Courts Reject Hindsight Assessments, Dismiss Subprime Securities Suits

Courts Reject Hindsight Assessments, Dismiss Subprime Securities Suits

In recent decisions in separate subprime-related securities class action lawsuits reflecting a common unwillingness to engage in "backward looking assessments," two different Southern District of New York judges granted defendants' motions to dismiss. In each of the cases, the judge's recognition of the extent of the financial crisis played into their rulings, and in the absence of specific allegations showing how internal information or knowledge differed from the defendant companies' public statements, both judges were unwilling to allow the cases to go forward.

The State Street Case 

In a February 22, 2010 opinion, Southern District of New York Judge Richard Holwell granted with prejudice the motion of defendants to dismiss the subprime-related securities class action lawsuit that had been filed against State Street Corporation, its management arm, and two executives and eight trustees of the management arm and one of the funds it managed, the Yield Plus Fund.

According to the complaint, the Fund's value declined 34% during the class period of July 1, 2005 and June 30, 2008. This decline was alleged to have reflected the write-downs of the value of the Fund's mortgage-related holdings. The Fund was liquidated on May 30, 2008.

The plaintiffs claimed that the Fund's offering documents reflected three categories of misrepresentations: (1) a misleading description of the Fund's investment strategy; (2) misrepresentations of the extent of Fund's exposure to mortgage-related securities; and (3) inflated valuations of the Fun's mortgage-related holdings. Based on these alleged misrepresentations, the plaintiffs sought to recover damages under the liability provisions of the Securities Act of 1933.

With respect to the plaintiffs' allegations that the defendants' misrepresented the Fund's investment strategy, by misrepresenting its goal to invest in "high-quality debt securities," Judge Holwell found the plaintiffs had insufficiently pled falsity. He noted that though the phrase "high quality" is "somewhat vague when read in isolation," it "surely cannot be understood as a guarantee that investors would not suffer losses."

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