by Josh Silverman, guest blogger
Mortgage-backed securities (“MBS”) litigation should expand this year, as Isaac Gradman correctly pointed out on The Subprime Shakeout in his Top 5 Reasons That MBS Lawsuits Are Just Beginning. The sheer number of lawsuits continues to increase, and businesses that typically shy away from securities fraud litigation are now getting involved. Even banks and insurers are starting to file MBS cases – including big names like Allstate, Dexia, Mass Mutual and the Federal Home Loan Banks of Boston, Seattle, San Francisco and Pittsburgh.
After a rocky start, the law is getting better for MBS plaintiffs, too, at least in individual (non-class) actions. The positive developments identified in Isaac’s post could embolden additional MBS investors to pursue legal remedies.
But in my view the jump in individual MBS lawsuits is not due solely, or even primarily, to shifting sentiment. Instead, many MBS investors are filing suit now because it may be their last chance to do so. If they wait, good claims could expire, and downsized MBS class actions no longer give them cover to observe from the sidelines. As described below, these two factors could be the primary drivers of an increase in MBS lawsuits this year.
Expiring Statutes of Limitation
All civil claims are subject to a limitations period, also called a statute of limitations. These operate like a shot clock in sports, requiring plaintiffs to take action within a certain amount of time or lose forever the ability to seek recovery.
Naturally, the best claims for MBS investors also have the shortest limitations period. Claims under Sections 11 and 12 of the Securities Act of 1933 are widely considered to be the most pro-plaintiff causes of action in federal securities laws. Plaintiffs bringing these claims do not have to prove the thorniest issues like intent, causation and reliance. Instead, they only have to prove that the defendant made a material misrepresentation in a registration statement or prospectus (and for Section 12, that the defendant sold the MBS). But Section 11 and 12 claims can currently only be brought within the earlier of one year after an investor discovered or should have discovered the fraud, or three years after the SEC filing in question (note that some legal commentators have argued that the longer statute of limitations of five years from the filing and two years from discovery, set forth in Sarbanes-Oxley, should apply to Section 11 and 12 claims that “sound in fraud”; however, courts have generally rejected that view).
For all practical purposes, that means that Section 11 and 12 claims for MBS issued between 2005 and 2007 will be time-barred unless the limitations period was tolled (suspended). Under federal law, the statute of limitations can sometimes be tolled when the plaintiff falls within the class definition of a pending class action. However, this is one area where the law has not developed favorably for MBS investors. Lower courts adopted a limited view of tolling in Wells Fargo, Countrywide, and other class action MBS cases. Expect this issue to reach the appellate courts in 2011.
Other types of claims have more generous limitations periods, but many are now on the brink of expiring. A typical securities fraud claim under Section 10(b) of the Securities and Exchange Act of 1934 can be brought within two years of discovery, or no more than five years after the misrepresentations were made. Fraud and negligent misrepresentation claims under state common law generally have a 2-5 year limitations period running from the discovery of the misrepresentation.
These statutes of limitation will force undecided MBS investors off the fence. Many will lose claims if they don’t act shortly.
MBS Class Actions Get Smaller
Shrinking MBS class actions may also spike the number of filings in 2011, as investors formerly covered by a class action find they have to proceed on their own.
After the credit meltdown of 2008, class actions were filed against most major private-label MBS issuers. These lawsuits included very broad class definitions, often covering several dozen or even hundreds of separate MBS securitizations. An MBS investor included in one or more of these large classes might hold off filing its own lawsuit to see what level of recovery could be achieved in the class actions.
But federal courts have since dramatically narrowed the majority of MBS class cases. Notwithstanding their broad class definitions, numerous decisions have limited class actions to the specific MBS securitizations owned by the named plaintiffs in those lawsuits.
The impact has been profound. Claims for 85 of the 94 MBS securitizations originally included in the Lehman Bros. MBS class action have been dismissed. 91 of 106 IndyMac MBS were pared from that class action. And in the Countrywide MBS class action, an amended complaint filed in December dropped all but fourteen of the 427 Countrywide MBS once part of various class actions against that issuer. MBS investors no longer part of these class actions can only obtain recovery by filing their own lawsuits.
Between these two factors and the five reasons identified by Isaac, 2011 should be an active year for MBS filings. Stay tuned…
Josh Silverman is of counsel at Pomerantz Haudek Grossman & Gross LLP and a fan of The Subprime Shakeout. Silverman exclusively represents investors in securities litigation and was co-lead counsel representing three multi-billion dollar state funds in a leading MBS case against Countrywide. He welcomes your comments and can be reached by email at firstname.lastname@example.org. The ethics rules in his state require him to remind you that this post is not legal advice.