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Federal Housing Finance Agency, Etc v. Ally Financial Inc.

December 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 one or both of 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 discovery in this matter, 11 Civ. 7010 (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 Freddie Mac between September 2005 and May 2007. Each of the GSE Certificates pertains to one of 21 securitizations offered for sale pursuant to one of six shelf-registration statements. Each of the 21 securitizations was sponsored by non-party Residential Funding Company, LLC, formerly known as Residential Funding Corporation ("RFC" or the "ResCap Sponsor"). As alleged in the complaint, RFC is an indirect, wholly-owned subsidiary of defendant GMAC Mortgage Group, Inc. ("GMACM"), which is, in turn, a wholly-owned subsidiary of Ally Financial Inc. ("AFI"), the lead defendant in this case. The following non-parties, all of which are wholly owned, indirect subsidiaries of GMACM and AFI, acted as depositors for the 21 securitizations: Residential Asset Mortgage Products, Inc. ("RAMP"), Residential Asset Securities Corporation ("RASC"), Residential Accredit Loans, Inc. ("RALI") (collectively, the "ResCap Depositors"). RFC, RAMP, RASC, and RALI were originally named as defendants in this action, but were released as defendants after they filed for bankruptcy protection along with their indirect parent company Residential Capital LLC ("ResCap"). In addition to the ways already discussed, AFI affiliates are alleged to have been involved in the securitization process through defendant Ally Securities, LLC ("Ally Securities"), a wholly-owned subsidiary of AFI that served as the co-lead underwriter for five of the securitizations and was an underwriter for an additional eight of them.

The Amended Complaint asserts securities law claims against AFI and GMACM as well as the following banks, which served as underwriter or co-lead underwriter for one or more of the 21 securitizations but are not otherwise affiliated with AFI: Barclays Capital Inc. ("Barclays"), Citigroup Global Markets Inc. ("Citi"), Credit Suisse Securities (USA) LLC ("Credit Suisse"), Goldman, Sachs & Co. ("Goldman"), JPMorgan Securities, LLC -- in its own right and as successor-in-interest to Bear Stearns Companies, Inc. ("BSC") -- ("JPMS"), RBS Securities Inc. ("RBS"), and UBS Securities LLC ("UBS"). The plaintiff's fraud-related claims are asserted only against AFI, JPMS (in its own right and as successor-in-interest to BSC), Goldman, and GMACM (collectively, "the fraud defendants").

The following five groups of defendants have each filed separate motions to dismiss the Amended Complaint: 1) AFI and GMACM; 2) Ally Securities; 3)RBS; 4) Goldman; and 5) a group consisting of the remaining underwriter defendants. The motions press a number of arguments that are also pressed by other defendants in these coordinated actions, the majority 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

I. Adequacy of Fraud Allegations Against Underwriter Defendants As in other cases filed by this plaintiff, several of the motions to dismiss devote particular attention to the adequacy of the FHFA's scienter allegations. 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 each other and 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.

With respect to JPMS and Goldman in particular, the Amended Complaint in this case largely repeats allegations that the Court has already found sufficient to plead fraud-based claims against these defendants and their corporate affiliates in other cases brought by the plaintiff. See Chase, 2012 WL 5395646, *11-14; Goldman, 2012 WL 5494923, *2. As the brief for JPMS notes, certain of these allegations pertain to activities by those affiliates of the banks that sponsored or served as depositors for securitizations other than those at issue here. Those allegations have limited relevance here, where the securitizations at issue were almost exclusively packaged by AFI affiliates. Other allegations, however, provide a strong basis for inferring that the banks acted knowingly or recklessly in continuing to underwrite RMBS offerings backed by mortgages that failed to conform to stated guidelines. In particular, the Amended Complaint cites the waiver rates in the Clayton Report and defendants' own statements regarding the due diligence they performed on the supporting loans pools for these very securitizations to assert that, to the extent JPMS, BSC, and Goldman were ignorant of the fact that a substantial number of the supporting loans were not originated according to stated guidelines, it was only because they consciously disregarded that risk.

As to Ally Securities, it is likewise true that, given the firm's representations that it reviewed portions of the loan pool for compliance with guidelines, the high defect rate alleged in the Amended Complaint is strongly suggestive that the firm knew the loans were underwritten to standards lower than those reported in the Offering Documents. This allegation is further buttressed by FHFA's allegations that Ally Securities was strongly motivated to disregard loan defects in order to benefit itself and its corporate affiliates and had particular insight into the quality of the supporting loans given the role its corporate affiliates played in originating, purchasing, and securitizing those loans.

As in Chase, these allegations are more than adequate to plead fraud with respect to the Offering Documents' representations regarding mortgage-underwriting standards. Chase, 2012 WL 5395646, at *11-14. But because these allegations do not bear on defendants' knowledge that their statements regarding LTV and owner-occupancy fraud in particular were false, see Merrill, 2012 WL 5451188, at *2, the plaintiff's claims based on those two categories of statements must be dismissed.

AFI's motion to dismiss also raises several arguments that are not fully addressed by prior Opinions in this litigation. Those ...

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