On March 14, almost six months after Volkswagen AG (“VW”) admitted to installing software in its diesel vehicles to cheat emissions testing, VW was hit with a $3.6 billion lawsuit in Germany.  The case was filed in Braunschweig on behalf of 278 institutional investors, including investors from Australia, Austria, Canada, Denmark, France, Italy, Japan, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, Taiwan, the U.K., and the U.S.  Investors claim that the German automaker took too long to disclose information about its diesel emissions scandal.

The U.S. Environmental Protection Agency (EPA) first publicly unveiled the scandal on September 18, 2015, when it issued a notice of violation of the Clean Air Act to VW.  VW reacted with an apologetic press release two days later and a formal market disclosure on September 22.  Immediately thereafter, VW’s stock price plummeted and VW became the target of regulatory investigations in multiple countries.

VW is currently facing a multitude of lawsuits around the world, including 70 cases pending in Braunschweig over losses on VW shares, seeking between 600 and 2 million euro.  While this suit is VW’s biggest legal challenge in Germany to date, it may not be the last.  Other institutional investors are reportedly in talks about bringing an additional suit.

For more information, see links below.

http://www.bloomberg.com/news/articles/2016-03-14/volkswagen-sued-for-3-7-billion-in-germany-over-diesel-scandal

http://www.law360.com/securities/articles/771450?nl_pk=ee84a207-8ece-4a6a-919c-fbe6fa37b6f5&utm_source=newsletter&utm_medium=email&utm_campaign=securities

Royal Park Investments SA/NV (“Royal Park”), a Belgian investment fund, filed a class action on behalf of itself and similarly situated investors against Bank of New York Mellon Corporation (“BNYM”).  The complaint alleged that BNYM breached its obligations as a trustee of $1.12 billion in residential mortgage-backed securities (“RMBS”) when it failed to cure, substitute, and repurchase loans that did not comply with representations and warranties (“R&Ws”) contained in its governing documents, and more generally, when it failed to exercise its granted rights and powers with the same degree of care as a prudent person would after it learned about the occurrence of events of default.  BNYM responded with a motion to dismiss.

On March 2, 2016, U.S. District Judge Gregory H. Woods of the Federal District Court of Manhattan denied, in part, BNYM’s motion to dismiss.  Royal Park Invs. SA/NV v. Bank of N.Y. Mellon, No. 1:14-cv-6502, 2016 U.S. Dist. LEXIS 26793, at *2 (S.D.N.Y. Mar. 2, 2016).  In its decision, the Court evaluated the question of whether Royal Bank’s complaint “adequately [pled] that BNYM had actual knowledge of R&Ws breaches and the occurrence of an event of default, such that BNYM was subject to a heightened duty of care.”  Id., at *7.

To establish that BNYM had actual knowledge of R&Ws breaches, Royal Park pointed to extensive media coverage, congressional inquiries, other legal actions, and “historically unprecedented default rates.”  Id., at *15-16.  BNYM argued that these allegations were not enough to survive a motion to dismiss because Royal Park had not “plausibly alleged discovery of specific breaches of R&Ws and that the allegations [did] not establish actual, specific knowledge of the falsity of particular statements from which it is possible to infer awareness.”  Id., at *11.

The Court disagreed.  Id., at *14-15.  Citing to several other courts in the district, the Court emphasized that at the motion to dismiss stage, “the question is not whether in fact the Trustee    [ ] had [actual knowledge]” but instead, “the question . . . is whether plaintiffs have pled plausible facts supporting allegations of actual knowledge.”  Id., at *11-12.  Ultimately, the Court “join[ed] the chorus of judges in [its] district evaluating similar pleadings” and held that a majority of Royal Park’s claims survived BNYM’s motion to dismiss.  Id., at *16, 35-36.

This case highlights the “low bar” for plaintiffs at the motion to dismiss stage for RMBS claims.  Id., at *16.

Read the Court’s full opinion here.

Companies engaged in the capital markets are at risk of claims and lawsuits alleging investment mismanagement and other misconduct.  For this reason, they typically purchase directors and officers liability (“D&O”) insurance policies to provide a defense against, and indemnification for, allegations of wrongful acts in the course of their delivery of financial services.  To ensure that they will be adequately protected, D&O policyholders must be wary of “professional services” exclusions often lurking in their policies.  When broadly worded, these exclusions purport to bar coverage for claims “arising out of, based upon, or attributable to” the insured’s “professional services” (which may or may not be a defined term).  While the intent of such exclusions is presumably to bar coverage for claims arising out of “traditional” professional services, such as the provision of legal or accounting advice (often insured under other types of policies), some insurers have recently sought to expand the exclusion to apply generally to finance and investment activities.  Such a broad interpretation of the exclusion would essentially swallow and render illusory the D&O coverage purchased by participants in the financial services industry, because insurers could attempt to characterize nearly every aspect of their insureds’ businesses as “professional services.”

Courts in some jurisdictions have agreed with insurers’ unduly broad application of the professional services exclusion.  For instance, last May, the United States District Court for the Southern District of Florida held in Goldberg v. National Union that a lawsuit arising out of a bank’s failure to detect a Ponzi scheme was not covered under its D&O policy because the suit’s allegations concerned the bank’s internal management and regulatory compliance functions, which were specialized “professional services” triggering the exclusion.

Earlier this month, however, the District of Columbia Court of Appeals sided with the policyholder in construing the professional services exclusion narrowly.  In Carlyle Investment Management, LLC v. ACE American Insurance Company, the insured, a subsidiary of the Carlyle Group, was sued over the failure of a mortgage-backed securities fund that it managed.  The complaint alleged that the investment management company had enticed investors into unsafe investments with false promises of high returns, failed to warn investors about increasing risk, and mismanaged the investments even after the market deteriorated.  While the trial court held that these “management liability claims” involved professional services and were therefore excluded from D&O coverage, the appellate court disagreed and reversed, holding that the policy’s professional services exclusion was ambiguous and must be construed against the insurer.  Specifically, the court focused on the fact that key terms in the particular exclusion at issue, such as “investment management services,” were undefined.  Therefore, the court found that the policy was unclear as to whether the exclusion should apply only to allegations involving the operational management of the fund, or whether its scope extended to allegations involving the company’s corporate governance and risk management procedures as well.  These doubts were resolved against the insurer and in favor of coverage.

Companies in the financial services community should be mindful of the wording of professional services exclusions in their professional liability insurance policies.  When possible, policyholders should request that the professional services exclusion – often added by endorsement – be deleted entirely.  At a minimum, companies should request that the language of the exclusion be narrowed so that it is clearly limited to areas of their business that are covered under professional errors and omissions policies, but does not encompass core functions of the policyholders’ business or management.  Lowenstein’s Insurance Recovery Group has deep experience in the D&O coverage space and is available to review professional services exclusions with insureds and their brokers.

Judge Marrero of the Southern District of New York preliminarily approved a $100 million class settlement on Thursday, and scheduled a hearing on July 8, 2016 to determine whether the settlements should be approved as fair.  Objections will be entertained no later than 20 days before the hearing.

The proposed settlement concerns six investment banks, including UBS, Natixis, and Societe Generale, and would resolve all remaining claims in the seven-year-old multidistrict litigation over an alleged unlawful conspiracy on the part of more than forty corporate defendants and others to illegally rig bids, limit competition, and fix prices in the municipal derivatives market.

Class plaintiffs allege that they, and members of the class, “received lesser interest rates on municipal derivatives than they would have received in a competitive marketplace, unfettered by collusive and unlawful activities.”  The class previously settled claims against Morgan Stanley, JPMorgan, Wachovia, Bank of America and GE for $125 million, collectively.

The Second Circuit affirmed dismissal of Commerzbank AG’s fraud claims concerning a collapsed structured investment vehicle against Morgan Stanley on February 23.  Commonwealth of Pennsylvania Pub. Sch. Employees’ Ret. Sys. v. Morgan Stanley & Co., No. 13-2095-CV (2d Cir. Feb. 23, 2016).

The case has had a rather convoluted procedural history.  Commerzbank brought the action both on notes it purchased for itself and on notes purchased by Allianz-Dresdner Daily Asset Fund (“DAF”) and subsequently sold to Dresdner Bank A.G. (“Dresdner”), a company that Commerzbank later acquired.  Judge Scheindlin of the Southern District previously dismissed Commerzbank’s fraud claims regarding notes initially purchased by DAF for lack of standing.  Under New York law, the record holder of a rated note may not bring fraud claims on behalf of prior holders without an assignment of the fraud claim.  In the case of Commerzbank, Judge Scheindlin found that there was no evidence of such an assignment.

The Second Circuit reversed, holding that the District Court erred in refusing to consider certain evidence of the assignment, and certified questions of state law to the New York State Court of Appeals.  However, New York’s highest Court held that the sale of notes did not confer standing on the buyer to sue for common law fraud under New York law.  Consequently, the Second Circuit affirmed the dismissal of the fraud claims on standing grounds.  

On February 23, the U.S. Court of Appeals for the Second Circuit vacated the district court’s dismissal of a fraud case brought by Simmtech Co. Ltd. — a Korean circuit board manufacturer — against Citigroup Inc. and certain of its affiliates.  Between 2006 and 2008, Simmtech purchased “knock in knock out” derivatives contracts (commonly known as KIKOs) from Citigroup.  The KIKOs were meant to hedge against the risk of fluctuations in the value of the Korean won.  Simmtech purchased the KIKOs to protect itself against the risk of loss in the event that the won decreased in value between the time that Simmtech made sales and the time that it actually received payment.  When the won tumbled in 2008, the company ultimately lost $73 million in connection with 15 Citigroup KIKO contracts.

Simmtech was unsuccessful in a lawsuit that it brought against Citibank Korea in the Korean courts.  In July 2013, Simmtech filed a complaint in New York state court against Citibank N.A., Citigroup Inc., Citibank Overseas Investment Corp., Citibank Holdings Inc., and Citigroup Global Markets Inc. (collectively, “Citigroup”), which Citigroup removed to federal court.  The complaint alleged that Citigroup failed to disclose to Simmtech that KIKOs were risky and complex instruments that exposed Simmtech to extensive losses.  The complaint sought $73 million in damages, alleging fraud, negligence, breach of fiduciary duty, and violations of Korean law.  Simmtech also alleged that Citigroup took advantage of its lack of expertise with derivatives and unfamiliarity with U.S. law and the English language.

In 2015, U.S. District Judge Katherine Forrest dismissed the suit on forum non conveniens grounds, finding that Seoul was the proper venue for the case because Simmtech negotiated and executed the derivatives contracts at issue in South Korea with Citibank Korea.  This week, the Second Circuit vacated the district court’s decision, finding that “the district court failed to appreciate that [Simmtech’s] complaint is grounded in the theory of agency,” in that much of the relevant conduct was directed by Citigroup from New York.  In particular, the Second Circuit noted that Citibank Korea’s marketing materials used Citigroup logos, confirmations of the derivatives purchases at issue were issued by Citigroup, and a disclosure report relating to one of the KIKOs was attributed to Citigroup.  Thus, the court concluded that “there are a multitude of contacts with New York that indicate a strong likelihood that witnesses and evidence are most conveniently produced in plaintiff’s chosen forum,” New York.  The case is Simmtech Co. Ltd. v.  Citibank N.A. et al., No. 15-736-cv, and the summary order was issued by Circuit judges Rosemary S. Pooler, Peter W. Hall, and Susan L. Carney.

Last week, 11 Wall Street banks agreed to pay more than $63 million to settle claims brought against them by the Commonwealth under the Virginia Fraud Against Taxpayers Act. Brought by the Virginia attorney general, the suit originally sought $1.15 billion against the banks for alleged misrepresentation of the quality of residential mortgage-backed securities (“RMBS”) sold to the Virginia Retirement System between 2004 and 2010. Although the alleged damages totaled $383 million, with $250.6 million in realized losses, the amount sought was trebled pursuant to the state fraud statute.

The alleged fraud was first reported to the Commonwealth by Integra REC LLC, a financial modeling company that examined the RMBS and the underlying properties that served as collateral. The complaint alleged, among other things, that the defendants misrepresented the loan-to-value ratio of the 785,000 mortgages securitized into the 220 relevant securities. For example, the banks claimed that only 23 percent of such mortgages were made for more than 80 percent of the value of the underlying properties, when in fact 54 percent of the mortgages had a loan-to-value ratio in excess of 80 percent. Additionally, more than 15 percent of the underlying properties were underwater; those mortgages exceeded the total value of the underlying properties.

As announced by Attorney General Mark R. Herring, Bank of America entities Merrill Lynch, Pierce, Fenner & Smith, and Countrywide agreed to pay a combined $19.5 million; RBS agreed to pay $10 million; Barclays agreed to pay $9 million; Morgan Stanley agreed to pay $6.9 million; Deutsche Bank agreed to pay $5.6 million; Citigroup agreed to pay $4.8 million; Goldman Sachs agreed to pay $2.9 million; HSBC agreed to pay $2.5 million; Credit Suisse agreed to pay $1.2 million; and UBS agreed to pay $850,000. None of the defendants admitted liability, and the suit was dismissed with prejudice.

Goldman Sachs announced yesterday that it has agreed in principle to a $5.06 billion settlement with the U.S. Department of Justice (“DOJ”), which would resolve claims stemming from several state and federal investigations concerning the investment banking giant’s underwriting and sale of residential mortgage-backed securities (“RMBS”) from 2005 to 2007.  To date, the DOJ has reached similar settlements with JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., and Morgan Stanley.  According to the DOJ, its settlement with Bank of America was the largest civil settlement it has ever reached with a single entity in American history.

Goldman Sachs cautioned in a press release yesterday that “[t]he agreement in principle is subject to the negotiation of definitive documentation, and there can be no assurance that the firm, the U.S. Department of Justice and the other applicable governmental authorities will agree on the definitive documentation.”  The negotiation process may take months.  For example, the DOJ and Morgan Stanley have not yet finalized their $2.6 billion agreement in principle, which was announced in February 2015.

Separately, Goldman Sachs also announced yesterday that it will pay $15 million to resolve allegations brought by the U.S. Securities and Exchange Commission, which accused Goldman Sachs of inadequately securing the stock needed to administer short-selling trades.

The International Chamber of Commerce (ICC) has recently announced two major decisions.  First, for cases registered on and after January 1, 2016, the Court will now publish on its website the names of the arbitrators sitting in ICC cases, their nationality, whether the appointment was made by the Court or by the parties, and which arbitrator is the tribunal chairperson.  The case reference number and the names of the parties and of counsel, however, will not be published in order to preserve confidentiality.  Parties can, by mutual agreement, opt out of this limited disclosure.

Second, the Court has released a note which states that ICC arbitral tribunals must submit draft awards within three months after the last substantive hearing concerning matters to be decided in an award, or, if later, the filing of the last written submissions.  The time frame will be set at two months for cases heard by sole arbitrators.  For example, for draft awards submitted up to 10 months after the last substantive hearing or written submissions, the fees that the Court would otherwise have considered fixing are reduced by 10 to 20%.  Mr. Alexis Mourre, president of the ICC International Court of Arbitration, explained that “[b]y releasing this new note, we send a clear signal to tribunals that unjustified delays will not be tolerated, and we provide transparency on the consequences that the Court will draw from such situations.”  These new policies further promote the goal of the expeditious resolution of disputes.

The U.S. Supreme Court agreed on Friday to consider Puerto Rico’s appeal regarding the Puerto Rico Public Corporation Debt Enforcement & Recovery Act (the “Recovery Act”), which was passed by its legislature last June and would allow Puerto Rico’s public utilities to restructure $20 billion in debt. Puerto Rico’s appeal asks the Court to reverse the decision of the U.S. Court of Appeals for the First Circuit, which held that the Recovery Act is unconstitutional. Puerto Rico argues that the Recovery Act is essential because, unlike U.S. states, Puerto Rico, a U.S. commonwealth, is precluded from utilizing Chapter 9 of the U.S. Bankruptcy Code. A decision is not expected until June 2016.

In the meantime, U.S. Senate Democrats introduced legislation in July that would allow the commonwealth to seek protection under Chapter 9 of the U.S. Bankruptcy Code. In October, the White House announced its proposal for legislation that would go even further – it would allow federal territories to restructure debt issued by the central government, a power that is unavailable to U.S. municipalities and states. Both plans have been met with significant opposition by bondholders and Republican lawmakers.