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Federal Housing Finance Agency v. Merrill Lynch & Co.

United States District Court, S.D. New York

November 8, 2012

MERRILL LYNCH & CO., et al., Defendants.

Page 275

Philippe Z. Selendy, Kathleen M. Sullivan, Adam M. Abensohn, Jordan A. Goldstein, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, for Plaintiff Federal Housing Finance Agency.

Brendan v. Sullivan, Jr., David S. Blatt, Edward J. Bennett, Williams & Connolly LLP, Washington, DC, for Defendants Merrill Lynch & Co., Inc.; MLPF & S Inc.; Merrill Lynch Mortgage Lending, Inc.; Merrill Lynch Mortgage Capital, Inc.; First Franklin Financial Corp.; Merrill Lynch Mortgage Investors, Inc.; Merrill Lynch Government Securities, Inc.

Page 276

Daniel C. Zinman, Neil S. Binder, Richards Kibbe & Orbe LLP, New York, NY, for Defendants Donald C. Han, Matthew Whalen, Brian T. Sullivan, Michael M. McGovern, Donald J. Puglisi, and Paul Park.


DENISE COTE, District Judge.

This is one of sixteen actions currently before this Court in which the Federal Housing Finance Agency (" FHFA" or " the Agency" ), as conservator for Fannie Mae and Freddie Mac (together, the " Government Sponsored Enterprises" or " GSEs" ), alleges misconduct on the part of the nation's largest financial institutions in connection with the offer and sale of certain mortgage-backed securities purchased by the GSEs in the period between 2005 and 2007.[1] As amended, the complaints in each of the FHFA actions assert that the Offering Documents used to market and sell Residential Mortgage-Backed Securities (" RMBS" ) to the GSEs during the relevant period contained material misstatements or omissions with respect to the owner-occupancy status, loan-to-value (" LTV" ) ratio, and underwriting standards that characterized the underlying mortgages.[2] On the basis of these allegations, the complaints assert claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, l (a)(2), o; the Virginia Securities Act, VA Code Ann. § 13.1-522(A)(ii), (C); and the District of Columbia Securities Act, D.C.Code § 31-5606.05(a)(1)(B), (c). In six of the cases, including this one, the Agency has also asserted claims of fraud and aiding and abetting fraud under the common law of New York State against certain entity defendants (the " Fraud Claim Cases" ). As pleaded, these fraud claims attach to each of the categories of misstatements upon which the plaintiff's securities law claims are based.

The Court has already issued three Opinions addressing motions to dismiss in

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two other cases brought by the FHFA: Federal Housing Finance Agency v. UBS Americas, Inc. et al., 858 F.Supp.2d 306 (S.D.N.Y.2012) (" UBS I " ); Federal Housing Finance Agency v. UBS Americas, Inc., et al., No. 11 Civ. 5201(DLC), 2012 WL 2400263 (S.D.N.Y. June 26, 2012) (" UBS II " ); and Federal Housing Finance Agency v. JPMorgan Chase & Co., et al., 902 F.Supp.2d 476, 11 Civ. 6188(DLC), 2012 WL 5395646 (S.D.N.Y. Nov. 5, 2012) (" Chase " ). Familiarity with those Opinions is assumed; all capitalized terms have the meanings previously assigned to them.

Following this Court's decision of the motion to dismiss in FHFA v. UBS, discovery began in all of the coordinated cases. Pursuant to a June 14 Pretrial Scheduling Order, briefing of defendants' motions to dismiss in the remaining fifteen cases has occurred in two phases, with the motions in this case and the other Fraud Claim Cases becoming fully submitted on October 11, 2012. The motions in the remaining nine cases are scheduled to be fully submitted November 9, 2012. Depositions are to begin in all cases in January 2013, and all fact and expert discovery in this matter, 11 Civ. 6202(DLC), must be concluded by December 6, 2013. Trial in this matter is scheduled to begin on June 2, 2014.


This case concerns 88 RMBS Certificates purchased by the GSEs between September 2005 and October 2007. The Certificates correspond to 72 independent securitizations, each offered for sale pursuant to one of ten shelf registration statements. The lead defendant is Merrill Lynch & Co. (" Merrill" ). Various corporate and individual affiliates of Merrill are also defendants, including individual defendant Donald C. Han, who served as the Treasurer of Merrill Lynch Mortgage Investors, the depositor for 62 of the 72 securitizations. Merrill affiliates also sponsored 60 of the 72 securitizations and served as lead underwriter for all of them.

Pursuant to the June 14 Pretrial Scheduling Order, the defendants jointly moved to dismiss the Amended Complaint on July 13, 2012 (the " Joint Motion" ). Defendant Han filed a separate motion to dismiss, which concerned only the claims against him. The motions were briefed and became fully submitted on October 10, 2012.

The Joint Motion presses several arguments that have been addressed in this Court's previous Opinions in this litigation, taking particular aim at the adequacy of the Agency's fraud allegations. The Court hereby adopts by reference the reasoning and, to the extent they are relevant here, the rulings of those prior Opinions.[3]

As in Chase, the motion to dismiss argues that the FHFA's scienter allegations are insufficient to support its fraud claims. These defendants' footprint in the mortgage-backed securities market differed somewhat from that of the defendants in Chase. Despite this fact and the different allegations that flow from it, however, ...

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