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National Credit Union Administration Board v. Wachovia Capital Markets, LLC

United States District Court, S.D. New York

May 6, 2014

NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Liquidating Agent of Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union, Plaintiff,
v.
WACHOVIA CAPITAL MARKETS, LLC, now known as WELLS FARGO SECURITIES, LLC, Defendant.

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.

Andrew W. Goldwater, Friedman Kaplan Seiler & Adelman LLP, New York, NY, David H. Fry, Christian K. Wrede, and Hannah E. Shearer, Munger, Tolles & Olson LLP, San Francisco, CA, for the Defendant.

OPINION & ORDER

DENISE COTE, District Judge.

This Opinion addresses a motion to dismiss filed in 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"). NCUA has sued 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] The complaints in the NCUA actions generally assert that the Offering Documents used to market and sell RMBS to the Credit Unions during the relevant period contained material misstatements or omissions with respect to (1) whether the underlying mortgage loans were underwritten according to certain risk guidelines, and (2) certain statistics regarding the quality of the underlying loans, including the loan-to-value ("LTV") ratio, the owner-occupancy status, and the borrowers' debt-to-income ("DTI") ratio.

The Court has already issued an Opinion addressing a motion to dismiss filed in the lead case brought by NCUA: NCUA v. Morgan Stanley & Co., Inc., et al., 13 Civ. 6705 (DLC), 2014 WL 241739 (S.D.N.Y. Jan. 22, 2014) ("Morgan Stanley"). Familiarity with that Opinion is assumed; all capitalized terms have the meanings previously assigned to them.

This action is brought against Wachovia Capital Markets, LLC ("Wachovia"), now known as Wells Fargo Securities, LLC, and it asserts claims under the Texas Securities Act, Tex. Rev. Civ. Stat. Ann. art. 581, ยง 33 (2013) ("Texas Blue Sky Law"). Wachovia has moved to dismiss many of the claims brought against it. For the reasons set forth below, the motion is denied.

BACKGROUND

This case concerns two RMBS Certificates that were underwritten and sold by Wachovia and purchased by Southwest: WMLT 2006-AMN1 ("AMN1") and WMLT 2006-ALT1 ("ALT1"). Both Certificates were rated AAA. AMN1 and ALT1 were purchased in June and December 2006, respectively, for a total of $25, 738, 350. By mid-2009, the Certificates were downgraded to junk status. By June of 2013, approximately 25% of the loans for each Certificate were delinquent.

Four originators were involved in these securities. For AMN1, American Mortgage Network, Inc. ("AmNet") originated 100% of the loans in the security. For ALT1, four originators contributed loans in the security: National City Mortgage Co. (~66% of the loans), Accredited Home Lenders, Inc. (~19%), Wachovia Mortgage Corp. (~12%), and AmNet (~3%). As relevant here, NCUA alleges that AmNet's percentage of loans "originated for distribution" was 90.3% in 2006 and 71.9% in 2007.

The Wachovia complaint asserts material misstatements in the Offering Documents with respect to the statistics relating to the quality of the underlying loans, with an emphasis on LTV ratios and owner-occupancy rates. A portion of the complaint discusses the results of a forensic analysis of the ALT1 security, which found materially higher LTV ratios and lower owner-occupancy rates than those listed in the Offering Documents for ALT1. The complaint also asserts that the Offering Documents contained material misstatements with respect to originators' compliance with the underwriting guidelines (and the reduced documentation program underwriting guidelines).

On February 5, 2014, following this Court's ruling on the motion to dismiss in Morgan Stanley, Wachovia moved to dismiss most of the claims in this action.[2] In an Order of February 7, that motion was stayed pending resolution of a motion to transfer filed before the Judicial Panel on Multi-District Litigation Panel ("JPML"). On February 12, the JPML denied the motion to transfer. Following a conference with the parties on March 11, the stay was lifted, and a schedule was entered for briefing the motion to dismiss. The motion became fully submitted as of April 25, 2014.

DISCUSSION

Wachovia's present motion consists of essentially two sets of arguments. First, Wachovia moves to dismiss all claims concerning misrepresentations in the Offering Documents for AMN1, arguing that NCUA has failed to plead sufficient allegations regarding AmNet, the originator that contributed the loans underlying AMN1. Second, Wachovia moves to dismiss all claims concerning misrepresentation of LTV and DTI ratios.

Both sets of these arguments have been addressed in this Court's previous Opinions, the Opinion in Morgan Stanley and two Opinions in the RMBS cases brought by the Federal Housing Finance Agency ("FHFA"), as conservator of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Fed. Hous. Fin. Agency ("FHFA") v. UBS Americas, Inc., et al., 858 F.Supp.2d 306 (S.D.N.Y. 2012) ("UBS"); FHFA v. JPMorgan Chase & Co. , 902 F.Supp.2d 476, 493 (S.D.N.Y. 2012) ("JPMorgan"). The Court hereby adopts by reference the legal standards and reasoning in these prior Opinions. The claims at issue here are strict liability claims subject to the pleading standard set forth in Rule 8(a), Fed.R.Civ.P. Morgan Stanley, 2014 ...


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