Opinion
No. 451802/2012.
12-24-2014
The PEOPLE of the State of New York, by Eric T. SCHNEIDERMAN, Attorney General of the State of New York, Plaintiff,—— v. CREDIT SUISSE SECURITIES (USA) LLC, f/k/a “Credit Suisse First Boston LLC,” DLJ Mortgage Capital, Inc., Credit Suisse First Boston Mortgage Securities Corporation, Asset Backed Securities Corporation and Credit Suisse Mortgage Acceptance Corporation, Defendants.
Virginia Chavez Romano and Steven C. Wu, Office of the New York State Attorney General, Eric T. Schneiderman, New York, Counsel for Plaintiff. Richard W. Clary, Cravath, Swaine & Moore LLP, New York, Counsel for Defendants.
Virginia Chavez Romano and Steven C. Wu, Office of the New York State Attorney General, Eric T. Schneiderman, New York, Counsel for Plaintiff.
Richard W. Clary, Cravath, Swaine & Moore LLP, New York, Counsel for Defendants.
Opinion
MARCY S. FRIEDMAN, J.
In this enforcement action for injunctive relief and damages, the Attorney General of the State of New York (N.Y.AG) alleges that defendants Credit Suisse Securities (USA) LLC and related entities (Credit Suisse) committed fraudulent and deceptive acts in connection with the creation and sale of residential mortgage-backed securities (RMBS).
The Complaint alleges that in promoting and selling RMBS, defendants led investors to believe that defendants had “carefully evaluated—and would continue to monitor—the quality of the loans underlying their RMBS, and that [defendants] would encourage loan originators to implement sound origination practices,” when in fact defendants “systematically failed to adequately evaluate these loans....” (Complaint, ¶ 2.) According to plaintiff, as a result of defendants' focus on “keeping a high volume of loans coming to them from originators,” they implemented an “incentives” program which rewarded originators (to whom defendants extended lines of credit worth hundreds of millions of dollars), based solely on the volume of loans they sold to defendants, and encouraged originators to deliver defective loans. (Id., ¶ 4.) Plaintiff also alleges that defendants were aware of “pervasive flaws in the screening process for loans underlying Defendants' RMBS,” and that despite defendants' acknowledgment “internally” of such flaws, defendants failed to disclose the flaws to investors or the public. (Id., ¶¶ 5, 6.) Further, plaintiff alleges that even when defendants' “severely flawed” review process identified defective and failing loans, defendants knowingly waived such loans into the pools. (Id., ¶¶ 53–55.) While the Complaint emphasizes defendants' alleged misrepresentations about, and flaws in, their due diligence process, the Complaint also alleges misrepresentations regarding the quality of the mortgage loans underlying the securities. (Id., ¶¶ 39–42; see infra at 13.)
The court refers to its decision in HSH Nordbank AG v. Barclays Bank PLC (2014 WL 841289 [Mar. 3, 2014] ) for a discussion of the process by which mortgages are securitized.
The Complaint pleads two causes of action. The first alleges that defendants violated the Martin Act, Article 23–A of the General Business Law (GBL §§ 352 et seq. ), by employing “deception, misrepresentations, concealment, suppression, fraud and false promises regarding the issuance, exchange, purchase, sale, promotion, negotiation, advertisement and distribution of securities.” (Complaint, ¶ 74.) The second alleges that defendants violated Executive Law § 63(12), based on their violation of the Martin Act or other “persistent fraud or illegality in the carrying on, conducting or transaction of business.” (Id., ¶ 76.) This action raises claims similar to those brought against Credit Suisse in jurisdictions around the country. The claims under the Martin Act are, however, unique.
See e.g., IKB Duetsche Industriebank AG v. Credit Suisse Secs..(USA) LLC, 2014 WL 859355 [Sup Ct, N.Y. County, March 3, 2014] ; Allstate Ins. Co. v. Credit Suisse Secs. (USA) LLC, 2014 WL 432458 [Sup Ct, N.Y. County Jan. 24, 2014] ; Luther v. Countrywide Home Loans Servicing LP, No. BC 380698 [Cal Super Ct LA County, filed Nov 14, 2007]; Federal Home Loan Bank of Seattle v. Credit Suisse Secs. (USA) LLC, No. 09–2–46353–1 SEA [Wash Super Ct, King County, filed Dec. 23, 2009].
Credit Suisse moves to dismiss the Complaint, pursuant to CPLR 3211(a)(5) and (7), based upon res judicata, failure to timely commence suit under the applicable statute of limitations, and failure to state a cause of action.
Defendants also moved to dismiss on the ground that the NYAG's claims are preempted by the Federal National Securities Market Improvement Act of 1996. They acknowledge that currently controlling authority, People ex rel Cuomo v. Greenberg (95 AD3d 474 [1st Dept 2012], affd on other grounds 21 N.Y.3d 439 [2013], is to the contrary. Defendants represent that they raise the argument solely to preserve it in the event of a future favorable ruling from the Court of Appeals. (See Ds.' Memo. In Reply at 11; Oral Argument Transcript [Tr.] at 4–5.)
Standard Of Review
It is well settled that on a motion to dismiss pursuant to CPLR 3211(a)(7), “the pleading is to be afforded a liberal construction (see, CPLR 3026 ). [The court must] accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory.” (Leon v. Martinez, 84 N.Y.2d 83, 87–88 [1994]. See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 [2002].) However, “the court is not required to accept factual allegations that are plainly contradicted by the documentary evidence or legal conclusions that are unsupportable based upon the undisputed facts.” (Robinson v. Robinson, 303 A.D.2d 234, 235, 757 N.Y.S.2d 13 [1st Dept 2003] ; see also Water St. Leasehold LLC v. Deloitte & Touche LLP, 19 A.D.3d 183, 796 N.Y.S.2d 598 [1st Dept 2005], lv denied 6 N.Y.3d 706 [2006].)
Statute Of Limitations
The parties' threshold and principal dispute is whether the three year statute of limitations of CPLR 214(2) or the six year statute of limitations of CPLR 213(1) or (8) applies to the NYAG's claims. Credit Suisse contends that the Complaint must be dismissed in its entirety because it is an action to recover on a liability created by statute and is therefore governed by the three year limitations period set forth in CPLR 214(2). (Ds.' Memo. In Support at 12.) Plaintiff counters that this action is not one to recover upon a liability created by statute because it seeks relief based on fraud recognized at common-law, and that the action is therefore governed by the six year limitations period set forth in CPLR 213(1) for actions for which no limitation is specifically prescribed by law, or the six year limitations period set forth in CPLR 213(8) for fraud. (P.'s Memo. In Opp. at 6.)
The parties do not dispute that the Martin Act and Executive Law § 63(12) do not contain their own limitations provisions governing civil actions brought by the NYAG.
Credit Suisse also argues, in the alternative, that if CPLR 213 applies to the NYAG's claims, all claims relating to eight certificates issued on or before March 7, 2006 are untimely because such conduct occurred more than six years prior to the effective date of a tolling agreement between the parties, and the NYAG could, with reasonable diligence, have discovered the claims two years prior to such effective date. (Ds.' Memo. In Support at 2.) Plaintiff concedes this point and will not seek redress for the eight certificates. (P.'s Memo. In Opp. at 17, n 7.).
The three year statute of limitations provided by CPLR 214(2) governs “an action to recover upon a liability, penalty or forfeiture created or imposed by statute” (with exceptions not here relevant). It is well settled that “CPLR 214(2) does not automatically apply to all causes of action in which a statutory remedy is sought, but only where liability would not exist but for a statute.” ' (Gaidon v. Guardian Life Ins. Co. of Am., 96 N.Y.2d 201, 208 [2001] [Gaidon II ], quoting Aetna Life & Cas. Co. v. Nelson, 67 N.Y.2d 169, 174 [1986] ; see also City of New York v. Kingsview Homes, Inc., 70 A.D.2d 866, 867, 418 N.Y.S.2d 62 [1st Dept 1979], quoting Shepard Co. v. Taylor Pub. Co., 234 N.Y. 465, 468 [1923] [“[A] liability created by statute ... is construed to mean a liability which would not exist but for the statute” '].) It is further settled that “CPLR 214(2) does not apply to liabilities existing at common law which have been recognized or implemented by statute.” ' (Gaidon II, 96 N.Y.2d at 208, 727 N.Y.S.2d 30, 750 N.E.2d 1078, quoting Aetna Life, 67 N.Y.2d at 174, 501 N.Y.S.2d 313, 492 N.E.2d 386.) Where the statute codifies or implements liabilities existing at common law, “the Statute of Limitations for the statutory claim is that for the common-law cause of action.” (Gaidon II, 96 N.Y.2d at 208, 727 N.Y.S.2d 30, 750 N.E.2d 1078.)
The Martin Act “authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York.” (Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgt. Inc., 18 N.Y.3d 341, 349 [2011].) The purpose of the Martin Act was “to create a statutory mechanism in which the Attorney–General would have broad regulatory and remedial powers to prevent fraudulent securities practices by investigating and intervening at the first indication of possible securities fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution.” (Id. at 350–351, 939 N.Y.S.2d 274, 962 N.E.2d 765.)
As the Court of Appeals has made clear, where a statute does not “make' unlawful the alleged fraudulent practices, but only provide[s] standing in the Attorney–General to seek redress and additional remedies for recognized wrongs which pre-existed the statute[ ],” such a statute does “not create or impose new obligations.” (State of New York v. Cortelle Corp., 38 N.Y.2d 83, 85 [1975].)
There is substantial authority applying the six year statute of limitations to investor fraud claims brought under Executive Law § 63(12) or the Martin Act. In Cortelle, the Court of Appeals explained that “[i]n applying a Statute of Limitations it is basic that one look to the essence of plaintiff's claim and not to the form in which it is pleaded.” (38 N.Y.2d at 86, 378 N.Y.S.2d 654, 341 N.E.2d 223.) Cortelle held that CPLR 213(1), rather than CPLR 214(2), was applicable to an Executive Law § 63(12) claim based on a scheme to obtain ownership of distressed properties by means of fraudulent misrepresentations. The Court reasoned that although this Executive Law provision “may in part expand the definition of fraud so as to create a new liability in some instances, it also incorporates already existing standards applied to fraudulent behavior always recognized as such.” (Id. at 87, 378 N.Y.S.2d 654, 341 N.E.2d 223.) The Court further held that the allegations at issue “create no new claims but only provide particular remedies and standing in a public officer to seek redress on behalf of the State and others. Moreover, the kind of wrong the Attorney–General seeks to redress is not a new one to the decisional law but a now rather old and common type of fraud”—namely, “promissory fraud.” (Id. at 86, 87, 378 N.Y.S.2d 654, 341 N.E.2d 223.)
Executive Law § 63(12) provides in relevant part:
“Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business, the attorney general may apply, in the name of the people of the state of New York ... for an order enjoining the continuance of such business activity or of any fraudulent or illegal acts ... The word fraud' or fraudulent' as used herein shall include any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions.”
GBL § 353(1) authorizes the Attorney General to bring an action in the name and on behalf of the people of the state of New York against any “person, partnership, corporation, company, trust or association [that] has engaged in, is engaged or is about to engage in any of the practices ... declared to be fraudulent practices.” GBL § 352(1) defines “fraudulent practices” in relevant part as:
“any device, scheme or artifice to defraud or for obtaining money or property by means of any false pretense, representation or promise, or ... any deception, misrepresentation, concealment, suppression, fraud, false pretense or false promise, or ... any practice or transaction or course of business relating to the purchase, exchange, investment advice or sale of securities or commodities which is fraudulent or in violation of law and which has operated or which would operate as a fraud upon the purchaser....”
In Cortelle, the owners acquired the distressed properties by allegedly visiting the owners and inducing them to convey title based on false “representations that the deeds were merely collateral for loans. They were told that for a stated fee' at the expiration of the leases their titles would be reconveyed. When, however, the owners tendered the stated sums, defendants would reject or avoid the tender and refuse to reconvey title.” (38 N.Y.2d at 85, 378 N.Y.S.2d 654, 341 N.E.2d 223.).
In State of New York v. Bronxville Glen I Assocs. (181 A.D.2d 516 [1992] ), this Department expressly held that CPLR 213(8) rather than 214(2) was applicable to a Martin Act claim. As explained by the Court, “[l]iability is considered to be created by statute ... if the statute establishes a unique species of liability entirely unknown at common law.” (Id. at 516.) Noting that “the Martin Act may expand the definition of fraud so as to create new liability in some instances,” the Court found that “[l]iability for investor fraud was not created by the Martin Act, but is recognized in case law predating that legislation.” (Id. )
Defendants argue that the NYAG's claims are “substantively different from claims cognizable at common-law and would not exist but for those statutes.” (Ds.' Memo. In Support at 9.) According to defendants, the claims are substantively different because the NYAG does not, and under the Martin Act need not, plead two of the “hallmark” elements of common-law fraud—namely, scienter and reliance. Defendants maintain that this difference compels the court to apply CPLR 214(2) to the NYAG's claims under the “reasoning” of Gaidon II and other cases. (Id. at 9–11, 727 N.Y.S.2d 30, 750 N.E.2d 1078.) Plaintiff responds that his claims in this action were recognized at common-law and that he has in fact pleaded the elements of common-law fraud. (P.'s Memo. In Opp. at 7–10, 15–17.) Plaintiff further contends that Gaidon II did not involve the Martin Act, and did not overrule the holdings of Cortelle and Bronxville that Martin Act fraud claims are not subject to CPLR 214(2). According to plaintiff, the reasoning of Gaidon II does not in any event support a holding that the elements of scienter and reliance must be pleaded in order for the CPLR 213 six year limitations period to apply. (Id. at 12–13, 727 N.Y.S.2d 30, 750 N.E.2d 1078.)
The elements of common-law fraud are “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” (Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 [2009] ; see also Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236, 242 [2009] [same].)
Gaidon II (96 N.Y.2d 201, 727 N.Y.S.2d 30, 750 N.E.2d 1078, supra ) held that misrepresentations in promotional materials used in selling vanishing premium policies “did not rise to the level necessary to establish a common-law fraud claim” (id. at 209, 727 N.Y.S.2d 30, 750 N.E.2d 1078 ), but were actionable under General Business Law § 349, “a creature of statute based on broad consumer-protection concerns.” ' (Id., quoting Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330, 343 [1999] [Gaidon I ].) Although noting that a General Business Law § 349 claim may cover conduct “akin to” a common-law fraud claim, the Court found that the section 349 claim at issue was “critically different ” from a common-law fraud claim. (Id. at 209, 727 N.Y.S.2d 30, 750 N.E.2d 1078, quoting Gaidon I, 94 N.Y.2d at 343, 704 N.Y.S.2d 177, 725 N.E.2d 598.) The Court accordingly applied the three year statute of limitations of CPLR 214(2).
Defendants argue that Gaidon II “reason[ed] that because the consumer fraud statute did not require scienter, the statute encompassed a significantly wider range of deceptive business practices that were never previously condemned by decisional law', and thus, CPLR 214(2) applied.” (Ds.' Memo. In Support at 10, quoting Gaidon II, 96 N.Y.2d at 210, 727 N.Y.S.2d 30, 750 N.E.2d 1078.) Defendants thus suggest that the absence of scienter is the critical element that distinguishes common-law fraud from the conduct that the Court held actionable under General Business Law § 349.
Defendants' quotation of the Gaidon II Court's holding is, however, incomplete. The quoted sentence reads: “Thus, despite plaintiffs' and the Attorney General's contentions to the contrary, it is not merely the absence of scienter that distinguishes a violation of section 349 from common-law fraud; section 349 encompasses a significantly wider range of deceptive business practices that were never previously condemned by decisional law.” (Gaidon II, 96 N.Y.2d at 209–210, 727 N.Y.S.2d 30, 750 N.E.2d 1078.) More specifically, the Gaidon II Court reasoned that the defendants' misrepresentations in their promotional materials did not support a common-law fraud claim “because of the disclaimers” in the materials. In holding that General Business Law § 349 created a new liability, the Court found that although the disclaimers vitiated the common-law fraud claim, they “were not sufficient to dispel the deceptiveness of [the defendants'] sales practices” under the statute. (Id. at 209, 727 N.Y.S.2d 30, 750 N.E.2d 1078.)
Defendants thus overstate the holding of Gaidon II in claiming that it requires application of the three year statute of limitations of CPLR 214(2) “where a statute sets forth elements of proof that diverge from the elements required by common law.” (See Ds.' Memo. In Support at 10.) State v. Daicel Chem. Indus., Ltd. (42 A.D.3d 301, 303, 840 N.Y.S.2d 8 [1st Dept 2007] ), on which defendants rely, also fails to support this reading of Gaidon II. Following Gaidon II, Daicel held that a cause of action under Executive Law § 63(12), based on General Business Law § 349, was barred by CPLR 214(2). The Court's reasoning was as follows: “These claims rely on allegations of conduct made illegal by statute, and do not even allege all the elements of common-law fraud, and as such they are covered by CPLR 214(2).” Daicel, like Gaidon II, thus notes the divergence between the elements of proof of the common-law claim and the statutory claim, but does not hold that it is determinative of whether the liability is created by statute. Based on close reading of these cases, this court concludes that a divergence in the elements of proof is but one factor that must be considered in determining whether liability was created by statute, not the sine qua non of such determination.
The remaining cases which defendants cite involve liabilities created by statutes other than the Martin Act, and statutory claims which differed materially, and were “critically different,” from state law claims. (See Gaidon II, 96 N.Y.2d at 209, 727 N.Y.S.2d 30, 750 N.E.2d 1078 [characterizing the General Business Law § 349 claim at issue as “critically different” from a common-law fraud claim]; Durante Bros. & Sons, Inc. v. Flushing Natl. Bank, 755 F.2d 239, 248–249 [2d Cir1984], cert denied 473 U.S. 906 [1985] [holding CPLR 214[2] applicable to civil RICO claim based on alleged collection of unlawful debts, where state law claim for such conduct could be established without proof of nine of the ten elements of the RICO claim]; Cullen v. Margiotta, 811 F.2d 698, 717–718 [2d Cir1987], cert denied 483 U.S. 1021, 107 S.Ct. 3266, 97 L.Ed.2d 764 [holding CPLR 214[2], rather than 213[6], applicable to civil RICO claim, because state law claim could be established without proof of criminal conduct or “any other elements of civil RICO”]; Baena v. Woori Bank, 515 F Supp 2d 414, 422–423 [SD N.Y.2007], reconsideration denied 2007 WL 3284719] [applying CPLR 214[2] to Korean statutory claim for “negligent fraud” because New York does not recognize such a claim].).
The court notes that Durante and Cullen were decided before Agency Holding Corp. v. Malley–Duff & Assocs., Inc. (483 U.S. 143 [1987] ), which held that the four year statute of limitations applicable to the Clayton Act, rather than a state statute of limitations, is applicable to civil RICO actions.
Significantly, cases construing the Martin Act since the time of its enactment have held that the Act prohibits misrepresentation of facts in the sale of securities, even where such misrepresentation is not intentional. (People of the State of New York v. The Federated Radio Corp., 244 N.Y. 33, 36 [1926] ; State of New York v. Rachmani Corp., 71 N.Y.2d 718, 725 n. 6 [1988] [“[T]o establish liability for fraudulent practices in an enforcement proceeding under the Martin Act, the Attorney–General need not allege or prove either scienter or intentional fraud”]; Assured Guar. (UK) Ltd., 18 N.Y.3d at 350, 939 N.Y.S.2d 274, 962 N.E.2d 765 [same].) With this standard of proof already well settled, the Court of Appeals in Cortelle and this Department in Bronxville held that Executive Law § 63(12) and Martin Act cases based on investor fraud were governed by the six year statute of limitations of CPLR 213.
Other authorities are to the same effect. (See e.g. Morelli v. Weider Nutrition Group, 275 A.D.2d 607, 608, 712 N.Y.S.2d 551 [1st Dept 2000] [“Claims for fraud and those brought pursuant to Executive Law § 63[12], governed by a six-year limitation period, are distinguishable from those brought pursuant to General Business Law § 349 ”]; Loengard v. Santa Fe Indus., Inc., 573 F.Supp. 1355, 1359 [SD N.Y.1983] [holding fraud-based Martin Act claim subject to six year statute of limitations]; Podraza v. Carriero, 212 A.D.2d 331, 340, 630 N.Y.S.2d 163 [4th Dept 1995], lv dismissed 86 N.Y.2d 885, 635 N.Y.S.2d 950, 659 N.E.2d 773 [“[A]ctions brought under the Martin Act are governed by the six-year Statute of Limitations for fraud”].).
Defendants do not cite any appellate case which holds that an investor fraud claim under either Executive Law § 63(12) or the Martin Act is not subject to the six year limitations period of CPLR 213. Nor do they cite any appellate case which supports their contention that Cortelle and Bronxville are “superseded” by Gaidon II and Daicel. (See Ds.' Memo. In Support at 11.) These cases do not explicitly or implicitly overrule the earlier cases. As discussed above, Gaidon II and Daicel involve liability under a wholly different statute. Defendants' contention aside, the cases do not hold that liability is imposed by statute, and that application of CPLR 214(2) is required, whenever there is a divergence between the elements of a common-law claim and the elements of the statutory claim. Rather, under Gaidon II and Daicel, a divergence is a factor to be considered in determining whether the statute creates a new liability. Gaidon II reaffirmed settled law that “CPLR 214(2) does not apply to liabilities existing at common law which have been recognized or implemented by statute.' ” (96 N.Y.2d at 208, 727 N.Y.S.2d 30, 750 N.E.2d 1078.) Indeed, Gaidon II cited Cortelle approvingly for the proposition that, in such instance, “the Statute of Limitations for the statutory claim is that for the common-law cause of action which the statute codified or implemented.” (Id. at 208, 378 N.Y.S.2d 654, 341 N.E.2d 223.)
To the extent that plaintiff contends that all Executive Law § 63(12) and Martin Act cases based on investor fraud are subject to a six year statute of limitations, that contention also overstates the law. Cortelle relies on well settled law in holding that a court must look to the essence of the claim, and not to the form in which it is pleaded, to determine whether a liability was recognized by the common-law or is imposed by statute. (38 N.Y.2d at 86, 378 N.Y.S.2d 654, 341 N.E.2d 223, citing Brick v. Cohn–Hall–Marx Co., 276 N.Y. 259, 264 [1937] ; accord Matter of Guzman v. 188–190 HDFC, 37 A.D.3d 295, 296, 830 N.Y.S.2d 112 [1st Dept 2007], lv denied 9 N.Y.3d 801, 840 N.Y.S.2d 566, 872 N.E.2d 252 [citing Cortelle ]; see Western Elec. Co. v. Brenner, 41 N.Y.2d 291, 293 [1977].) The inquiry that the court must undertake is therefore whether plaintiff's claims under Executive Law § 63(12) and the Martin Act allege conduct that would not be illegal or fraudulent but for the Martin Act or whether they allege fraud that was cognizable at common-law.
This court finds that the essence of plaintiff's claims under both Executive Law § 63(12) and the Martin Act is that defendants made false representations in order to induce investors to purchase their securities. These claims thus seek to impose liability on defendants based on the classic, longstanding common-law tort of investor fraud. The court accordingly holds that, even in the absence of allegations of scienter, the claims are subject to the six year statute of limitations.
The Complaint pleads that defendants violated Executive Law § 63(12) in that they “engaged in fraudulent or illegal acts (in violation of, inter alia, the Martin Act) or otherwise demonstrated persistent fraud or illegality in the carrying on, conducting or transaction of business.” (Complaint, ¶ 76.) However, the acts alleged in support of the Executive Law and Martin Act claims are the same.
In so holding, the court need not, and does not, determine plaintiff's claim that the fraud at issue should be characterized as an “equitable fraud.” (See P.'s Memo. In Opp. at 9.) The court notes, however, that although the Complaint does in fact plead scienter (see infra at 12), if scienter is not ultimately proved and the fraud claim is ultimately determined to be equitable in nature, an issue may exist as to whether certain of the monetary relief which the Complaint seeks is available. (See 60A N.Y. Jur 2d § 146 [noting that although the CPLR abolishes the distinction between actions at law and in equity, the traditional distinction between legal and equitable relief has been maintained].).
The court's conclusion that the NYAG's claims are for investor fraud recognized at common-law is strongly supported by the fact that in the many pending common-law fraud cases brought before this court by private investors in RMBS, the allegations as to the misrepresentations made by the defendant-securitizers are substantially similar to those in this action. (See e.g. Allstate Ins. Co. v. Credit Suisse Secs. (USA) LLC [Allstate ], 2014 WL 432458, * 7 [Sup Ct, N.Y. County Jan. 24, 2014] [alleging misrepresentations, among others, that loans were generally originated in accordance with underwriting guidelines; that exceptions to underwriting standards were on a case-by-case basis only when the borrower demonstrated compensating factors; and that the defendants ignored their own due diligence, issued repurchase demands to originators for defective loans, and then kept the money recovered from originators rather than passing it on to the securitization trusts for the benefit of investors]; HSH Nordbank v. Barclays Bank PLC, 2014 WL 841289 [Sup Ct, N.Y. County Mar. 3, 2014] [HSH Nordbank ].)
Although this court has held that this action is subject to the six year statute of limitations of CPLR 213 even absent the pleading of scienter, the court notes that the allegations of plaintiff's Complaint are substantially similar to those which the court has previously determined are sufficient to plead scienter in the common-law fraud RMBS actions. (See Allstate, 2014 WL 432458 at * 12 ; HSH Nordbank, 2014 WL 841289 at * 15–16.)
See Appendix A, comparing the NYAG and Allstate Complaints. The Allstate Complaint is filed under Sup Ct, N.Y. County Index No. 650547/11, as NYSCEF Doc. No. 15.
Defendants further argue that the Complaint does not allege reliance on defendants' alleged misrepresentations, and that plaintiff therefore asserts claims that would not exist but for the statute, or seeks to take advantage of a wider range of deceptive practices than supported liability under the common-law. (Ds.' Memo In Reply at 5, 7.) Contrary to defendants' contention, the NYAG's Complaint includes allegations of reliance by private investors on defendants' alleged misrepresentations, which are similar to the reliance allegations in RMBS actions brought by private investors that are pending before this court.
See Appendix B, comparing the NYAG and Allstate Complaints.
To the extent that defendants argue that it is necessary to plead direct reliance by the NYAG in order to state a claim cognizable at common-law, that argument is untenable. Plaintiff correctly maintains that “reliance would not be an element of a sovereign action for investor fraud even absent the Martin Act and § 63(12).” (P.'s Memo. In Opp. at 15, 11.) As discussed above, the Martin Act was enacted to “create a statutory mechanism in which the Attorney–General would have broad regulatory and remedial powers to prevent fraudulent securities practices” by investigating and prosecuting claims. (Assured Guar. (UK) Ltd., 18 N.Y.3d at 350–351, 939 N.Y.S.2d 274, 962 N.E.2d 765 [internal citations and quotation marks omitted].) Here, as in Cortelle, “[a]s applied to the allegations in this case, the statutes authorizing the Attorney–General to bring this action “create no new claims but only provide particular remedies and standing in a public officer to seek redress on behalf of the State and others. Moreover, the kind of wrong the Attorney–General seeks to redress is not a new one to the decisional law but a now rather old and common type of fraud.” (38 N.Y.2d at 86, 378 N.Y.S.2d 654, 341 N.E.2d 223.)
Defendants also argue that plaintiff fails to plead reasonable reliance by private investors on defendants' alleged misrepresentations and, in particular, that the Complaint does not allege such reliance because the marketing materials contained clear warnings and disclaimers that statements in such materials should not be relied upon. (Ds.' Memo. In Reply at 7.) This argument ignores that the Complaint pleads that defendants made misrepresentations not only in marketing materials but also in offering documents, including Prospectus Supplements and Private Placement Memoranda. (Complaint, ¶ 39.) These representations included that the loans were originated “generally in accordance” with underwriting standards; that exceptions were made to underwriting standards only where “compensating factors” existed; that originators made a determination that the borrowers had the ability to repay; and that in the case of “stated income” loans—i.e., loans that permitted borrowers to state their income and assets without verification—defendants applied a “reasonableness test” to determine whether the claimed income was reasonable. (Id., ¶¶ 40–41, 378 N.Y.S.2d 654, 341 N.E.2d 223.) Defendants do not argue that the offering documents made disclosures about these representations that rendered investors' reliance on them unjustifiable.
It is noted that even where offering documents have included disclosures about deviations from underwriting standards or other warnings affecting loan value, the courts considering RMBS claims have overwhelmingly held that such disclosures or warnings do not give notice to investors of the defendants' wholesale abandonment of underwriting standards. (See Allstate, 2014 WL 432458 at * 7–8 [and authorities collected therein].).
Defendants contend that the disclaimers in the marketing materials preclude reliance on representations made in those materials. (Ds.' Memo. In Reply at 7.) The alleged disclaimer in the marketing materials states that these materials “may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with CS.” (Aff. of Lauren Moskowitz, Ex. 28 at 25.) The record does not contain evidence as to the written agreement, if any, with Credit Suisse. Moreover, defendants do not submit any legal authority which addresses the effectiveness of the disclaimer under governing New York law, or demonstrates that it precludes reliance as a matter of law.
In sum, the court concludes that CPLR 213 is applicable to the NYAG's claims here because, as stated in Cortelle, the essence of the claims is common-law fraud (38 N.Y.2d at 86, 378 N.Y.S.2d 654, 341 N.E.2d 223 ) or, as stated in Bronxville, “allegations of fraud are the heart of the State's complaint.” (181 A.D.2d at 516, 581 N.Y.S.2d 189.)
Res Judicata
Defendants contend that the NYAG's claims based on “bulk settlements” are barred by res judicata, as a result of a settlement by Credit Suisse with the SEC involving the same transactions. (Ds.' Memo. In Support at 18.) The Complaint alleges, with respect to bulk settlements, that when defendants' quality control review process revealed defective loans, defendants often left the loans in the pools underlying the RMBS, but obtained monetary settlements for the loans from the originators which defendants “pocketed for themselves.” (Complaint, ¶¶ 67–72.)
It is well settled that res judicata “bars successive litigation based upon the same transaction or series of connected transactions if: (i) there is a judgment on the merits rendered by a court of competent jurisdiction, and (ii) the party against whom the doctrine is invoked was a party to the previous action, or in privity with a party who was.” (People ex rel Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105, 122 [2008] [internal quotation marks and citation omitted].) Privity has been characterized as an “amorphous term.” (Id. at 123, 863 N.Y.S.2d 615, 894 N.E.2d 1, quoting Buechel v. Bain, 97 N.Y.2d 295, 304 [2001].) “Ultimately, [the court] must determine whether the severe consequences of preclusion flowing from a finding of privity strike a fair result,” taking into account “the policies that res judicata is designed to protect.” (Id. )
The court is unpersuaded by defendants' contention that Applied Card compels
a finding of privity in this case. (See Ds.' Memo. In Reply at 12.) The Court in Applied Card held that the NYAG was in privity with, and barred from seeking monetary restitution on behalf of, New York members of a class who received restitution under a nationwide class action settlement. The Court held, however, that the NYAG was in privity only with respect to New York consumers who were members of the class, and only with respect to claims existing as of a certain date which had been pursued to a final and binding judgment. (Id. at 124–125, 863 N.Y.S.2d 615, 894 N.E.2d 1.)
Here, defendants do not claim that the NYAG or any New York investors had the right to accept or reject the SEC cease-and-desist order, or that their interests were formally or informally represented by the SEC. Moreover, defendants fail to cite any authority which holds that a state attorney general may be in privity with the SEC with respect to a cease-and-desist order, or which involves analogous circumstances. Without such authority, defendants fail on this motion to carry their burden of establishing privity for res judicata purposes as to the “bulk settlement” claims.
Failure To State A Claim
Finally, defendants argue that the Complaint fails to plead the facts underlying its fraud claims with the specificity required by CPLR 3016(b). (Ds.' Memo. In Support at 20.) As discussed above (supra at 11–12), the misrepresentations alleged in the NYAG's Complaint as to loan quality and due diligence are similar to those alleged by private investors in the RMBS fraud cases pending before this court, and in which this court has upheld the pleadings at the motion to dismiss stage. The court relies on the reasoning and authority of its prior decisions in holding that the Complaint here pleads actionable misrepresentations. (Allstate, 2014 WL 432458, supra ; HSH Nordbank, 2014 WL 841289, supra. )
The court rejects defendants' contention that the Complaint is insufficiently pleaded because it fails to allege details about the materials or documents in which the misrepresentations were made or to identify the securitizations to which the misrepresentations relate. (See Ds.' Memo. In Support at 21; Ds.' Memo. In Reply at 13.) As noted in prior decisions, the weight of authority holds that an RMBS fraud claim is adequately pleaded where the complaint alleges the defendants' systematic abandonment of underwriting guidelines, notwithstanding that the complaint does not specifically reference the loans in the pools underlying the securities. (Allstate, 2014 WL 432458 at * 9–10 [and authorities cited therein].) That authority is applicable here, as the Complaint alleges defendants' knowledge of its originators' systematic abandonment of underwriting standards. (Complaint, ¶¶ 18, 20, 21.) As to defendants' further contention that the Complaint lacks sufficient specificity because it does not state how the marketing materials were published or identify the investors that received them (see Ds.' Memo. In Reply at 13), the court holds that the particularity standard of CPLR 3016(b) does not require that level of detail. (See generally HSH Nordbank, 2014 WL 841289 at * 17.) The court has considered defendants' remaining objections to the pleading of the fraud claim and finds them to be without merit.
It is accordingly hereby ORDERED that defendants' motion to dismiss the Complaint is denied in its entirety.
APPENDIX A
NYAG Complaint:
Allstate Complaint:
“Defendants knew that there were pervasive flaws in the screening process for loans underlying Defendants' RMBS, and failed to disclose the flaws to investors.” (¶ 5.)
“Defendants' own loan-level due diligence revealed, on a daily basis, that the underwriting standards disclosed to investors were not being followed.” (¶ 240.)
“While they acknowledged internally the bad quality of the loans sold by originators, Defendants falsely represented to investors that they influence [d]' originators to utilize appropriate origination practices.” ' (¶ 6.)
“Even as Credit Suisse became affirmatively aware that it and its warehouse lenders were flagrantly disregarding underwriting guidelines ... it continued to acquire these loans, while misrepresenting to investors that the loans complied with specified underwriting guidelines.” (¶ 75.)
“Through internal tracking mechanisms ... Defendants were well aware of the serious and widespread defects in the loans they acquired from originators.... Yet Defendants continued to securitize loans from each of these problematic originators, and others, through 2007.”(¶ 18.)
“[A]t the time Defendants made these representations, they knew the Mortgage Loans were not being generated in accordance with the underwriting guidelines they described to investors.” (¶ 5.)
“In their role as sponsor and underwriter of dozens of RMBS, each containing hundreds of millions of dollars' worth of mortgage loans, Defendants were uniquely positioned through the due diligence process to obtain material information regarding the quality of these loans.” (¶ 32.)
“Defendants and their affiliates controlled and/or facilitated every aspect of originating, acquiring, securitizing, and sale of the underlying Mortgage Loans, providing Defendants with unique and special knowledge regarding the characteristics of the Mortgage Loans and the quality of the underwriting and servicing practices.” (¶ 70.)
“Defendants exercised full discretion to waive' defects discovered by due diligence firms and to change a grade of 3' to a 2' or 1.' ” (¶ 36.)
“Even when Defendants' own due diligence revealed that a significant percentage of loans failed to meet the applicable underwriting standards, Defendants acquired the loans and included [ ] them in securitization pools anyway.” (¶ 151.)
“Defendants repeatedly and consistently assured investors about the efficacy of their due diligence process....” “Defendants' representations about the thoroughness of their due diligence, their RMBS loans' adherence to guidelines, and their scrutiny of the income stated in stated income loans, were false and misleading.” (¶¶ 42–43.)
“Contrary to their representations, Defendants did not take steps to ensure that the loans they were securitizing had been originated according to the practices presented to investors.” (¶ 6.)
“The bulk due diligence process, as Defendants were well aware, was compromised by the massive number of loans that Defendants sought to have reviewed in a short period of time.... As a result, due diligence reviews did not involve the rigorous examination of loans that Defendants repeatedly represented that they were undertaking ... Clayton's due diligence reviewers were directed not to spend too much time on a loan (or not to get married to' the loan).” (¶ 44.)
“Defendants deliberately relaxed their pre-securitization diligence, routinely acquired defective loans, and included such loans in the pools underlying their securities.” (Id. ¶ 6.)
APPENDIX B
| NYAG Complaint: | Allstate Complaint: |
|---|---|
| “In publicly filed documents and in marketing materials, and by holding themselves out as responsible RMBS sponsors and underwriters, Defendants led investors to believe that Defendants had carefully evaluated—and would continue to monitor—the quality of the loans underlying their RMBS, and that they would encourage loan originators to implement sound origination practices.” (¶ 2.) | ”Allstate relied upon Defendants' representations and assurances regarding the quality of the mortgage collateral underlying the Certificates, including the quality of the underwriting processes related to the underlying Mortgage Loans. Allstate received, reviewed, and relied upon the Offering Materials, which described in detail the Mortgage Loans underlying each offering.” (¶ 283.) |
| “Defendants were uniquely positioned through the due diligence process to obtain material information regarding the quality of these loans ... Investors had a right to rely on Defendants based on representations that were premised on their unique access to critical information that enabled them to root out discernible problems and risks.” (¶ 32.) | ”Defendants were the exclusive source of information regarding the loans backing the securities. Unlike Defendants, Allstate did not have access to the underlying loan files. Allstate, therefore, depended on Defendants to present truthful and accurate information about the Mortgage Loans that had been verified by Defendants' diligence and underwriting practices.” (¶ 4.) |
| “Knowing whether originators complied with applicable underwriting guidelines was critical to any understanding of the riskiness of the loans backing Defendants' RMBS. Recognizing this, Defendants made representations about their RMBS loans' adherence to these guidelines in Prospectus Supplements (“ProSupps”) and in Private Placement Memoranda (“PPMs”) that were typically issued in connection with Defendants' RMBS.” (¶ 39.) | ”Defendants' representations regarding the underwriting process were understood reasonably by investors, including Allstate, to mean that Defendants had taken appropriate measures to ensure that non-compliant loans would not be included in the mortgage pools.” (¶ 86.) “This representation was important to investors like Allstate, because it reflected Defendants' own verification of the loan-origination practices, which investors were not in a position to assess.” (¶ 80.) |