Hous. Fin. Agency v. Countrywide Fin. Corp. (In re Countrywide Fin. Corp. Mortg.–Backed Sec. Litig.)

932 F.Supp.2d 1095

In re COUNTRYWIDE FINANCIAL CORPORATION MORTGAGE–BACKED SECURITIES LITIGATIONFederal Housing Finance Agency, as conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, Plaintiff,

v.Countrywide Financial Corporation, et al., Defendants.

Case Nos. 2:11–ML–02265–MRP (MANx), 2:12–CV–1059 MRP (MANx).

United States District Court, C.D. California.

March 15, 2013.

Validity Called into Doubt

17 C.F.R. § 230.159A

Adam M. Abensohn, Christine H. Chung, David B. Schwartz, Leah McCallister Ray, New York, NY, Molly C. Stephens, Los Angeles, CA, Renee Beltranena Bea, San Francisco, CA, for Plaintiff.

Mark Holland, Daniel P. Roeser, New York, NY, Alexis L. Shapiro, Brian Charles Devine, Brian E. Pastuszenski, Don M. Kennedy, John B. Daukas, John J. Falvey, Jr., Boston, MA, Lloyd Winawer, Los Angeles, CA, for Defendants.

Order Re Motions to Dismiss the First Amended Complaint

MARIANA R. PFAELZER, District Judge.

I. Background

The Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) are government-sponsored enterprises (“GSEs”). The GSEs are private corporations chartered by Congress to provide stability to the U.S. mortgage market, to respond appropriately to the private capital markets and to provide assistance to the secondary market for residential markets. 12 U.S.C. § 1716; 12 U.S.C. § 1451 note. The GSEs were a dominant force in the home mortgage market, together holding trillions of dollars in mortgage debt and mortgage-backed securities as of 2006. In the years before the housing crisis, Fannie Mae sought “bigger market share, profits, and bonuses, which led it to ramp up its exposure to risky loans and securities.” FINANCIAL CRISIS INQUIRY REPORT xix (2011). ¹ Housing prices began to fall in 2007, which precipitated “substantial losses” in the value of the mortgages and mortgage-backed securities held by the GSEs. First Am. Compl. (“FAC”) ¶ 11. In light of these losses, Congress passed the Housing and Economic Recovery Act of 2008 on July 30, 2008. HERA created the Plaintiff Federal Housing Finance Agency (“FHFA,”) and empowered the Director of the FHFA to place both GSEs into conservatorship and appoint the Agency as conservator. 12 U.S.C. § 4617(a)(1). The Director did so on September 6, 2008. FAC ¶ 13. As conservator, FHFA succeeded to all legal rights of Fannie Mae and Freddie Mac. 12 U.S.C. § 4617(b)(2).

On September 2, 2011, FHFA sued the defendants and other issuers of mortgage-backed securities in New York state court. Defendants removed the case to federal court on September 30, 2011. The portion of the case involving these defendants was transferred to this Court as part of the Countrywide Multidistrict Litigation proceedings in February 2012. After the Court rejected FHFA's motion to remand the case to state court, FHFA filed an Amended Complaint. Defendants moved to dismiss the Amended Complaint on timeliness and legislative jurisdiction grounds. The Court rejected that motion as to most of the claims on October 18, 2012. Fed. Hous. Fin. Agency v. Countrywide Fin. Corp., 900 F.Supp.2d 1055 (C.D.Cal.2012). The defendants now move to dismiss the First Amended Complaint on the grounds that it fails to state a claim upon which relief can be granted.

In the FAC, FHFA asserts that the GSEs purchased approximately $26.6 billion in residential mortgage-backed securities (“RMBS”) between August 30, 2005 and January 23, 2008, that were originated, sponsored or deposited by Countrywide Financial Corporation (“CFC,”) Countrywide Home Loans, Inc. (“CHL,”) Countrywide Capital Markets, LLC (“CCM,”) Countrywide Securities Corporation (“CSC,”) CWALT, Inc. (“CWALT,”) CWABS, Inc. (“CWABS”) and CWMBS, Inc. (“CWMBS”) (the last three are the “Depositor Defendants,” and collectively all seven are “Countrywide” or the “Countrywide Defendants”). Banc of America Securities LLC, Citigroup Global Markets, Inc., Deutsche Bank Securities, RBS Securities, Inc., UBS Securities, LLC (collectively, with Countrywide Securities Corporation, the “Underwriter Defendants”) underwrote the securities.

The RMBS were created through a process called “securitization.” Securitization refers to the creation of pools of residential mortgage loans, each of which produces cash-flows from the payment on the loans. The rights to the cash-flows of these pools are sold to investors as “certificates.” Here, CHL originated or acquired thousands of mortgage loans. It sold the loans to the Depositor Defendants, which then transferred the loans to trusts pursuantto a contract called the “Pooling and Servicing Agreement.” The trusts issued separate securities in the form of certificates for purchase by investors. A certificate entitled the holder to a portion of the cash-flow from the pool of underlying mortgages. The certificates were sold in “tranches,” i.e., slices of the loan pool with different priorities of payment, interest rates and credit protection. Upon issuance, the credit rating agencies credit ratings to each tranche. If they wished, investors could select riskier certificates in “junior” tranches with higher interest payments but lower credit ratings, instead of the more “senior” tranches with lower interest payments and higher credit ratings.

The legal mechanism by which the securities issued began with the Depositor Defendants, who filed “shelf” registration statements with the SEC, that entitled them to issue certificates at a later date. The certificate would then issue after the “prospectus,” which explains the general structure of the investment, and a “prospectus supplement,” which includes the detailed descriptions of the mortgage pools underlying the certificate, were filed with SEC. Investors could learn detailed information about the characteristics of their certificates through reading all of the documents filed with the SEC, which were the shelf registration statements, prospectuses and prospectus supplements (collectively, the “Offering Documents”).

The FAC alleges that the Offering Documents included four types of false statements, and FHFA brings causes of action based on federal and state securities and common law for the injuries it allegedly suffered from those misstatements.

II. Legal Standards

The Amended Complaint includes thirteen causes of action. FHFA sues the Underwriter Defendants, CWALT, Inc., CWABS, Inc. and the “Individual Defendants” (N. Joshua Adler, Ranjit Kripalani, Stanford Kurland, Jennifer S. Sandefur, Eric Sieracki and David A. Spector) for violation of Section 11 of the Securities Act of 1933. 15 U.S.C. § 77k. The elements of a Section 11 claim are that a registration statement contained an omission or misrepresentation, and that that omission or misrepresentation was material. Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir.1994). Unlike common law fraud or securities fraud statutes, the plaintiff need not show that the defendant knew the information was false. Id. FHFA sues the Underwriter and Depositor Defendants for violations of Section 12(a)(2) of the Securities Act. 15 U.S.C. § 77 l(a)(2). Liability extends to defendants that offered or sold a security, using interstate commerce, by means of a prospectus or oral communication that contained an untrue statement of material fact or omits to state a material fact necessary to make the statement not misleading. Miller v. Thane Int'l, Inc., 519 F.3d 879, 885 (9th Cir.2008). Scienter is not an element of Section 12(a)(2). Id. at 886. FHFA alleges that CFC, CHL, CCM and the Individual Defendants (collectively, the “Control Person Defendants,”) controlled one or both of CSC and the Depositor Defendants in violation of Section 15 of the Securities Act. 15 U.S.C. § 77 o(a). Section 15 requires that plaintiffs show that a primary violation of Section 11 and 12(a)(2) occurred, and that the defendant controlled the primary violator. Id.

FHFA sues CSC, Citigroup Global Markets, Inc., Deutsche Bank Securities and RBS Securities, Inc., each of whom underwrote securities sold to Freddie Mac, for violations of Virginia state “blue sky” law Section 13.1–522(A)(ii). “Any person who ... sells a security by means of an untrue statement of a material fact ... shall be liable to the person purchasing such security from him.” VA Code Ann. § 13.1–522(A)(ii). The statute applies only to parties who pass title to the plaintiff, and is “otherwise identical” ² to Section 12(a)(2). Fed. Hous. Fin. Agency v. Barclays Bank PLC, No. 11 Civ. 6190(DLC), 2012 WL 5844189, at *3 (S.D.N.Y. Nov. 19, 2012). FHFA sues CSC, Banc of America Securities, Deutsche Bank Securities, RBS Securities, UBS Securities, each of whom underwrote securities sold to Fannie Mae, and the Depositor Defendants for violations of the Washington, D.C. blue sky law section 31–5606.05(a)(1)(B), which is “nearly-identical” to Section 12(a)(2). Hite v. Leeds Weld Equity Partners, IV, LP, 429 F.Supp.2d 110, 114 (D.D.C.2006). FHFA sues the Control Person Defendants under the control-person provisions of Washington, D.C. law, and CFC and CCM under the control-person provisions of Virginia law, both of which parallel Section 15. D.C.Code § 31–5606.05(c) (extending liability over a person “who directly or indirectly controls a person liable under” the primary liability subsection); Barclays Bank, 2012 WL 5844189, at *2 (interpreting VA Code Ann. § 13.1–522(C)).

FHFA sues CSC and the Depositor Defendants for negligent misrepresentation. The parties disagree about the elements of negligent misrepresentation. This case was transferred from New York, so New York choice-of-law rules apply. In re Korean Air Lines Co., Ltd., 642 F.3d 685, 699 n. 12 (9th Cir.2011). New York only applies its choice-of-law rules when there is an “actual conflict between the laws of the jurisdictions involved.” Matter of Allstate Ins. Co. (Stolarz), 81 N.Y.2d 219, 223, 597 N.Y.S.2d 904, 613 N.E.2d 936 (1993)....