Grewal v. Credit Suisse Securities (USA) LLC

• Decision Date: 17 June 2021
• Docket Number: MER-C-137-13
• Parties: GURBIR S. GREWAL, ATTORNEY GENERAL OF THE STATE OF NEW JERSEY, ON BEHALF OF AMY G. KOPLETON, DEPUTY CHIEF OF THE NEW JERSEY BUREAU OF SECURITIES, Plaintiff, v. CREDIT SUISSE SECURITIES (USA) LLC, CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP., AND DLJ MORTGAGE CAPITAL, INC. Defendants.
• Court: New Jersey Superior Court — Appellate Division

GURBIR S. GREWAL, ATTORNEY GENERAL OF THE STATE OF NEW JERSEY, ON BEHALF OF AMY G. KOPLETON, DEPUTY CHIEF OF THE NEW JERSEY BUREAU OF SECURITIES, Plaintiff,

v.
CREDIT SUISSE SECURITIES (USA) LLC, CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP., AND DLJ MORTGAGE CAPITAL, INC. Defendants.

No. MER-C-137-13

Superior Court of New Jersey, Appellate Division, Mercer

June 17, 2021

NOT FOR PUBLICATION WITHOUT APPROVAL OF THE COMMITTEE ON OPINIONS

Thomas E. Redburn, Jr., Esq., argued the cause for Plaintiff, Gurbir S. Grewal, Attorney General of the State of New Jersey, on Behalf of Amy G. Kopleton, Deputy Chief of the New Jersey Bureau of Securities (Lowenstein Sandler LLP, attorneys; Christopher S. Porrino, Esq., of counsel and on the briefs, Thomas E. Redburn, Jr., Esq., Zachary D. Rosenbaum, Esq., Jennifer Florica Delgado, Esq., Ryan M. Wilson, Esq., Peter Slocum, Esq., Kent D. Anderson, Esq., Rachel K. Warren, Esq., Jarrett R. Schindler, Esq., Brian F. McDonough, Esq., Assistant Attorney General, Toral M. Joshi, Esq., Brian De Vito, Esq., Nicholas Dolinsky, Esq., Deputy Attorney Generals, on the briefs).

Richard A. Jacobsen, Esq. (pro hac vice), argued the cause for Defendants, Credit Suisse Securities (USA) LLC, DLJ Mortgage Capital, Inc., and Credit Suisse First Boston Mortgage Securities Corp. (Orrick, Herrington, & Sutcliffe LLP, Dughi, Hewit & Domalewski, P.C., attorneys; Elyse Echtman, Esq. (pro hac vice), of counsel, Richard A. Jacobsen, Esq., John Ansbro, Esq. (pro hac vice), Paul F. Rugani, Esq. (pro hac vice), Daniel A. Rubens, Esq. (pro hac vice), Barry S. Levin, Esq. (pro hac vice), and Craig A. Domalewski, Esq., on the briefs).

Vincente Martinez, Esq., argued the cause for the North American Securities Administrators Association, Inc. (amicus curiae) (Patterson Belknap Webb & Tyler LLP, attorney; Peter C. Harvey, Esq., of counsel and on the briefs).

Daniel P. D'Alessandro, Esq. argued the cause for the New Jersey Chamber of Commerce (amicus curiae) (McCarter & English, LLP, attorney; David R. Kott, Esq., of counsel and on the briefs).

OPINION DENYING MOTION FOR PARTIAL SUMMARY JUDGMENT FILED BY CREDIT SUISSE

Jacobson, A.J.S.C.

I. Introduction

This case involves a civil enforcement action brought by the Attorney General of the State of New Jersey on behalf of the New Jersey Bureau of Securities ("Bureau") against Defendants, DLJ Mortgage Capital, Inc. ("DLJ"), Credit Suisse First Boston Mortgage Securities Corp. ("First Boston"), and Credit Suisse Securities (USA) LLC ("Credit Suisse USA") for violations of the New Jersey Uniform Securities Law ("NJUSL") in connection with the offer and sale of certificates ("Certificates") from thirteen different residential mortgage-backed securities ("RMBS") trusts: the Home Equity Asset Trusts ("HEAT") 2006-4, 2006-5, 2006-7, 2006-8, 2007-1, 2007-2, and 2007-3, as well as the Home Equity Mortgage Trusts ("HEMT") 2006-4, 2006-5, 2006-6, 2007-1, and 2007-2. (Defs.' Statement of Facts [DSF] ¶ 1 n.1; Pl.'s Counterstatement of Facts [PCSF] ¶¶ 3-4). Certificates in these HEAT and HEMT trusts were sold between May 1, 2006 and April 30, 2007. (DSF ¶ 1; PCSF ¶ 4).

The Bureau brings two causes of action under the New Jersey Uniform Securities Act, N.J.S.A. 49:3-47 et seq. ("NJUSL"), against the defendants. In Count One, the Bureau alleges that Credit Suisse engaged in various offers and sales of "toxic RMBS" to investors in violation of N.J.S.A. 49:3-52(b), which prohibits regulated parties from making "any untrue statement of a material fact or [] omit[ting] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading." (Am. Compl. ¶¶ 146-51). In Count Two, the Bureau alleges that these same transactions violated N.J.S.A. 49:3-52(c), which prohibits persons from "engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person." (Am. Compl. ¶¶ 152-53). The Bureau seeks various forms of relief, including: (i) enjoining Credit Suisse from future violations of the NJUSL; (ii) rescission; (iii) restitution; (iv) disgorgement; and (v) civil monetary penalties under N.J.S.A. 49:3-70.1. (Am. Compl. 56-57).

The Bureau has brought a motion for partial summary judgment to strike various defenses raised by Credit Suisse. That motion for partial summary judgment is addressed in a separate opinion, although both motions were argued together on the same date. In addition to opposing the Bureau's motion, Credit Suisse brings its own motion for partial summary judgment seeking to dismiss certain securities transactions involving seven investors from this enforcement action: (i) AB Global Bond Fund, Inc. and Alliance Capital Management Corp. ("AllianceBernstein"); (ii) Barclays Capital, Inc. ("Barclays"), (iii) Blackrock Strategic Global Bond Fund, Inc. ("Blackrock"); (iv) Goldman Sachs & Co. ("Goldman"), (v) Harding Advisory LLC ("Harding"), (vi) Merrill Lynch & Co., Inc. ("Merrill Lynch"), and (vii) Mizuho Securities USA ("Mizuho")(collectively, "Seven Investors"). (Defs.' Supp. & Opp'n Br. 13-15).

Essentially, Credit Suisse is seeking to dismiss with prejudice the Bureau's claims to the extent that they are based on offers or sales of residential mortgage-backed securities that took place outside of New Jersey. The Bureau opposes the motion, claiming not only that there are disputed facts of record preventing the court from granting the relief sought by Defendants, but also that the legal underpinnings of Credit Suisse's arguments misconstrue the applicable statutes and constitutional law. Once again, the parties bring a motion that requires the court to closely examine the language, purpose, and scope of the NJUSL, this time joined to a claim that the Bureau's efforts to reach the disputed transactions violate the extraterritorial principle of the Dormant Commerce Clause. While Credit Suisse admits that the NJUSL applies to offers of securities directed to and received in New Jersey, Defendants seek partial summary judgment dismissing the claims involving the designated investors whose purchases exceed $700 million, a substantial percentage of the investments that the Bureau has included in this enforcement action. Credit Suisse asserts that the Bureau's efforts to reach the transactions involving these investors fall outside of its jurisdiction under the NJUSL. Despite the Bureau's opposition to the motion based on disputed facts, Credit Suisse claims that its motion for partial summary judgment addresses matters of statutory construction and constitutional law based on undisputed facts, and that its arguments on the law require the court to drastically limit the scope of the Bureau's complaint.

II. Facts

A. The Defendants and Their Roles

Defendant Credit Suisse Securities is a Delaware limited-liability company with its principal place of business at 11 Madison Avenue, New York, New York 10010. (DSF ¶ 2; Pl.'s Resp. ¶ 2). Defendant DLJ is a Delaware corporation with its principal place of business at 11 Madison Avenue, New York, New York 10010. (DSF ¶ 4; Pl.'s Resp. ¶ 4). As the "sponsor," DLJ was tasked with acquiring loans subsequently sold to First Boston. (DSF ¶ 4; Pl.'s Resp. ¶ 4). DLJ primarily acted as the "sponsor" of HEAT and HEMT, which meant that it acquired the loans underlying the RMBS. (PCSF ¶ 84; McDonough Certification ("Cert.") ¶¶ 33, 35, Ex. 32 [CSNJAG003406818], Ex. 34; Domalewski Cert. ¶¶ 8, 32, Ex. 7 [Grice R. & R. ¶¶ 31-32, 36], Ex. 31 [24-30]). The sponsor would later sell the loans to the "depositor." (McDonough Cert. ¶ 34, Ex. 33 [CSNJAG003403132]). Defendant Credit Suisse First Boston is a Delaware corporation with its principal place of business at 11 Madison Avenue, New York, New York 10010. (DSF ¶ 5; Pl.'s Resp. ¶ 2). With regard to the relevant RMBS, First Boston acted as the "depositor," which meant that it would establish trusts, such as HEAT and HEMT, place loans in those trusts, and sell Certificates in those trusts. (McDonough Cert. ¶ 33, 156, Ex. 32 [CSNJAG003406818], Ex. 155 [S-36]). Defendants Credit Securities USA, First Boston, DLJ and non-party Credit Suisse Financial Corporation (CSFC) all had "activities or operations" in an office in Princeton, New Jersey. (Domalewski Cert. ¶ 14, Ex. 13 [R&O No. 13]). All three defendants are subsidiaries of Credit Suisse (USA), Inc., which is itself a wholly owned subsidiary of Credit Suisse Group AG.

B. Background: The RMBS Group and the Loan-Acquisition to Sale Process

The Credit Suisse RMBS Group created and sold residential mortgage-backed securities ("RMBS") through a "unitary process" that utilized DLJ, First Boston, and Credit Suisse USA (collectively, "Credit Suisse"). (Domalewski Cert. ¶ 8, Ex. 7 [Grice R. & R. ¶¶ 35-37, 99], Ex. 13; McDonough Cert. ¶ 20, Ex. 19 [Shev R. & R. ¶¶ 49-56]). First, Credit Suisse would acquire residential mortgage loans (PCSF ¶ 84; McDonough Cert. ¶ 35, Ex. 34; Domalewski Cert. ¶¶ 8, 32, Ex. 7 [Grice R. & R. ¶¶ 31-32, 36]; Ex. 31 [24-30]), through four different "channels," including its (i) bulk channel;^[1] (ii) mini-bulk channel;^[2] (iii) loan-by-loan (LBL) channel;^[3] and (iv) wholesale channel.^[4] (Domalewski Cert. ¶¶ 8, 14, Ex. 7 [Grice R. & R. ¶ 99], Ex. 13 [R&O No. 1]). Prior to closing any purchase of loans, Credit Suisse performed pre-acquisition due diligence to determine whether a given loan, or pool of loans, ^[5] was eligible for purchase based on Credit Suisse's underwriting criteria, which varied based on the channel through which the loan was acquired. (Domalewski Cert. ¶¶ 7, 14, 29, Ex. 8 [Grice R. & R. ¶¶ 32, 36-39, 116-117], Ex. 13 [R&O No. 1], Ex. 28 [Tr. 10:2-25]; McDonough Cert. ¶¶ 34, 45, 48, 100, Ex. 33 [CSNJAG003403260], Ex. 44 [Sacco Tr. 30:16-32:10], Ex. 47 [CSNJAG000001750], Ex. 99 [Shev R. & R. 32-35]). Nonetheless, not all...