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Federal Housing Finance Agency, Etc v. Morgan Stanley

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, including this one, the Agency has also asserted common law claims of fraud and aiding and abetting fraud against certain entity defendants (the "Fraud Claim Cases"). As pleaded, these fraud claims attach to each of the three categories of misstatements upon which the plaintiff's securities law claims are based.*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 this case and the other Fraud Claim Cases becoming fully submitted on October 11, 2012. The motions in the remaining nine 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. 6739 (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 33 securitizations offered for sale pursuant to one of seven shelf-registration statements. The lead defendant is Morgan Stanley. Various corporate affiliates of Morgan Stanley and associated individuals are also defendants. Morgan Stanley affiliates served as lead underwriter for 30 of the 33 securitizations at issue, as sponsor for 23 of them, and as depositor for 30. Each individual defendant signed one or more of the Offering Documents. For certain of the securitizations, the plaintiff also asserts securities law claims against RBS Securities Inc. ("RBS") and Credit Suisse Securities (USA) LLC ("Credit Suisse"). These banks acted as underwriters for certain of the securitizations but are not otherwise affiliated with Morgan Stanley. The plaintiff's fraud claims are asserted only against the Morgan Stanley entity defendants.

Three motions to dismiss have been filed in this case: one on behalf of all of the Morgan Stanley defendants and affiliated individuals, one on behalf of Credit Suisse, and one on behalf of RBS. The motions press a number of arguments that are also pressed by other defendants in these coordinated actions, some 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.*fn4 All capitalized terms have the meanings previously assigned to them.

I. Adequacy of Fraud Allegations

As in other cases filed by this plaintiff, defendants'

motion to dismiss devotes particular attention to the adequacy of the FHFA's allegations in support of its fraud claims. To be sure, each of these coordinated actions must be considered on its own bottom. The roles of these defendants in the RMBS securitization process and their familiarity with it differ from those of defendants in other cases in material respects. The plaintiff's allegations in support of its fraud claims differ accordingly. Nonetheless, an independent review of the plaintiff's allegations in this case compels an outcome similar to those this Court has reached in previous Opinions in this litigation.

As in Chase, the facts alleged in the Amended Complaint are sufficient to plead fraud with respect to the Offering Materials' representations regarding mortgage-underwriting standards. In addition to the arguments considered and rejected in Chase, defendants argue that the plaintiff's scienter allegations are not credible because Morgan Stanley retained an interest in the securitizations that it sold to the GSEs and therefore had no motive to permit the securitization of deficient loans. The plaintiff counters that Morgan Stanley's filings indicate it intended to re-securitize these residual interests and "unload [them] onto other unsuspecting parties."

Whatever the merit of these arguments, they turn on factual disputes that are inappropriate for resolution through a motion to dismiss.

With respect to the scienter component of FHFA's fraud claims based on LTV and owner-occupancy information, however, the Amended Complaint relies almost entirely on the disparity between the statistics reported by the defendants and the results of the Agency's own analysis. As explained in previous Opinions, without additional support, this disparity is insufficient to allege fraudulent intent with the specificity required by Rules 8(a) and 9(b), Fed. R. Civ. P. Merrill, 2012 WL 5451188, at *2. Accordingly, ...

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