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National Credit Union Administration Board v. Morgan Stanley & Co., Inc.

United States District Court, S.D. New York

April 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.
MORGAN STANLEY & CO., INC. and MORGAN STANLEY CAPITAL I INC., 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, Erik Haas, Peter W. Tomlinson, Phillip R. Forlenza, and Michelle W. Cohen, Paterson Belknap Webb & Tyler 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.

James P. Rouhandeh, Paul S. Mishkin, Daniel J. Schwartz, and Jane M. Morril, Davis Polk & Wardwell LLP, New York, NY, for the Defendants.

OPINION & ORDER

DENISE COTE, District Judge.

This is one of seven actions brought in this district by the National Credit Union Administration Board ("NCUA"), 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 that the Credit Unions purchased in the period from 2005 to 2007.[1] This action is brought against Morgan Stanley & Co., Inc. and Morgan Stanley Capital I Inc. (collectively "Morgan Stanley"), and it asserts claims under the Illinois Securities Law of 1953, 815 Ill. Comp. Stat. Ann. 5/12 & 13 (2013) ("Illinois Blue Sky Law"), and under the Texas Securities Act, Tex. Rev. Civ. Stat. Ann. art. 581, § 33 (2013) ("Texas Blue Sky Law").

On March 18, 2014, NCUA moved to strike sixteen of the thirty-one affirmative defenses in Morgan Stanley's February 25, 2014 answer. For the reasons stated below, NCUA's motion to strike is granted in part: twelve of Morgan Stanley's defenses will be struck.

BACKGROUND

This action involves alleged misrepresentations in the offering materials for residential mortgage backed securities purchased by NCUA. In its complaint filed on September 23, 2013, NCUA also asserted claims under Sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, l (a)(2) (2012) ("Securities Act").

On November 13, Morgan Stanley moved to dismiss all claims. In an Opinion and Order of January 22, 2014, the motion was granted in part. The federal claims were dismissed as time-barred, but the state law claims survived. NCUA v. Morgan Stanley & Co., Inc., et al., 13 Civ. 6705 (DLC), 2014 WL 241739 (S.D.N.Y. Jan. 22, 2014).

On February 25, Morgan Stanley filed an answer. The answer included thirty-one affirmative defenses. At issue in the present motion are the following sixteen affirmative defenses:

• Defense No. 1: The Complaint fails to state a cause of action against Morgan Stanley.
• Defense No. 7: NCUA's claims are barred because Morgan Stanley's conduct was not the cause of NCUA's losses or damages. Any losses or damages were caused by other factors, such as market-wide phenomena and intervening acts by non-parties.
• Defense No. 8: Any liability for damages under Section 11 of the Securities Act may not exceed the total price at which the securities were offered to the public. See 15 U.S.C. § 77k(e)(3).
• Defense No. 9: NCUA's claims are barred because the alleged misstatements or omissions attributed to Morgan Stanley were based on the work of others, including experts, upon which the Morgan Stanley reasonably relied. See 15 U.S.C. § 77k(b)(3)(A).
• Defense No. 15: Morgan Stanley is entitled to recover contribution from others for any liability incurred in this matter.
• Defense No. 17: NCUA's claims are barred by its own negligence and the negligence of Southwest and/or Members United, including the failure to undertake due diligence.
• Defense No. 18: NCUA has waived any claims against Morgan Stanley, in part because it continues to receive payments on some or all of the securities that Southwest and/or Members United purchased.
• Defense No. 19: NCUA, Southwest, and/or Members United have ratified and/or consented to the alleged acts, omissions and conduct of which NCUA now complains. This ratification/consent, inter alia, prohibits NCUA from obtaining relief, including rescission.
• Defense No. 21: NCUA's claims are barred because the injuries allegedly sustained were caused by the actions or inactions of parties and/or events outside of Morgan Stanley's custody and control.
• Defense No. 22: NCUA's claims are barred by the doctrine of laches.
• Defense No. 24: NCUA's claims are barred by equitable estoppel, waiver, unclean hands, in pari delicto, ...

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