On July 12, 2017, the Royal Bank of Scotland (RBS) and the Federal Housing Finance Agency (“FHFA”) announced an agreement to settle claims arising out of RBS’s sale of allegedly faulty residential mortgage-backed securities (“RMBS”).  RBS will pay $5.5 billion to settle the claims.

Continue Reading RBS Settles RMBS Claims in FHFA Settlement

On May 1 and 3, UBS Securities LLC and Credit Suisse Securities USA LLC announced settlements of significant claims brought against them by the National Credit Union Administration (“NCUA”), the federal agency serving as liquidation agent for credit unions that folded during the economic crisis. Credit Suisse will pay $400 million and UBS $445 million to settle the NCUA claims.

Continue Reading Credit Suisse and UBS Settle RMBS Claims with National Credit Union Administration

On December 7, New York Supreme Court Justice Eileen Bransten dismissed a $500 million lawsuit against UBS AG (“UBS”) brought by Ace Decade Holdings Limited (“Ace Decade”), a British Virgin Islands company, for lack of personal jurisdiction and forum non conveniens.  Ace Decade alleged that UBS fraudulently induced it to invest in shares of a company publicly traded in Hong Kong through a UBS-affiliated intermediary in Hong Kong, an affiliation that UBS concealed.  Ace Decade’s investment allegedly resulted in a loss of more than $500 million.

Ace Decade pled that both general and specific jurisdiction existed because UBS had systematic contact with New York and transacted business in New York that gave rise to the claims: the “cause of action [arose] from a transaction that UBS induced Ace Decade to make…months after Ace Decade moved to New York,” “UBS made misrepresentations to Ace Decade over several months while they were in New York,” and “UBS’s tortious acts injured Ace Decade in New York.”

In its motion to dismiss, UBS argued that under Daimler AG v. Bauman, 134 S. Ct. 746, 754 (2014), UBS is not subject to general jurisdiction in New York because UBS is incorporated in and has its principal place of business in Switzerland.  Furthermore, UBS argued that New York lacked specific jurisdiction because the transactions giving rise to Ace Decade’s claims occurred in Hong Kong, not New York.  Lastly, UBS argued that New York was not a convenient forum for several reasons, including the fact that trying the case in New York would impose undue hardship on UBS because almost all relevant witnesses and documents were abroad.

Justice Bransten agreed with UBS and held that the Court lacked personal jurisdiction.  She stated that “the record makes clear that the ‘original critical events’ associated with the [i]nvestment occurred in Hong Kong.”  The fact that Ace Decade moved to New York after entering into all relevant agreements and committing to make an investment was not a sufficient basis for jurisdiction.  The Court also concluded that even if it could properly exercise jurisdiction, the action would be dismissed based on forum non conveniens because all relevant documents and witnesses are located in Hong Kong.

Earlier last month, the Appellate Division, First Department, reversed a trial court’s dismissal of investment fund Phoenix Light’s $700 million residential mortgage-backed securities (RMBS) fraud suits against Credit Suisse and Morgan Stanley. In a brief opinion, the appellate court held that Phoenix Light’s allegations that it relied on defendants’ misrepresentations and omissions in their respective RMBS offering materials were sufficient to state a fraud claim.

Justice Ramos of the Supreme Court of the State of New York, Commercial Division, had previously granted the defendants’ motions to dismiss Phoenix Light’s common law fraud, fraudulent inducement, and aiding and abetting fraud claims. In so holding, Justice Ramos relied on the fact that Phoenix Light never alleged that it requested mortgage loan files or due diligence reports from the defendants to conduct independent analysis of the loans underlying the RMBS. Phoenix Light argued that such requests to the defendants would have been futile, but the trial court held that a sophisticated investor should have done so.

The Appellate Division disagreed, relying on its prior decision in IKB International S.A. v. Morgan Stanley, 142 A.D.3d 447 (1st Dept. 2016), among other authority. In IKB’s case against Morgan Stanley, the First Department concluded that even if the plaintiff bank had demanded loan files from Morgan Stanley, the defendant would not have provided said files. Thus, IKB’s allegations of justifiable reliance were sufficient as pleaded. Further, in the Phoenix Light opinion, the court noted that RMBS plaintiffs are not required to plead that they received representations and warranties made directly by defendants concerning the underlying loans, merely that such representations and warranties were made to the defendants by third parties with the relevant information. As such, Phoenix Light’s pleaded reliance on the defendants’ offering materials was sufficient.

The cases are captioned Phoenix Light SF Ltd. et al. v. Credit Suisse AG et al., index number 653123/2013, and Phoenix Light SF Ltd. et al. v. Morgan Stanley et al., index number 652986/2013.

On November 4, the New York State Department of Financial Services (“DFS”) and the Agricultural Bank of China agreed to a Consent Order requiring the bank to pay a $215 million penalty and to install an independent monitor to review the bank’s program for compliance with anti-money laundering laws (“AML”), including the Bank Secrecy Act (“BSA”).

The Agricultural Bank of China’s New York Branch (the “Branch”) conducts U.S. dollar clearing in large volumes through foreign correspondent accounts.  Since U.S. dollar clearing – a process by which U.S. dollar-denominated transactions are settled between counterparties through a U.S. bank – is a high-risk business line that creates an opportunity for bad actors to launder money or facilitate terrorist transactions, transaction monitoring systems are particularly important for entities that engage in this type of activity.

According to the Consent Order, despite warnings by DFS in 2014 that the Branch’s transaction monitoring systems were inadequate for a greater volume of clearing activity, the Branch substantially increased its clearing activity without implementing stronger monitoring systems.  Furthermore, when the Chief Compliance Officer (“CCO”) raised concerns in 2014 about potentially suspicious activity, Branch management failed to properly address these concerns and curtailed the CCO’s independence and ability to carry out vital compliance responsibilities.

The Consent Order states that during its 2015 investigation, DFS discovered an “‘unmanageable’ backlog of nearly 700 alerts of potential suspicious transactions” at the Branch that had not yet been investigated.  Additionally, DFS uncovered several alarming transaction patterns, including unusually large round-dollar transfers between Chinese and Russian companies and potentially suspicious dollar-denominated payments from trading companies located in the Middle East.

In a press release accompanying the Consent Order, New York Superintendent of Financial Services Maria T. Vullo stated that “[t]he failure of a strong compliance program at the New York Branch of the Agricultural Bank of China created a substantial risk that terrorist groups, parties from sanctioned nations, and other criminals could have used the Bank to support their illicit activities.”  Therefore, according to Superintendent Vullo, “serious sanctions and remedial action” were implemented.  The press release further noted that the settlement was the first between DFS and a Chinese bank, and “highlights the importance of DFS’s new risk-based anti-terrorism and anti-money laundering regulation that requires regulated institutions to maintain programs to monitor and filter transactions for potential BSA/AML violations and prevent transactions with sanctioned entities.”

With all the news surrounding the SEC’s headline-grabbing prosecution of Lynn Tilton and her firm, Patriarch Partners LLC, it is easy to miss the insurance coverage element of the case.  It is no secret that in recent years, and particularly following the enactment of the Dodd-Frank Act in 2010, the SEC has dedicated more resources to investigating and targeting, among others, private equity firms, hedge funds, and mutual funds.  Responding to an SEC subpoena or investigation can be extremely expensive and disruptive.  Importantly, in some instances, these costs may be covered by a company’s liability insurance policies.

Patriarch Partners is seeking coverage from AXIS Insurance (“AXIS”) for an SEC subpoena and subsequent enforcement action. Patriarch Partners LLC v. AXIS Insurance Company, No. 1:16-cv-02277-VEC (S.D.N.Y. filed March 29, 2016).  AXIS has denied coverage and is seeking a court ruling that there is no coverage because (1) Patriarch allegedly did not disclose in a warranty for the AXIS policy that it had received an informal request for documents from the SEC; (2) the claim was barred by a prior acts exclusion; and (3) the SEC claims at issue constituted a “claim” made prior to the policy period.

In short, AXIS is arguing that, because the SEC allegedly requested certain documents from Patriarch and started an inquiry prior to the policy period, no coverage is available for the SEC’s subsequent claims.  Notably, although AXIS is contesting its coverage obligation, the primary insurer and the lower-layer excess carriers agreed to fund Patriarch’s defense and already have exhausted their limits.

The case raises a number of issues that all sophisticated buyers of insurance need to anticipate to increase the likelihood that coverage will be available for SEC claims:

  1. Be careful in completing applications and executing warranties. In purchasing insurance, policyholders are often required to complete applications or execute warranties.  Insureds, of course, must be honest in these applications and warranties because, as the Patriarch case demonstrates, insurance companies may attempt to avoid their coverage obligation based on purported misrepresentations.  But, as the Patriarch case also shows, responding to insurance applications is often easier said than done.  For example, to challenge coverage, AXIS is relying on a warranty by Patriarch stating that it was not “aware of any facts or circumstances that would reasonably be expected to result in a Claim” covered by the AXIS policy.  At the time Patriarch executed its warranty, however, its representation likely was accurate:  it likely did not know that a limited investigation by the SEC would result in a claim leading to more than $20 million in fees.  Nevertheless, Patriarch now faces an obstacle to coverage that could have been avoided.
  1. How the term “Claim” is defined. Most management liability insurance policies are written on a claims-made basis, which means that they are triggered by claims made during the policy term.  The definition of “Claim,” however, varies significantly from policy form to policy form.  In virtually all policies, the definition of “Claim” will include civil lawsuits, but, as reflected in the Patriarch case, it may also include a subpoena, an order of investigation, or an SEC Form 1662.  Policies also generally tie the definition of “Claim” to instances where there are allegations of “wrongful acts.”  The definition of “Claim” can have broad consequences for coverage and will affect the policyholder’s notice obligations, which policy period(s) is triggered, and how exclusions are applied.
  1. Understand the ramifications of prior acts and prior litigation exclusions. The vast majority of D&O policies contain prior acts or prior litigation exclusions that bar coverage for claims arising out of acts, or “related” lawsuits, that took place prior to the policy period.  The language of these exclusions again differs from policy to policy.  Where possible, seek a narrower and clearer exclusion, so that there is little doubt regarding what is excluded.  For example, in the Patriarch case, the policy contains a somewhat expansive exclusion barring coverage for claims “based upon, arising out of or attributable to any demand, suit or other proceeding pending” against Patriarch on or prior to July 31, 2011, “or any fact, circumstance or situation underlying or alleged therein.”  AXIS still will be required to show that this exclusion clearly and unambiguously bars coverage for the claim at issue, but this type of language gives insurers too much room to try to contest coverage.

There is no way to guarantee that all SEC claims will be covered, but by being proactive and anticipating key issues, you will put your firm in the best possible position to obtain coverage and manage this critical risk.  We will be monitoring the Patriarch case as it develops.


* Joseph Saka is a member of Lowenstein Sandler’s Insurance Recovery Group.  Zachary Rosenbaum, Chair of the Capital Markets Litigation Group, contributed to this post.

The National Credit Union Administration (NCUA) and the Royal Bank of Scotland (RBS) have reached a $1.1 billion agreement to settle two separate federal cases that arose out of RBS’s sale of residential mortgage-backed securities (RMBS) to two corporate credit unions that later failed and were placed into NCUA conservatorship.  The two complaints, pending in the District of Kansas and the Central District of California, alleged that RBS misrepresented the risks of RMBS investments, particularly the likelihood that borrowers would default on the mortgage loans underlying the transactions.

The Kansas suit revolves around RMBS that U.S. Central Federal Credit Union purchased in 2006 and 2007, which resulted in approximately $800 million in losses.  The California suit concerns RMBS purchases by the now-defunct Western Corporate Federal Credit Union.  Both suits survived RBS motions to dismiss last year.

The NCUA has settled numerous other RMBS claims against banks, including a $491 million settlement with Goldman Sachs in June, a $69 million settlement with UBS in June, and a $29 million settlement with Credit Suisse in March.  Last year, the NCUA reached a $225 million settlement with Morgan Stanley in December, inked a $378 million settlement with Barclays and Wachovia in October, and accepted a $129.6 million offer of judgment from RBS Securities in September concerning other failed credit unions.  The NCUA’s recoveries in RMBS matters now exceed $4.3 billion.

While the NCUA continues to pursue other RMBS claims against Credit Suisse and UBS Securities, more and more RMBS claims, like those of the U.S. Central Federal Credit Union and Western Corporate Federal Credit Union, will continue to arise.

U.S. Southern District Judge Deborah A. Batts shut down underwriter defendants’ attempt to avoid proceeding with discovery in a $7.7 billion mortgage-backed securities fraud action, by arguing that an automatic bankruptcy stay applied to the underwriter defendants in addition to the debtor defendants.

The current discovery dispute arises from a proposed class action lawsuit against the now bankrupt NovaStar Mortgage Inc. (“NMI”) and NovaStar Mortgage Funding Corporation (“NMFC”) and the investment banks that underwrote $7.7 billion of NovaStar mortgage-backed securities issued in 2006.  The underwriter defendants include RBS Securities Inc., Deutsche Bank Securities Inc., and Wells Fargo Securities LLC.  The class action alleges that the offering documents failed to disclose that NovaStar had abandoned its underwriting standards in the wake of the 2009 housing crisis, which caused significant losses for investors.

NovaStar initiated voluntary bankruptcy proceedings on July 20 in the U.S. Bankruptcy Court for the District of Maryland.  The underwriter defendants then argued that the automatic bankruptcy stay bars them from continuing with discovery in the class action.  They reasoned that the automatic stay applied because (1) continuation of the action would have an “immediate adverse economic consequence” for the debtor defendants’ reorganization and (2) the underwriter and debtor defendants are “inextricably woven” such that a finding of liability would necessarily implicate the debtor defendants.

Judge Batts rejected the underwriter defendants’ arguments, concluding that “the automatic stay provision of the bankruptcy code does not operate to stay this action except as to the Debtor Defendants [NovaStar].” The Court rejected the “immediate adverse economic consequence” argument, finding that “the mere possibility of a future indemnification claim [against debtor defendants] will not support application of the automatic stay” and neither will concerns about the creation of adverse precedent or collateral estoppel, given that the bankruptcy operates to deprive the debtor defendants of a full and fair opportunity to litigate the claims.  Finally, Judge Batts rejected the “inextricably woven” rationale because the underwriter defendants and the debtor defendants, NMI and NMFC, are separate entities and the claims against them are legally distinct; therefore, “the concern that Debtor Defendants are the ‘real party defendant’ is not present in this Action.”

The case is captioned New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group, PLC, et al., case number 1:08-cv-05310, in the U.S. District Court for the Southern District of New York.

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court’s dismissal of the National Credit Union Administration’s (NCUA’s) residential mortgage-backed securities (RMBS) fraud claims against Nomura Home Equity Loan Inc.  The appellate court held that the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) extended all applicable deadlines for the NCUA to file any suit in its capacity as conservator or liquidating agent for a troubled credit union.  Among many other reforms, FIRREA included an “extender” provision that allows the NCUA to bring claims that would otherwise be barred by applicable statutes of limitation and statutes of repose.  Similar statutes govern claims brought by the Federal Deposit Insurance Corporation (FDIC) as conservator or receiver for a failed bank, as well as claims brought by the Federal Housing Finance Agency (FHFA) as conservator or receiver for government-sponsored entities such as Fannie Mae and Freddie Mac.

Specifically, the Ninth Circuit held that the extender provision of FIRREA applies to both statutes of limitation, which set forth deadlines by which plaintiffs must file suit, and related statutes of repose, which set absolute deadlines after which defendants may not be sued.  Thus, the NCUA’s claims, although filed in 2011, more than three years after the subject RMBS were purchased in 2006 and 2007, were still timely.

The NCUA brought the underlying suit on behalf of Western Corporate Credit Union (WesCorp), which originally purchased the securities at issue.  The complaint alleges that Nomura and other defendants falsely represented to WesCorp that these RMBS were low risk, while knowing and failing to disclose that the mortgage loans underlying the RMBS failed to meet applicable underwriting standards, in violation of Section 13 of the Securities Act of 1933.  Because WesCorp was placed into NCUA conservatorship following its failure in 2009, the appellate court concluded that NCUA’s 2011 suit was well within the three-year statute of limitations.  The Ninth Circuit’s holding follows similar rulings interpreting extender statutes by its sister courts, the Second Circuit, Fifth Circuit, and Tenth Circuit.

Massachusetts Mutual Life Insurance Company (MassMutual) and RBS Securities Inc. (RBS) have reached a confidential agreement to settle MassMutual’s claims that RBS misrepresented the quality of $235 million in residential mortgage-backed securities (RMBS) sold to MassMutual between 2005 and 2007. MassMutual’s complaint alleges that RBS Financial Products Inc. (then operating as Greenwich Capital Financial Products Inc.) made knowingly false representations as to the quality of the loans serving as collateral for the 10 securities RBS sold to MassMutual.

Because MassMutual had no access to the loan-level data underlying the deals, it relied on RBS’s allegedly false representations that the loans were underwritten in accordance with market standards.  MassMutual claims that RBS knew that the loans were issued based on overstated income, false verification of employment, and inflated appraisals, among other defects.  Additionally, the insurer claims that RBS routinely allowed exceptions to underwriting guidelines to approve loans for no reason other than its bottom line.

The parties filed a joint request to dismiss the case with prejudice, noting that they had reached a confidential settlement that would resolve all of MassMutual’s claims against RBS and related entities. The case was filed in U.S. District Court for the District of Massachusetts.

MassMutual has recently settled numerous other RMBS suits against big banks.  In March, it reached a settlement with Barclays Capital Inc. concerning the purchase of $175 million of RMBS.  And in October 2015, MassMutual settled with JPMorgan Chase & Co. regarding more than $2.3 billion worth of RMBS.  Additionally, the insurer has settled claims against HSBC Bank PLC, Bank of America Corp., UBS, and Deutsche Bank AG.  However, its claims against Credit Suisse Group Inc. and Goldman Sachs Group Inc. are still active.