusion. “Unlike the claim in Lone Star, Plaintiffs here do not claim that the Trusts
contain a small number of non-conforming loans. Instead, Plaintiffs here claim securities law
disclosure violations in the form of widespread misrepresentations regarding the nature of the
underwriting practices described in the offering documents.” Id. at *7. And, most recently, the
court in Employees’ Retirement System of the Government of the Virgin Islands v. J.P. Morgan
Chase & Co., No. 09 Civ. 3701, 2011 WL 1796426 (S.D.N.Y. Mar. 30, 2011), also rejected the
argument advanced by defendants here: “Lone Star is distinguishable from this case. In Lone Star,
the plaintiffs pointed to a limited number of loans that failed to conform to the representation
regarding their default status; here, by contrast, the plaintiffs claim widespread misrepresentations
regarding the nature of the underwriting and appraisal practices described in the offering
documents.” Id. at *11 (citing City of Ann Arbor, 2010 WL 6617866, at *7).
Indeed, Footbridge itself – the only case that has ever followed Lone Star – proves the
same point. In addition to a breach of the representation and warranty in the PSA that no loan was
delinquent, the plaintiffs in Footbridge alleged that there were several other categories of untrue
or misleading statements in the offering documents, including statements about occupancy status
and underwriting standards. Although the Footbridge defendants moved to dismiss the entire
action based on Lone Star,72 the court instead applied Lone Star to dismiss only the allegations
about delinquent loans. It did not apply Lone Star to dismiss claims about any other untrue or
misleading statements in the offering documents. See 2010 WL 3790810, at *9-17.
Third, this consensus of district courts, that the Fifth Circuit’s decision in Lone Star should
not be extended to statements outside the “representations and warranties” section of the PSAs, is
72 Defs.’ Joint Mem. of Law in Support of Mot. Dismiss at 22-23, Footbridge, No. 09 Civ. 4050 (S.D.N.Y., filed Sept. 18, 2009), Hartman Dec. Ex. 9.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-64-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
supported by basic principles of contract law. “Representations and warranties” are contractual
promises. That is what the Fifth Circuit meant when it wrote that the “repurchase or substitute”
provision “changed the nature” of the “representations.” Lone Star, 594 F.3d at 390. The
“repurchase or substitute” provision made clear that the representation and warranty in the PSA
was a contractual promise rather than a statement of fact. It is well established that the only
remedy for breach of a contractual promise is to sue for breach of contract.73 In contrast, when an
untrue or misleading statement of fact is not a contractual promise, then the proper remedy is a
tort claim, such as a claim under the federal securities laws or the California Corporate Securities
Law. See e.g., New Jersey Carpenters Health Fund, 2011 WL 1630349, at *8 (holding that
defendants’ “argument employs principles of contract law that are inapposite in the context of a
[claim under the securities laws]”). Because the descriptions of the mortgage loans in the
prospectus supplements were not contractual promises – certainly the issuers and underwriters of
the mortgage-backed securities did not promise to repurchase or replace all of the loans if their
statements about them were untrue or misleading – Lone Star does not make those statements
non-actionable.
Fourth, the representations and warranties in the PSAs all refer to individual loans, e.g.,
that no individual loan was delinquent when the securitization closed and that no individual loan
violated predatory lending laws. The “repurchase or substitute” remedy makes perfect sense as a
remedy for the breach of representations and warranties about individual loans. If any loan does
not comply, then the seller must repurchase it from the trust or substitute a loan that does comply.
In contrast, all of the allegedly or misleading statements in the prospectus supplements concern
73 See, e.g., Oracle USA, Inc. v. XL Global Services, Inc., No. C 09-00537 MHP, 2009 WL 2084154, at
*4 (N.D. Cal. July 13, 2009) (dismissing promissory fraud claim where the “factual underpinning” of plaintiff’s claim was the “failure of [defendant] to keep its promise . . . [and] meet [plaintiff’s] bargained-for expectations”); Multifamily Captive Group, LLC v. Assurance Risk Managers, Inc., 629 F. Supp. 2d 1135, 1146 (E.D. Cal. 2009) (dismissing fraud claim where “the damages plaintiffs seek are the same economic losses arising from the alleged breach of contract”); Intelligraphics, Inc. v. Marvell Semiconductor, Inc., No. C07-02499 JCS, 2009 WL 330259, at *17 (N.D. Cal. Feb. 10, 2009) (dismissing fraud claim based on alleged misrepresentations that were “at most, assurances that [defendant] intended to meet its contractual obligations”); see also Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979, 989 (2004) (“[C]onduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law.”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-65-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
the mortgage loans in the aggregate, e.g., 70% of the loans in the collateral pool are principal
residences and 80% of the loans have an LTV of less than 85%. Untrue and misleading statements
of this kind cannot be cured by the repurchase or substitution of individual mortgage loans. See,
e.g., Employees’ Retirement System of the Government of the Virgin Islands, 2011 WL 1796426,
at *11 (“In Lone Star, the plaintiffs pointed to a limited number of loans that failed to conform to
the representation regarding their default status; here, by contrast the plaintiffs claim widespread
misrepresentations regarding the nature of the underwriting and appraisal practices described in
the offering documents.”).
Fifth, the plaintiffs in Lone Star had standing under the PSAs to demand the repurchase or
substitution of non-compliant loans, but the Bank does not. Before they filed their securities
action, the Lone Star plaintiffs had already demanded successfully that Barclays repurchase loans
from the trust. Lone Star, 594 F.3d at 389. The Bank, however, is not a party to the PSAs that
contain the repurchase or substitute provisions.74 For this reason, the court in Federal Home Loan
Bank of Pittsburgh v. J.P. Morgan Securities, LLC, No. GD09-016892, 2010 WL 5472006 (Pa.
Ct. C.P. Nov. 29, 2010), rejected the precise argument that defendants are making here.
The . . . Prospectus Supplement describes the mechanism for repurchase and substitution of noncomplying loans: the trustee reviews each loan and may cause the seller to repurchase or substitute any defective loans within a limited time after closing. Therefore, what the [underwriter] defendants characterize as the ‘repurchase and substitute’ provision as plaintiff’s ‘sole remedy,’ is not a remedy available to plaintiff, because plaintiff is not the trustee and only the trustee may demand repurchase or substitution from the seller.
Finally, if the Court were to interpret the “repurchase or substitute” provisions of the PSAs
to make non-actionable the untrue or misleading statements in the prospectus supplements, then
those provisions would be void because they would violate the anti-waiver provisions of both
federal and state law. 15 U.S.C. § 77n (“Any condition, stipulation, or provision binding any
person acquiring any security to waive compliance with any provision of this subchapter . . . shall
be void.”); CAL. CORP. CODE § 25701 (“Any condition, stipulation or provision purporting to bind
74 See, e.g., BALTA 2005-9 PSA § 2.4 (notification to purchase or substitute may be made by custodian); CSFB 2005-9 PSA § 2.03 (notification to repurchase or substitute may be made by “parties hereto”) CWALT 2005-46CB PSA § 2.03 (same); INDX 2005-AR5 PSA § 2.03 (same); RAST 2006-A1 PSA § 2.03 (same).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-66-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
any person acquiring any security to waive compliance with any provision of this law or any rule
or order hereunder is void.”).75 As one court recently held, “Lone Star is in significant tension
with the well-established rule that individual security holders may not be forced to forgo their
rights under the federal securities laws due to a contract provision.” Employees Retirement System
of the Government of the Virgin Islands, 2011 WL 1796426, at *11; see also City of Ann Arbor,
2010 WL 6617866, at *7 (“Lone Star is at odds with the anti-waiver provision of the securities
laws . . . . The court therefore declines to dismiss this action based upon Lone Star.”).
B. LTVs And Credit Ratings Are Not “Non-Actionable Opinions.”
Defendants argue that they should be excused from liability for their untrue or misleading
statements about LTVs, appraisals, and credit ratings because those were statements of “opinion”
rather than statements of “fact.” (Joint Br. 33-40, 49.) There are at least four reasons why this
argument is not a valid excuse from liability for those untrue or misleading statements.
1. Untrue Or Misleading Statements Give Rise to Liability Even If They Involve An Element of Judgment.
Defendants argue that statements about LTVs, appraisals, and credit ratings are non-
actionable opinions because they are “subjective.” (Joint Br. 34, 49.) But not every subjective
statement is a non-actionable opinion. As the Supreme Court of the United States has
recognized,76 some opinions address facts about the real world and can be untrue even if they
incorporate an element of subjective judgment and are sincerely held (“In my opinion John Jones
is a liar,” to take the example used by the Supreme Court77). The only opinions that are non-
actionable are those that are completely subjective, those that do not address any fact about the
real world (“In my opinion, Painting A is more beautiful than Painting B”) and therefore cannot
be untrue unless the person who gives the opinion does not actually hold it.
75 Plaintiffs in Lone Star and Footbridge relied on similar anti-waiver provisions. 594 F.3d at 390; 2010
WL 3790810 at *16. The courts held that they did not apply to claims based specifically on breaches of a representation and warranty. No court has held that the anti-waiver provisions of federal or California securities laws would not apply to a contract that purported to supplant those laws for all untrue or misleading statements made in the sale of securities.
76 See Milkovich v. Lorain Journal Co., 497 U.S. 1, 17-20 (1990). 77 Id. at 19.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-67-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
California courts, too, hold that certain opinions, including opinions about value, are
actionable if untrue. The California Supreme Court made very clear in Bily v. Arthur Young &
Co., 3 Cal. 4th 370, 408 (1992) – a case that defendants themselves rely on (Joint Br. 51) – that
defendants may not avoid liability for untrue or misleading statements simply because those
statements include “opinions.”
When a statement, although in the form of an opinion, is not a casual expression of belief but a deliberate affirmation of the matters stated, it may be regarded as a positive assertion of fact. Moreover, when a party possesses or holds itself out as possessing superior knowledge or special information or expertise regarding the subject matter and a plaintiff is so situated that it may reasonably rely on such supposed knowledge, information, or expertise, the defendant’s representation may be treated as one of material fact.
Bily, 3 Cal. 4th at 408.78
The “opinions” that the Supreme Court considered in Bily were audit reports by an
independent accounting firm to certify that a public company had complied with Generally
Accepted Accounting Principles. The court made clear that such audit reports are actionable even
though they involve significant judgment and subjectivity by the auditor. Indeed, the court noted
that the audit reports are “professional opinion[s] based on numerous and complex factors” that
involve “the auditor’s interpretation and application of hundreds of professional standards, many
of which are broadly phrased and subject to different constructions. . . .[T]he report is the final
product of a complex process involving discretion and judgment on the part of the auditor at every
stage.”79 Id. at 400 (emphasis added).
78 Other states have recognized this same principle. See, e.g., Davis v. McGuigan, 325 S.W.3d 149, 154-55 (Tenn. 2010); Buttitta v. Lawrence, 178 N.E. 390, 393 (Ill. 1931); Stack v. Nolte, 29 Wn. 188, 195 (1902).
79 Similarly, most securities actions against public companies allege that their financial statements were untrue or misleading because they failed to comply with Generally Accepted Accounting Principles. GAAP requires considerable subjective judgment about how the complex financial position of a company is to be presented. See, e.g., In re Countrywide Financial Corp. Securities Litigation, 588 F. Supp. 2d 1132, 1175 (C.D. Cal. 2008) (“‘Financial accounting is not a science. It addresses many questions as to which the answers are uncertain and is a process that involves continuous judgments and estimates.’” (quoting Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 100 (1995)); In re Raytheon Securities Litigation, 157 F. Supp. 2d 131, 148 (D. Mass. 2001) (acknowledging that GAAP involves a large measure of judgment and “tolerates a range of reasonable treatments,” but concluding that an application of GAAP that “strays beyond the boundaries of reasonableness” provides evidence from which scienter may be inferred). Even so, courts routinely deny motions to dismiss securities claims based on alleged inaccuracies in GAAP accounting. See, e.g., In re Daou Systems, Inc., 411 F.3d 1006, 1019-20 (9th Cir. 2005) (reversing dismissal of complaint alleging GAAP violations); Backe v. Novatel Wireless, Inc., 642 F. Supp. 2d 1169, 1185 (S.D. Cal. 2009) (denying motion to
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-68-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
2. California Courts, Including This Court, Have Held That Appraisals and Credit Ratings Are Actionable Under California Law.
Defendants omit that this Court has already rejected exactly the same argument that
defendants are making here. Just over a year ago, this Court overruled the demurrers of several
credit rating agencies in California Public Employees’ Retirement System v. Moody’s Corp., No.
CGC-09-490241, 2010 WL 2286924, at 5 (Cal. Super. Ct. May 24, 2010) (Kramer, J). The
agencies argued that “the credit ratings issued by the Rating Agencies (the only alleged
misstatement identified in the Complaint) are statements of opinion, not fact.”80 This Court held
that “having considered all of the allegations of the Complaint, the Court finds that Plaintiff has
properly and fully alleged, with specificity, each and every element of a cause of action of
negligent misrepresentation against each Defendant.” CALPERS, 2010 WL 2286924, at *6. This
Court’s decision in CALPERS is consistent with the unanimous consensus of courts in California
that “opinions” like appraisals and credit ratings are actionable under California law. These courts
have given at least three reasons why appraisals and credit ratings are treated as actionable
statements of fact, not non-actionable opinions.
a. The opinions of professional real estate appraisers and credit rating agencies are actionable under California law.
The Supreme Court held in Bily that the statements of “professionals, including attorneys,
architects, engineers, title insurers, and abstractors,” are not “casual expressions” of opinion and,
therefore, are actionable under California law. 3 Cal. 4th at 408, 410. Following Bily, courts have
held repeatedly that the opinions of professional real estate appraisers and credit rating agencies
are actionable under California law.
First, California courts have held expressly that “opinions” of professional real estate
appraisers are actionable. In Soderberg v. McKinney, 44 Cal. App. 4th 1760 (1996), for example,
a pension trust sued an appraiser for negligent misrepresentation in his appraisal of a property for
dismiss where complaint alleged defendants “knowingly violating GAAP in order to exceed or meet Wall Street expectations”).
80 Mem. of P. & A. in Supp. of Defs.’ Dem. to Compl., California Public Employees’ Retirement System v. Moody’s Corp., No. CGC-09-490241, 2010 WL 1789975, 23 (Cal. Super. Ct. Jan. 12, 2010), Hartman Dec. Ex. 10.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-69-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
a residential mortgage. The pension trust was prohibited under its investment criteria from making
a loan with an LTV higher than 70%. Id. at 1763. The Court of Appeal held that appraisers, “like
auditors . . . may also face suits by third persons claiming reliance on information and opinions
generated in a professional capacity.” Id. at 1768; see also Bright v. Central Pacific Mortgage
Co., No. 97AS06021, 1999 WL 34806021 (Cal. Super. Ct. Nov 23, 1999) (“[A]n appraiser who
erroneously values a property may be held liable on a theory of negligent misrepresentation to
third persons.”).
Just like audit opinions, appraisals are professional opinions that are not mere “casual
expressions.” An appraiser does not simply look at a property and form a completely subjective
opinion of its value in the same way in which an art critic evaluates a painting. See, e.g., CAL.
BUS. & PROF CODE § 11302(b) (defining “Appraisal” as “a written statement independently and
impartially prepared by a qualified appraiser setting forth an opinion in a federally related
transaction as to the market value of an adequately described property as of a specific date,
supported by the presentation and analysis of relevant market information”). In California, as in
most states, appraisers are licensed professionals who are required to follow the Uniform
Standards of Professional Appraisal Practice.81 See id. § 11319 (“Notwithstanding any other
provision of this code, the Uniform Standards of Professional Appraisal Practice constitute the
minimum standard of conduct and performance for a licensee in any work or service performed
that is addressed by those standards.”); Sound Appraisal v. Wells Fargo Bank, N.A., 717 F. Supp.
2d 940, 942-43 (N.D. Cal. 2010) (noting that the federal Financial Institutions and Reform Act of
1989 requires compliance with USPAP in federally related transactions). USPAP imposes
substantial limitations on the subjectivity of an appraisal. Appraisers are required to be aware of,
understand, and correctly apply recognized methods for appraising a property. Appraisers also are
required to identify and analyze certain very specific aspects of each property, including “its
location and physical, legal, and economic attributes,”82 and to analyze sales data for comparable
81 2010 USPAP, available at http://www.uspap.org/toc.htm. 82 Id. Standards Rule 1-2(e)(i).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-70-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
properties to “indicate a value conclusion.”83 Appraisers are subject to sanctions if they fail to
comply with USPAP. See, e.g., CAL. CODE REGS., tit. 10, § 3721 (authorizing a disciplinary action
against any appraiser who has, inter alia, “[v]iolated any provision of USPAP”); see generally 2
HARRY D. MILLER & MARVIN B. STARR, CALIFORNIA REAL ESTATE § 4:96 (3d ed. 2010)
(describing disciplinary procedures and penalties for appraisers). Thus, although appraisers are
required to exercise professional judgment, that judgment is greatly limited by USPAP.84
Notably, defendants do not cite a single decision under California law that an appraisal
conducted by a licensed appraiser is a non-actionable opinion. Defendants cite only three cases
that even discuss California law, but all three involved “appraisals” that were not made by
professional appraisals. In Fifty Associates v. Prudential Insurance Co., a federal case that was
decided 20 years before Bily, the “opinion” of the value of the real estate was “no more than the
proverbial ‘educated guess.’” 450 F.2d 1007, 1011 (9th Cir. 1971). Likewise in Neu-Visions
Sports, Inc. v. Soren/McAdam/Bartells, 86 Cal. App. 4th 303, 310 (2000), the plaintiff knew that
the defendant was an accountant, “not a professional appraiser,” and “[t]hus the value
representation was merely the expression of an opinion as to a future fact.” And in Padgett v.
83 Id. Standards Rule 1-4(a). 84 Defendants argue that their statements that the appraisals of mortgage loans complied with USPAP
also are non-actionable because these statements, too, rely on the accuracy of the appraisals. (See, e.g., Joint Br. 36 n.51.) Defendants are mistaken. When defendants represented that appraisals conformed to USPAP or Fannie Mae and Freddie Mac standards (see, e.g., CS ¶¶ 79-84), they unquestionably made statements of fact. Whether appraisals complied with established standards governing the profession is an objectively verifiable fact. See, e.g., In re Washington Mutual, Inc. Securities, Derivative & ERISA Litigation, 694 F. Supp. 2d 1192, 1224 (W.D. Wash. 2009) (“Plaintiffs allege that Deloitte made the misleading and false statement that its internal control reports were audited ‘in accordance with the [Public Company Accounting Oversight Board]’s standards.’ Whether or not Deloitte employed the PCAOB standards is a verifiable factual statement that is material to those relying on its certification of WaMu’s internal controls.”). Indeed, courts frequently are called upon to determine whether appraisers have acted in conformance with USPAP, since appraisers may be sanctioned when they fail to do so. See, e.g., Eidson v. Washington, 32 P.3d 1039, 1050 (Wash. Ct. App. 2001). In the few cases defendants cite in which courts dismissed allegations based on USPAP compliance, they did so because the plaintiff’s allegations were found to lack sufficient factual support under the strict federal pleading requirements, not because the representations were statements of opinion. See In re IndyMac Mortgage-Backed Securities Litigation, 718 F. Supp. 2d at 510-11 (S.D.N.Y. 2010); Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 393-94 (S.D.N.Y. 2010; Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 658 F. Supp. 2d 299, 307-08 (D. Mass. 2009) overruled by Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 773 (1st Cir. 2011).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-71-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Phariss, 54 Cal. App. 4th 1270, 1284 (1997), the alleged misrepresentations of a property’s fair
market value came from real estate agents, not from a licensed appraiser.
Second, at least one other court has agreed with this Court that, under Bily, the opinions of
credit rating agencies are actionable under California law. Just three months ago, the federal
district court in Anschutz Corp. v. Merrill Lynch & Co., Inc., No. C 09-03780, 2011 WL 1134321
(N.D. Cal. Mar. 27, 2011), rejected substantially the same argument that defendants make here.
The credit rating agencies moved to dismiss a negligent misrepresentation claim on the ground
that their ratings were opinions, not statements of fact. Id. at *16. The court rejected this argument
and noted that defendants had failed to cite “any cases applying California law to determine
whether ratings such as the ones at issue here should be considered statements of opinion or
representations of fact.” Id. The court found that credit ratings are professional opinions that
under Bily must be treated as statements of fact. Id. at *17.
Courts outside California also have held that credit ratings are not mere subjective
opinions, but rather are “facts constituting the actual evaluation by reputable independent entities
concerning the creditworthiness of [securities].” M&T Bank Corp. v. Gemstone CDO VII, Ltd.,
No. 7064/08, 2009 WL 921381, at *11 (N.Y. Sup. Ct. Apr. 7, 2009); accord MBIA Insurance
Corp. v. Royal Bank of Canada, No. 12238/09, 2010 WL 3294302, at *29 (N.Y. Sup. Ct. Aug. 19,
2010). The court in M&T Bank reasoned that:
The ratings by Moody’s and S&P are not just predictions of future valuation but a present analysis of current valuation. Such ratings have been highly regarded and eagerly sought for years. To characterize them merely as predictions or opinions would undercut the necessary reliability such ratings furnish in the world of credit.
2009 WL 921381, at *11; see also Abu Dhabi Commercial Bank v. Morgan Stanley & Co., 651 F.
Supp. 2d 155, 176 (S.D.N.Y. 2009) (“[T]he Rating Agencies’ ratings were not mere opinions but
rather actionable misrepresentations”); In re Taxable Municipal Bond Securities Litigation, Civ.
A. MDL No. 863, 1993 WL 591418, at *5 (E.D. La. Dec. 29, 1993) (rejecting S&P’s argument
that “its ratings were opinions and therefore were not actionable”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-72-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
b. LTVs and appraisals were presented as statements of fact in the prospectus supplements and are actionable under California law.
California courts have also held that statements of “opinion,” and statements about value
in particular, are actionable “where a party states his opinion as an existing fact or as implying
facts which justify a belief in the truth of the opinion.” Cohen v. S & S Construction Co., 151 Cal.
App. 3d 941, 946 (1983). For more than a century, the California Supreme Court has recognized
that “[a] statement as to the value of property is not always made as a mere expression of opinion
upon which the other party has no right to rely. It may be a positive affirmation of a fact, intended
as such by the party making it, and reasonably regarded as such by the party to whom it was
made.” Crandall v. Parks, 152 Cal. 772, 776 (1908). In Crandall, the Supreme Court expressly
rejected the same argument that defendants advance here, that all statements about value are non-
actionable. (Joint Br. 37.)
Wherever a party states a matter which might otherwise be only an opinion, and does not state it as the mere expression of his own opinion, but affirms it as an existing fact material to the transaction, so that the other party may reasonably treat it as a fact and rely and act upon it as such, then the statement clearly becomes an affirmation of fact within the meaning of the general rule, and may be a fraudulent misrepresentation . . . [S]tatements which most frequently come within this branch of the rule are those concerning value.
Id. (emphasis added).
The Amended Complaints allege that defendants made dozens of statements in each
prospectus supplement about the LTVs of the mortgage loans. (CS ¶ 52.) The Amended
Complaints also allege that “the Defendants intended these statements be understood as
statements of fact,” and “[t]he Bank did understand the statements about the LTVs as statements
of fact.” (Id. at ¶ 54.) None of these statements was labeled an “opinion.” The prospectus
supplements did not state, for example, that defendants “believed” that the LTVs were as they
stated them to be. Instead, defendants put statistical tables into the prospectus supplements that
presented as fact the LTVs of the loans in each trust. These are precisely the kinds of “opinions”
that the California Supreme Court has held are actionable. For example, in Harris v. Miller, the
Supreme Court held that a statement about the value of a crop was actionable as a statement of
fact, because the speaker presented it as a statement of fact rather than as a mere opinion.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-73-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
It is the general and well-settled rule that, when a representation concerning the subject-matter of a transaction which might, ordinarily, be only the expression of an opinion is asserted as an existing fact, material to the transaction, and which has a reasonable tendency to induce one of the parties to the transaction to consider and rely upon such representation as a fact, the statement then becomes an assertion of an existing fact within the meaning of the general rule as to fraudulent representations.
196 Cal. 8, 13 (1925); see also Powell v. Oak Ridge Orchards Co., 84 Cal. App. 714, 718-19
(1927).
c. The “opinions” of credit rating agencies and appraisers are actionable because they had superior knowledge and special information regarding the mortgage loans.
California courts have held also that a defendant may be liable for a statement of opinion
if that defendant has “superior knowledge or special information.” Ogier v. Pacific Oil & Gas
Development Corp., 132 Cal. App. 2d 496, 506-07 (1955); see also Bily, 3 Cal. 4th at 408
(holding that opinions by a defendant that “possesses or holds itself out as possessing superior
knowledge or special information or expertise regarding the subject matter” are actionable);
Harazim v. Lynam, 267 Cal. App. 2d 127, 131 (1968) (same). Defendants cannot credibly dispute
that both appraisers and credit rating agencies had superior knowledge about the mortgage loans
in the trusts. The appraisers had direct access to the properties that secured the loans that were
sold into the trusts, and defendants gave the credit rating agencies information about the mortgage
loans that they did not give to the Bank or any other investor. Indeed, the Amended Complaints
specifically allege that the Bank was not given access to loan files that formed the basis for the
LTVs and credit ratings. (CS ¶¶ 41, 54.)
3. Defendants Ignore Binding California Authority And Rely On Only A Few Federal Decisions That Are Not Persuasive Authority For This Court.
Defendants do not address any of the California authority discussed above, nor do they
cite any other California authority for their argument that all opinions are always non-actionable.
Instead, defendants rely most heavily on four recent decisions of lower federal courts that
appraisals and LTVs are statements of opinion.85 These decisions are not binding on this Court
85 In re Wells Fargo Mortgage-Backed Certificates Litigation, No. 5:09-cv-01376-LHK, 2010 U.S. Dist. LEXIS 106687, at *17-18 (N.D. Cal. Oct. 5, 2010); In re IndyMac, 718 F. Supp. 2d at 511; New Jersey Carpenters Health Fund v. DLJ Mortgage Capital, Inc., No. 08 Civ. 5653(PAC), 2010 WL 1473288, at *7-8
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-74-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
and are contrary to California law for the reasons given above. In three of the four cases, the
question whether appraisals or LTVs are statements of opinion was not even briefed by the
parties,86 so those courts decided that important question sua sponte, without the benefit of
informed debate. Moreover, in none of these cases did the federal courts actually explain why
they concluded that appraisals are non-actionable opinions. In Tsereteli v. Residential Asset
Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 393 (S.D.N.Y. 2010), for example, the earliest
of these decisions and the one that defendants rely on most, the court simply stated its conclusion
in just a few dozen words.87
Although a few federal judges followed Tsereteli, others were not persuaded. In the most
recent decision, another judge of the same court rejected Tsereteli, holding that, even if appraisals
might be non-actionable opinions, the LTVs based on them certainly are not.
In Tsereteli v. Residential Asset Securitization Trust 2006–A8, Judge Kaplan characterized both property appraisals and corresponding LTV ratios as “subjective opinion[s]” that are “actionable under the Securities Act only if the amended complaint alleges that the speaker did not truly have the opinion at the time it was made.” 692 F. Supp. 2d 387, 393–94 (S.D.N.Y.2010). But whether or not the appraisal values at issue are properly designated “opinions,” the alleged appraisal misconduct surely distorted the resulting LTV ratios, which were then featured in the Offering Documents. Accordingly, the Court declines to dismiss claims involving the alleged misstatements regarding LTV ratios under a blanket “subjective opinion” rule.
In re Wachovia Equity Securities Litigation, 753 F. Supp. 2d 326, 378 n.48 (S.D.N.Y. 2011); see
also In re Wells Fargo Mortgage-Backed Certificates Litigation, 712 F. Supp. 2d 958, 972 (N.D.
Cal. 2010) (allegations that “Wells Fargo’s practices permitted the pervasive and systematic use
of inflated appraisals, affecting all types of mortgages” adequately pleaded a claim under the
(S.D.N.Y. Mar. 29, 2010); New Jersey Carpenters Health Fund v. The Royal Bank of Scotland Group PLC, 720 F. Supp. 2d 254, 271 (S.D.N.Y. 2010); Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 393 (S.D.N.Y. 2010).
86 See Tsereteli, No. 08 Civ. 10637 (S.D.N.Y. removal filed Dec. 8, 2008), docket nos. 30, 32, 34, 39, 43, 45, 46, 47, 48; DLJ Mortgage, No. 08 Civ. 5653 (S.D.N.Y. removal filed June 23, 2008), docket nos. 55, 69, 77; In re IndyMac, No. 09 Civ. 04583 (S.D.N.Y. filed May 14, 2009), docket nos. 146, 155, 162, 159, 174, 186, 189, 190, 193.
87 In Tsereteli, the court stated merely that “neither an appraisal nor a judgment that a property’s value supports a particular loan amount is a statement of fact. Each is instead a subjective opinion based on the particular methods and assumptions the appraiser uses.” 692 F. Supp. 2d at 393.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-75-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
federal securities laws based on untrue and misleading LTVs); Anschutz, 2011 WL 1134321, at
*17 (rejecting rating agencies’ claims that their ratings were non-actionable opinions).
4. Even If Defendants’ Untrue Or Misleading Statements Were Completely Subjective Opinions, The Bank Has Sufficiently Alleged That They Were False.
Even a completely subjective opinion is actionable if the complaint alleges that the giver
of the opinion did not believe the opinion when he or she gave it or that he or she knew or should
have known that the opinion might be misleading. See Apollo Capital Fund v. Roth Capital
Partners, LLC, 158 Cal. App. 4th 226, 243 (2007); Richard P. v. Vista Del Mar Childcare
Service, 106 Cal. App. 3d 860, 865-66 (1982); Virginia Bankshares, Inc. v. Sandberg, 501 U.S.
1083, 1095-96 (1991). The Amended Complaints allege that “a material number of the upwardly
biased appraisals were not statements of the appraiser’s actual finding of the value of a property
based on his or her objective valuation, but rather were the result of pressure on the appraiser to
‘hit the bid.’” (CS ¶ 78) The Amended Complaints plead facts that support this allegation,
including that appraisers were subjected to pressure by mortgage brokers, real estate brokers, and
loan officers to inflate their appraisals (see id. ¶ 74), and that, in every collateral pool, there were
many times more – sometimes 15 times more – homes that were over-appraised than were under-
appraised (see, e.g., id. ¶ 77). These allegations are sufficient to state a claim even if the Court
were to conclude that appraisals are always non-actionable opinions.
In a very recent decision, a federal court in New York held that systematic upward bias in
appraisals is sufficient to allege that appraisers did not believe their opinions when they gave
them. In Employees’ Retirement System of the Government of the Virgin Islands, the court held
that allegations that appraisers were pressured to “produce predetermined, preconceived, inflated
and false appraisal values” and that appraisers “frequently succumbed” to this pressure were
sufficient to establish that “(a) appraisers did not believe the appraisals when they made them and
(b) that appraisers accepted assignments that were contingent on predetermined results, which
would have been a violation of USPAP.” 2011 WL 1796426, at *9.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-76-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
C. That Defendants Repeated Untrue Or Misleading Statements By Others Is No Excuse Under the California Corporate Securities Law Or The 1933 Act.
Under the Corporate Securities Law, it is unlawful “to offer or sell a security . . . by means
of any written or oral communication which includes an untrue statement of a material fact” or a
misleading omission. CAL. CORP. CODE § 25401. Likewise, sections 11 and 12 of the 1933 Act
prohibit the sale of securities by offering documents that contain any “untrue statement of a
material fact” or that fail “to state a material fact” necessary to make the statements “not
misleading.” See 15 U.S.C. §§ 77k & 77l. According to defendants, they are not responsible for
untrue statements about the occupancy of the mortgaged properties because they “did not purport
to have verified the occupancy status data [and] made no representations as to the accuracy of the
borrowers representations.” (Joint Br. 42.) The defendants’ position, in other words, is that they
are not responsible for untrue statements in their offering documents if those statements are
attributable to third parties. This position is incorrect for at least three reasons.
First, as issuers and underwriters of securities, defendants are not mere passive conduits of
information obtained from others. To the contrary,
[u]nderwriters must “exercise a high degree of care in investigation and independent verification of the company’s representations.” Overall, “[n]o greater reliance in our self-regulatory system is placed on any single participant in the issuance of securities than upon the underwriter.” Underwriters function as “the first line of defense” with respect to material misrepresentations and omissions in [offering documents]. As a consequence, courts must be “particularly scrupulous in examining the[ir] conduct.”
In re WorldCom Securities Litigation, 346 F. Supp. 2d 628, 662 (S.D.N.Y. 2004); see also Escott
v. BarChris Construction Corp., 283 F. Supp. 643, 697 (S.D.N.Y. 1968) (“[U]nderwriters are
made responsible for the truth of the prospectus. If they may escape that responsibility by taking
at face value representations made to them by the company’s management, then the inclusion of
underwriters among those liable under Section 11 affords the investors no additional protection.”).
Underwriters (and certainly issuers) of securities may not avoid liability by arguing that they
faithfully repeated untrue or misleading statements of others. See, e.g., Escott, 283 F. Supp. at 697
(“To effectuate the statute’s purpose, the phrase ‘reasonable investigation’ must be construed to
require more effort on the part of the underwriters than the mere accurate reporting in the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-77-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
prospectus of ‘data presented’ to them by the company.”); In re Phar-Mor, Inc. Securities
Litigation, 848 F. Supp. 46, 49 (W.D. Pa. 1993) (holding underwriter liable even though offering
materials stated that it did not independently verify information or make any warranties about its
accuracy or completeness); Barnebey v. E.F. Hutton & Co., 715 F. Supp. 1512, 1523-24 (M.D.
Fla. 1989) (holding that seller could not avoid liability by asserting that all statements in offering
memorandum were those of a third party and not warranted by it).
This high standard of care does not, as some defendants have argued, make underwriters
“insurers” of securities. Under both California and federal securities laws, underwriters have a
“due diligence” defense, which protects them from liability if they prove that they conducted a
diligent investigation and had reasonable grounds to believe that the statements in their offering
documents were true.88 But this defense is not available on these demurrers because the Amended
Complaints certainly do not demonstrate that defendants diligently investigated their statements
and had reasonable grounds to believe that they were true. See, e.g., Childs v. California, 144 Cal.
App. 3d 155, 163 (1983) (“Matters of defense not apparent in the pleading are not available upon
demurrer.”).
Put simply, when an issuer or underwriter drafts a prospectus supplement, files it with the
SEC, and uses it to solicit investors, it has “made” the statements in that prospectus supplement.89
To hold otherwise would undermine the primary purpose of both California and federal securities
laws – to protect investors – because most statements in every offering document prepared by an
underwriter are based on facts provided to the underwriter by some third party, usually the issuer
88 See CAL. CORP. CODE § 25501 (providing a defense if “the defendant proves that . . . [it] exercised reasonable care and did not know (or if [it] had exercised reasonable care would not have known) of the untruth or omission);15 U.S.C. §§ 77k(b)(3) (requiring underwriters to prove that they “had, after reasonable investigation, reasonable ground to believe and did believe . . . that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading”), 15 U.S.C. § 77l(a)(2) (requiring underwriters to show that they “did not know, and in the exercise of reasonable care, could not have known, of [the] untruth or omission”); see also In re Software Toolworks, Inc., 50 F.3d 615, 621 (9th Cir. 1995) (discussing affirmative defenses available to underwriters). Issuers also have a due diligence defense under the Corporate Securities Law and under section 12(a)(2), but not section 11, of the 1933 Act.
89 Defendants’ argument that they cannot be held liable because they affirmatively disclaimed any responsibility for the truth of certain information included in the offering documents and disclosed that the information might be inaccurate raises a separate issue, which is addressed in Point III.D.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-78-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
of the security. For example, in Lincoln National Life Insurance Company v. Donaldson, Lufkin &
Jenrette Securities Corporation, a federal court in Indiana held that the defendants could not
escape liability under Indiana’s version of the Corporate Securities Law by arguing that their
allegedly untrue or misleading statements were based on information provided by a third party. 9
F. Supp. 2d 994, 999-1002 (N.D. Ind. 1998). The court held that such an argument has no bearing
on the “sufficiency of the complaint.” Id. at 1002.
Second, most of the statements for which defendants are trying to escape liability are not
quotations from third parties. Rather, they are statements that defendants themselves wrote based
on information provided by third parties. It is not plausible that defendants did not “make” these
statements; the statements did not exist until defendants wrote them in their prospectus
supplements.
Third, defendants have shown no reason why untrue or misleading statements about the
occupancy of mortgaged properties are different from any other statements that an issuer or
underwriter makes in an offering document. The Corporate Securities Law makes those
defendants liable for such untrue or misleading statements even though the prospectus
supplements disclosed that the statements were repeated from borrowers.90 See, e.g., In re Phar-
Mor, 848 F. Supp. at 49 (statement in offering document that defendants did not independently
verify any information or make warranties as to its accuracy or completeness did not absolve them
of liability); Federal Home Loan Bank of Pittsburgh, No. GD09-016892, 2010 WL 5472006
(concluding that underwriters could be liable for including credit ratings in offering materials if
plaintiff alleged that defendants knew or should have known that the rating process was flawed
and that no weight should be given to the rating).
D. Defendants May Not And Did Not Disclaim Their Statutory Duty.
The California and federal securities laws make the defendants strictly liable (subject to
the due diligence defense) for untrue or misleading statements. Defendants argue that they can
sidestep liability under the securities laws by inserting in their prospectus supplements disclaimers
90 Nor does the disclaimer itself absolve defendants of liability, as discussed in detail in Point III.D.2.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-79-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
that any statement in them “might” be untrue or misleading. (As will be seen below, defendants
rely on the same disclaimers to argue that none of their untrue or misleading statements was
material and that it was unreasonable as a matter of law for the Bank to rely on them.) But the
securities laws are not so easily evaded. The question whether a particular disclaimer was
effective is almost always a question of fact. Moreover, cautionary language cannot cure untrue or
misleading statements of present or past fact, nor can sellers of securities that make such
statements escape liability for them by disclaimers. And even if disclaimers could ever shield
defendants from liability for their untrue or misleading statements of fact, still the Court should
overrule their demurrers because their disclaimers were not meaningful because they did not
relate clearly and specifically to their untrue or misleading statements.
1. The Effectiveness Of Disclaimers Is A Question Of Fact That Cannot Be Decided On Demurrer.
Dozens of courts have held that the question whether cautionary language and disclaimers
are sufficient to shield a defendant from liability is a question of fact that cannot be resolved on a
motion to dismiss or demurrer. See, e.g., Fecht v. Price Co., 70 F.3d 1078, 1081 (9th Cir. 1995)
(“[W]hether a public statement is misleading, or whether adverse facts were adequately disclosed
is a mixed question to be decided by the trier of fact”); Boilermakers, 748 F. Supp. 2d at 1257
(declining to analyze sufficiency of risk disclosures at pleading stage).91 Thus, even if issuers and
underwriters of securities could ever absolve themselves of their duty under the Corporate
Securities Law or 1933 Act by the use of disclaimers (which, as discussed below, they cannot), it
would be premature to consider whether the particular disclaimers that defendants gave the Bank
were sufficient to exonerate them from liability.
91 See also Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 947 (9th Cir. 2005)
(“Dismissal on the pleadings under the bespeaks caution doctrine . . . requires a stringent showing: There must be sufficient ‘cautionary language or risk disclosure’ [such] that reasonable minds could not disagree that the challenged statements were not misleading.”); Federal Home Loan Bank of Pittsburgh, No. GD09-016892, 2010 WL 5472006 (holding that disclosures in offering materials describing risky nature of loans in collateral pool did not warrant finding, as a matter of law, that defendants made no misrepresentations).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-80-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
2. Untrue Or Misleading Statements Of Present Or Past Fact Can Never Be Cured By Cautionary Language, Nor Liability For Them Avoided By Disclaimers.
Without citation to any authority whatsoever, defendants argue that they are not liable for
the untrue or misleading statements in their prospectus supplements because they warned that the
statements in them might be inaccurate. Defendants claim the alleged misrepresentations were
“plainly disclosed on the face” of the offering documents. (Joint Br. 3.) But the law does not
permit issuers and underwriters to make untrue or misleading statements of fact with impunity
simply by warning that their statements “might” be inaccurate. See, e.g., In re Phar-Mor, 848 F.
Supp. at 49 (defendants’ reliance on the “general language” in disclaimer was “misplaced”);
Barnebey, 715 F. Supp. at 1524 (“[T]he mere disclaiming of any intent to warrant the truthfulness
of the prospectus is insufficient to carry the burden” of escaping liability on a motion to dismiss).
The duty not to make untrue or misleading statements of fact cannot be disclaimed.
Under defendants’ apparent interpretation of the “bespeaks caution” approach, one could construct a completely inaccurate and fraudulent offering memorandum, yet be shielded from a fraud claim as long as there was language in the document cautioning investors of the specific risks. To the extent that such a rule would allow, if not encourage, fraud and non-disclosure on the part of corporate actors, it clearly is not a viable application of the “bespeaks caution” doctrine.
Gurfein v. Sovereign Group, 826 F. Supp. 890, 908 (E.D. Pa. 1993). The contrary rule, which
defendants advocate, would undermine the main purpose of the California and federal securities
laws. See People v. Figueroa, 41 Cal.3d 714, 736 (1986) (“[T]he general purpose of the
[California Securities Law] is to protect the public against the imposition of unsubstantial,
unlawful and fraudulent stock and investment schemes and the securities based thereon.”); Ernst
& Ernst v. Hochfelder, 425 U.S. 185, 198 (1976) (“the congressional purpose in the 1933 and
1934 Acts to protect investors against false and deceptive practices that might injure them.”).
The “bespeaks caution” doctrine does permit an issuer or underwriter to disclaim liability,
but only for forward-looking statements, that is, predictions about the future. Such disclaimers do
not avoid liability for untrue or misleading statements of present or past fact. See, e.g., Iowa
Public Employees’ Retirement System v. M.F. Global Ltd., 620 F.3d 137, 144 (2d Cir. 2010)
(“bespeaks caution does not apply insofar as those characterizations communicate present or
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-81-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
historical fact as to the measures taken.”); Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416
F.3d 940, 947-48 (9th Cir. 2005) (“bespeaks caution” doctrine applies only to forward-looking
statements and not to statements of historical fact); see also P. Stoltz Family Partnership v. Daum,
355 F.3d 92, 97 (2d Cir. 2004) (“It would be perverse indeed if an offeror could knowingly
misrepresent historical facts but at the same time disclaim those misrepresented facts with
cautionary language.”). None of the untrue or misleading statements alleged here was forward-
looking. Each was a statement about a fact that existed when the prospectus supplement was sent
to the Bank. The disclaimers, therefore, are irrelevant.
3. The Disclaimers In The Prospectus Supplements Did Not Relate Clearly And Specifically To The Untrue Or Misleading Statements.
Even if issuers and underwriters could ever validly disclaim their liability for untrue or
misleading statements of fact, the disclaimers that defendants actually gave the Bank were
ineffective to do so. A demurrer under the “bespeaks caution” doctrine “requires a stringent
showing . . . such that reasonable minds could not disagree that the challenged statements were
not misleading.” Livid Holdings, 416 F.3d at 947. To be effective, disclaimers and other
cautionary language must be precise and relate clearly and specifically to the allegedly untrue or
misleading statement. See Provenz v. Miller, 102 F.3d 1478, 1493 (9th Cir. 1996) (“The
cautionary statements must be precise and directly address the defendants’ future projections”); In
re Flag Telecom Holdings, Ltd. Securities Litigation, 618 F. Supp. 2d 311, 322 (S.D.N.Y. 2009)
(“The requirement that the cautionary language match the specific risk is particularly important,
considering that most, if not all security offerings contain cautionary language.”). Disclosures of
general risks are ineffective.
Cautionary language must be extensive and specific. Vague or blanket (boilerplate) disclaimer which merely warns the reader that the investment has risks will ordinarily be inadequate to prevent misinformation. To suffice, the cautionary statements must be substantive and tailored to the specific future projections, estimates or opinions in the prospectus which the plaintiffs challenge.
Slayton v. American Express Co., 604 F.3d 758, 772 (2d Cir. 2010) (citing Institutional Investors
Group v. Avaya, Inc., 564 F. 3d 242, 256 (3d Cir. 2009)). Moreover, even specific warnings “do
not shelter defendants from liability if they fail to disclose hard facts critical to appreciating the
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-82-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
magnitude of the risks described.” Credit Suisse First Boston Corp. v. ARM Financial Group.,
Inc., No. 99 Civ. 12046 WHP, 2001 WL 300733, at *8 (S.D.N.Y. Mar. 28, 2001) (emphasis
added); see also In re Convergent Technologies Securities Litigation, 948 F.2d 507, 515 (9th Cir.
1991) (“To warn that the untoward may occur when the event is contingent is prudent; to caution
that it is only possible for the unfavorable events to happen when they have already occurred is
deceit.”); Goldman Sachs, 2011 WL 135821, at *10 (holding that the “generalized language in the
Offering Documents did not put investors on notice as to the underwriting practices that the loan
originators were using, and therefore obscured the actual level of risk faced by investors who
purchased the Certificates”); New Jersey Carpenters Health Fund v. DLJ Mortgage Capital, Inc.,
No. 08 Civ. 5653(PAC), 2010 WL 1473288, at *6 (S.D.N.Y. Mar. 29, 2010) (disclosures “fail[ed]
to make clear the magnitude of the risk”); In re Prudential Securities Ltd. Partnerships Litigation,
930 F. Supp. 68, 72 (S.D.N.Y. 1996) (holding the law provides “no protection to someone who
warns his hiking companion to walk slowly because there might be a ditch ahead when he knows
with near certainty that the Grand Canyon lies one foot away”).
The disclaimers that defendants gave the Bank did not address the specific subjects on
which the defendants made untrue or misleading statements, nor did they disclose the magnitude
of the risks that those untrue or misleading statements concealed.
4. LTVs, Appraised Values, And Undisclosed Additional Liens
Defendants argue that they are not liable for their untrue or misleading statements about
LTVs or appraised values because the prospectus supplements “expressly warned investors that
LTV ratios might not be an accurate predictor of risk.” (Joint Br. 35.) Defendants refer in
particular to this disclaimer that appeared in some prospectus supplements.
No assurance can be given that the value of any mortgaged property has remained or will remain at the level that existed on the appraisal or sales date. If residential real estate values generally or in a particular geographic area decline, the Loan-to-Value Ratios might not be a reliable indicator of the rates of delinquencies, foreclosures and losses that could occur with respect to the Mortgage Loans.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-83-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
(Id. 35.)92 This cautionary language about future risk had nothing to do with the present fact that
appraisals were inflated when they were given so that statements based on them were untrue or
misleading. (See, e.g., CS ¶¶ 75-78.) Likewise, these disclaimers did not warn investors of the
present fact that already existing pervasive bias in appraisals and the failure to follow USPAP
made the defendants’ statements about LTVs materially untrue or misleading. (Id. ¶¶ 76-84.)
Defendants also argue that warnings in the prospectus supplements exempt them from
liability for undisclosed additional liens. The prospectus supplements for 34 of the 116
securitizations disclosed some information about the existence and amounts of additional liens,
and the Bank has made no claim about additional liens in those transactions. In the other 82
securitizations, defendants’ disclaimers about additional liens are ineffective to shield them from
liability. Sixty-nine of those prospectus supplements gave no disclaimer at all about additional
liens. But even the prospectus supplements that mentioned additional liens did not sufficiently
identify the risks posed by those liens or the magnitude of those risks. Most merely acknowledged
the possibility of additional liens. For example, four disclosed that the LTVs ratios did “not take
into account any secondary financing . . . on the mortgage loans that may [have] existed at the
time of origination.” (Joint Br. 33 & n.46.)
None of these disclaimers shields defendants from liability. None of them warned
investors of the actual, not theoretical, existence of additional liens or of the magnitude of the risk
that they posed. The Bank does not allege that defendants failed to disclose that there might be
additional liens, but rather that there actually were such liens already of record “in the pool at the
time of the closing of the[] securitizations.” (CS ¶ 68.) Because the representations regarding the
existence of those additional liens were untrue or misleading at the time the Bank purchased the
92 Defendants maintain that it is “axiomatic that a true and accurate statement cannot give rise to a misstatement claim.” (Joint Br. 34.) That is beside the point; the Amended Complaints allege that the statements in the prospectus supplements regarding LTVs and appraisals were neither “true” nor “accurate” at the time when they were made. Moreover, defendants’ “axiom[]” is not even correct. Literally “true” statements can give rise to a misrepresentation claim. See Miller v. Thane International, Inc., 519 F.3d 879, 886 (9th Cir. 2008) (“[L]iteral truth is not the standard for determining whether statements in a prospectus are misleading. . . . Some statements, although literally accurate, can become, through their context and manner of presentation, devices which mislead investors.”). The test, as the Ninth Circuit explained in Miller, is whether “[t]he fair and reasonable implication an ordinary investor would derive from all” of the representations made by the defendants was misleading. Id.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-84-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
certificates, defendants’ statements about LTVs were materially misleading. See, e.g., Berson v.
Applied Signal Technology, Inc., 527 F.3d 982, 986 (9th Cir. 2008) (“The passage [cited by
defendant], moreover, speaks entirely of as-yet-unrealized risks and contingencies. Nothing alerts
the reader that some of these risks may already have come to fruition . . . .”).
In addition, many of the prospectus supplements stated that there were upper limits on
combined loan-to-value ratios (CLTVs). (A CLTV includes all loans on a property, not just the
first mortgage loan, in the numerator.) Those limits ranged from 75% to 100%. See, e.g., CWALT
2005-57CB Pros. Sup. at S-46 (“Under the Reduced Documentation Program . . . [t]he maximum
Loan-to-Value Ratio, including secondary financing, ranges up to 75%.”). In every case in which
the undisclosed additional liens caused the CLTV to exceed the limit stated in the prospectus
supplements, the defendants’ statements about those CLTVs were untrue and not excused by any
disclaimers about the mere possibility of additional liens.
5. Primary Residences
Defendants argue that they are not liable for their untrue or misleading statements about
the number of primary residences in each securitization because their prospectus supplements
warned that information concerning occupancy status was not verified (e.g., Joint Br. 40-42) or
that borrowers sometimes presented fraudulent documentation to a lender to obtain a loan (e.g.,
id. at 41). Neither of these statements would be specific enough to shield defendants from liability
(even assuming that they could ever disclaim their liability for untrue statements of present or past
fact). Disclosing that information was not verified or that the defendant does not warrant that it is
accurate does not excuse an issuer or underwriter from liability if its statements based on that
information were untrue or misleading. See Point III.D.2. Moreover, a vague disclaimer that
borrowers sometimes present unspecified fraudulent documentation was not sufficient to disclose
the magnitude of the occupancy problem specifically. (See, e.g., CS ¶¶ 88-96.) As issuers and
underwriters of securities backed by loans for which borrowers may have submitted fraudulent
documentation, defendants should have diligently investigated the borrowers’ statements. See,
e.g., In re WorldCom, 346 F. Supp. 2d at 662 (“Underwriters must exercise a high degree of care
in investigation and independent verification of the company’s representations.”); In re Enron
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-85-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Corp. Securities, Derivative & ERISA Litigation, 235 F. Supp. 2d 549, 612 (S.D. Tex. 2002) (“An
underwriter of a public offering risks exposure to such liability under § 11, as well as to liability
under § 10(b) for any material misstatements or omissions in the registration statement made with
scienter, and thus has a duty to investigate an issuer and the securities that the underwriter offers
to investors.”); see also Hanly v. SEC, 415 F.2d 589, 595-96 (2d Cir. 1969) (“[Securities] brokers
and salesmen are under a duty to investigate and . . . must analyze sales literature and must not
blindly accept recommendations made therein. The fact that [their] customers may be
sophisticated and knowledgeable does not warrant a less stringent standard.”).
Having failed to investigate, defendants assumed the risk that their own statements based
on false assurances by the borrowers would themselves be untrue or misleading. Their disclaimers
that those assurances were not verified independently were not an effective substitute for their
own investigation and disclosure of the extent of occupancy fraud. See In re IPO Securities
Litigation, 358 F. Supp. 2d 189, 212 (S.D.N.Y. 2004) (“[I]f a party is aware of a particular
problem worthy of disclosure, the party may not rely on general disclaimers to avoid liability.”);
SEC v. Dain Rauscher, Inc., 254 F.3d 852, 857 (9th Cir. 2001) (“A securities professional has an
obligation to investigate the securities he or she offers to customers.”).
6. Underwriting Standards
Defendants argue that they are not liable for untrue or misleading statements about
underwriting standards because their prospectus supplements warned:
• that the mortgage loans were only “generally in accordance with” or in “substantial compliance with” the underwriting standards described in the prospectus supplements;
• that the mortgage loans had not been “re-underwritten”; and
• that exceptions to the stated underwriting standards could be made on a case-by-case basis where compensating factors were present.
(Joint Br. 43-46.) In no prospectus supplement, however, did defendants warn of the specific facts
alleged in the Amended Complaints, i.e., that originators were making extensive and often blanket
exceptions to their stated standards without regard to whether or not compensating factors were
present or documented in the originators’ records; that the originators were making mortgage
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-86-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
loans that borrowers could not repay; and that the originators were frequently failing to follow
quality assurance practices necessary to detect and prevent fraud intended to circumvent their
underwriting standards. (See, e.g., CS ¶ 100.) “Disclosures that described lenient, but nonetheless
existing guidelines about risky loan collateral, would not lead a reasonable investor to conclude
that the mortgage originators could entirely disregard or ignore those loan guidelines.” New
Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group PLC, 720 F. Supp. 2d
254, 270 (S.D.N.Y. 2010).
Courts have held repeatedly that similar disclaimers do not insulate issuers and
underwriters from liability for untrue or misleading statements about underwriting standards. In In
re IndyMac, for example, the plaintiffs alleged that statements about IndyMac’s underwriting
standards were untrue or misleading because IndyMac had actually abandoned its underwriting
standards and was ignoring the borrowers’ ability to make their payments. 718 F. Supp. 2d at 509.
Defendants relied on statements that (1) loans might be made under an exception to the
underwriting standards, and (2) loans could have been made under a lending program that reduced
or eliminated requirements for documentation and verification. The court rejected this argument,
reasoning that although the offering documents “did contain extensive disclosures about IndyMac
Bank’s ‘low-doc’ and ‘no-doc’ loan programs, and the exceptions that may have been made to
these non-traditional underwriting guidelines,” the “crux of plaintiffs’ claims . . . is that IndyMac
Bank ignored even those watered-down underwriting standards, including the standards for
granting exceptions to the guidelines . . . . Disclosures regarding the risks stemming from the
allegedly abandoned standards do not adequately warn of the risk the standards will be ignored.”
Id. Many other federal district courts have reached the same conclusion.93
93 See, e.g., Employees’ Retirement System of the Government of the Virgin Islands, 2011 WL 1796426, at *9 (rejecting defendants’ argument that the disclaimer that there would be exceptions to the underwriting standards rendered the widespread abandonment of underwriting standards non-actionable); Boilermakers, 748 F. Supp. 2d at 1255 (allegation that underwriting standards essentially ceased to exist stated claim despite warnings about alternative documentation programs used to evaluate loans); Merrill Lynch, 714 F. Supp. 2d at 483 (alleged repeated deviation from established underwriting standards was enough to make the statement that such standards were “generally followed” misleading); In re Wells Fargo Mortgage-Backed Certificates Litigation, 712 F. Supp. 2d at 971 (disclosures about variable nature of underwriting practices were insufficient where plaintiffs alleged a failure to disclose “that variance from the stated standards was essentially defendants’ norm”); DLJ Mortgage Capital, 2010 WL 1473288, at *6-7 (cautionary language about exceptions to
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-87-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
In addition, the First Circuit recently reversed a decision that disclaimers nearly identical
to those at issue here excused the defendants from liability for making misleading statements in
their MBS offering documents. See Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset
Acceptance Corp., 632 F.3d 762, 773 (1st Cir. 2011). The court held that the warnings in the
offering materials did not specifically warn the plaintiffs of the alleged risk: “Neither being ‘less
stringent’ than Fannie Mae nor saying that exceptions occur when borrowers demonstrate other
‘compensating factors’ reveals what plaintiffs allege, namely, a wholesale abandonment of
underwriting standards.” Id. The First Circuit held likewise that “the warning that less verification
may be employed for ‘certain limited documentation programs designed to streamline the loan
underwriting process’” was too general to excuse defendants from liability for their allegedly
untrue or misleading statements. Id. Here, the disclaimers identified by the defendants did not
disclose to the Bank that the mortgage “originators were departing extensively from [the]
underwriting standards . . . when no compensating factors were present” and without regard to
whether the borrowers could repay the loans. (CS ¶ 100.)
7. Credit Ratings
Defendants argue that they are not liable for untrue or misleading statements about the
triple-A credit ratings assigned to the certificates because the prospectus supplements contained
one or more of the following disclaimers:
• A “rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating agencies.”
• “If the performance of the related mortgage loans is substantially worse than assumed by the rating agencies, the ratings of any class of the certificates may be lowered in the future.”
underwriting standards and risk of default in certain types of loans was insufficient where plaintiffs alleged that originators abandoned their standards); Tsereteli, 692 F. Supp. 2d at 392 (disclosures regarding greater risk of default and loss in certain types of loans were insufficient where plaintiffs alleged a “fail[ure] to disclose that [originator] had abandoned the underwriting standards that it professed to follow and ignored whether borrowers ever would be able to repay their loans”); In re Lehman Bros., 684 F. Supp. 2d at 493 (disclosure that originators had discretion to make exceptions to standards found insufficient where complaint alleged that originators “systematically failed to follow the underwriting guidelines, including the procedures for using underwriting guideline exceptions”); Federal Home Loan Bank of Pittsburgh, No. GD09-016892, slip op. at 25-26 (rejecting argument that disclosures about relaxed underwriting standards barred plaintiff’s misrepresentation claims as a matter of law).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-88-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
• “A rating may not remain in effect for any given period of time and the rating agency could lower or withdraw the rating entirely in the future. For example, the rating agency could lower or withdraw its rating due to . . . a decrease in the adequacy of the value of the trust assets or any related credit enhancement.”
(Joint Br. 49.) None of these disclaimers adequately warned investors that the triple-A ratings
were based on inaccurate information about LTVs, additional liens, primary residences, and
departures from underwriting standards. (See, e.g., CS ¶ 119.) A disclaimer that the ratings might
change, or that the actual performance of the loans might vary from the performance assumed by
the rating agencies, did not warn investors that the original ratings were based on information
about the mortgage loans that was already untrue when it was submitted to the rating agencies.
Thus, defendants cannot rely on these disclaimers to exonerate themselves from liability.94
IV. THE AMENDED COMPLAINTS SUFFICIENTLY ALLEGE THAT DEFENDANTS’ UNTRUE OR MISLEADING STATEMENTS WERE MATERIAL.
Defendants argue that the thousands of untrue or misleading statements alleged in the
Amended Complaints were immaterial as a matter of law. (Joint Br. 50-51.) To state a claim
under the Corporate Securities Law, the Bank must allege for each securitization that the
defendants made at least one “untrue statement of a material fact” or “omit[ted] to state a material
fact necessary in order to make the statements made, in the light of the circumstances under which
they were made, not misleading.” CAL. CORP. CODE § 25401. Materiality is also an element of the
Bank’s claims under the 1933 Act and for negligent misrepresentation. Miller v. Thane
International, Inc., 519 F.3d 879, 888 (9th Cir. 2008); Fox v. Pollack, 181 Cal. App. 3d 954, 962
(1986). A statement or omission “is material if there is a substantial likelihood that a reasonable
[investor] would consider it important in deciding” whether to purchase the offered security. TSC
94 Most of the cases defendants cite on this issue are inapposite because they either did not address the effectiveness of disclosures about ratings at all or addressed disclosures and allegations that differ from those involved here. See In re Wells Fargo, 712 F. Supp. 2d at 968-69 (dismissing ratings allegations on grounds other than risk disclosures, which the court did not address); In re IndyMac, 718 F. Supp. 2d at 511-12 (addressing only the disclosure that rating agencies worked with originator and underwriters in structuring securitization transactions); New Jersey Carpenters Health Fund v. Residential Capital, LLC, 2010 WL 1257528, at *6 (finding disclosures effective where plaintiffs alleged only that the agencies later revised their models and that credit enhancements were later shown to be inadequate, reasoning that there was no factual allegation that the ratings described in the offering documents were incorrect at the time offered).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-89-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also Matrixx Initiatives, Inc. v.
Siracusano, 131 S. Ct. 1309, 1318 (2011). California courts have adopted the same definition of
materiality. See, e.g., Insurance Underwriters Clearing House, Inc. v. Natomas Co., 184 Cal.
App. 3d 1520, 1526 (1986). It is not necessary to show that there was “a substantial likelihood
that disclosure of the omitted fact would have caused the reasonable investor to change his
[investment decision],” only “that the disclosure of the omitted fact would have been viewed by
the reasonable investor as having significantly altered the ‘total mix’ of information made
available.” TSC Indus., 426 U.S. at 449.
Any reasonable investor would “attach importance” to essential information about the
credit quality of the mortgage loans that were to be the sole source of payment on the certificates.
The Amended Complaints allege in detail why each of the untrue or misleading statements in the
offering documents was material. Entire sections of the Amended Complaints are devoted to “The
Materiality of LTVs,” “The Materiality of Occupancy Status,” etc. (See, e.g., CS ¶¶ 47-51 and ¶¶
86-87.) SEC Regulation AB requires sellers of mortgage-backed securities to disclose such
information,95 and common sense says that ten investment banks would not have disclosed that
information in identical form in 116 offering documents if it were not material. Thus, materiality
is at least a question of fact that the Court cannot decide on a demurrer. See Nomura, 658 F. Supp.
2d at 308 (“With rare exception, the issue of whether a statement or omission was material is
committed to the finder of fact.”); Shapiro v. UJB Financial Corp., 964 F.2d 272, 280 n.11 (3d
Cir. 1992) (a claim may be dismissed “[o]nly if the alleged misrepresentations or omissions are so
obviously unimportant to an investor that reasonable minds cannot differ on the question of
materiality”). Undeterred, defendants argue that not one of the untrue or misleading statements in
the offering documents was material. (See Joint Br. 51 (“additional disclosures . . . would not have
altered the total mix of information”).) Of course defendants do not and cannot argue that the
amount of equity that borrowers have in their houses, whether the borrowers live in the houses, or
whether the lenders departed from their disclosed underwriting standards in making the loans to
95 See 17 C.F.R. §§ 229.1100-1123
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-90-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
the borrowers, are all “so obviously unimportant to an investor that reasonable minds cannot
differ on the question of materiality.” Shapiro, 964 F.2d at 280 n.11. Rather, defendants fall back
on the same disclaimers that they used to argue that their statements were not untrue or
misleading. (See Joint Br. 51 (“The offering documents’ extensive disclosures concerning the
potential for inaccuracies in the original information . . . rendered any further warnings about
potential inaccuracies in the loan data unnecessary and cumulative”).) Defendants also argue that
certain of the untrue or misleading statements were not material because “the allegedly omitted
facts were publicly known.” (Id.)
These arguments are non sequiturs. The fact that “certain loans might not conform to the
information contained in the offering documents” (id.) does not mean that accurate information
about the loan pool as a whole (such as the average LTV and underwriting standards) is not
important to the reasonable investor. And concerns about mortgages in general that were allegedly
public when the Bank purchased the certificates did not make it less important, but rather more
important, to a reasonable investor to have accurate information about the specific mortgage loans
that would back the certificates that the defendants were selling. By providing information about
those specific loans in their offering documents, defendants were affirming the truth of those
statements despite any contrary public information about mortgages in general. And the Bank
took comfort in the role and duty of defendants as issuers and underwriters not to make untrue or
misleading statements in their offering documents.96
Defendants cite Garber v. Legg Mason, Inc., 347 Fed. Appx. 665, 668 (2d Cir. 2009), to
support their argument that “information already in the public domain” is relevant to materiality.
(Joint Br. 50.) In Garber, the plaintiff alleged that the defendant failed to disclose that a manager
had left a corporation, a specific fact that three newspapers had reported and that had been
disclosed in three SEC filings. Id. In the Bank’s actions, by contrast, any public information
available when the Bank purchased its certificates was too general to negate the materiality of
96 See, e.g., CS ¶ 39 (“Securities dealers, like eight of the Defendants, play a critical role in the process of securitization. They underwrite the sale of the certificates, that is, they purchase the certificates from the trust and then sell them to investors. Equally important, securities underwriters provide to potential investors the information that they need to decide whether to purchase certificates.”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-91-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
defendants’ statements about the specific loans in the collateral pools of their securitizations.
Moreover, investors like the Bank had no access at the time they purchased certificates to
information about those specific loans, so it was hardly “unnecessary” for defendants to provide
accurate information about them.
The Bank’s detailed allegations of materiality are more than sufficient under the pleading
standards of California law.
V. THE COMPLAINTS ADEQUATELY ALLEGE RELIANCE FOR PURPOSES OF PLEADING NEGLIGENT MISREPRESENTATION.
To state a claim for negligent misrepresentation, the Bank must allege that it justifiably
relied on the defendants’ statements. See, e.g., Bily, 3 Cal. 4th at 413. Both Amended Complaints
allege that the Bank justifiably relied on defendants’ statements in deciding whether to purchase
certificates. (See, e.g., CS ¶¶ 160, 163.)97
Defendants argue that it was unreasonable as a matter of law for the Bank to rely on
statements in the offering documents because the Bank is a sophisticated participant in the
mortgage business and was aware or at least “chargeable with knowledge” of the fact that the
defendants’ statements were untrue or misleading. (Joint Br. 52.) This argument is wrong for at
least three reasons.98
97 Inexplicably, UBS argues that the Bank failed to allege “that Defendants made statements with intent to induce FHLB-SF.” (UBS Br. 9 (emphasis in original).) Paragraph 160 of the Credit Suisse Amended Complaint directly contradicts this argument: “In making the representations referred to above, the Defendants intended to induce the Bank to rely on those representations in making its decision to purchase these certificates in these securitizations.” Moreover, the purpose of SEC-regulated offering documents, like the prospectus supplements at issue here, is to solicit investors like the Bank to purchase securities. See Gustafson v. Alloyd Co., 513 U.S. 561, 575 (1995) (noting that a prospectus is a “document soliciting the public to acquire securities”).
98 UBS argues that the Bank fails to allege “that Defendants had no reasonable ground for believing the statements in its offering documents.” (UBS Br. 9 (emphasis in original).) Again, this argument is contradicted by the Amended Complaints. (See e.g., CS ¶ 161 (“When the Defendants made these representations, they had no reasonable ground for believing them to be true.”).) The Bank also alleges that the defendants had access to loan origination files and the reports of their own due diligence contractors, which provided “information that either did make the Defendants aware, or should have made them aware had they heeded that information, that the representations they made to the Bank contained material untrue or misleading statements about the mortgage loans in the collateral pools.” (CS¶ 161.) Moreover, the Amended Complaints allege that defendants made hundreds of untrue or misleading statements in each prospectus supplement. If those allegations are assumed to be true (as they must be on a demurrer), then the sheer magnitude of the untrue or misleading statements itself gives rise to a reasonable inference that defendants did not exercise due care in preparing the offering documents for the securities they sold to the Bank.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-92-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
First, the fact that the Bank is knowledgeable about mortgages in general does not mean
that it had either the access to information or the forensic resources to detect that defendants’
statements were untrue or misleading and therefore that it was unreasonable to rely on them. Even
if such detection were possible, “the reliance requirement was not designed to shield perpetrators
of fraud by forcing investors to conduct exhaustive research every time they invest money,”
Alexander v. Evans, No. 88 Civ. 5309 (MJL), 1993 WL 427409, at *17 (S.D.N.Y. Oct. 15, 1993);
see also Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 181 (2d Cir. 2007)
(defendant’s promise to “provide accurate and adequate facts . . . entitled [plaintiff] to rely on
them without further investigation or sleuthing”); DDJ Management LLC v.Rhone Group L.L.C. ,
15 N.Y.3d 147, 154–55 (2010) (even a “sophisticated” plaintiff “should not be denied recovery
merely because hindsight suggests that it might have been possible to detect the fraud when it
occurred”).
Second, the Bank’s allegations of justifiable reliance are more than sufficient to plead a
claim for negligent misrepresentation. The Court of Appeal in OCM Principal Opportunities
Fund v. CIBC World Markets Corp., 157 Cal. App. 4th 835 (2007), held that “a plaintiff is not
barred [for failing adequately to plead reliance] unless his conduct, in the light of his own
information and intelligence, is preposterous and irrational.” Id. at 865 (emphasis added). Here,
the Bank did not have independent access to any specific information about the mortgage loans;
its only information about the characteristics of those loans came from defendants. Moreover, the
Bank knew that defendants had direct access to the originators of the mortgage loans and due
diligence contractors that purportedly were employed to test the quality of the collateral. See, e.g.,
CS ¶ 161 (alleging that the defendants had access to the loan files).99 Given defendants’ far
99 Defendant Morgan Stanley argues that underwriters cannot be liable for negligent misrepresentation based on untrue or misleading statements in the offering documents because the statements were “made” by the issuers and the depositors. (Morgan Stanley Br. 8.) Notably, Morgan Stanley is the only underwriter to make this argument, perhaps because it has no support in California law. The Bank alleges that Morgan Stanley “made” statements in the prospectus supplements because it adopted the prospectus supplements as its own when it used them to solicit the Bank to purchase securities. (See, e.g., CS, Sched. 45, Item 52 (“In the prospectus supplement, Morgan Stanley . . . made the following statements about the LTVs of the mortgage loans in the collateral pool of this securitization.”).) The Bank also alleges that “dealers that underwrite the sale of the certificates in a securitization are responsible for gathering, verifying, and presenting to potential investors the information about the credit quality of the loans that will be deposited into the trust.” (See CS ¶
(footnote continued)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-93-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
greater access to information about the mortgage loans, defendants cannot credibly argue that it
was “preposterous or irrational” for the Bank to rely on the statements that defendants made about
those loans in the prospectus supplements.100
Finally, whether the Bank’s reliance was reasonable is not properly resolved on a
demurrer. “Except in the rare case where the undisputed facts leave no room for a reasonable
difference of opinion, the question of whether a plaintiff’s reliance is reasonable is a question of
fact.” OCM Principal Opportunities Fund, 157 Cal. App. 4th at 864 . For all of these reasons,
defendants cannot establish that the Bank was unreasonable as a matter of law in relying on the
defendants’ untrue or misleading statements.
VI. THE AMENDED COMPLAINTS ADEQUATELY PLEAD A CLAIM FOR RESCISSION OF WRITTEN CONTRACT.
Section 1689 of the California Civil Code provides that
A party to a contract may rescind the contract . . . [i]f the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party.
41.) Under California law, to state a claim for negligent misrepresentation, the Bank must allege that Morgan Stanley made a “positive assertion, in a manner not warranted by the information of the person making it.” Bily, 3 Cal. 4th at 407. The Amended Complaints clearly satisfy that standard. Morgan Stanley relies on one federal decision, SEC v. Tambone, 597 F.3d 436, 443-50 (1st Cir. 2010), in which the court was not considering California law but, rather, was construing specific terms in Rule 10b-5. Tambone is not persuasive authority for this Court.
100 UBS argues in its individual brief that the Amended Complaints do not plead “specific facts regarding [the Bank’s] reliance on statements by UBS and/or MASTR.” (UBS Br. 10.) UBS appears to be objecting to the Bank’s use of the term “defendants” rather than specifically referring to UBS. This argument is a non-sequitur. The Amended Complaints allege that all defendants sent prospectus supplements to the Bank for purposes of soliciting the Bank to purchase securities, and that the Bank relied on those prospectus supplements and other statements of defendants in purchasing the securities. (See, e.g., CS ¶¶ 145, 160, 163.) The Amended Complaints also include lengthy schedules that list the names of each defendant and the securities that it purchased from those defendants. In short, the Bank “plead[ed] facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’” Murphy v. BDO Seidman, LLP, 113 Cal. App. 4th 687, 692 (2003) (quoting Lazar v. Superior Court, 12 Cal. 4th 631, 645 (1996)). The Bank also pleaded “the precise date” on which the Bank bought the certificates and “the amount paid, to permit [UBS and/or MASTR] to prepare a defense.” Id. at 697. Thus, the Bank has properly pleaded a complaint for negligent misrepresentation against each defendant. Moreover, it is not settled law in California that the Bank’s negligent misrepresentation claims must be plead with specificity. To the contrary, the California Supreme Court has noted that “California courts have never decided whether the tort of negligent misrepresentation . . . must also be pled with specificity.” See Small v. Fritz Companies, Inc., 30 Cal. 4th 167, 184 (2003).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-94-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
The Amended Complaints plead claims for rescission based on two of the grounds provided by
section 1689. First, under sections 1572, 1573, and 1710 of the Civil Code, “fraud” includes
negligent misrepresentation. See McKenzie v. Kaiser-Aetna, 55 Cal. App. 3d 84, 88 (1976)
(“Negligent misrepresentation may render a contract void, or may be ground for rescission or
reformation.”). Second, even an untrue or misleading statement that is made innocently rather
than negligently is a “mutual mistake” and grounds for rescission under section 1689. See Wood v.
Kalbaugh, 39 Cal. App. 3d 926, 929 (1974) (“In this state, a contract may be rescinded by a
contracting party unilaterally if its consent to be bound by the agreement was induced by a
material misrepresentation, though innocently made, or a mistake.”); Crocker-Anglo National
Bank v. Kuchman, 224 Cal. App. 2d 490, 495-96 (1964). Section 1689 permits rescission even if a
contract has been fully executed. WITKIN, SUMMARY OF CALIFORNIA LAW, CONTRACTS, § 933 at
1028 (10th ed. 2005).
Thus, because the Amended Complaints have pleaded claims for negligent
misrepresentation or violations of the California and federal securities laws (all of which require
an untrue or misleading statement), the Amended Complaints also necessarily have pleaded a
claim for rescission under section 1689.101
Virtually all of defendants’ arguments why the Bank has failed adequately to plead a claim
for rescission are simply repetitions of defendants’ previous arguments with respect to the Bank’s
other claims. These arguments are incorrect as to the Bank’s claims for rescission for at least these
three reasons.
First, defendants argue, as they do with respect to all of the Bank’s claims, that “the
offering documents do not contain any material misrepresentations of fact.” (Joint Br. 53.)
Defendants are wrong for the reasons discussed at length above. Second, defendants argue that the
Bank “bears the risk of the mistake” as a matter of law because “the offering documents clearly
disclosed the limitations of the information they contained – the risk that the mortgage loan
101 Defendants’ argument that the Bank’s claim for rescission rests on a single “threadbare allegation” is absurd. (Joint Br. 53.) The factual allegations that support the Bank’s rescission claim are set forth in detail and with specificity in the 164 paragraphs and nearly 700 numbered pages of schedules that are expressly incorporated by reference into the rescission claim. (See CS ¶ 166.)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-95-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
characteristics might be inaccurate – and further informed Plaintiff by the ‘cure, repurchase and
substitute’ provisions that the remedy for such inaccuracies would be limited.”102 (Joint Br. 54.)
Again, defendants are wrong for all of the reasons discussed above.103 Moreover, assumption of
risk is a question of fact that cannot be decided as a matter of law on demurrer. See, e.g., Guthrie
v. Times-Mirror Co., 51 Cal. App. 3d 879, 885-86 (1975) (court could not determine assumption
of risk at demurrer stage); Twin City Fire Insurance Co. v. Philadelphia Life Insurance Co., 795
F.2d 1417, 1428 (1986) (court could not determine assumption of risk on summary judgment);
Consolidated Rail Corp. v. Portlight, Inc., 188 F.3d 93, 98 (3d Cir. 1999) (“At this early stage of
the litigation, before any discovery has been conducted, we do not see how it is possible to arrive
at an informed judgment concerning [the allocation of risk].”). Finally, defendants argue that the
Bank has not satisfied the elements of a claim for “unilateral mistake.” (Joint Br. 53.) That is
beside the point because the Bank is not alleging a unilateral mistake. Rather, the Bank’s claim
for rescission is based on mutual mistake and negligent misrepresentation, either of which is
sufficient grounds to rescind a contract under section 1689, as discussed above.104
102 The “risk of mistake” is relevant only to a claim for rescission based on “mutual mistake.” This
argument is entirely irrelevant to the Bank’s claim for rescission based on negligent misrepresentation. Compare RESTATEMENT (SECOND) OF CONTRACTS § 164 (“(1) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient”) with RESTATEMENT (SECOND) OF CONTRACTS § 152 (“(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.”)
103 A party bears the risk of the mistake if (1) the risk was allocated to the party by the contract; (2) the party was aware at the time of contracting that it had limited knowledge regarding facts to which the mistake related but treated the limited facts as sufficient; or (3) the risk is allocated to the party by the court because it is reasonable to do so under the circumstances. See Donovan v. RRL Corp., 26 Cal. 4th 261, 282 (2001); RESTATEMENT (SECOND) OF CONTRACTS § 154. Just as with the Bank’s other claims, generic non-specific disclosures like those in the offering documents were not specific enough to establish that the Bank “assumed” the particular risk that the statements about the mortgage loans in the prospectus supplements were untrue or misleading. See RESTATEMENT (SECOND) OF CONTRACTS § 154.
104 If defendants did not know that the statements were untrue or misleading, then defendants were “mistaken,” and the Bank is entitled to rescission under a theory of “mutual mistake.” If defendants knew, or should have known, that the statements were untrue or misleading, then defendants committed negligent misrepresentation or fraud, and the Bank is also entitled to rescission under section 1689. Under no circumstances, however, do either of these possibilities give rise to a case of “unilateral mistake.”
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-96-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
VII. THE AMENDED COMPLAINTS ADEQUATELY PLEAD A CLAIM UNDER SECTION 12(A)(2).
Section 12(a)(2) of the Securities Act imposes liability on any person who “offers or sells
a security . . . by means of a prospectus or oral communication, which includes an untrue
statement of a material fact or omits to state a material fact necessary in order to make the
statements . . . not misleading . . . .” 15 U.S.C. § 77l(a)(2). Certain defendants105 argue that the
issuers of securities cannot be liable under Section 12(a)(2) because the underwriters, rather than
the issuers, actually sold the securities to the Bank. Defendants also argue that the Bank lacks
standing to sue under section 12(a)(2) because it did not allege that it purchased its certificates in
public offerings. Both arguments are without merit.
A. Issuers May Be Liable Under Section 12(a)(2).
A party is a “seller” under Section 12 if it either (1) transferred title to the securities at
issue; or (2) solicited the sale of the securities with a desire to serve its own financial interests.
Pinter v. Dahl, 486 U.S. 622, 642-47 (1988). The issuer defendants argue that because they sold
certificates to the Bank pursuant to a “firm commitment underwriting,”106 the underwriters were
the only actual sellers for purposes of section 12(a)(2). (See Countrywide Br. 3-5, JP Morgan Br.
9-10; RBS Br. 8-9.) But the SEC expressly rejected this argument more than five years ago when
it promulgated SEC Rule 159A.107
105 See Countrywide Br. 3-8; JP Morgan Br. 9-10; RBS Br. 8-9. 106 In a “firm commitment” underwriting, the underwriter agrees to buy all the shares to be issued and
remains financially responsible for any securities not purchased. BLACK’S LAW DICTIONARY (9th ed. 2009). 107 The defendant issuers are also sellers under the second prong of Pinter because they solicited the
Bank by preparing, signing, and filing the prospectus supplements. That is sufficient to satisfy the pleading requirements under section 12(a)(2). See, e.g., In re Twinlab Corp. Securities Litigation, 103 F. Supp. 2d 193, 204-05 (E.D.N.Y. 2000) (finding allegations that defendant “solicited the sale of Company shares through participating in the preparation of the materially false and misleading Prospectus,” sufficient to state a claim for 12(a)(2) liability against the issuer in a firm commitment underwriting); In re Sirrom Capital Corp. Securities Litigation, 84 F. Supp. 2d 933, 945 (M.D. Tenn. 1999) (“Defendants’ acts of solicitation included participating in the preparation of the false and misleading Prospectus. . . . A Prospectus itself is considered a solicitation document. Thus, the Defendants who actually signed the Registration Statements may be said to have to solicited the public to purchase the stock.”); Degulis v. LXR Biotechnology, Inc., 928 F. Supp. 1301, 1315 (S.D.N.Y. 1996) (“Although signing the registration statement need not constitute active solicitation, it is, at this stage of the proceedings, a sufficient allegation to permit Plaintiffs to present evidence that, alone or in tandem with other acts, the signatures constituted active solicitation . . . .”); In re National Golf Properties, Inc., No. CV 02-1383GHK(RZX), 2003 WL 23018761, at *3 (C.D. Cal. Mar. 19, 2003 (“allegations that an issuer signed a registration statement is sufficient to allege active solicitation”).
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-97-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
For purposes of section 12(a)(2) of the Act only, in a primary offering of securities of the issuer, regardless of the underwriting method used to sell the issuer’s securities, seller shall include the issuer of the securities sold to a person as part of the initial distribution of such securities.
17 C.F.R. § 230.159A (emphasis added). The SEC further explained in a related release that:
We believe there currently is unwarranted uncertainty as to issuer liability under Section 12(a)(2) for issuer information in registered offerings using certain types of underwriting arrangements. As a result, there is a possibility that issuers may not be held liable under Section 12(a)(2) to purchasers in the initial distribution of the securities for information contained in the issuer’s prospectus included in its registration statement. . . . When an issuer registers securities to be sold in a primary offering, the registration covers the offer and sale of its securities to the public. The issuer is selling its securities to the public, although the form of underwriting of such offering, such as a firm commitment underwriting, may involve the sale first by the issuer to the underwriter and then the sale by the underwriter to the public. We believe that an issuer offering or selling its securities in a registered offering pursuant to a registration statement containing a prospectus that it has prepared and filed, or by means of other communications that are offers made by or on behalf of or used or referred to by the issuer can be viewed as soliciting purchases of the issuer’s registered securities.
Securities Offering Reform, Securities Act Release No. 52056 (July 29, 2005), 2005 WL
1692642, at *78 (emphasis added) Thus, the issuer defendants’ argument that they are not
“statutory sellers” for purposes of section 12(a)(2) has been “foreclosed by SEC Rule 159A.” See
Citiline Holdings, Inc. v. iStar Financial Inc., 701 F. Supp. 2d 506, 512 (S.D.N.Y. 2010) (issuer’s
argument that it was not a “seller” because it sold securities through a firm commitment
underwriting was “foreclosed by SEC Rule 159A which provides that an issuer is a statutory
seller for the purposes of Section 12(a)(2) regardless of the form of underwriting”).108
Moreover, the United States Supreme Court has held that federal courts must defer to the
authority of regulatory agencies like the SEC to interpret the federal statutes that they are to
enforce. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
Section 19 of the 1933 Act provides that the SEC “shall have authority” to make “such rules and
108 Only two decisions have expressly considered Rule 159A since it was promulgated by the SEC in
2005. The first, Citiline Holdings, held that issuers may now be held liable under section 12(a)(2). The second is a recent decision in Maine State Retirement System v. Countrywide Financial Corp., No. 2:10-CV-0302 MRP, slip op. at 19-20 (C.D. Cal. May 5, 2011). The court declined to apply Rule 159A because “although numerous courts have been presented with the question of whether an issuer is a statutory seller, only one court has applied SEC Rule 159A.” Id. The Bank respectfully submits that Maine State was wrongly decided. Notably, neither of the courts that Maine State referred to actually considered whether to apply Rule 159A because the plaintiffs in those cases did not even bring the rule to the attention of the Court.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-98-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
regulations as may be necessary to carry out the provisions of this subchapter.” 15 U.S.C. §
77s(a). Thus, “the Securities and Exchange Commission has been entrusted by Congress with the
interpretation, administration, and enforcement of the Securities Acts,” and courts must defer to
its interpretation of those statutes. City Capital Associates Ltd. Partnership v. Interco Inc., 860
F.2d 60, 64 (3d Cir. 1988); see also Europe and Overseas Commodity Traders, S.A. v. Banque
Paribas London, 147 F.3d 118, 123 n.3 (2d Cir. 1998) (“the SEC has provided some guidance as
to the applicability of registration requirement of the 1933 Act . . . [w]e, of course, honor an
agency’s reasonable interpretation of a statute that Congress has entrusted the agency to
administer.”), abrogated on a different ground by Morrison v. National Australia Bank Ltd., 130
S. Ct. 2869 (2010); American Equity Investments Life Insurance Co. v. S.E.C., 613 F.3d 166 (D.C.
Cir. 2010); SEC v. McNulty, 137 F.3d 732, 741 (2d Cir.1998) As the Supreme Court wrote in
Chevron,
If . . . the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.
467 U.S. at 842-843.
SEC Rule 159A is precisely the kind of “administrative interpretation” that the Supreme
Court was referring to. Section 12 “is silent or ambiguous” with respect to the question whether
an issuer in a firm-commitment underwriting may be held liable as a “seller.” Courts must
therefore defer to the clear guidance that the SEC has provided.109
109 Defendants may argue that Chevron does not apply here because Rule 159A is in conflict with the
Supreme Court’s interpretation of Section 12 in Pinter. That is incorrect for two reasons. First, the SEC specifically noted that Rule 159A was consistent with Pinter.” See Securities Act Release, 2005 WL 1692642, at *78 n.422 (citing Pinter). Second, even if Rule 159A were in conflict with Pinter or its progeny, a “court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967, 982 (2005) (emphasis added). None of the cases on which defendants rely hold that the terms of Section 12 are so unambiguous.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-99-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
B. The Bank Has Sufficiently Alleged That It Purchased Its Certificates Pursuant To Public Offerings.
Three defendants also argue that the Bank lacks standing to sue under section 12(a)(2)
because the Bank failed to allege that it purchased its certificates in the initial public offering,
rather than in the secondary market. (See Countrywide Br. 6; JP Morgan Br. 10; and RBS Br. 8.)
It is evident from the allegations in the Amended Complaints, however, that the Bank purchased
its certificates in the initial offerings. The Amended Complaints allege that the Bank purchased
each of its certificates directly from an underwriter that was named in the prospectus
supplement. (See, e.g., CS Sched. 40, Item 44. ) The Amended Complaints also allege that the
Bank purchased the vast majority of its certificates less than 30 days after they were issued and
all but six of its certificates less than 90 days after they were issued. Therefore, for those
purchases to be “secondary,” the underwriters would have had to sell the certificates, buy them
back, and then sell them to the Bank. Defendants do not argue that this unlikely sequence of
events actually occurred. Thus, the only plausible inference based on the facts alleged in the
Amended Complaints is that the Bank purchased its certificates in the initial offering.110
VIII. THE ALLEGATIONS OF CONTROL PERSON LIABILITY STATE A CLAIM FOR RELIEF UNDER SECTION 15 OF THE SECURITIES ACT.
Section 15 of the Securities Act provides joint and several liability for defendants who
“control” a defendant found liable for violating Section 11 or 12(a)(2) of the Securities Act. 15
U.S.C. § 77o (“Every person who, by or through stock ownership, agency, or otherwise . . .
controls any person liable under sections [11 or 12] of this title, shall also be liable jointly and
severally . . . .”). “Control” is defined as “the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a person, whether through the ownership
of voting securities, by contract, or otherwise.” 17 C.F.R. § 230.405. It is not necessary that the
control person actually exercised its power or control in the particular transaction involved in the
110 The same inference applies to the six certificates that the Bank purchased more than 90 days after issuance. It is more plausible that the Bank purchased certificates that still remained from the initial offering than to assume that the underwriters would have had to sell the certificates and then coincidentally repurchased those same certificates and re-sold them to the Bank only a few months after issuance. In any event, however, should the Court decide that the Bank must formally plead that it purchased its certificates in an initial offering, the Bank respectfully requests leave to amend its complaints to add such an allegation.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
GO
OD
IN, M
AC
BRID
E, S
QU
ERI,
DA
Y &
LA
MPR
EY, L
LP
ATT
OR
NEY
S A
T LA
W
SAN
FR
AN
CIS
CO
-100-
PLAINTIFF’S MPA IN OPPOSITION TO DEMURRERS
claim. See, e.g., No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West
Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003); In re Cadence Design Systems, Inc. Securities
Litigation, 692 F. Supp. 2d 1181, 1194 (N.D. Cal. 2010).
The Bank has sued four defendants as “control persons” of four entities that are mere
corporate shells.111 Those four defendants argue that the Bank has failed to state Section 15 claims
against them because it has alleged only conclusions of law and a parent-subsidiary relationship
between the controlling and controlled defendants. (E.g., Deutsche Bank Br. 5-6.) That is not so.
The Bank has alleged that each controlled entity “existed for no purpose other than to receive and
deposit loans into the trusts” and was or is in fact controlled by the specified defendant. (See, e.g.,
CS ¶¶ 23; 152, 154-56 (alleging Section 15 claims against Countrywide Financial Corporation for
its control of CWALT).) The Bank is required to do nothing more at the pleading stage.112
“Whether a defendant is a control person is a fact question rarely appropriate for motion practice.”
In re Countrywide Financial Corp. Securities Litigation, 588 F. Supp. 2d 1132, 1183 (C.D. Cal.
2008); see also, e.g., American West Holding Corp., 320 F.3d at 945 (“Whether [the defendant] is
a controlling person is an intensely factual question, involving scrutiny of the defendant’s
participation in the day-to-day affairs of the corporation and defendant’s power to control
corporate actions.”). Indeed, in In re Worlds of Wonder Securities Litigation, 694 F. Supp. 1427,
1435 (N.D. Cal. 1988), the court denied motions to dismiss control person claims where the
primary violation was sustained because “[w]hether or not liability as a controlling person should
be imposed cannot be otherwise resolved at the pleading stage.”
111 The Bank alleges Bear Stearns Companies, Inc. controlled SAMI II (CS Compl. ¶¶ 12, 150-53, 155-
56; DB Compl. ¶¶ 11, 147-49, 151, 153-54); Countrywide Financial Corporation controlled CWALT (CS Compl. 23; 150-52; 154-56); DB Structured Products, Inc. controlled Deutsche Alt-A (DB Compl. ¶¶ 8, 147-50, 153-54); and Greenwich Capital Holdings, Inc. controlled Greenwich Capital Acceptance, Inc. (DB Compl. ¶¶ 16, 147-49, 152-54).
112 See In re Adaptive Broadband Securities Litigation, No. C 01-1092, 2002 WL 989478, at *19 (N.D. Cal. Apr. 2, 2002 (“[T]he fact that the named individual defendants held important positions in the company is sufficient at the pleadings stage.”); In re Cylink Securities Litigation, 178 F. Supp. 2d 1077, 1089 (N.D. Cal. 2001) (allegation stating simply that a corporate officer had the capacity to exert control over a company was sufficient to plead control person liability); Backe v. Novatel Wireless, Inc., 642 F. Supp. 2d 1169, 1191-92 (S.D. Cal. 2009) (finding that allegations that defendants controlled corporate defendant by virtue of their positions as executives were sufficient to plead control person liability).
1
APPENDIX A TO PLAINTIFF’S MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO DEMURRERS
Trusts on Which the Bank’s Claims Were Tolled by the Filing of Class Actions
Federal Home Loan Bank of San Francisco v. Credit Suisse, No. CGC-10-497840
Schedule Trust Class Action Date Trust Became Part of
Class Action
Date Trust Dismissed From
Class Action
7 CWALT 2007-18CB Luther v. Countrywide Financial Corp. No. BC 380698, Superior Court of California, County of
Los Angeles
11/14/2007
8 RALI 2007-QO1 New Jersey Carpenters Health Fund v. Residential Capital LLC No. 08-cv-8781 (HB),
United States District Court for the Southern District of New York
9/22/2008 3/31/3010
9 CWALT 2005-54CB Luther v. Countrywide Financial Corp. 11/14/2007
10 CWALT 2005-23CB Luther v. Countrywide Financial Corp. 11/14/2007
18 CWALT 2007-16CB Luther v. Countrywide Financial Corp. 10/16/2008
19 CWALT 2007-2CB Luther v. Countrywide Financial Corp. 11/14/2007
20 CWALT 2006-39CB Luther v. Countrywide Financial Corp. 11/14/2007
21 CWALT 2006-HY12 Luther v. Countrywide Financial Corp. 11/14/2007
22 CWALT 2006-HY3 Luther v. Countrywide Financial Corp 11/14/2007
23 CWALT 2005-84 Luther v. Countrywide Financial Corp. 11/14/2007
24 CWALT 2005-85CB Luther v. Countrywide Financial Corp. 11/14/2007
25 CWALT 2005-65CB Luther v. Countrywide Financial Corp. 11/14/2007
26 CWALT 2005-52CB Luther v. Countrywide Financial Corp. 11/14/2007
27 CWALT 2005-31 Luther v. Countrywide Financial Corp. 11/14/2007
28 CWALT 2005-20CB Luther v. Countrywide Financial Corp. 11/14/2007
29 CWALT 2005-11CB Luther v. Countrywide Financial Corp. 11/14/2007
30 CWALT 2005-7CB Luther v. Countrywide Financial Corp. 11/14/2007
31 CWALT 2005-1CB Luther v. Countrywide Financial Corp. 11/14/2007
40 BSMF 2006-AR5 In re Bear Stearns Mortgage Pass-Through 05/15/2009
2
Federal Home Loan Bank of San Francisco v. Credit Suisse, No. CGC-10-497840
Schedule Trust Class Action Date Trust Became Part of
Class Action
Date Trust Dismissed From
Class Action
Certificates Litigation, No. 08-cv-8093, United States District Court for the Southern District of
New York
41 CWALT 2005-46CB Luther v. Countrywide Financial Corp. 11/14/2007
44 CWALT 2005-3CB Luther v. Countrywide Financial Corp. 11/14/2007
45 CWALT 2007-17CB Luther v. Countrywide Financial Corp. 10/16/2008
46 CWALT 2005-86CB Luther v. Countrywide Financial Corp. 11/14/2007
47 CWALT 2005-47CB Luther v. Countrywide Financial Corp. 11/14/2007
54 CWALT 2006-HY13 Luther v. Countrywide Financial Corp. 11/14/2007
55 CWALT 2006-4CB Luther v. Countrywide Financial Corp. 11/14/2007
56 CWALT 2005-63 Luther v. Countrywide Financial Corp. 11/14/2007
57 CWALT 2005-27 Luther v. Countrywide Financial Corp. 11/14/2007
58 CWALT 2005-17 Luther v. Countrywide Financial Corp. 11/14/2007
59 CWALT 2005-16 Luther v. Countrywide Financial Corp. 11/14/2007
75 CWALT 2006-2CB Luther v. Countrywide Financial Corp. 11/14/2007
76 CWALT 2005-75CB Luther v. Countrywide Financial Corp. 11/14/2007
77 CWALT 2005-57CB Luther v. Countrywide Financial Corp. 11/14/2007
78 CWALT 2005-36 Luther v. Countrywide Financial Corp. 11/14/2007
3
Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities, No. CGC-10-497839
Schedule Trust Class Action Date Trust Became Part of
Class Action
Date Trust Dismissed From
Class Action
4 DBALT 2007-AR2 Massachusetts Bricklayers & Masons Trust Funds v. Deutsche Alt-A Securities Inc., No. 08-
cv-3178, United States District Court for the Eastern District of New York
6/27/2008 04/06/2010
7 BSMF 2007-AR3 In re Bear Stearns Mortgage Pass-Through Certificates Litigation,No. 08-cv-8093, United
States District Court for the Southern District of New York
05/15/2009
8 SAMI 2007-AR2 In re Bear Stearns Mortgage Pass-Through Certificates Litigation
05/15/2009
11 INDX 2007-AR21IP In re Indymac Mortgage Backed Securities Litigation, No. 09-cv-4583, United States
District Court for the Southern District of New York
10/09/2009 06/21/2010
12 INDX 2007-AR19 In re Indymac Mortgage Backed Securities Litigation
10/09/2009 06/21/2010
13 INDX 2007-AR5 In re Indymac Mortgage Backed Securities Litigation
5/14/2009 06/21/2010
14 INDX 2006-AR41 In re Indymac Mortgage Backed Securities Litigation
5/14/2009 06/21/2010
15 INDX 2006-AR33 In re Indymac Mortgage Backed Securities Litigation
5/14/2009 6/21/2010
16 INDX 2006-R1 In re Indymac Mortgage Backed Securities Litigation
10/09/2009 06/21/2010
18 HVMLT 2007-5 New Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group, PLC No. 08-cv-
5093, United States District Court for the Southern District of New York
05/19/2009 3/26/2010
19 HVMLT 2006-7 New Jersey Carpenters Vacation Fund v. The Royal Bank of Scotland Group
05/19/2009 1/18/2011
(class certification denied)
21 RAST 2006-A1 In re Indymac Mortgage Backed Securities Litigation
10/09/2009 06/21/2010
32 INDX 2007-FLX6 In re Indymac Mortgage Backed Securities Litigation
10/09/2009 06/21/2010
1
APPENDIX B TOPLAINTIFF’S MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO DEMURRERS
List of Prospectus Supplements That Do Not Mention a Representation or Warranty
About Accuracy of Mortgage Loan Schedule
Federal Home Loan Bank of San Francisco v. Credit Suisse, No. CGC-10-497840
Schedule Trust
3 CSFB 2005-10
4 FHAMS 2005-FA8
5 CSFB 2005-9
6 ARMT 2005-2
7 CWALT 2007-18CB
9 CWALT 2005-54CB
10 CWALT 2005-23CB
12 DBALT 2007-2
13 DBALT 2007-RS1
14 DBALT 2007-2R
15 DBALT 2005-6
16 DBALT 2005-5
17 CWALT 2004-30CB
18 CWALT 2007-16CB
19 CWALT 2007-2CB
20 CWALT 2006-39CB
21 CWALT 2006-HY12
22 CWALT 2006-HY3
23 CWALT 2005-84
24 CWALT 2005-85CB
2
Federal Home Loan Bank of San Francisco v. Credit Suisse, No. CGC-10-497840
Schedule Trust
25 CWALT 2005-65CB
26 CWALT 2005-52CB
27 CWALT 2005-31
28 CWALT 2005-20CB
29 CWALT 2005-11CB
30 CWALT 2005-7CB
31 CWALT 2005-1CB
34 FHAMS 2005-AA6
36 FHAMS 2005-AA1
41 CWALT 2005-46CB
43 CWALT 2004-28CB
44 CWALT 2005-3CB
45 CWALT 2007-17CB
46 CWALT 2005-86CB
47 CWALT 2005-47CB
54 CWALT 2006-HY13
55 CWALT 2006-4CB
56 CWALT 2005-63
57 CWALT 2005-27
58 CWALT 2005-17
59 CWALT 2005-16
60 BAFC 2007-R1
63 BAFC 2006-G
73 CWALT 2004-33
3
Federal Home Loan Bank of San Francisco v. Credit Suisse, No. CGC-10-497840
Schedule Trust
75 CWALT 2006-2CB
76 CWALT 2005-75CB
77 CWALT 2005-57CB
78 CWALT 2005-36
4
Federal Home Loan Bank of San Francisco v. Deutsche Bank, No. CGC-10-497839
Schedule Trust
1 INDX 2005-AR31
2 INDX 2005-AR16IP
3 INDX 2005-AR13
4 DBALT 2007-AR2
6 INDX 2005-AR3
9 INDX 2004-AR15
10 INDX 2004-AR13
11 INDX 2007-AR21
12 INDX 2007-AR19
13 INDX 2007-AR5
14 INDX 2006-AR41
15 INDX 2006-AR33
16 INDX 2006-R1
20 RAST 2005-A6CB
21 RAST 2006-A1
22 MARS 2007-1
25 RAST 2005-A11CB
26 INDX 2005-AR10
27 RAST 2005-A4
28 RAST 2004-IP2
29 INDX 2005-AR21
30 INDX 2005-AR7
31 INDX 2005-AR5
5
Federal Home Loan Bank of San Francisco v. Deutsche Bank, No. CGC-10-497839
Schedule Trust
32 INDX 2007-FLX6
33 INDX 2007-FLX5
36 WAMU 2005-AR13
37 WMALT 2006-1
38 WMALT 2006-3
3428/001/X129497.v1
