Monday, October 11, 2010

Northern California Judges Allow parts of Securities Complaint against Wells Fargo to Proceed

Wells Fargo in Tempe, AZ. Photo courtesy of Rail Life.
A series of pension funds brought individual actions against Wells Fargo for violations of securities laws.  Judge Susan Illston combined the cases into a class action.  The class complaint alleges that Wells Fargo sold certificates which essentially pooled mortgages, the certificates would pay whatever the mortgage earned in terms of principal and interests payments.  The plaintiffs allege that Wells Fargo stated that the pooled mortgages met its underwriting standards while "confidential witnesses" who were Wells Fargo loan officers stated that "70%" of the mortgages pooled did not meet underwriting standards.

In an April 2010 order, Judge Illston explained "Section 11 of the Securities Act of 1933 imposes liability on issuers, underwriters, and other participants in a public securities offering for any material misstatement of fact or material omission in the registration statement." The defendants argued that the plaintiffs lacked standing because the lead plaintiffs were not involved in many of the transactions which they now claim were unfair. The court agreed and dismissed with leave to amend.  However, the court noted that 37 of the 54 transactions lacked participation of a lead plaintiff, but 11 did not.  The 37 were dismissed but the 11 were a basis for liability under Section 11 which also gave liability to control agents (supervisors) under Section 15 of the Securities Act.

In the next round of pleading, the defendants took a different approach under Rubke v. Capital Bancorp LTD (9th Cir. 2009) and argued that the statements which the defendants state are misleading "appraisals, ratings, and [Loan to Value] LTV ratios" are statements of opinion and must be plead with particularity to demonstrate their misleading nature.  Judge Lucy Koh agreed and dismissed the 37 Section 11 counts again with leave to amend.

However, the underwriter defendants (companies other than Wells Fargo) moved to dismiss 11 of the 37 counts which were supported by new plaintiffs stating that the statute of limitations expired for those claims and it could not be tolled by the earlier filing since none of the plaintiffs had standing.  Judge Koh agreed citing Palmer v. Stassinos, (N.D. Cal. 2006)("it would be beyond the constitutional power of a federal court to toll a period of limitations based on a claim that failed because the claimant had no power to bring it.").  She dismissed those counts with prejudice.

In the April 2010 Order, Judge Illston explained, "Section 12(a)(2) provides that any person who 'offers or sells' a security by means of a prospectus containing a materially false statement or material omission shall be liable to any 'person purchasing such security from him.'" However, to have standing one of the name plaintiffs must have actually purchased a security. Previously, the Court dismissed the plaintiffs Section 12(a)(2) for failure to find a plaintiff who purchased a security from Wells Fargo (as opposed to one who purchased the certificate on the open market). Now, Judge Koh stated that upon opportunity to amend the plaintiffs still could not locate such a transaction and dismissed this count of the complaint with prejudice.

The Case is In re Wells Fargo Mortgage-Backed Securities Litigation No C 09-1376 and the three Motion to Dismiss Opinions are below the jump.

First Motion to Dismiss:
In Re Wells Fargo Mortgage-Backed Cert Lit MTD1
Second MTD:
In Re Wells Fargo Mortgage-Backed Cert Lit MTD
Underwriters MTD:
In Re Wells Fargo Mortgage-Backed Cert Lit MTD2

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