Circuit Narrows Standing Defense in MBS Class Action

The U.S. Court of Appeals for the Second Circuit has put some crucial limits on a standing defense used by banks to knock out billions in mortgage-back securities claims because plaintiffs didn’t invest in the individual offerings—or even tranches—of securities on which they based their allegations. In a unanimous 38-page opinion, the circuit ruled on Sept. 6 that investors can assert class claims that they were duped by misleading claims on offerings in which they didn’t purchase certificates, as long as the offerings were backed by loans from the same set of originators as the certificates in which the plaintiffs actually invested. The decision in NECA-IBEW Health & Welfare Fund v. Goldman Sachs, 11-2762-cv, , written by Judge Barrington Parker (See Profile) and joined by Judges Reena Raggi (See Profile) and Raymond Lohier Jr. (See Profile), resurrects putative class claims over seven separate MBS offerings that were underwritten by Goldman Sachs and issued by GS Mortgage Securities Corp.

The panel also ruled that Goldman must face claims related to different tranches of securities in the same offerings, finding that differing levels of payment priority between tranches do not “raise such a ‘fundamentally different set of concerns’ as to defeat class standing.” And it concluded that even if the relevant MBS trusts didn’t skip payments to investors, the plaintiffs could still establish an injury upon which to plead their claims under §11 of the 1933 Securities Act.