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National Credit Union Administration Board v. Goldman Sachs & Co.

United States District Court, Second Circuit

January 28, 2014

NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Liquidating Agent of Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union, Plaintiff,
v.
GOLDMAN, SACHS & CO., GS MORTGAGE SECURITIES CORP., Defendants.

David Fredrick, Wan J. Kim, Gregory G. Rapawy, and Andrew C. Shen, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC, David H. Wollmuth, Fredrick R. Kessler, Steven S. Fitzgerald, and Ryan A. Kane, Wollmuth Maher & Deutsch LLP, New York, NY, George A. Zelcs, Korein Tillery LLC Chicago, IL, Stephen M. Tillery, Greg G. Gutzler, Peter H. Rachman, and Robert L. King, Korein Tillery LLC, St. Louis, MO, For the Plaintiff.

Richard H. Klapper, William B. Monahan, Peter A. Steciuk, and Sara Hausner-Levine, Sullivan & Cromwell LLP, New York, NY, For the Defendants.

OPINION & ORDER

DENISE COTE, District Judge.

This is one of nine actions brought by the National Credit Union Administration Board ("NCUA" or "the Board"), as liquidating agent of Southwest Corporate Federal Credit Union ("Southwest") and Members United Corporate Federal Credit Union ("Members United") (collectively, the "Credit Unions"), against various financial institutions involved in the packaging, marketing, and sale of residential mortgage-backed securities ("RMBS") that the Credit Unions purchased in the period from 2005 to 2007.[1] NCUA brought this case against Goldman Sachs & Co. and GS Mortgage Securities Corp. (collectively "Goldman Sachs") on September 23, 2013. The complaint asserts claims under Sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, l (a)(2) (2012); and the Texas Securities Act, Tex. Rev. Civ. Stat. Ann. art. 581, § 33 (2013) ("Texas Blue Sky Law").

On November 13, Goldman Sachs filed a motion to compel arbitration. For the reasons that follow, the motion is denied.

BACKGROUND

Although NCUA's case against Goldman Sachs concerns three securities purchased in 2006 and 2007, the present motion relates to a contract signed almost fifteen years earlier. In March 1992, Southwest[2] signed a one-page, dual-column contract with Goldman Sachs, titled "Cash Account Agreement." The contract does not set forth the exact nature of the relationship between the parties, but it appears - given the nature of the contract terms included - to be a broker-dealer relationship between Southwest and Goldman Sachs. For example, Southwest promised that, if it directed Goldman Sachs to purchase securities on its behalf, it would pay for such securities, would pay interest for any late payments, and could be subject to a lien if it failed to pay in certain circumstances. Additionally, Southwest promised that, if it directed Goldman Sachs to sell securities that it owned, it would provide such securities before the settlement date.

This contract also included a mandatory arbitration clause. The relevant sections of the contract are as follows:

9. This agreement and its enforcement shall be governed by the laws of the State of New York and its provisions shall cover individually and collectively all accounts which Customer may maintain with you....
10. (a) Arbitration is final and binding on the parties.
(b) The parties are waiving their right to seek remedies in court, including the right to a jury trial.
(c) Pre-arbitration discovery is generally more limited than and different from court proceedings.
(d) The arbitrator's award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited.
(e) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.
Any controversy between you or any of your affiliates or any of your or their partners, officers, directors or employees on the one hand, and Customer on the other hand, arising out of or relating to this Agreement or the accounts established hereunder, shall be settled by arbitration....

(emphasis added). The contract bears the signature of Emily Hollis, who lists her title as Vice President of Funds Management of Southwest Corporate Federal Credit Union. The signature is dated March 11, 1992.

In 2006 and 2007, Southwest purchased from Goldman Sachs three Certificates for $40 million in RMBS that bore the highest rating from the major ratings agencies.[3] Beginning in April 2008, these securities were downgraded due to significant defaults in the loans that served as collateral to the securities. By 2010, the securities' credit ratings had been downgraded to either the lowest or second lowest level.

On September 24, 2010, the NCUA, an independent executive agency that oversees and regulates corporate credit unions, placed Southwest into conservatorship, pursuant to the Federal Credit Union Act, 12 U.S.C. § 1751. On October 31, it placed Southwest into involuntary liquidation. As conservator and liquidator of Southwest, NCUA assumed all rights and privileges of Southwest, including the ability to bring suit for pending claims.

On September 23, 2013, NCUA filed the present suit against Goldman Sachs. Its central allegation is that the offering documents Goldman Sachs provided relating to the three securities contained material misstatements or omissions. In a letter of October 8, Goldman Sachs requested that NCUA submit its claims to arbitration, citing the 1992 Cash Account Agreement contract. In a letter of October 17, NCUA rejected this request, contending that it was not bound to arbitrate for reasons that will be discussed in detail below.

On November 13, Goldman Sachs filed a motion to compel arbitration, citing the 1992 Cash Account Agreement contract.[4] The motion ...


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