Past Cases

In re Dynex Capital, Inc. Securities Litigation

Status Past Case

Practice area Securities Litigation & Investor Protection

Court U.S. District Court for the Southern District of New York

Case number 1:05-cv-01897-HB-DCF


On March 13, 2012, the Honorable Harold Baer, United States District Judge for the Southern District of New York issued an order and final judgement, approving a $7.5 million settlement, and concluding this six-year certified securities fraud class action.

Lead Plaintiff, Pension Fund Local 445, and other investors claimed that Dynex Capital and its subsidiary Merit Securities Corporation sold more than $630 million in mortgage-backed bonds between February 7, 2000 and May 13, 2004 without verifying the quality of the underlying loans, some of which were supposedly already in trouble when Dynex bought them.

Unique to the case were precedential rulings addressing corporate scienter and arguments addressing bond certification and bond market efficiency.

Cohen Milstein was court-appointed Lead Counsel in this litigation.

Case Background

Dynex Capital is a financial services company. At the time of the litigation, it was in the business of packaging mortgage loans into securities, including the two series of bonds at issue: the $336 million offering of Series 12 bonds and the $303 million offering of Series 13 bonds. Together with its affiliates, Dynex was responsible for all aspects of the loan securitization process.

Through its subsidiary Dynex Financial, Inc., between 1996 and 1999 Dynex originated or purchased the 13,000 mobile home loans that collateralized the bonds. Dynex subsidiary Merit Securities Corporation served as issuer of the bonds, purchasing the collateral loans from another Dynex subsidiary, Issuer Holding Corp., and packaging them into securities.

Plaintiffs claim that It was not long after the bonds were issued in 1999 that the collateral loans began to perform poorly, according to public disclosures by the company. Then, between November 2003 and May 2004, the rating agencies Moody’s Investor Service and Fitch Ratings and ultimately downgraded the bonds. Following the downgrades by the rating agencies, the value of the bonds dropped by as much as 85%.

The gravamen of Plaintiffs’ claims are allegations that Defendants engaged in a fraudulent scheme to artificially inflate the price of the bonds by misrepresenting that the poor performance of the bond collateral resulted from “market conditions,” thereby concealing what Plaintiffs contend was the true cause of the poor performance: namely, that Defendants’ aggressive and reckless loan underwriting and origination practices generated a pool of Collateral Loans of poor credit quality and impaired by inherent defects. More specifically, Plaintiffs’ theorized that Dynex was a late entrant to the market for originating and securitizing mobile home loans and as a consequence overtly expressed to mobile home dealers a willingness to “buy bad paper,” i.e. to originate or purchase uncreditworthy loans in order to gain market share and generate a sufficient volume of new loans to permit the issuance of mortgage-backed securities (“MBS”).