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Alison Frankel: How BofA could lose big if it wins MBIA regulatory challenge

Alison Frankel: How BofA could lose big if it wins MBIA regulatory challenge


Alison Frankel’s On The Case-

I’ve spent a lot of time talking about what I consider Bank of America’s risky gamesmanship in its multi-pronged litigation with the bond insurer MBIA, but it may be that I’ve underestimated that risk by focusing on the downside for the bank in MBIA’s breach of contract and fraud suit. Under a not-implausible scenario, BofA faces serious risk in its regulatory challenge to MBIA’s transformation that’s going to trial on May 14. And ironically, the risk comes not from losing the case — but from winning it.

According to a sophisticated and well-advised MBIA institutional investor that has devoted serious resources to analyzing the issue — trust me, even though the investor doesn’t want to broadcast its involvement, this is a seriously savvy player — if Bank of America and two French banks succeed in overturning MBIA’s 2009 split into separate muni bond and structured finance businesses, there’s a reasonable likelihood that BofA could wind up at the back of the line of MBIA claimants, waiting years for whatever scraps are left over from payouts to municipal bond insurance policyholders.

Here’s why. For all sorts of reasons…

[REUTERS ON THE CASE]

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Alison Frankel: Will 2nd Circuit remake AIG’s MBS case against BofA?

Alison Frankel: Will 2nd Circuit remake AIG’s MBS case against BofA?


REUTERS LEGAL-

Mortgage-backed securities litigation has been very good for some of the most obscure laws on the books. I’ve already mentioned the starring role the unheralded statute of repose has taken in bank motions to dismiss securities claims by MBS investors, and we all know about Bank of America’s ingenious (or nefarious, depending on your perspective) use of New York’s Article 77 — a proceeding so rarely invoked that the judge assigned the case had to look it up — to seek approval of its proposed $8.5 billion settlement with investors in Countrywide mortgage-backed notes. Today I bring you the Edge Act, a hundred-year-old law that grants federal-court jurisdiction to civil suits against any U.S corporation in which claims arise from international banking or banking transactions in a U.S. territory.

You’re probably wondering what the Edge Act has to do with U.S. MBS trusts in which securities are backed by U.S.-issued mortgages on properties in the United States. Well, it turns out that a handful of the mortgages backing BofA securities actually originated in the Virgin Islands and Guam. We are talking about a very small handful. According to a brief AIG submitted to the 2nd Circuit Court of Appeals, of the 1.7 million mortgages underlying the 349 MBS trusts at issue in AIG’s $10 billion case against Bank of America, exactly 8 mortgages in 3 trusts originated in U.S. territories.

[REUTERS ON THE CASE]

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Alison Frankel: NY AG’s curious new bid to intervene in $8.5 bl BofA MBS deal

Alison Frankel: NY AG’s curious new bid to intervene in $8.5 bl BofA MBS deal


Reuters Legal-

New York Attorney General Eric Schneiderman still wants a say in whether Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors should be approved by a state-court judge. The AG’s new intervention motion, filed more than seven months after Schneiderman first moved to join the case, makes the exact same arguments as the old motion, which was pending before New York State Supreme Court Justice Barbara Kapnick when the settlement was removed from state court to Manhattan federal court last August. There’s just one notable exception: The AG’s office “deleted” its explosive fraud counterclaims against Countrywide MBS trustee Bank of New York Mellon. Is playing nice (or, at least, nicer) enough to win the AG a seat at the table?

Those fraud counterclaims, as you’ll surely recall, caused quite a stir when Schneiderman’s office tacked them onto its original motion to intervene. One Manhattan business development official questioned the wisdom of attacking a trustee that was at least making an effort to respond to investors’ concerns and warned that the AG was endangering the city’s standing as the preferred home of financial institutions. BNY Mellon and the institutional investors backing the proposed $8.5 billion settlement responded in kind to the AG’s intervention motion, asserting that Scheiderman didn’t have standing to intervene because he’s not a Countrywide MBS investor.

[REUTER’S ON THE CASE]

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Does Pauley’s BNYM ruling spell new liability for MBS trustees?

Does Pauley’s BNYM ruling spell new liability for MBS trustees?


Alison Frankel-

Beth Kaswan of Scott + Scott has the fervor of a pioneer when she talks about the implications of U.S. District Judge William Pauley‘s ruling Tuesday that her client, a Chicago police officers’ pension fund, can proceed with some claims that Bank of New York Mellon violated its duty to Countrywide mortgage-backed securities investors under the federal Trust Indenture Act. “Judge Pauley is the first judge to say the Trust Indenture Act, in existence since 1939, does apply in this type of circumstance to mortgage-backed securities,” Kaswan told me Wednesday. “That means investors can sue trustees, even if they can’t cobble together 25 percent” of the voting rights in any particular trust — a prerequisite to suing under the pooling and servicing agreements governing most MBS trusts.

Kaswan, who said her firm was the first to assert the federal law against an MBS trustee, believes Pauley’s 19-page decision offers a significant new route to damages for MBS investors. The Manhattan federal judge ruled that the Chicago fund only has standing to bring claims for the trusts in which it invested, reducing the number of Countrywide MBS trusts in the case from 530 to 26. But he also said that investors in those 26 trusts can sue BNY Mellon for allegedly failing to notify certificateholders that Countrywide and Bank of America supposedly breached their obligations to the trusts and for failing to take action on those breaches.

[ON THE CASE -REUTERS]

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Alison Frankel: Why NY businesses should worry about BofA’s new MBS defense

Alison Frankel: Why NY businesses should worry about BofA’s new MBS defense


Reuters Legal-

U.S. District Judge Mariana Pfaelzer of federal court in Los Angeles is poised to deliver a ruling in AIG’s mortgage-backed securities case against Countrywide that could have an impact on just about every company headquartered in New York. The issue: How long do N.Y. businesses have to bring fraud claims? Are they entitled to the benefit of the state’s generous six-year statute of limitations? Or, as Countrywide argues in a supplemental motion to dismiss filed on March 23, are companies headquartered in New York instead restricted to the generally stingier time limits in their states of incorporation?

To understand how this question arose in AIG’s MBS case, we have to back up a few steps. It’s no secret that in MBS litigation, there’s no more potent defense than arguments that investors waited too long to file suit. It’s a quick, clean way to excise big chunks of a plaintiff’s case, particularly because federal securities claims, with exceptions for American Pipe tolling (if you don’t know, don’t ask), are generally time-barred after three years under the statute of limitations or the more-obscure-until-MBS-litigation statute of repose. That’s why we’ve seen so many MBS plaintiffs — including AIG and the satellite insurance companies that are also plaintiffs in its Countrywide suit — assert state-law fraud claims in addition to federal securities claims.

[ON THE CASE REUTERS]

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Alison Frankel | Securities lawyers beware: The SEC may be coming after you

Alison Frankel | Securities lawyers beware: The SEC may be coming after you


Alison Frankel-

If you’re a lawyer who advises securities issuers, there was an ominous confluence of events Friday. Kenneth Lench of the Securities and Exchange Commission’s Enforcement Division said publicly, according to Bloomberg, that the SEC is considering enforcement actions against lawyers who helped put together dubious transactions involving complex securities. And quicker than you could say Janus Capital v. First Derivative, the full Commission issued a notice that it’s reviewing the scope of protection the U.S. Supreme Court’s 2011 ruling offers secondary-player defendants in enforcement actions. (Hat tip: Securities Law Prof Blog.)

The Janus decision, you’ll recall, held that Janus Capital wasn’t liable for the alleged misstatements its mutual funds made in an offering prospectuses. The Supreme Court said that only the funds “made” the offending statements, no matter how much of a behind-the-scenes role the parent company played. Janus hasn’t turned out to be an absolute bar on claims against financial advisers — National Century bondholders won a summary judgment ruling last month that permits them to proceed with their securities fraud case against Credit Suisse — but continued the line of Supreme Court rulings that has made it increasingly difficult for investors to tag secondary players with liability.

[ON THE CASE -REUTERS]

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Big news in BofA MBS litig: Kapnick tosses Walnut vs Counrtywide case

Big news in BofA MBS litig: Kapnick tosses Walnut vs Counrtywide case


Alison Frankel via Reuters Legal/ On the Case is working on this story.

Please check back.

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MBS damages: making cents of the $32 million Deutsche Bank deal

MBS damages: making cents of the $32 million Deutsche Bank deal


Alison Frankel-

Ordinarily, a $32.5 million settlement of a securities class action against Deutsche Bank wouldn’t get much attention. But when the case is based on mortgage-backed securities and it’s only the third known class action resolution, you have to pay heed . In MBS litigation, every new settlement means that damages estimates in hundreds of pending securities cases become a little more reality-based.

The settlement papers filed Monday by the co-lead counsel in the Deutsche Bank case, Robbins Geller Rudman & Dowd and Labaton Sucharow, indicate that the $32.5 million represents $12.80 for every $1,000 in initial certificate value for the two Deutsche Bank trusts in the case. That may not sound like much, but it’s a lot more than the $2.70 per $1,000 that plaintiffs got in the first MBS class action settlement, a $125 million deal with Wells Fargo last July. In last December’s $315 million settlement with Merrill Lynch, class counsel at Bernstein Litowitz Berger & Grossmann obtained $19.05 per $1,000 in initial certificate value for plaintiffs. That case, however, was farther along than the Deutsche Bank MBS litigation; at the time of the settlement, U.S. Senior District Judge Jed Rakoff of federal court in Manhattan had already certified a class of Merrill MBS noteholders and had set a pretrial schedule.

[REUTERS LEGAL]

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COMPLAINT | Sand Canyon Corp. v. American Home Mortgage Servicing, Inc

COMPLAINT | Sand Canyon Corp. v. American Home Mortgage Servicing, Inc


SUPREME COURT OF NEW YORK

Sand Canyon Corporation,

Plaintiff

v.

American Home Mortgage Servicing, Inc.

Defendant

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New MBS twist: Sand Canyon sues servicer for releasing loan info

New MBS twist: Sand Canyon sues servicer for releasing loan info


Alison Frankel-

Just when you think you’ve seen it all in mortgage-backed securities litigation, along comes the likes of Sand Canyon to prove you wrong.

The onetime California mortgage lender, which stopped originating loans in late 2007 and sold its servicing business to American Home Mortgage Servicing in 2008, has filed a complaint in New York State Supreme Court in Manhattan that accuses American Home of making it too easy for MBS trustees and insurers to get hold of underlying loan files. In essence, Sand Canyon’s lawyers at Cahill Gordon & Reindel are arguing that the servicer should be helping it thwart claims that it breached representations and warranties about the mortgages it sold to MBS issuers, not smoothing the way for put-back demands.

Sand Canyon’s 26-page complaint, filed last month, asserts that American Home pledged to act as an ally when it bought the servicing business in 2008. “Sand Canyon bargained for and obtained (American Home’s) cooperation in connection with Sand Canyon’s defense,” the complaint said. Under their agreement, according to the complaint, American Home was supposed to “refrain from disclosing confidential loan information to third parties except as required by law.”

[REUTERS LEGAL]

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YVES SMITH: The Legal Lie at the Heart of the $8.5 Billion Bank of America and Federal/State Mortgage Settlements

YVES SMITH: The Legal Lie at the Heart of the $8.5 Billion Bank of America and Federal/State Mortgage Settlements


H/T Abigail – If you had any doubts about whether ‘your’ federal gov’t works for you or BofA, read Yves Smith’s latest:

One in a while, you can discern a linchpin lie on which other important lies hinge. We can point to quite a few in America: the notion of a permanent war on terror, which somehow justifies vitiating not just the Constitution, but even the Magna Carta, or the idea of an imperial executive branch.

Now the apparently-to-be-filed-in-court-today Federal/state attorneys general mortgage settlement is less consequential than matters of life and limb. But it still show the lengths to which the officialdom is willing to go to vitiate the law in order to get its way.

HUD Secretary Donovan, the propagandist in chief for the Federal/state mortgage pact, has claimed he has investor approval to do the mortgage modifications that are a significant portion of the value of the settlement. We’ll eventually see what is actually in the settlement, but the early PR was that “no less than $10 billion” of the $25 billion headline total was to come from principal reductions. Modifications of mortgages not owned by banks, meaning in securitized trusts, are counted only 50% and before Donovan realized he was committing a faux pas, he said he expected 85% of the mods to be from securitizations, so that means $17 billion.

[NAKED CAPITALISM]

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2nd Circuit greenlights novel vehicle for BofA’s MBS settlement

2nd Circuit greenlights novel vehicle for BofA’s MBS settlement


Alison Frankel-

Way back in June, a day or so after Bank of America announced its proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors, I wrote about the very peculiar vehicle through which the bank was seeking judicial approval of the arrangement. The settlement was filed by the Countrywide MBS trustee, Bank of New York Mellon, under Article 77 of the New York state code. Article 77, which allows a trustee to seek a judicial endorsement of trust-related decisions, is usually invoked in garden-variety trust disputes, not in an $8.5 billion deal affecting thousands of beneficiaries in 530 trusts. But the law offered distinct advantages for BofA, BNY Mellon, and the group of 22 institutional investors that negotiated the Countrywide MBS settlement. Under New York trust law, trustees have broad discretion to make decisions on behalf of the trusts they oversee. As long as the judge presiding over an Article 77 proceeding determines that the trustee has acted reasonably and hasn’t abused its discretion, the trustee’s decision gets a stamp of judicial approval. Anyone who disagrees with the trustee — and the banks and institutional investors that negotiated the BofA proposed settlement knew that there would be many investors who didn’t like it — bears the heavy burden of proving that the trustee acted outside the bounds of reason.

[REUTERS LEGAL]

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Judge in SEC’s Bear Stearns case catches Rakoff fever w/ Transcript

Judge in SEC’s Bear Stearns case catches Rakoff fever w/ Transcript


Alison Frankel-

U.S. District Judge Frederic Block of Brooklyn federal court will probably, in the end, approve a $1 million settlement between the Securities and Exchange Commission and former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin. He said as much in open court Monday, presiding over a settlement hearing rather than the civil trial scheduled to begin that day. But for everyone except Cioffi, Tannin, and their lawyers, the real story at Monday’s hearing was Block’s stream-of-consciousness musings on the appropriate role of a judge overseeing an SEC case. If there was any doubt that U.S. Senior District Judge Jed Rakoff has inspired soul-searching in the nation’s federal judiciary, the utterly compelling transcript of the hearing before Block should put it to rest. (My Reuters colleague Jessica Dye attended the hearing and sent me the transcript.)

[REUTERS LEGAL]

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Shareholders and robosigning: Is Wells Fargo ruling a portent?

Shareholders and robosigning: Is Wells Fargo ruling a portent?


This is interesting since all responsible for Foreclosure Fraud are being investigated or sued for some breach of fiduciary duty including LPS for robosigning, whom by the way executed most of the documents…

Alison Frankel-

The big question for the other banks that signed the nationwide foreclosure settlement, though, is whether Illston’s robosigning ruling improves the prospects for shareholder derivative suits against them. JPMorgan Chase, for example, was just hit with a Manhattan State Supreme Court robosigning derivative complaint filed by Robbins Geller, one of the plaintiffs’ firms in the Wells Fargo case. Earlier this month, shareholders in a consolidated derivative class action against Bank of America in Manhattan federal court voluntarily dismissed their robosigning-based case, but said they planned to refile in Delaware Chancery Court. Two derivative suits against Citigroup alleging flawed foreclosure practices were consolidated in Manhattan federal court in December, but the docket indicates no activity since then.

But those banks, according to the plaintiffs’ allegations in the Wells suit, were quicker to renounce robosigning than Wells Fargo. JPMorgan Chase and Ally Financial were the first to halt foreclosures to investigate robosigning allegations, doing so in September 2010. Bank of America followed in October. Wells Fargo was still insisting at the time that its foreclosure practices were sound. According to the shareholder complaint, Wells continued to permit robosigning of foreclosure documents well into 2011, after it told shareholders it was cooperating with the government investigation.

[REUTERS LEGAL]

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Alison Frankel: Rest easy, MBS investors: You’re protected in mortgage settlement

Alison Frankel: Rest easy, MBS investors: You’re protected in mortgage settlement


Alison Frankel:

Asking investors in mortgage-backed securities to trust the banks that issued them is like asking Charlie Brown to trust Lucy van Pelt. MBS noteholders are so convinced they’ve been duped by the folks that packaged and sold shoddy mortgage loans that it’s little wonder the banks’ $25 billion settlement with federal and state regulators has been greeted with a tsunami of skepticism. Sure, MBS investors understand that the settlement doesn’t preclude them or regulators from suing over deficient securitizations. But their fear, in the absence of the actual settlement documents, is that the loan modifications the deal calls for will reduce the revenue stream to MBS trusts.

It’s an understandable fear. The five banks that agreed to the settlement — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial — carry some troubled mortgage loans on their own books. Others were bundled into MBS trusts, in which the banks transfer ownership of the mortgages and remain as servicers. MBS noteholders are supposed to receive a stream of income from the principal and interest payments on the underlying mortgage loans. So if a bank agrees to reduce the unpaid principal a homeowner owes on a mortgage that’s been securitized, less money flows to the trust and into MBS investors’ hands.

[REUTERS LEGAL]

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