On October 24, 2010, a federal judge in the Western District of Washington ruled that a suit against several former directors at Washington Mutual Bank (WaMu) as well as WaMu auditor Deloitte & Touche LLP could go forward in one of a number of suits that are part of multidistrict litigation stemming from the collapse and sale of the troubled thrift in 2008.
The California plaintiffs, Monterey County and the City of San Buenaventura, alleged that WaMu and Deloitte violated the California Corporations Code in connection with the plaintiffs' purchase of certain notes from WaMu. Specifically, plaintiffs claimed that WaMu's directors abandoned their underwriting standards for so-called prime and subprime mortgages, relegated WaMu's risk management group to a "customer service" role, and pressured appraisers to inflate their appraisals in order to understate loan-to-value ratios. As to Deloitte, plaintiffs alleged that it issued "clean" audit reports during the crucial period of 2005 to 2007 when WaMu's underwriting standards were actually deteriorating, that it was "intimately familiar" with WaMu's business model and loan practices, and therefore knew or recklessly disregarded WaMu's true financial condition and exposure.
In April 2010, Judge Marsha Pechman dismissed the original complaint, finding that plaintiffs had not adequately pleaded viable fraud and negligent misrepresentation claims and pointed to plaintiffs' "threadbare" allegations as to reliance. Plaintiffs then amended their claims, and Judge Pechman allowed the amended complaint to proceed (Order). Judge Pechman noted that plaintiffs provided "much greater detail" regarding their reliance claims, including specific facts surrounding the decision to purchase WaMu notes, the types of investment information reviewed, the specific financial advisors, and the means of accessing the materials that the plaintiffs allegedly relied upon.
In the same order, the court dismissed the City's "holder" claims, which required the City to allege that if it had read a truthful account of the corporation's financial status it would have sold its stock, including specifying how many shares it would have sold and when. The court found that the City had not alleged that it or its investment advisor ever read subsequent WaMu securities filings, but merely that it was "informed of the contents" of the filing through its investment advisor.