This just in: the Hon. Harold Baer, Jr. of the Southern District of New York has certified a class of bondholders in Goldman Sachs MBS Trust 2006-S2 led by the Mississippi Public Employees Retirement Fund. Included in the class are all bondholders in the Trust, not limited by the class of securities purchased. With this decision, it’s official: the trend I’ve discussed previously of courts approving more permissive definitions of MBS classes has taken hold, and should allow far more coordination between adversely affected bondholders, and far greater securities law recoveries. You can read the full decision here.
What’s really striking about this decision, and what confirms that the roots of a more permissive trend have taken hold, is that Judge Baer’s decision flies in the face of a earlier decision on MBS certification issued by… Judge Baer (discussed in development #3 in my prior article on RMBS Developments). In this decision by Judge Baer in a case brought by the New Jersey Carpenters Vacation Fund, et al. against Residential Capital and Royal Bank of Scotland (hereinafter “Residential Capital”), Hizzoner held that class certification was not appropriate because investors varied in sophistication and knowledge (based in part on the timing of their purchases) to such an extent that individual questions predominated.
In his newest decision involving Goldman’s securities, Judge Baer seems to downplay these differences, noting that differences in knowledge and sophistication alone do not require that class cert be denied. In fact, he explicitly mentions and distinguishes his earlier decision in Residential Capital, saying:
In [my prior holding in] Residential Capital I determined that common issues did not predominate where different putative class members had different levels of knowledge regarding underwriting guidelines and practices. While Residential Capitalrefers to the sophistication of certain class members and their familiarity with the mortgage-backed securities market, 272 F.R.D. at 168, sophistication is not sufficient on its own to find that questions of individual investor knowledge predominate over common issues. See Rocco v. Nam Tai Elecs., Inc., 245 F.R.D. 131, 136 (S.D.N.Y. 2007), cited by DLJ, 2011 WL 3874821, at*8–9 n. 1.
Indeed, [my ruling in] Residential Capital rested on a finding of individual investor knowledge that was informed not only by the sophistication of class members and differences in the availability of information over time, but other, more specific, evidence as well. See, e.g., Residential Capital, 272 F.R.D. at 169 (finding that certain class members “were extensively involved in the structuring of the [offerings at issue], including in the review and selection of the loans that backed the certificates”). (Order Granting Class Certification in Public Employees Retirement System v. Goldman Sachs, et al. at 9)
Throughout the Goldman decision, Judge Baer returns to this notion that the specific evidence cited in Residential Capital, that certain investors had knowledge that the mortgages backing their investment may not have been as represented, was not present in Goldman Sachs. Whether this turnabout is based on subsequent rulings that distinguish or contradict the Judge’s Residential Capital decision or whether Judge Baer sees the specific facts of the Rescap case as distinguishing that case in a meaningful way is difficult to know for sure. What is patently clear, however, is that Judge Baer has significantly narrowed the circumstances in which class certification is not appropriate, and opened the door for far broader class actions against Wall St. MBS issuers.