Maine State Retirement System v. Countrywide Financial Corp.
On behalf of its client Countrywide Financial Corporation,
Goodwin Procter helped obtain two groundbreaking rulings from the
federal district court in Los Angeles that greatly reduced the size
of what had been the largest mortgage-backed securities
("MBS") class action filed in the United States.
Maine State Ret. Sys. v. Countrywide Fin. Corp., 2011 WL
4389689 (C.D. Cal. May 5, 2011); Maine State Ret. Sys. v.
Countrywide Fin. Corp., 722 F. Supp. 2d 1157 (C.D. Cal.
2010).
Countrywide, acquired by Bank of America in July 2008, was the
country's largest mortgage lender. The original complaint filed
in federal court against Countrywide concerned 427 MBS offerings
issued between early 2005 and late 2007 that had an original
notional value of approximately $350 billion. Each MBS offering
typically involves multiple "tranches," each of which is
a separate security with different payment terms, "credit
enhancement" features, risks, and credit ratings.
On November 4, 2010, the Central District of California held that
the named class plaintiffs lacked standing to sue over offerings in
which they themselves did not buy securities. The court also held
that limitations periods had not been tolled by an earlier class
action filed in California state court. As a result of this ruling,
the Maine State case was narrowed from 427 MBS offerings
to just the 14 MBS offerings in which both the federal court named
plaintiffs and the earlier state court named plaintiffs had
purchased.
Following that decision, the plaintiffs filed an amended complaint,
and the court invited Countrywide to submit additional briefing on
standing and statute of limitations issues. In response,
Countrywide argued that the court's prior rulings regarding
standing and tolling should be applied not only at the
offering level, but also at the tranche level
– i.e., that the federal court named plaintiffs
lacked standing, and the state court named plaintiffs did not
trigger tolling, with respect to any tranches that these named
plaintiffs did not themselves purchase, even if they had purchased
other tranches in the same offering. Although offering-based
standing and tolling issues had been litigated in numerous MBS
cases pending across the country, Countrywide was the first to
argue tranche-based standing and tolling. On May 5, 2011, the court
issued a ruling agreeing with Countrywide's arguments and
sharply limiting the named plaintiffs' standing and tolling to
only the individual tranches they actually bought. As a result, the
Maine State case was further narrowed from 14 MBS
offerings to just the eight MBS tranches in which both the federal
court named plaintiffs and the earlier state court named plaintiffs
had purchased.
These rulings together slashed the case from 427 offerings
(consisting of tens of thousands of separate tranches) with an
original notional amount of more than $350 billion, to
just eight tranches, with an original notional amount of $2.5
billion and dramatically reduced the estimated exposure.
In re Smith & Wesson Holding Corp. Securities
Litigation
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Steven J. Hurvitz
The U.S. Court of Appeals for the First Circuit recently affirmed the grant of summary judgment in favor of a defendant in a securities class action, holding that the allegation that it had made false or misleading statements was not supported by the evidence. In re Smith & Wesson Holding Corp. Sec. Litig., 2012 U.S. App. LEXIS 3259 (1st Cir. Feb. 17, 2012). The class of stock purchasers claimed that Smith & Wesson falsely implied through various public statements that its reported sales figures were supported by strong existing demand. Although the District Court had certified the class, it rejected the claims on summary judgment.
In affirming the District Court's ruling, the First Circuit began by observing that "[p]urely forward looking statements ... enjoy considerable protection" under the safe harbor provisions of the Private Securities Litigation Reform Act. This did not end the court's inquiry, however, because the public statements implied "that the sales numbers represented market demand at the time of the sales, which concerned past factual conditions."
Nevertheless, the court held that there was insufficient evidence on two of the required elements for a Section 10(b) and Rule 10b-5 claim: (i) a misrepresentation or omission and (ii) scienter. First, it explained that using discounts and promotions is "neither inherently fraudulent nor always innocent; size, design, purpose, transparency, and history are all relevant." In this case, the class introduced no credible evidence showing that Smith & Wesson's sales methods were "unusual, represented a significant percentage of the reported sales for the quarter, or were otherwise suspect." Indeed, the court observed that the class was "surprisingly light in quantitative evidence that the discounts exceeded what was traditional."
Second, as to the allegation that the defendant delayed disclosing a change in demand, the court concluded that "Section 10(b) is primarily a fraud provision and a showing of either conscious intent to defraud or a high degree of recklessness is required." The class was required to, but could not, offer "evidence of subjective bad intent, or, alternatively, misstatements or omissions so blatantly improper that bad intent or recklessness can be inferred."
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2012 Goodwin Procter LLP. All rights reserved.
