Narrative Opinion Summary
In a lawsuit initiated by the Federal Housing Finance Agency (FHFA) against financial institutions including Nomura and RBS, the plaintiffs allege material misrepresentations in offering documents for residential mortgage-backed securities (RMBS) purchased by government-sponsored enterprises (GSEs) between 2005 and 2007. The legal proceedings focus on whether the defendants can claim defenses under the Securities Act, specifically due diligence and reasonable care, for their roles in the securitizations. The court found that neither Nomura nor RBS conducted a reasonable investigation into the accuracy of the loan representations. Nomura's due diligence processes were insufficient, failing to verify the accuracy of the offering documents and neglecting red flags such as high kick-out rates in loan pools. RBS relied heavily on Nomura's inadequate reviews without conducting its own independent investigations. The court granted FHFA's motion for partial summary judgment, ruling that the defendants cannot invoke due diligence defenses, thus holding them strictly liable for the alleged misrepresentations under Sections 11 and 12(a)(2) of the Securities Act and related Blue Sky Laws. The outcome emphasizes the stringent requirements for due diligence in securities offerings, particularly for affiliated and unaffiliated underwriters.
Legal Issues Addressed
Assessment of Due Diligence Under Securities Act Sections 11 and 12(a)(2)subscribe to see similar legal issues
Application: Nomura's pre-acquisition due diligence was insufficient to establish a reasonable investigation, failing to verify the accuracy of the Offering Documents.
Reasoning: Nomura failed to perform due diligence on the 15,000 loans within the supporting loan groups, despite having previously purchased these loans.
Materiality of Misrepresentations and Omissionssubscribe to see similar legal issues
Application: The court found that the significance of the misrepresentations was clear enough that reasonable minds could not disagree, warranting summary judgment.
Reasoning: The materiality of misrepresentations or omissions can be resolved via summary judgment if their significance is so clear that reasonable minds could not disagree.
Role and Responsibility of Underwriters in Securities Offeringssubscribe to see similar legal issues
Application: RBS, acting as an underwriter, failed to conduct adequate due diligence and relied on incomplete or insufficient reviews from Nomura.
Reasoning: RBS, as the sole lead underwriter for three Securitizations and co-lead for another, also failed to adequately test the accuracy of representations regarding the SLGs.
Strict Liability for Material Misrepresentations Under Securities Actsubscribe to see similar legal issues
Application: Nomura and RBS are held strictly liable for material misrepresentations unless they can prove statutory defenses related to due diligence and reasonable care.
Reasoning: Nomura and RBS are held strictly liable for material misrepresentations unless they can prove statutory defenses related to due diligence and reasonable care under the Securities Act and Blue Sky Laws.
Summary Judgment on Due Diligence Defensesubscribe to see similar legal issues
Application: The court granted summary judgment in favor of FHFA, finding that neither Nomura nor RBS could demonstrate a reasonable investigation or exercise due care.
Reasoning: The adequacy of a due diligence program is typically assessed during a trial, but in this case, summary judgment is deemed appropriate based on the existing record.