March 01, 2013

The Second Circuit Court of Appeals today reversed a lower court’s dismissal of securities claims brought by investors who purchased in a $1.32 billion offering of mortgage-backed securities sold by investment banking defendants RBS Greenwich Capital, Wachovia Capital Markets Inc. and Deustche Bank Securities Inc., according to Cohen Milstein Sellers & Toll PLLC, attorneys for the lead plaintiff in New Jersey Carpenters Health Fund v. NovaStar Mortgage, Inc., et al.  

The ruling also paves the way for the potential prosecution of claims arising from five other mortgage-backed securities offerings sold by the same investment banking defendants totaling an additional $6.4 billion.

“We are gratified that the Second Circuit agreed with us that the dismissal of the case against the investment banking and other defendants should be reversed and that the case should be allowed to  proceed on behalf of the investors,” said plaintiffs lead counsel Joel P. Laitman, of Cohen Milstein Sellers & Toll PLLC. 

The investment banking defendants underwrote and sold to the lead plaintiff and the Class over $7.75 billion in mortgage-backed securities in six offerings between June 22, 2006 and May 25, 2007 where the underlying mortgages were originated by NovaStar. Soon after issuance of the certificates, and as a result of massive increases borrower delinquency, foreclosure, repossession and bankruptcy involving the mortgage loans underlying the certificates, the value of the certificates collapsed. The lawsuit alleges that the offering documents contained numerous misstatements and omissions of fact in violation of the Securities Act.

In overturning the March 2011 U.S. District Court, Southern District Court of New York, dismissal of the case against NovaStar, judges for the Second Court wrote: “We hold that the allegations in the complaint—principally, that a disproportionately high number of the mortgages in a security defaulted, that rating agencies downgraded the security’s ratings after changing their methodologies to account for lax underwriting, and that prior employees of the relevant underwriter had attested to systematic disregard of underwriting standards—state a plausible claim that the offering documents for the security misstated the applicable underwriting standards in violation of . . . the Securities Act of 1933.”

In addition to the investment banking defendants RBS Securities, Inc., and Greenwich Capital Markets, Inc., (dba RBS Greenwich Capital), Deutsche Bank Securities, Inc., and Wachovia Securities LLC, the defendants also include NovaStar Mortgage, Inc.(“NMI’s”), NMI’s wholly-owned subsidiary NovaStar Mortgage Funding Corporation (NMFC); and certain officers and directors of NMFC.

In addition to Joel P. Laitman, the plaintiffs are represented by Christopher Lometti and Michael Eisenkraft, of Cohen Milstein Sellers & Toll PLLC.

A copy of the Second Court decision can be found here.