Certifies Investor Class
Until last week, class action plaintiffs lawyers had won just two rulings granting class certification for investors suing over mortgage-backed securities. (The plaintiffs lost the only other class certification ruling we’re aware of in an MBS case.) After a ruling issued Friday by Seattle federal district court judge Marsha Pechman, Cohen Milstein Sellers Toll and Scott + Scott can also boast class action status in their suit against Washington Mutual Inc. But thanks to the same ruling, the case will proceed at just a fraction of its former size.
Judge Pechman’s 17-page decision slashes the potential value of the plaintiffs’ claims over alleged misrepresentations in six WaMu offerings by about 80 percent. Siding with WaMu’s lawyers at Cravath, Swaine Moore and Bingham McCutchen, the judge concluded that the named plaintiffs had only invested in 13 out 123 tranches of securities in the offerings and that they lacked standing to sue over the rest. She agreed to certify a class including only investors that bought securities in the remaining 13 tranches.
“The very point of pooling mortgages and creating tranches is to create different securities whose credit and risk profiles attract different purchasers,” Judge Pechman wrote. “Plaintiffs’ standing is thus limited only to those tranches in which they actually purchased certificates.”
The ruling is just the latest setback for MBS class action plaintiffs on the standing issue. In the case against WaMu, Judge Pechman already trimmed the plaintiffs claims in September 2010 after finding that the named plaintiffs lacked standing to sue over 25 offerings.
But in her ruling Friday on a motion by WaMu for judgment on the pleadings, Judge Pechman went further than most courts have gone in examining MBS plaintiffs’ standing. Rather than determining standing by virtue of whether the named plaintiffs invested in the offerings at issue, she analyzed the extent to which the named plaintiffs had so-called tranche-level standing. In only one other MBS case–a putative class action brought by investors who bought securities issued by Countrywide Financial Corporation–has a judge dismissed claims based on the lack of tranche-level standing, according to Steven Toll of Cohen Milstein, co-lead counsel in the WaMu litigation.
“We think it’s dead wrong,” Toll said of the decision. He said the plaintiffs are considering whether to seek to appeal to the U.S. Court of Appeals for the Ninth Circuit.
Judge Pechman wrote that she was “unpersuaded” by decisions cited by Cohen Milstein and Scott + Scott to support their contention that the case should cover all 123 tranches. She was particularly unmoved by Manhattan federal district court judge Jed Rakoff’s August decision certifying an MBS class suing Bank of America’s Merrill Lynch. Judge Rakoff had concluded that the “representations in each offering apply equally to all tranches within that offering.” But Judge Pechman found “no meaningful rationale” in Judge Rakoff’s ruling to persuade her that his holding was proper.
Toll said he was nevertheless pleased that Judge Pechman did certify an investor class. At a hearing earlier this month, Toll estimated that the 13 tranches in which the named plaintiffs invested included securities valued at $2 billion, according to a transcript. Judge Pechman dismissed arguments by WaMu that the class was not sufficiently numerous if limited by tranche and concluded that a class action would be “superior” to forcing the plaintiffs to litigate their claims individually.
Cravath joined Bingham McCutchen on WaMu’s defense team after fending off an attempt by the plaintiffs to add WaMu’s acquirer, JPMorgan Chase, as a named defendant in the suit.
A spokeswoman for JPMorgan did not respond to a request for comment. Toll’s co-counsel, David Scott of Scott + Scott was not immediately available to comment.
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