On February 17, 2010 Judge Kaplan issued a written opinion granting in part and denying in part the individual Lehman defendants' motion to dismiss in In re: Lehman Brothers Mortgage-Backed Securities Litigation.

A copy of the opinion can be found here. Our discussion of Judge Kaplan's ruling with respect to the Ratings Agencies can be found here.

With respect to Article III standing, Judge Kaplan granted the individual Lehman defendants' motion to dismiss as to 85 of the 94 offerings of mortgage-backed securities at issue. The court held that since the lead plaintiffs had only purchased mortgage-backed securities ("MBS") from nine (9) offerings, the plaintiffs only suffered an Article III injury with respect to those offerings.

As to the nine (9) offerings for which the plaintiffs have standing, the court held that the allegations relating to two of the three categories of misstatements failed to state a claim:

  • Conflict of interest: The court held that the allegations regarding the individual Lehman defendants' failure to disclose the relationship between Lehman and the Ratings Agencies were insufficient as a matter of law because the conflict of interest has been publicly known since the January 2003 SEC report that exposed the conflict of interest between issuers and ratings agencies.
  • Failure to disclose inadequate credit enhancements: The court found that the allegations that the registration statements failed to disclose that the securities had inadequate credit enhancements were insufficient because such statements were based on inactionable opinions by the Ratings Agencies.
  • Departure from underwriting guidelines: The complaint alleges that the offering documents were misleading because they failed to disclose that the loan originators did not comply with the disclosed underwriting guidelines that were designed to ensure a borrower’s ability to repay. The essence of this claim is that the loan originators systematically disregarded the stated underwriting guidelines, including the procedures for originating loans pursuant to the guideline exceptions, and ignored the borrowers’ ability to repay in order to originate as many mortgage loans as possible. The court found these allegations created a reasonable inference that the offering documents description of the underwriting practices were materially misleading because the plaintiffs provide factual allegations about widespread departures from underwriting standards across the loan origination industry, including the originators of the loans backing the MBS, and the impact that these practices allegedly had on the MBS.