The United States District Court for the Northern District of California recently granted in part and denied in part motions to dismiss a class action brought by a class of purchasers of mortgage pass-through certificates. In Re Wells Fargo Mortgage-Backed Certificates Litigation, C 09-01376 SI. [Click here for a copy of the court’s decision.]
The complaint, filed on March 27, 2009, against Wells Fargo Bank, the originator and custodian/servicer on the underlying loans, various rating agencies who rated the credit quality of the pooled mortgages, and the entities that had sold the certificates to investors, alleged violations of §§11, 12, and 15 of the Securities Act of 1933. Specifically, the complaint alleged that the offering documents contained numerous false and misleading statements and omissions regarding Wells Fargo’s underwriting process, loan standards, the appraisal value of the underlying properties and the credit quality of the certificates.
Defendants moved to dismiss the consolidated class action on numerous grounds, including: (1) lack of standing against Wells Fargo and the underwriter defendants; (2) statute of limitations; (3) no liability on the part of the ratings agencies under the Securities Act; and (4) that plaintiffs had failed to allege any actionable misstatements.
The court agreed that plaintiffs did not have standing to bring suit on behalf of those who purchased securities through offerings in which the named plaintiffs had not purchased securities. Accordingly, of the 54 offerings described in the complaint, the court held that plaintiffs only had standing to bring suit with respect to the 17 offerings through which they purchased securities. The court also dismissed plaintiffs’ §12 claims because the plaintiffs failed to allege that they had purchased the securities in question directly from defendants (instead stating that plaintiffs had “purchased or otherwise acquired certificates pursuant and/or traceable to the defective prospectuses.”) As a result, the court dismissed those claims without prejudice.
The court also granted the motion to dismiss as to the ratings agencies, finding that the agencies were not subject to §11 liability. The court specifically rejected the plaintiffs’ claim that rating agencies could be held liable as underwriters.
The court, however, rejected defendants’ argument that the complaint should be dismissed on statute of limitations grounds. Defendants argued that the complaint should be dismissed because the plaintiffs’ claims accrued more than one year before the complaint was filed (March 27, 2009). According to the defendants, the plaintiffs were put on inquiry notice before March 27, 2008 by a series of articles involving the mortgage crisis and mortgage backed securities, as well as by the fact that ratings agencies began downgrading the certificates in December of 2007. The court held that whether the articles were sufficient to put investors on inquiry notice was a question of fact, not appropriate for evaluation in a motion to dismiss. Similarly, the court held that whether the minor downgrades prior to March 2008 (from AAA to AA to A), could have put the plaintiffs on inquiry notice was a question of fact.
Finally, the court held that plaintiffs had sufficiently stated a claim with respect to the alleged misstatements or omissions remaining in the complaint. Despite defendants’ arguments that the complaint did not tie the inconsistent underwriting conduct to the certificates at issue in this case, the court found that the plaintiffs alleged that the challenged conduct (i.e., placing intense pressure on loan officers to close loans) infected the entire underwriting process. Accordingly, the court denied the motion to dismiss as to the remaining claims in the complaint.