Past Cases

RALI MBS Litigation

Status Past Case

Practice area Securities Litigation & Investor Protection

Court U.S. District Court, Southern District of New York

Case number 08-8781 (HB)


On July 31, 2015, U.S. District Court Judge Katherine P. Failla approved a $335 million settlement in the RALI MBS action, noting: “I think it is the most striking factor here, that in 2008 no one else seemed to want to take this particular tack with litigation, and in 2011 they seemed to be proven correct, but here we are with a rather substantial settlement. I don’t want to demean this by saying that fortune favors the brave, but that is what happened here. Plaintiffs’ counsel took on an enormous amount of risk and stuck with it for nearly seven years.”

Case Background

Cohen Milstein represented lead plaintiff New Jersey Carpenters Health Fund (“Carpenters Health Fund”), Plaintiff New Jersey Carpenters Vacation Fund (“Carpenters Vacation Fund”) and Plaintiff Boilermaker Blacksmith National Pension Trust (“Boilermaker Pension Trust”) (collectively, “Plaintiffs”) in a securities class action lawsuit pending in the United States District Court for the Southern District of New York. Plaintiffs bring this action pursuant to the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77a, et seq., on its own behalf and as a class action on behalf of all persons and entities (the “Class”) who purchased or otherwise acquired interests in the various RALI Trusts (the “RALI Trusts” or “Issuing Trusts”) pursuant or traceable to two (2) separate Registration Statements and accompanying Prospectuses filed with the Securities and Exchange Commission (“SEC”) by Residential Accredited Loans, Inc. (“RALI”), a subsidiary of Residential Capital, LLC f/k/a Residential Capital Corporation (“RCC”), on March 3, 2006 and on April 3, 2007 (collectively, the “Registration Statements”). Pursuant to the Registration Statements and later-filed prospectus supplements incorporated therein, Residential Funding Securities Corporation d/b/a GMAC RFC Securities along with Goldman, Sachs & Co., Inc. (“GSC”), RBS Securities, Inc. f/k/a Greenwich Capital Markets, Inc. d/b/a RBS Greenwich Capital (“GCM”), Deutsche Bank Securities, Inc. (“DBS”), Citigroup Global Markets, Inc. (“CITI”), Credit Suisse Securities (USA) LLC (“CSS”), Merrill Lynch, Pierce, Fenner & Smith, Inc. (“ML”), UBS Securities, LLC (“UBS”), Bear, Stearns & Co., Inc. (“BSC”) and Morgan Stanley & Co., Inc. (“MS”) (collectively, the “Underwriter Defendants”) underwrote and sold to Plaintiffs and the Class $37.66 billion of Mortgage Asset-Backed Pass-Through Certificates (the “Certificates”). The Certificates were issued in fifty-nine (59) Offerings between March 28, 2006 and October 9, 2007 (collectively, the “RALI Offerings”). The Defendants named in the Consolidated First Amended Securities Class Action Complaint (the “Complaint”) are RFC, RCC, RALI, certain officers and directors of RALI (collectively, “Residential Capital”) and the Underwriters of the RALI Offerings.

The Complaint alleges, among other things, that the Offering Documents contained material misstatements and omissions of material facts in violation of Sections 11 and 12 of the Securities Act, including the failure to disclose that: (i) the Certificate mortgage loan collateral was not originated in accordance with the loan underwriting guidelines set forth in the Registration Statements or the Prospectus Supplements, since Residential Capital and the originators failed to conduct meaningful assessment of the borrower’s creditworthiness, employment verification and/or standard appraisals of the mortgaged properties sufficient to assess their fair value; (ii) Residential Capital and the Underwriter Defendants failed to conduct adequate due diligence with respect to the originators’ compliance with the loan underwriting guidelines stated in the Offering Documents; (iii) the stated credit enhancement did not support the investment grade ratings assigned to the Certificates in light of the true undisclosed and impaired quality of the mortgage collateral; (iv) there were material undisclosed conflicts of interest between Residential Capital and the Underwriter Defendants, and the Ratings Agencies, including as reflected in the undisclosed ratings shopping practices, which incentivized the Ratings Agencies to understate the appropriate Certificate credit enhancement and inflate the Certificate ratings; and (v) the amount of credit enhancement provided to the Certificates was inadequate to support the AAA and investment grade ratings because those amounts were determined primarily by Ratings Agencies’ models which had not been updated in a timely manner.

On March 31, 2010, Judge Harold Baer issued a decision denying in part Defendants’ pending motions to dismiss. Although dismissing plaintiffs’ claims against based on the Rating Agencies’ undisclosed structuring role and conflicts of interest, the Court allowed plaintiff’s claims as to Residential Capital’s and the Underwriter Defendants’ inadequate due diligence and the originators’ systematic disregard of the stated underwriting guidelines to proceed. In doing so, Judge Baer relied on his decision in New Jersey Carpenters Health Fund, et al., v. The Royal Bank of Scotland Group, PLC, Civ. No. 08-5093 (S.D.N.Y. March 26, 2010) upholding similar claims in which Cohen Milstein is also served as Lead Counsel.

However, the Court also held that plaintiffs had standing to sue only on those Offerings in which they had themselves purchased, RALI Series 2006-QO7; RALI Series 2007-QH4; RALI Series 2007-QO4; and RALI Series 2007-QS1. As a result, the Court dismissed, without prejudice, plaintiffs’ claims as to the 13 Harborview Offerings that plaintiffs had not purchased on.

The case is titled New Jersey Carpenters Health Fund, et al., v. Residential Capital, LLC, et al., Civ. No. 08-8781 (HB) (S.D.N.Y.)