A New York federal judge has certified a class of investors to pursue fraud claims against Deutsche Bank, RBS and Wells Fargo for underwriting $7.7 billion of NovaStar mortgage-backed securities (MBS). U.S. District Judge Deborah A. Batts ruled the fundamental question of whether the banks lied ties the investors’ claims together. In her ruling, Judge Batts granted the motion filed by the New Jersey Carpenters Health Fund, the named Plaintiff, to certify a class of investors. They had invested in now-defunct subprime lender NovaStar Mortgage Inc.’s mortgage-backed securities.
The claims were that Deutsche Bank Securities Inc., RBS Securities Inc. and Wachovia Capital Markets LLC, now Wells Fargo Advisors LLC, lied in the offering documents that accompanied the securities. Judge Batts held that the common question of whether the banks made material false or misleading statements in the offering documents for the securities at issue will predominate over the individual issues in the class.
The dispute stems from 2006, when NovaStar issued six securities tied to residential MBS. The securities, which together held more than $7.7 billion in assets, were underwritten by Deutsche Bank, RBS and Wachovia. By June 2009, more than half the mortgages behind the securities had defaulted amid the housing collapse, causing massive investor losses. The fund filed the suit in June 2008.
The fund, which had invested $100,000 in one of the securities, filed suit against subprime lender NovaStar, the underwriting banks, and ratings agency Defendants such as Moody’s and Standard & Poor’s. The ratings agencies were dismissed from the suit in April 2011. The class action alleged that offering documents filed when the securities were issued failed to disclose that NovaStar had abandoned its underwriting standards to increase the number of mortgages it could originate.
In March 2012, Judge Batts dismissed the suit, saying that the complaint lacked specific examples of underwriting fraud and that the investors had been adequately warned of risks tied to the mortgage market. However, in March 2013, the Second Circuit Court of Appeals directed the lower court to follow the circuit’s 2012 decision in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. Under the precedent of that decision, when a bank issues multiple securities under the same shelf registration statement, an investor that purchased at least some of the securities can serve as the lead Plaintiff, so long as all the claims in the suit raise the same set of concerns.
Judge Batts ruled in February of last year that the Plaintiffs could file a third amended complaint, which is now the operative complaint in the suit. The case is stayed as to NovaStar, as its successor filed for Chapter 11 protection in July, and the underwriter banks and investors have since been in conflict over whether discovery can proceed in the remainder of the suit. The Plaintiffs are represented by Joel P. Laitman, Michael B. Eisenkraft and Christopher Lometti of Cohen Milstein Sellers & Toll PLLC. The case is New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group PLC et al. in the U.S. District Court for the Southern District of New York.
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