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In re Lehman Brothers Securities and Erisa Litigation

United States District Court, Second Circuit

July 31, 2013

Merrill Lynch & Co., Inc., 10 Civ. 6637 (LAK) This document applies to: Stichting Pensioenfonds ABP

Jay W. Eisenhofer, GRANT & EISENHOFER P.A., Attorneys for Plaintiff.

Robert F. Serio, Aric Hugo Wu, Laura Kathryn O'Boyle, Jason William Myatt, GIBSON, DUNN & CRUTCHER LLP, Attorneys for Defendants Financial Asset Securities Corporation, RBS Acceptance Inc. (f/k/a Greenwich Capital Acceptance, Inc.), RBS Securities Inc. (f/k/a Greenwich Capital Financial Products, Inc.), Robert J. McGinnis, Carol P. Mathis, Joseph N. Walsh III, John C. Anderson, and James Esposito.


LEWIS A. KAPLAN, District Judge.

This case is part of the multidistrict litigation involving investor claims arising out of the collapse of Lehman Brothers in 2007. The plaintiff in this action, Stichting Pensioenfonds ABP ("ABP"), [1] invested in a single residential mortgage backed security ("RMBS") issued and underwritten by RBS and lost money when the housing market collapsed and the security dropped in value.[2] ABP now asserts claims under the Securities Exchange Act of 1934 (the "Exchange Act") and New York common law against certain RBS corporate entities and certain officers of those entities.

The RBS Defendants[3] move to dismiss the amended complaint for failure to state a claim upon which relief may be granted.[4] For the reasons that follow, the motion is granted.

I. Background

A. The Securitization Process

A residential mortgage backed security is a financial product created by aggregating mortgage loans to collateralize securities through a process called securitization. The process starts with the mortgage originators who extend loans to borrowers to purchase homes.[5] After issuing the loan, the originator becomes entitled to a stream of payments from the borrower consisting of principal and interest.[6] Instead of waiting for the payments to be made over the term of the loan, the originator can sell the rights to these payments and earn an immediate but discounted profit.[7]

To create a RMBS, a "sponsor" either originates or purchases a large number of mortgages and sells them to a "depositor" that deposits the mortgages in a trust.[8] In return for the pool of mortgages, the trust issues certificates to the depositor. These certificates entitle the depositor to receive a stream of payments.[9] The depositor then works with underwriters to sell these certificates, known as RMBS, to investors.[10]

Multiple classes or "tranches" of certificates are issued by each trust.[11] The most senior tranche is entitled to receive payments first.[12] The middle tranches are the next to receive payment. And the bottom or "equity" tranches are the last to receive payment.[13] In other words, if a certain percentage of the borrowers default on their loans, the equity holders absorb those losses first while the more senior certificate holders continue to receive payments.[14] Each tranche is rated by a rating agency with the most senior tranche being the most highly rated, typically AAA.[15]

The relative risk of the securities thus is dependent, at least in part, on the riskiness of the underlying mortgage loans.[16] Mortgage originators normally have guidelines that they are supposed to follow in order to ensure the ability and willingness of borrowers to repay.[17] These guidelines are detailed in the prospectus supplements for the RMBS.[18] Compliance with the guidelines is important because it ensures the quality of the loan pool and thus permits the RMBS issuers to accurately structure the collateralization of the various tranches. Compliance is important also so that the rating agencies can accurately assess the riskiness of the RMBS tranches.[19] Compliance thus is important to the average RMBS investor.[20]

The securitization process provides opportunities for abuse at the expense of investors. Apparent abuses by numerous participants in the RMBS industry in the last decade now are widely known. And the collapse of the residential mortgage market had and continues to have wide-ranging deleterious effects on the national and global economy. Many disappointed RMBS investors have sought relief in court. ABP is one such investor.

B. ABP's Claims

ABP invested in one RMBS issued and underwritten by the RBS Defendants, First Franklin Mortgage Loan Trust, Series 2006-FF16.[21] The RMBS allegedly dropped in value when the housing market collapsed. As of January 2012, the RMBS certificates were trading at 94 percent ...

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