In a January 12, 2010 opinion (here) in a subprime-related securities suit involving
Goldman Sachs-issued mortgage pass-through certificates, Southern District of
New York Judge Harold Baer, Jr. granted the rating agency defendants'
motion to dismiss on the grounds that they are not "underwriters"
under Section 11, but denied the Goldman Sachs defendants' motion to dismiss,
at least as to the securities offerings in which the plaintiffs had actually
Although Judge Baer's closely follows other decisions in
similar cases, it also diverges from other recent decisions in certain
respects, including a recent decision in a separate case in the same courthouse
involving other Goldman Sachs-issued mortgage pass through certificates.
Goldman Sachs and related entities sold over $2.6 billion
in mortgage pass-through certificates in three offerings from three issuing
trusts between February 2, 2006 and March 28, 2006. The credit rating agencies
assigned AAA ratings or their equivalent to the certificates. The named
plaintiff in the case purchased securities in only one of the three trusts.
The plaintiffs filed their initial securities class
action complaint February 6, 2009. The plaintiffs alleged that the originators
of the mortgages underlying the certificates had "systematically
disregarded" their own underwriting standards in originating the mortgages,
contrary to the representations about the originators' underwriting practices
in the offering documents.
The defendants moved to dismiss.
The January 12 Opinion
The plaintiffs had named the credit rating agency as
defendants and sought to hold them liable on the theory that, as a result of
the involvement in structuring the securities, the credit rating agencies had
acted as "underwriters" within the meaning of Section 11 of the
Securities Act of 1933.
In rejecting this theory, Judge Baer observed that:
While the Rating Agency Defendants may have played a
significant role in the ability of other defendants to market the securities at
issue, and if we were writing on a clean slate, their liability might be
presumed, the fact is we are not writing on a clean slate and, for the moment
at least, the law insulates them from exposure under section 11 and they must
Judge Baer similarly had little trouble granting the
defendants' motions to dismiss the plaintiffs' claims as to the two of the
three securities offerings in which the plaintiffs had not purchased any
securities. Referring to many other cases in which plaintiffs were held to lack
standing under similar securities, Judge Baer said "I concur with these
well reasoned and common-sense opinions that Plaintiff needs to show an injury
connected with the offerings it challenges as misleading, and therefore
Plaintiff's claims with regard to Certificates they did not purchase ...are
dismissed for lack of standing."
However, Judge Baer rejected the Goldman defendants' bid
to have the plaintiffs' remaining claims dismissed.
First, Judge Baer rejected the defendants' bid to have
the claims dismissed on statute of limitations ground. Specifically, he
rejected that defendants' contention that the plaintiffs had been put on
""inquiry notice" of possible misrepresentations more than a
year before the plaintiffs filed their suit.
Judge Baer found that neither the December 2007 ratings
downgrade of the securities nor generalized press coverage about problems with
loan originators' underwriting practices were sufficient to put the plaintiffs
on inquiry notice, because this information did not "directly relate"
to the misrepresentations that the plaintiffs alleged in this lawsuit.
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