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In re IndyMac Mortgage-Backed Securities Litigation

Citations: 286 F.R.D. 226; 2012 WL 3553083Docket: Master Docket No. 09 Civ. 4583 (LAK)

Court: District Court, S.D. New York; August 17, 2012; Federal District Court

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Lead Plaintiffs Wyoming State Treasurer and Wyoming Retirement System are pursuing a putative class action against IndyMac MBS, Inc. regarding mortgage pass-through certificates (the “Certificates”) issued through ten offerings under misleading Offering Documents, violating Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The Court is considering the Lead Plaintiffs’ motion for class certification and related appointments.

Lead Plaintiffs, appointed on July 29, 2009, manage significant financial assets and purchased Certificates traceable to the Registration Statements. Defendants include IndyMac MBS, its former officers, and Underwriter Defendants, comprising six financial institutions involved in the offerings. IndyMac MBS, a subsidiary of IndyMac Bank—closed by the FDIC in 2008—was responsible for the securities covered by the Offering Documents.

The Certificates represent a share of revenue from mortgage loans originated by IndyMac Bank. These loans were pooled and sold to investors, but reports indicate that underwriting standards were abandoned, leading to high-risk loans being approved. As a result, the value of the Certificates has significantly decreased, and they have been downgraded to junk status due to increased defaults among borrowers. The Second Amended Consolidated Complaint (SACC) claims the Offering Documents misrepresented the quality of the underlying loans, making the Certificates riskier than portrayed.

On May 14 and June 29, 2009, the Police and Fire Retirement System of the City of Detroit and Wyoming filed similar class action complaints. The Court appointed Wyoming as the lead plaintiff, consolidated the actions, and Wyoming filed an Amended Consolidated Complaint (ACC) on October 29, 2009. Subsequently, the Court ruled on defendants' motions to dismiss the ACC, allowing claims only related to ten specific offerings in which Wyoming purchased Certificates, thereby limiting the scope of litigation. The allowed claims included Section 11, 12(a)(2), and 15 allegations regarding IndyMac Bank’s underwriting standards. Other plaintiffs, the City of Philadelphia Board of Pensions and Retirement and Detroit, sought to intervene regarding offerings not purchased by Wyoming, and the Court permitted partial intervention for three additional offerings. The lead plaintiffs filed a Second Amended Consolidated Complaint (SACC) on August 15, 2011, adding Philadelphia and Detroit as plaintiffs-intervenors without altering the substance of the allegations.

Wyoming is now seeking to certify a class composed of individuals or entities that acquired beneficial interests in Certificates from ten offerings linked to IndyMac MBS Registration Statements from February 24, 2006, and February 14, 2007, and who sustained damages. Wyoming also requests to be designated as class representatives and seeks approval of its counsel, Berman DeValerio, as class counsel. Defendants oppose this motion, arguing Wyoming has not met the predominance and superiority requirements of Rule 23(b)(3). 

Before certifying a class, a district court must conduct a thorough analysis to ensure compliance with Rule 23(a) and Rule 23(b)(3) standards, addressing factual disputes relevant to each requirement. The burden lies with the moving party to demonstrate compliance by a preponderance of the evidence. Courts have noted that claims under Sections 11, 12(a)(2), and 15 of the Securities Act are particularly suitable for class action certification. The prerequisites for class certification include numerosity, commonality, typicality, and adequacy of representation.

Numerosity is met as the class consists of at least 714 unique investors, significantly exceeding the presumption of 40 members. Despite some offerings having fewer than 40 investors, class certification is justified due to impracticality in joinder and the substantial number of class members. The requirements of commonality, typicality, and adequacy of representation are closely related. Commonality is satisfied because all investors share a common issue regarding alleged misrepresentations in the prospectus. Typicality is established as all claims arise from similar wrongful acts by the defendants, and adequacy is ensured as plaintiffs' interests align with the class and their attorneys are competent. Plaintiffs allege that IndyMac Bank engaged in misleading practices concerning mortgage loans, asserting that the Offering Documents contained material misstatements and omissions. Defendants contest these requirements, arguing lack of standing for a named plaintiff regarding one offering, unique defenses arising from investment delegation, and unique issues related to materiality and damages. Previous cases have upheld similar claims as meeting the required standards.

Wyoming lacks standing to pursue claims related to the INDX 2006-AR11 offering due to its purchase of AR11 Certificates in the secondary market, ten months after the initial offering, which disqualifies it from bringing a Section 12(a)(2) claim. The court has previously ruled Wyoming is time-barred from pursuing a Section 11 claim for this offering, resulting in no valid claims under either section. Consequently, all claims related to AR11 are dismissed, although this does not impact class certification for the other nine offerings.

Additionally, Wyoming's delegation of investment decisions to advisors raises unique defenses but does not undermine the commonality, typicality, or adequacy required for class representation. The nature of the claims remains intact despite potential variances in investor knowledge or unique issues concerning materiality and damages, which can be proven generically. Materiality in Securities Act claims relies on generalized proof, and damages are calculated using a statutory formula, meaning differences in damages do not obstruct class certification.

Under Rule 23(b)(3), class-wide issues must predominate, which occurs when common legal or factual questions surpass individualized ones. While a rigorous standard, predominance does not necessitate the absence of individual issues. A court evaluates whether liability issues are common among class members; if so, these commonalities prevail over individual questions, considering both affirmative claims and potential defenses.

To establish a claim under Section 11 of the Securities Act, a plaintiff must demonstrate: 1) purchase of a registered security, directly from the issuer or in the aftermarket, 2) the defendant's participation in the offering sufficient to incur liability, and 3) the registration statement contained a material misstatement or omission. For Section 12 claims, the plaintiff must show: 1) the defendant is a 'statutory seller', 2) the sale was made via a prospectus or oral communication, and 3) this communication included a material misstatement or omission. Section 12 allows recovery against any 'statutory seller', while Section 11 targets 'offering participants'. Liability under both sections is strict but limited in scope. Section 15 liability is derivative of Sections 11 and 12; if a plaintiff lacks a valid Section 11 or 12 claim, a Section 15 claim fails. Defendants may raise several defenses: a claim will fail if the defendant proves the plaintiff was aware of the misstatement or omission at the time of acquiring the security or had notice of it more than a year prior to filing. Additionally, if the plaintiff acquired the security after the issuer released an earnings statement covering at least 12 months post-registration, the burden shifts to the plaintiff to demonstrate reliance on the misstatement or omission. Underwriters can avoid liability by showing due diligence and reasonable belief that their statements were accurate and complete. Lastly, defendants may assert that the decline in a security's value resulted from factors unrelated to the alleged misstatements or omissions.

Wyoming argues that predominance in this case is established because the Second Amended Class Complaint (SACC) claims violations of Sections 11 and 12(a)(2) of the Securities Act, requiring proof that defendants made material untrue statements or omissions. These issues can be addressed on a class-wide basis. Defendants contend that individual issues concerning investor knowledge, notice implicating the statute of limitations, and reliance on trustee reports undermine predominance, citing precedents from Tsereteli and New Jersey Carpenters Health Fund, which denied class certification due to failure to meet predominance requirements.

The defendants claim that certain class members had knowledge of the alleged misstatements when purchasing their Certificates and that individual notice issues could arise post-purchase, impacting the statute of limitations. They assert that the plaintiffs provide insufficient evidence on investor knowledge, which is an affirmative defense rather than a claim element. To challenge predominance, defendants must show that varying levels of knowledge among class members outweigh common issues. They suggest that many class members were sophisticated investors, had investment advisors, or were aware of the declining underwriting standards in the mortgage-backed securities (MBS) market.

However, the argument that sophistication negates predominance is weak. While some members may have recognized general issues in the MBS sector, this does not prove they were aware of specific misstatements or omissions regarding IndyMac Bank’s adherence to underwriting standards for the Certificates in question. The evidence only indicates a general understanding of declining investment quality, not specific knowledge of misleading statements in the Offering Documents.

Defendants assert that news articles and lawsuits in other jurisdictions provide class members with knowledge of misleading statements in the Offering Documents related to IndyMac Bank. However, these sources do not specifically address the Certificates or the claims in the SACC. The cited lawsuits either involve unrelated allegations against prospective class members or refer to IndyMac Bank's underwriting practices without connecting them to material misstatements regarding the Certificates. The court notes that the available evidence does not indicate that class members had actual or constructive knowledge of these alleged misstatements.

Regarding reliance, Section 11 plaintiffs typically enjoy a presumption of reliance on false statements in offering documents. However, this presumption is negated if a plaintiff acquires the security after the issuer has released an earnings statement for a period exceeding 12 months from the registration statement's effective date. Defendants claim the class includes investors who purchased certificates in 2008 and 2009, suggesting they must demonstrate reliance on trustee reports. The court counters that the defendants' argument is flawed, as only specific reports qualify as earnings statements under the statute. Consequently, the defendants have not demonstrated that any class member forfeited the presumption of reliance.

Defendants contend that individual issues of damages and liability predominate due to the issuance of various Certificates under different Offering Documents and underwriting guidelines. They argue that each Certificate, backed by distinct loan groups, may have experienced deviations from underwriting standards, necessitating individualized assessments to determine if the offering documents contained misleading statements. However, the plaintiffs assert that the disclosures are uniform and have similarly affected all offerings. Defendants fail to demonstrate significant differences in underwriting guidelines, and their expert acknowledged the presumption of consistency across loans. Evidence provided by the plaintiffs shows that misleading statements regarding underwriting standards were substantially similar, suggesting a common issue that supports class certification.

Regarding materiality, defendants claim individualized issues exist, but materiality should be assessed objectively, based on whether the defendants' representations would mislead a reasonable investor, which is a common issue. 

Defendants also argue that the presence of different underwriters for the offerings creates unique due diligence questions. However, these questions pertain to defenses unique to each underwriter and do not require separate proof from each class member, as common legal and factual questions still predominate.

Lastly, defendants assert that loss causation and damages calculations present individualized issues that challenge class predominance. Nonetheless, courts have found that individualized damages calculations do not preclude class certification, and previous rulings indicate that loss causation does not defeat predominance either. The Court concludes that common issues significantly outweigh any individual considerations in this case.

Wyoming must demonstrate that a class action is the superior method for resolving the dispute, focusing on several considerations: the interests of class members in controlling their own actions, the current litigation status concerning the controversy, the advantages or disadvantages of consolidating claims in a specific forum, and the challenges of managing a class action. Generally, securities lawsuits meet the superiority requirement of Rule 23 effectively. Individual actions would be inefficient, particularly for smaller investors who lack the resources to file separate lawsuits. Notably, no investors have initiated individual claims since the Court's prior opinion; instead, they have sought to intervene in the class action. 

The defendants contest the superiority of a class action, citing the presence of 'sophisticated and/or institutional investors' among the prospective class members and the inclusion of foreign entities. However, the mere existence of these investors does not negate the class action's superiority. Additionally, without specifying which foreign entities might not recognize preclusive effects, the defendants' argument is deemed weak. The Court finds that consolidating the dispute into a class action is beneficial, mitigating the risk of inconsistent judgments and promoting judicial efficiency. The Court perceives no significant management difficulties beyond those typical of complex litigation with substantial financial stakes.

Consequently, Wyoming's motion for class certification and appointment as class representative and class counsel is granted, with the exception of the INDX 2006-AR11 offering, which is dismissed. Relevant offering documents, including registration statements and prospectuses, are referenced for further details.

Dr. Steven P. Feinstein's Rebuttal Report highlights discrepancies in the defendants' expert testimony regarding the number of investors in the INDX 2006 AR-15 offering. Dr. Torous claimed there were "39 distinct investors," but this number excluded "18 transactions" that could reveal additional investors. An analysis identified 22 class members who purchased the INDX 2006-AR 11, suggesting that it could have as many as 40 members. However, Wyoming lacks standing to assert claims related to INDX 2006 AR-11, leading to the dismissal of those claims. Courts have consistently rejected the argument that numerosity must be proven on a tranche-by-tranche basis, as seen in various cases, establishing that class certification should not be undermined by such a requirement. The courts have emphasized that the criteria for class action maintenance are designed to ensure economic efficiency and adequate protection of class members' interests. The commonality and typicality requirements under Rule 23(a) are closely related and can often be met by demonstrating a single common question. Based on precedent, the plaintiffs' claims regarding omissions and misrepresentations in Offering Documents were found to be substantially similar, supporting their arguments for class certification.

Exhibits C and D reference several cases addressing class certification and standing under the Securities Act. Notably, the case of *N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc.* found that while Rule 23(a) requirements were satisfied, Rule 23(b)(3) requirements were not. The standing under Section 12(a)(2) is limited to individuals who purchased securities directly from the underwriting defendants during the public offerings, excluding those who acquired them in the secondary market, as established in *Pub. Emps. Ret. Sys. v. Merrill Lynch Co., Inc.*, and *In re Sterling Foster Co., Inc. Sec. Litig.* The *IndyMac I* case highlighted that Wyoming only had standing to pursue Section 12(a)(2) claims regarding specific securities, which negated any claims under Section 15 that require a viable Section 11 or Section 12 claim. 

Materiality of misstatements is evaluated through an objective standard, determining if a reasonable investor would find the misstatement significant in light of cautionary language provided, as referenced in *Rombach v. Chang*. The plaintiffs assert that the same misstatements are misleading for all tranches of the offering. The damages recoverable under Section 77k(a) can be calculated based on the difference between the purchase price and the security's value at the time of the lawsuit, or its market price at disposal. 

Concerns regarding commonality, typicality, and adequacy of representation under Rule 23(a) are noted, with the adequacy requirement also addressing class counsel competency and potential conflicts of interest. The Court remains unpersuaded by defendants' claims that Wyoming is an inadequate representative, citing that differences in legal approaches and settlement strategies among class members are largely speculative and not sufficient grounds for denying class certification.

Conflicts among class members during settlement or damage stages do not necessitate denial of class certification, as established in UFCW Local 1776 v. Eli Lilly Co. and other precedents. Individual issues are common in class actions, and dismissing a class due to secondary issues would undermine the enforcement of securities laws. Courts must evaluate potential defenses when assessing predominance requirements. Plaintiffs under Sections 11 and 12(a)(2) are not required to prove scienter, reliance, or loss causation. Section 15 holds that individuals controlling liable parties under Sections 11 or 12 are also jointly liable. The liability under Section 11 is generally absolute unless the defendant shows that the plaintiff was aware of the misstatement at the time of acquisition. Recovery rights are conditioned on plaintiffs acquiring securities based on untrue statements without knowledge of omissions, and reliance does not necessitate proof of having read the registration statement. Defendants carry the burden of proving any damages claimed are unrelated to the misrepresentation or omission, as the risk of uncertainty lies with them, not the plaintiffs.

A defendant can raise an affirmative defense if the seller of a security demonstrates that any recoverable amount does not solely represent depreciation due to misleading statements in the prospectus or oral communications. This defense involves multiple elements, including proving falsity, materiality, due diligence, causation, and damages. Both Sections 11 and 12(a)(2) of the Securities Act have a one-year statute of limitations starting from when a plaintiff discovers, or should have discovered, any untrue statements or omissions. In cases where individual investor knowledge affects the predominance of common issues, specific statements by class members can defeat class certification. However, courts tend to rule that varying degrees of investor knowledge may not be sufficient to create significant individual issues. The sophistication of investors does not equate to their actual knowledge of false statements in offering documents. Moreover, to trigger a duty of inquiry, warnings must directly relate to the misrepresentations or omissions that form the basis of the claims.

In Carpenters Health Fund v. Rali Series 2006-QO1 Trust, the Second Circuit addressed an appeal regarding class certification in a securities class action involving Goldman Sachs. The defendants contested the class certification based on arguments they believed mirrored those in NJ Carpenters. The court noted the ambiguity in the legal standard for predominance due to individualized knowledge defenses, with defendants asserting that a finding of predominance could be undermined if certain class members had knowledge of relevant information. However, the court found this issue irrelevant to the current motion's outcome, concluding that the defendants failed to adequately demonstrate that any knowledge or notice defense could defeat the predominance requirement under 15 U.S.C. 77k(a).

The parties acknowledged that all offerings in question were supported by a single loan pool. Expert reports indicated that while underwriting guidelines for mortgage loans may differ, the underwriting guidelines for the loans at issue were presumed consistent. Allegations of misstatements and omissions in the offering documents were shown to be similar across different offerings, and it was asserted that IndyMac Bank did not adhere to its stated underwriting guidelines, which affected the expected cash flow and value of the securities involved. The court highlighted that cross-collateralization of the offerings meant that the performance of individual loans could impact the value of MBS certificates associated with various loan groups, reinforcing the interconnectedness of the claims.

In Sys. of Miss. v. Goldman Sachs Grp. Inc., a class was certified for purchasers of three offerings, highlighting that similar statements in offering documents are sufficient grounds for class certification despite unique statements for individual offerings. In Pub. Emps. v. Merrill, a class was certified for eighteen offerings based on substantially similar statements relevant to the complaint. The concept of materiality is clarified, stating it hinges on the likelihood that omitted facts would alter a reasonable investor's view of the total information mix. Loss causation serves as a defense in claims under Sections 11 and 12(a)(2), requiring defendants to demonstrate a lack of causal link between misstatements and losses. No cases were found where loss causation has precluded Rule 23(b)(3) class certification. Although larger institutional investors can pursue individual claims, smaller investors may lack the resources to do so, supporting the case for class actions. Courts possess tools under Rule 23 to manage class actions effectively, including the ability to amend class certifications and establish subclasses.