Ten Years Since the Financial Crisis

2018 Ohio Securities Conference

Bailey Cavalieri LLC • 10 West Broad Street • Suite 2100 • Columbus, OH 43215-3422

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It ain’t what you don’t know

that gets you into trouble.

It’s what you know for sure

that just ain’t so.

-- Mark Twain

What did we know for sure?

Mortgage Loans were well underwritten.

Nobody could get a mortgage without a job or other income.

Rarely if ever would a loan amount exceed the appraised value.

Appraisals were accurate.

The lender cared about collecting on the loan.

What did we know for sure?

Everybody makes their mortgage payments.

A mortgage loan is well-secured.

Issuers provide full and fair disclosure in offering documents.

Rating Agency ratings are reliable.

Credit enhancements are reliable.

Source of this slide and the next slide: NERA, The Subprime Meltdown: A Primer (June 21, 2007)

The Subprime Market: Size

• 21% of all mortgage originations in

2004-2006 were subprime; increased

from 9% in 1996-2004

• At the end of 2006:

• $10 trillion outstanding mortgage debt

• $1.4 trillion was subprime

• $1.08 trillion was securitized

Key Credit-

Crisis Litigation

• Section 11 Jurisdiction

• Cyan v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018)– State Courts maintain concurrent

jurisdiction over putative class actions alleging only violations of the 1933 Act.

Key Credit-

Crisis Litigation

• Section 11 Standing: Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762 (1st Cir. 2011). First Circuit held that representative plaintiffs cannot assert claims involving securities that they did not purchase.

• NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012). Second Circuit reversed District Court and held plaintiff had class standing to assert the claims of purchasers of certificates backed by mortgages originated by the same lenders that originated the mortgages backing the securities purchased by NECA-IBEW “because such claims implicate the same set of concerns as plaintiff’s claims.”

Key Credit-

Crisis Litigation

• Statute of Limitations

• American Pipe and Construction Co. v. Utah, 414 U.S. 538 (1974): the commencement of a putative class action tolls the statute of limitations “as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.”

• CALPERS v. ANZ Securities, Inc., 137 S. Ct. 2042 (2017): American Pipe tolling doctrine does not apply to Section 11’s three-year statute of repose.

Key Credit-

Crisis Litigation

• Section 12(b) of the 1933 Act permits a defendant to seek a reduction in the plaintiff's Section 12 damages equal to the depreciation in value of the security not resulting from the material misstatement or omission at issue.

• Federal Housing Finance Authority v. Nomura Holding America, Inc. 873 F.3d 85 (2017): defendants argued that MBS lost value not because of alleged misstatements or omissions in in the offering materials, but because of a “marketwide economic collapse.” In rejecting this argument, the Second Circuit:– observed that defendants bore the burden of proof – commented that defendants “could break that

causal link only by proving that the risk that caused the loss[es] was [not] within the zone of risk concealed by the misrepresentations and omissions.”

Key Credit-

Crisis Litigation

• Falsity. In re Deutsche Bank AG Securities Litigation, 2016 WL 4083429 (S.D.N.Y July 25, 2016). The court recognized that a reasonable investor “understand[s] that opinions sometimes rest on a weighing of competing facts.” Accordingly, the court held that defendants were not required, to disclose that senior board officials disagreed with the opinion of a more junior employee because “[a] reasonable investor does not expect that every fact known to an issuer supports its opinion statement.”

Key Credit-

Crisis Litigation

• Falsity. Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011). Second Circuit affirmed the dismissal of an action alleging false and misleading statements regarding the company’s goodwill and loan loss reserves because the statements were “opinions, which were not alleged to have falsely represented the speakers’ beliefs at the time they were made.”

Key Credit-

Crisis Litigation

• Falsity. In re CIT Group, Inc. Securities Litigation, 2010 U.S. Dist. LEXIS 57467 (S.D.N.Y. June 10, 2010): court concluded that plaintiffs adequately alleged scienter by alleging that defendants knew about CIT’s lowered lending standards and in some cases affirmatively approved them—while publicly touting the company’s conservative and disciplined approaches.

Key Credit-

Crisis Litigation

• Scienter. In re HomeBanc Corp Securities Litigation, No. 10-12220 (11th Cir. May 24, 2011). “…the facts alleged do not give rise to a strong inference that appellees knew that their statements were fraudulent or were reckless in light of actual knowledge. Rather the stronger inference is that appellees simply failed to predict the eventual collapse of the housing and subprime market, and, as a result, were ill-prepared to respond when the markets crashed.”

Key Credit-

Crisis Litigation

• Rating Agency Litigation

• U.S. District Court S.D. Ohio: “The court finds that the complaint fails to allege that the rating agencies did not believe their ratings.” Aff’d by Sixth Circuit.

• California Appellate Court: “Under certain circumstances, expressions of professional opinion are treated as representations of fact.” CALPERS settled with S&P and Moodys for $255 million.

What’s past is prologue.

-- William Shakespeare

But which past…

Credits: Diagrams on Slides 5 and 6 – NERA, The Subprime Meltdown: A

Primer (June 21, 2007)