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Federal Housing Finance Agency, Etc v. Barclays Bank Plc

November 19, 2012


The opinion of the court was delivered by: 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.*fn1 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. 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, though not this one, the Agency has also asserted claims of fraud and aiding and abetting fraud against the certain entity defendants under the common law of New York State (the "Fraud Claim Cases").*fn2

The Court has already issued several Opinions addressing motions to dismiss in other cases brought by the FHFA.*fn3

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. Briefing of defendants' motions to dismiss in the remaining fifteen cases has occurred in two phases, with the motions in Fraud Claim Cases becoming fully submitted on October 11, 2012. The motions in this case and the remaining eight cases were 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. 6190 (DLC), must be concluded by December 6, 2013. Trial in this matter is scheduled to begin in January 2015 as part of the fourth tranche of trials in these coordinated actions.

This case concerns RMBS Certificates allegedly purchased by the GSEs between September 2005 and October 2007. Each of the GSE Certificates pertains to one of eight securitizations offered for sale pursuant to one of seven shelf-registration statements. The lead defendant is Barclays Bank PLC ("Barclays"). Several corporate affiliates of Barclays and three associated individuals are also defendants. Barclays affiliates served as lead or co-lead underwriter for each of the eight securitizations at issue and as depositor for two of them. Each individual defendant signed the shelf registration statement for the Barclays-deposited security.

The defendants' motion to dismiss presses a number of arguments that are also pressed by other defendants in these coordinated actions, many of which have been addressed by this Court's previous Opinions. The Court hereby adopts by reference the reasoning and, to the extent they are relevant here, the rulings of those prior Opinions. All capitalized terms have the meanings previously assigned to them.

The defendants' motion does, however, present one argument that has not been addressed in this Court's prior Opinions. The defendants argue that SABR (a Barclays-owned depositor) and the individual defendants cannot be held liable under the Virginia Securities Act for misstatements related to securities that they did not themselves sell to the plaintiff. The Amended Complaint asserts primary violations of the Virginia Securities Act by SABR and Virginia-law control-person claims against the individual defendants based on their control over SABR.

As a general matter, "Virginia courts will look to interpretations of the federal securities laws when called upon to construe the Virginia Securities Act." Dunn v. Borta, 369 F.3d 421, 428 n.17 (4th Cir. 2004). The language in the Virginia statute that defines the scope of control-person liability does not differ materially from its federal equivalent. Compare VA Code Ann. § 13.1-522(C), with 15 U.S.C. §§ 77o. Both provisions impose liability on a person who "controls" a primary violator. Defendants do not contend that the statutes differ in this respect. Rather, they argue that the plaintiff's claims against SABR cannot be sustained under the Virginia Act's primary liability provisions and that, for that reason, the Virginia-law control-person claims against the individual defendants fail as well.

With respect to primary liability, the Supreme Court has held in the federal context that a plaintiff may assert claims against a party under Section 12 of the Securities Act, even in the absence of contractual privity, so long as it is shown that the defendant "successfully solicit[ed] the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Pinter v. Dahl, 486 U.S. 622, 647 (1988).

The adoption of this rule, which has come to be known as the "statutory seller" standard, see UBS I, 858 F. Supp. 2d at 333, was driven in large part by the precise wording of Section 12, which provides, as relevant here:

Any person who . . . offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact . . . shall be liable . . . to the person purchasing such security from him . . . .

15 U.S.C. § 77l(a)(2).

The Court noted in particular that the Securities Act defines the terms "offer to sell," "offer for sale," or "offer" to include "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value." 15 U.S.C. ยง 77b(a)(3). From this, it concluded that "[t]he inclusion of the phrase 'solicitation of an offer to buy' within the definition of 'offer' brings an individual who engages in ...

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