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Federal Home Loan Bank of Boston v. Ally Financial, Inc.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

August 29, 2019



          Mitchell H. Kaplan, Justice

          This 2011 case finds its genesis in the residential mortgage crisis of the previous decade. Plaintiff Federal Home Loan Bank of Boston (the Bank) is one of the many institutional investors that purchased residential mortgage-backed securities (RMBS) before the market for this type of security collapsed. The purchases still at issue in this case occurred in 2006 and 2007. The remaining defendants are referred to as the "Credit Suisse Defendants" (Credit Suisse), "Nomura Defendants" (Nomura), and "RBS Defendants" (RBS).[1] The Bank alleges the offering documents used to market these RMBS contained materially false representations concerning underwriting standards, loan-to-value ratios, and credit ratings. It asserts claims against these defendants for violations of the Massachusetts Uniform Securities Act (MUSA), G.L.c. 110A, § § 410(a)(2) and 410(b), negligent misrepresentation, and violations of G.L.c. 93A, § 11. The matter is presently before the court on motions for summary judgment filed by Nomura and RBS and a motion for partial summary judgment filed by Credit Suisse. For the reasons that follow, both motions are ALLOWED in part and DENIED in part.


          The claims against Nomura, RBS, and Credit Suisse relate to several RMBS trust certificates each apparently including a number of so-called Alt-A mortgage loans. For the purposes of these motions, it is sufficient to note that Alt-A mortgage loans have characteristics that tend to make them at greater risk of default than traditional, prime mortgages.

          Between July 2006 and July 2007, the Bank acquired six "certificates" representing ownership interests in income streams generated by pools of residential mortgages that Nomura had sponsored: NAAC 2006-AR4, NAAC 2006-AF2, NAAC 2007-1, and NAAC 2007-3. It purchased two of the certificates (NAAC 2006-AF2 and NAAC 2006-AR4 certificates) directly from Nomura/RBS[2] in 2006 and four of the certificates (two NAAC 2007-1 certificates, a NAAC 2006-AR4 certificate, and a NAAC 2007-3 certificate) from Bear, Stearns & Co., Inc. (Bear Stearns) in 2007. Nomura/RBS prepared or assisted in preparing the offering documents (e.g., free writing prospectuses and prospectus supplements) through which the certificates were marketed.

          Between February 2006 and September 2007, the Bank also acquired nine certificates, again representing income streams from pooled residential mortgages that were sponsored by Credit Suisse and Chevy Chase Funding, LLC (Chevy Chase): ARMT 2006-1, ARMT 2006-2, ARMT 2006-3, ARMT 2007-1, ARMT 2007-2, CCMFC 2006-2A, CCMFC 2007-1A and CCMFC 2007-2A. It purchased six of the certificates (five ARMT certificates and one CCMFC certificate) from Credit Suisse and three certificates (all CCMFC certificates) from Barclays.[3] Barclays and Credit Suisse acted as co-underwriters in connection with the CCMFC certificates, each purchasing 50% of the certificates for resale to investors.


          As noted, the Bank asserts the same three claims against Nomura/RBS and Credit Suisse: (1) violation of MUSA; (2) negligent misrepresentation; and (3) violation of c. 93A. The claims asserted against Nomura/RBS concern two categories of certificates: (1) those the Bank purchased from Bear Stearns; and (2) those the Bank acquired directly from Nomura/RBS. The claims asserted against Credit Suisse also concern two similar categories of certificates: (1) those the Bank purchased from Barclays; and (2) those the Bank purchased directly from Credit Suisse. Nomura/RBS and Credit Suisse make similar arguments in support of their motions each differentiating the claims involving securities that they sold directly to the Bank from those where Bear Stearns or Barclays was the Bank’s seller.[4]

         Summary judgment is granted when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Mass.R.Civ.P. 56(c); Cassesso v. Commissioner of Corr., 390 Mass. 419, 422 (1983). To prevail on a motion for summary judgment, the moving party must affirmatively demonstrate the absence of a triable issue, and that the summary judgment record entitles it to a judgment as a matter of law. Pederson v. Time, Inc., 404 Mass. 14, 16-17 (1989). "[A]ll evidentiary inferences must be resolved in favor of the [nonmoving party]." Boyd v. National R.R. Passenger Corp., 446 Mass. 540, 544 (2006).

          A. MUSA

         MUSA imposes liability on any person or entity who "offers or sells a security by means of any untrue statement of a material fact or any omission ... [of] a material fact." G.L.c. 110A, § 410(a)(2). Liability as a seller under the statute extends to "[a] person who successfully solicits the purchase motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Cohen v. State Street Bank and Trust Co., 72 Mass.App.Ct. 627, 635, quoting Stolzoff v. Waste Sys. Intl., Inc., 58 Mass.App.Ct. 747, 766 n.21 (2003). To establish a violation of MUSA, a plaintiff must prove that: "(1) the defendant ‘offers or sells a security’; (2) in Massachusetts; (3) by making ‘any untrue statement of a material fact’ or by omitting to state a material fact; (4) the plaintiff did not know of the untruth or omission; and (5) the defendant knew, or ‘in the exercise of reasonable care [would] have known,’ of the untruth or omission." Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 52 (2004), quoting G.L.c. 110A, § 410(a)(2). MUSA claims are subject to a four-year statute of limitations. G.L.c. 110A, § 410(e).

          1. Claims Against Nomura/RBS

          With regard to the four certificates purchased from Bear Stearns, the MUSA claims asserted against Nomura/ RBS are dismissed. While Nomura/RBS created the trusts that held the mortgages and prepared the offering documents used to market them, it was not the seller of the certificates to the Bank, as the term "seller" is construed under MUSA and the cognate federal securities laws. See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1216 (1st Cir. 1996) ("[N]either involvement in preparation of a registration statement or prospectus nor participation in ‘activities’ relating to the sale of securities, standing alone, demonstrates the kind of relationship between defendant and plaintiff that could establish statutory seller status") (emphasis in original). The court finds the Bank’s arguments to avoid the settled case law in this area unavailing. Indeed, the court has addressed some of these arguments in deciding other motions in this case. See Memorandum of Decision and Order on Plaintiff’s Motion for Reconsideration, dated June 26, 2018 [35 Mass.L.Rptr. 168]. With respect to those certificates purchased from Bear Stearns, there is no evidence that Nomura/RBS was more than the seller’s seller. See Pinter v. Dahl, 486 U.S. 622, 644-47 (1988).

         Nomura/RBS is, however, undisputedly the "seller" with respect to the other two Nomura certificates. As to these certificates, Nomura/RBS argues that: (i) the MUSA claims are time barred; and (ii) the Bank has failed to establish an essential element of a MUSA claim, namely, that the offering documents contained an "untrue statement of a material fact." G.L.c. 110A, § 410(a)(2). The court disagrees.

          Nomura/RBS asserts that the MUSA claims are time barred because, by March 2007 (more than four years before the Bank filed its complaint), the Bank noticed or should have noticed that something was amiss with regard to the representations in the offering documents to the effect that the mortgages represented by the certificates had been reviewed and determined to comply with applicable underwriting and property appraisal guidelines. See Genovisi v. Nelson, 85 Mass.App.Ct. 43, 47 (2014), quoting Marram, 442 Mass. at 54 n.20 ("A claim under MUSA accrues when a reasonable investor would have noticed that something was ‘amiss’ ").[5] Nomura/RBS points out that between February and March 2007: Bank officers and its regulator, the Federal Housing Finance Board (FHFB), exchanged and discussed news articles regarding the growing delinquency problem with Alt-A loans and the potential effects of this phenomenon on the Bank’s RMBS portfolio; Bank officers asked the Bank’s Credit and Treasury Department to analyze the Bank’s exposure to RMBS backed by Alt-A loans in light of the developing turmoil in the Alt-A mortgage market; and the chairman of the Bank’s Finance Committee expressed concern regarding the Bank’s exposure to problems within the subprime sector. This evidence is certainly relevant and shows that the Bank was concerned about Alt-A mortgages generally and the possibility that the delinquency problem could affect its portfolio. But, it does not establish as a matter of law that the Bank was on inquiry notice that Nomura/RBS had misrepresented the underwriting and real estate appraisal standards that it had used in reviewing the mortgages that it pooled to create the certificates. See In re Countrywide Fin. Corp. Mortg-Backed Sec. Litig., 2012 WL 1322884, at *4 (C.D.Cal. Apr. 16, 2012) (where the court observes that: "2007 was a turbulent time during which the causes, consequences, and interrelated natures of the housing downturn and subprime crisis were still being worked out"). As a result, the court cannot conclude as a matter of law that the Bank was on inquiry notice of its claim in March 2007 and that therefore its claims are time barred. This is a question that must be resolved at trial.

          Turning to Nomura/RBS’s second argument, the court also finds that there are genuine issues of disputed fact on the question of whether the offering documents contained untrue statements of a material fact. The Amended Complaint alleges that Nomura/RBS misrepresented the underwriting standards it used in selecting the pooled mortgages and the loan to value ratios of the residential property securing the mortgages. Nomura/RBS maintains that to the extent the claims are based on these representations, the claims fail because the Bank’s experts witness opinions are inadequate to support jury questions concerning whether these statements were untrue. Again, the court disagrees.

          With respect to underwriting standards, the so-called prospective supplements (pro-supps) for the certificates stated: "All of the Mortgage Loans have been purchased by the sponsor from various banks, savings and loan associations, mortgage bankers and other mortgage loan originators and purchasers of mortgage loans in the secondary market, and were originated generally in accordance with underwriting criteria described in this section." Another section of the pro-supps stated that the mortgages had been originated in accordance with each originator’s underwriting guidelines. Whether these representations could reasonably be interpreted to mean that the mortgage loans complied with generally used underwriting standards applied by Nomura in its due diligence and/or the standards used by each loan originator is a question of fact to be decided at trial. The Bank has offered expert reports that state that, based on a review of a number of loan files selected in a statistically appropriate manner, these loans did not meet either underwriting standard. To the extent that Nomura/RBS moving papers suggest possible flaws in the plaintiff’s expert’s opinions, that goes to the creditability and weight of the opinions and does not preclude their admissibility.

         The pro-supps also contained representations concerning the loan to value ratios (LTV) of the loans being pooled, including that the property values had been determined by appraisals that conformed to the Uniform Standards of Professional Appraisals. Although an appraisal of the value of a property is an opinion, this court has held that statements concerning LTVs may constitute materially false statements if they can be shown to be both objectively false and subjectively false. See Cambridge Place Inv. Mgmt., Inc. v. Morgan Stanley & Co, Inc., 2012 Mass.Super. LEXIS 272, at *57 (Sept. 28, 2012) (Billings, J.) [30 Mass.L.Rptr. 594]. Additionally, statements that certain professional standards were used in determining property values can be false, if those standards were not actually employed. Id. at *58-59. The Bank’s valuation experts reviewed the same sampling of loans reviewed by the underwriting guideline experts and opined that statistically significant percentages of the property valuations were materially overstated. With respect to subjective falsity, this clearly does not require testimony from the individuals who reviewed the appraised values at the time Nomura purchased the loans to the effect that they were aware of the inflated values. State of mind almost always has to be proved by reliance on circumstantial evidence. For example, in criminal trials, where the jury must find that scienter has been proven beyond a reasonable doubt, evidence offered to prove the defendant’s state of mind is often circumstantial. See, e.g., Commonwealth v. Zanetti, 454 Mass. 449, 470 Appendix (2009) (providing model instruction on aiding and abetting liability).

          2. Claims Against Credit Suisse

          Credit Suisse only moves for summary judgment on the MUSA claims against it that are based on the three CMFC certificates that the Bank purchased from Barclays.[6] With regard to those certificates, Credit Suisse, like Nomura/RBS, argues that it cannot be liable under MUSA because it did not offer or sell these certificates. Credit Suisse’s relationship to these sales is not the same as Nomura/RBS’s relationship to its certificates sold by Bear Stearns.

          Credit Suisse’s Vice President admitted that "Credit Suisse and Barclays ... marketed deals together to get marketing power," a road show agenda for CCMFC 2007-2 shows that Credit Suisse and Barclay’s made a joint presentation to the Bank, and the record contains electronic communications in which both Credit Suisse and Barclays apparently solicited the Bank to purchase each of the CCMFC certificates at issue. Indeed, it is not clear from the summary judgment record why the Bank purchased certain certificates that were owned by Barclay’s rather than Credit Suisse, i.e., how or why certain purchases were allocated to one underwriter as opposed to the other. In any event, the evidence permits an inference that Barclays and Credit Suisse jointly solicited the Bank to purchase the CCMFC securities, including the certificates purchased from Barclays, and that Credit Suisse engaged in this joint marketing effort in service of its own financial interests. Under these circumstances, a reasonable jury could conclude that Credit Suisse was a "seller" of these certificates under MUSA. See Cohen, 72 Mass.App.Ct. at 635, quoting Stolzoff, 58 Mass.App.Ct. at 766 n.21 (liability as a seller under the statute extends to "[a] person who successfully solicits the purchase motivated at least in part by a desire to serve his own financial interests or those of the securities owner"); In re WorldCom, Inc. Sec. Litig., 294 F.Supp.2d 392, 423 (S.D.N.Y. 2003) (alleged participation in "road show" meetings indicated that defendants actively solicited the sale of the ...

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