The $39 Billion Question - The Marta Claims
Part 1:
Hey all. I've not been posting much recently because of other commitments, but the Weil argument against EC citing $50 billion in unsecured claims got my attention, so I thought I'd weigh in on the biggest one of those claims, the MARTA claims:
Thanks to Ghost for posting a thread with links of this claim. See ghostofwamu.com/forum/index.php?topic=2709.0.
This $39 billion dollar claim represents fully 80% of the $50 billion in unsecured claims cited by Weil in its objection to the EC. This issue has been floating around since April 2009, but to my recollection nobody has addressed it in detail yet, so let me take a stab at explaining it for those who don't want to read the 100+ pages of relevant filings:
On 8/4/08 the law firm of Kipling Law Group LLC filed a class action suit in State Court (not federal) in King County, WA, on behalf of two employee retirement plans (MARTA and New Orleans Employee's Retirement System) against WMI, WMB, WMAAC, et. al., alleging securities fraud in the marketing and sale of certain collateralized debt obligations (CDO's), specifically several separate mortgage backed security offerings (MBS's) based on mortgages originated by WMB and marketed by and through WMAAC, a Delaware Corporation which is a wholly owned subsidiary of WMB. WMB "sponsored" these securities. WMI's liability is based solely on the fact that WMAAC was a subsidiary of a subsidiary (WMB) of WMI, and that therefore WMI was a "controlling entity" under the Securities Act. No fraud by WMI is alleged. The lawyers (Kipling) are a small "boutique" law firm (5 partners) in the Fremont district north of downtown Seattle, who style themselves as sort of counter-culture complex-litgation specialists. ( See www.kiplinglawgroup.com/)
The complaint contains a very thorough explication of what MBS's are, and how WMB collateralized and marketed them. It extensively piggyback's onto some of the more sensational disclosures regarding WMB's alleged unethical practices ("liar loans", etc.), focusing on the unholy relationships with property appraisers uncovered and publicized by New York Attorney General Cuomo. It alleges numerous misrepresentations of fact by WMAAC (and, impliedly, WMB) in the marketing of these securities. Finally, it alleges that, based on these misrepresentations, the plaintiffs and others bought the securities, to their financial detriment, and claims up to $39 billion in damages. The plaintiff's seek class action status in order to represent the claims of "thousands" of potential purchasers of these MBS's. It is important to understand that the causes of action alleged to not allege fraud, but merely alleged nondisclosure of relevant information under the Federal Securities Act. More specifically, it is claimed that the loan-to-value ratio of these various MBS's was not 64% to 73%, as advertised, but at a much higher (and riskier) ratio, because of inflated appraisals.
Part 2:
Later, on 12/16/08, for reasons I can't understand at all, Kipling filed a "First Amended Complaint", which appears to me to be identical to the original complaint in all particulars: Same parties, same factual allegation, same causes of action. The only difference I see is that they have deleted WMI as a party defendant. Why? Perhaps, at that point, they bought the Weil/Rosen line and believed WMI was judgment-proof and so abandoned that particular "deep pocket" defendant as an empty pocket.
However, still later, on 3/30/09, Kipling, through local counsel in Delaware, filed a claim in the WMI bankruptcy proceeding for the $39 billion. (Maybe by then they figured WMI might have something left in its pocket after all.) This was initially set for hearing on 7/27/09, but was continued by agreement of the parties. It is still pending. Before the hearing date, WMI filed a response alleging the claim was no good because it had been "removed" as a defendant by the First Amended Complaint and therefore could not be liable because it had been "dismissed" from the lawsuit. (This is nonsense: Even if this was a "dismissal", which it wasn't, that doesn't mean a claim can't be filed in bankruptcy.) On 8/12/09, Kipling's attorneys in Delaware responded, saying it dropped WMI from the amended complaint because of the automatic stay imposed by the bankruptcy court, and instead pursued its remedies by filing a claim in the bankruptcy proceedings.
(Along the way, Kipling appears to also have sued the FDIC in Federal Court in Washington. See See New Orleans Employees’ Retirement System, et al. v. Federal Deposit Insurance Corporation, et al., No. C09-134RSM (W.D. Wash.). I Googled this with no results.)
Part 3:
So what's it all mean? What is this $39 billion dollar "claim" worth? In my opinion, as a practical matter, nothing as far as WMI is concerned. If anyone is liable it should be FDIC, because they stupidly gave JPM all the assets and kept all the liabilities (less a $500,000,000 indemnification clause) for themselves. And, since JPM is WMB's successor in interest, it should have primary liability on any under-performing mortgages unless the FDIC does. After all, the alleged reason JPM got WMB so cheaply is because of all the "bad loans" it would have to absorb. Also, I don't know anything about how a "controlling entity" might be vicariously liable under the Securities Act, but under standard legal principles a parent corporation is not liable for the misdeeds of its subsidiaries. That limited liability is the whole purpose of having separate corporations: to limit liability.
Moreover, the claim itself is wildly inflated. If you look closely at the complaint you'll see that the total value of all the MBS's together was $39 billion. To have $39 billion in damages all those mortgages would have to be worth nothing at all. That's preposterous. (Heck, one of those mortgages is mine, and I paid a 40% down payment and have made accelerated principal payments for six years.) At worst mortgage defaults would impact those MBS's by about 10 to 20%.
I won't even touch upon the complexities of establishing a valid "class" for purposes of prosecuting a class action lawsuit, or how much more complicated that would become within the context of a bankruptcy court. I don't even know if it can be done.
So, my humble opinion: The Kipling firm thought they had a great lawsuit against "deep pockets" defendants that would net their clients (and, more importantly, themselves) a nice settlement based upon the "nuisance value" of their allegations. This is a typical modus operandi of class action lawyers. Make outrageous claims, threaten protracted litigation, get a nice settlement, almost all of which goes to the lawyers. Here, Kipling bit off more than it can realistically chew. They can't possibly afford to pursue this vs. WMI, which is why they now appear to be focusing on FDIC and made only a a pro forma response to WMI's objection. WMI should prevail on the merits (ironically, possibly saved by the seizure itself!) and maybe on the technicalities as well.
Hope this helps.
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