Fed. Hous. Fin. Agency v. Royal Bank of Scotland Grp. PLC

• Decision Date: 17 August 2012
• Docket Number: Civ. No. 3:11-cv-01383(AWT)
• Parties: FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, v. THE ROYAL BANK OF SCOTLAND GROUP PLC, et al., Defendants.
• Court: U.S. District Court — District of Connecticut

FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL

NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN

MORTGAGE CORPORATION, Plaintiff,

v.THE ROYAL BANK OF SCOTLAND GROUP PLC, et al., Defendants.

Civ. No. 3:11-cv-01383(AWT)

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

Date: August 17, 2012

ORDER RE MOTION TO COMMENCE DISCOVERY

The plaintiff, Federal Housing Finance Agency ("FHFA"), brought this action as conservator for the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), against Royal Bank of Scotland Group PLC, RBS Holdings USA, Inc., RBS Securities, Inc., RBS Financial Products, Inc., RBS Acceptance, Inc., Financial Asset Securities Corp., Joseph N. Walsh, Carol P. Mathis, Robert J. McGinnis, John C. Anderson, and James M. Esposito, alleging, inter alia, violations of the federal securities laws. On December 2, 2011, the defendants moved to dismiss the complaint, and on March 2, 2012 they moved to dismiss the plaintiff's amended complaint.

The Private Securities Litigation Reform Act ("PSLRA")provides that: "In any private action arising under this chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss. . . ." 15 U.S.C. § 78u-4(b)(3)(B). The parties disagree as to whether this provision applies to this action, and the plaintiff has filed a motion to commence discovery. The defendants contend that the PSLRA's automatic stay applies here because the plaintiff is bringing private causes of action under the federal securities laws, and is prosecuting this action as conservator for Fannie Mae and Freddie Mac, which are private corporations rather than government actors. In the alternative, the defendants argue that even if the automatic stay of discovery under the PSLRA did not apply to this case, a stay should be granted under Federal Rule of Civil Procedure 26(c).

For the reasons set forth below, the motion is being granted.

Factual Background

Fannie Mae was established in 1938 as a federal agency and was converted into a private corporation in 1968. Freddie Mac was created as an alternative to Fannie Mae to make the secondary mortgage market more competitive and efficient. "Both firms are structured as private corporations, but they are federally chartered and play an important role in the national housing market by making it easier for home buyers to obtain loans."Judicial Watch, Inc. v. Fed. Hous. Fin. Agency, 646 F.3d 924, 926 (D.C. Cir. 2011).

In July 2008, in response to the crisis in the housing and mortgage market, Congress passed the Housing and Economic Recovery Act of 2008 ("HERA"), creating the FHFA. See Pub. L. No. 110-289 § 1101, 122 Stat. 2654 (codified at 12 U.S.C. § 4511). The HERA granted the director of the FHFA conditional authority to place regulated entities, including Fannie Mae and Freddie Mac, into conservatorship and/or receivership "for the purpose of reorganizing, rehabilitating, or winding up [their] affairs." 12 U.S.C. § 4617(a); see also id. § 4616. On September 6, 2008, the Director of the FHFA placed Fannie Mae and Freddie Mac under the FHFA's temporary conservatorship with the objective of stabilizing the institutions so they could return to their normal business operations. In its capacity as conservator of a regulated entity, the FHFA has "all rights, titles, powers, and privileges of the regulated entity, and of any stockholder, officer or director of such regulated entity with respect to the regulated entity and the assets of the regulated entity." 12 U.S.C. § 4617(b)(2)(A)(i).

HERA included an explicit limitation the ability of courts to review actions of FHFA in its capacity as conservator: "[N]o court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or areceiver." 12 U.S.C. § 4617(f). See also Kuriakose v. Fed. Hous. Loan Mortg. Co., 674 F. Supp. 2d 483, 493 (S.D.N.Y. 2009) ("The court lacks jurisdiction to adjudicate matters which may restrict the FHFA's ability to exercise these powers.").

This Action is Not a Private Action Under the PSLRA

The PSLRA provides that "[i]n any private action arising under this chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, . . . ." (emphasis added). 15 U.S.C. § 78u-4(b)(3)(B). Congress enacted the PSLRA to address "a perceived need to deter strike suits wherein opportunistic private plaintiffs file securities fraud claims of dubious merit in order to exact large settlement recoveries." Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000). In Congress's view, such actions "unnecessarily increase the cost of raising capital and chill corporate disclosure." S. Rep., 104-98 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 683. Congress also enacted the PSLRA after "identif[ying] ways in which the class-action device was being used to injure 'the entire U.S. economy.'" Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006) (quoting H.R. Rep. No. 104-369 (1995), at 31). "In response to perceived abuse of the class action device in litigation involving nationally traded securities, Congress enacted the Private Securities Litigation Reform Act ('PSLRA'), 15 U.S.C. §§ 77z-1; 78u-4." Backus v. Connecticut Cmty. Bank,N.A., Civ. No. 3:09-CV-1256, 2009 WL 5184360 (D. Conn. Dec. 23, 2009).

The plaintiff observes, correctly, that these concerns are not implicated here. In this case, the plaintiff is a government agency, not a private party, and this is not a class action. Rather, FHFA is bringing this action pursuant to its Congressional authorization under HERA to pursue claims as conservator for Fannie Mae and Freddie Mac. Therefore, the concerns motivating Congress in enacting the PSLRA are not present here.

The defendants contend that, nonetheless, FHFA has brought a "private action" under the PSLRA because the FHFA has asserted "private causes of action" under the Securities Act. However, courts have refused to apply the PSLRA to causes of action that are available to private plaintiffs in cases where the suit was filed by the SEC. See In re Reserve Fund Sec. & Derivative Litig., 732 F. Supp. 2d 310, 317-19 (S.D.N.Y. 2010) (holding that when the SEC brought suit under Section 10(b) and Rule 10b-5, the PSLRA did not apply to the action); Sec. & Exch. Comm'n v. Pentagon Capital Mgmt. PLC, 612 F. Supp. 2d 241, 263-64 (S.D.N.Y. 2009) (same). Like the SEC, the FHFA is an independent federal agency. See 12 U.S.C. § 4511(a) (providing that the FHFA is an"independent agency of the Federal Government").¹

The holdings in these cases reinforces the conclusion, suggested by discussion in numerous other cases, that the material distinction for purposes of determining whether an action is a "private action" under the PSLRA is the nature of the plaintiff, not the nature of the causes of action. In Tellabs, Inc. v. Makor Issues & Rights, Ltd., a case decided after the enactment of the PSLRA, the Court noted: "This Court has long recognized that meritorious private actions to enforce federal antifraud securities laws are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by the Department of Justice and the Securities and ExchangeCommission (SEC)." 551 U.S. 308, 313 (2007). This was not a new distinction. See Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985) ("[W]e repeatedly have emphasized that implied private actions provide 'a most effective weapon in the enforcement' of the securities laws and are 'a necessary supplement to Commission action.'") (quoting J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964)); Aaron v. Sec. & Exch. Comm'n, 446 U.S. 680, 718, n.9 (1980) (Blackmun, J, concurring in part and dissenting in part) ("In reliance on the different purposes of Commission enforcement proceedings and private actions, Congress enacted § 21(g) of the Act, § 15 U.S.C. 78u(g), which provides that, absent consent from the Commission, private actions may not be consolidated with Commission proceedings."); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 337 n.24 (1979) ("The Securities Exchange Act of 1934 provides for prompt enforcement actions by the SEC unhindered by parallel private actions. 15 U.S.C. § 78u(g)."); Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341, 356 (2d Cir. 1973) ("In J.I. Case Co. v. Borak, 377 U.S. 426 (1964), the Supreme Court emphasized that private actions provide 'a necessary supplement to Commission action' and that 'the possibility of civil damages or injunctive relief serves as a most effective weapon in the enforcement' of the securities laws.") (quoting Borak, 377 U.S. at 432); Sec. & Exch. Comm'n v. Texas Gulf Sulphur Co., 401 F.2d833, 854 (2d Cir. 1968) ("[W]hether the case before us is treated solely as an SEC enforcement proceeding or as a private action, proof of a specific intent to defraud is unnecessary.") (footnote omitted).

Also, in SEC v. Prater, which was an enforcement action, the court concluded that "[s]ince actions brought by the SEC are not considered 'private litigation,' the standard imposed in the PSLRA for pleading scienter does not apply to the SEC." 296 F. Supp. 2d 210, 215 (D. Conn. 2003). The court observed that "the securities laws apply differently to the SEC than they do to a private plaintiff, because Congress designated the SEC as 'the primary enforcement agency for the securities laws.'" Id. (quoting Sec. & Exch. Comm'n v. Rana Research, 8 F.3d 1358, 1364 (9th Cir. 1993)). Other courts in the Second Circuit have reached the same conclusion. See, e.g., In re Reserve Fund. Sec. & Derivative Litig., 732 F. Supp. 2d 310, 318 (S.D.N.Y. 2010) ("The PSLRA applies only to private actions, not to actions filed by the Commission."); Sec. & Exch. Comm'n v. Pentagon Capital Mgmt. PLC, 612 F. Supp. 2d 241, 263-64 (S.D.N.Y. 2009) ("By the terms of the PSLRA, its...