Securities – Mortgage-backed certificates – Credit ratings

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Where defendants charged with violating the Massachusetts Uniform Securities Act have filed a motion to dismiss, the motion must be denied as to claims based on credit ratings.

“Plaintiff Capital Ventures International (‘Capital Ventures’) purchased residential mortgage-backed security (‘RMBS’) pass-through certificates (the ‘Certificates’) from UBS Securities LLC (‘UBS’) between 2004 and 2006. Capital Ventures brings this action against UBS, UBS Real Estate Securities, Inc. (‘UBS Real Estate’) and Mortgage Asset Securitization Transactions, Inc. (‘MASTR’) (collectively, the ‘Defendants’) alleging violations of sections 410(a) and (b) of the Massachusetts Uniform Securities Act (‘MUSA’) arising from material misstatements or omissions regarding the credit quality of the Certificates in registration statements, prospectuses, prospectus supplements and term sheets (the ‘Offering Materials’). …

“… Here, Capital Ventures alleges that UBS knew that the [loan-to-value (LTV) ratios], owner-occupancy and other data on the loans given to the Rating Agencies did not reasonably relate to the true nature of the loans being securitized, knew that the ratings included in the Offering Materials were based on faulty data and thus did not genuinely believe in the ratings. … Another court in this district has considered similar allegations and similarly found In re Bear Stearns [Mortgage Pass-Through Certificates Litigation, 851 F. Supp. 2d 746 (S.D.N.Y. 2012)] to be persuasive and [Plumbers’ Union Local No. 12 Pension Fund v.] Nomura [Asset Acceptance Corp., 632 F.3d 762 (1st Cir. 2011)] to be distinguishable. See Capital Ventures Int’l v. J.P. Morgan Mortg. Acquisition Corp., No. 12-10085-RWZ, 2013 WL 535320, at *5–6 (D. Mass. Feb. 13, 2013). …

“As in J.P. Morgan, Capital Ventures has adequately alleged that UBS knew that the data underlying the credit ratings was faulty and did not relate to the Certificates and thus UBS did not subjectively believe the ratings that were published in the Offering Materials. Capital Ventures has amended its complaint to allege the many stages at which inaccurate data entered the ratings process. … The amended complaint recounts a chronology from the pre-bid investigation period through the final rating stages during which securitizers, including UBS, allegedly supplied inaccurate loan information to the Rating Agencies. …

“… Capital Ventures also alleges that based on UBS’s involvement in the securitization process as the underwriter, it had a duty, in ‘accordance with industry standards’ and its ‘legal obligations,’ to perform due diligence on the loan pool and the originators. … Thus, there are sufficient factual allegations to support an inference of knowledge on UBS’s part because ‘knowledge may be inferred from surrounding circumstances.’ … Accordingly, the allegations regarding UBS’s access to the underlying appraisal data, its duty to conduct due diligence and the results of the [automated valuation model (AVM)], which diverge greatly from the appraisals underlying the LTVs contained in the Offering Materials, create a reasonable inference that the LTV ratios were knowingly understated. …

“Thus, the false data that was given to investors with respect to the Certificates is also alleged to have been ‘used to produce the ratings that formed the basis for the rating-related representations in the Offering Materials.’ … Accordingly, the inclusion of the ratings in the Offering Materials constitutes an actionable misrepresentation and omission. …”

Capital Ventures International v. UBS Securities LLC, et al. (Lawyers Weekly No. 02-402-13) (Casper, J.) (USDC) (Civil Action No. 11-11937-DJC) (July 22, 2013).

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