Pa. Pub. Sch. Employees' Ret. Sys. v. Bank of Am. Corp.

• Decision Date: 28 August 2012
• Docket Number: No. 11 Civ. 733 (WHP).,11 Civ. 733 (WHP).
• Citation: 874 F.Supp.2d 341
• Parties: PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES' RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiff, v. BANK OF AMERICA CORPORATION, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

874 F.Supp.2d 341

PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES' RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiff,
v.
BANK OF AMERICA CORPORATION, et al., Defendants.

No. 11 Civ. 733 (WHP).

United States District Court,
S.D. New York.

July 11, 2012.
Memorandum Denying Reconsideration Aug. 28, 2012.

[874 F.Supp.2d 346]

Mark R. Rosen, M. Richard Komins, Jeffrey A. Barrack, Barrack, Rodos & Bacine, Philadelphia, PA, for Plaintiff.

Jay B. Kasner, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, Counsel for Bank of America and Defendants Moynihan, Noski, and Cotty.

Charles S. Duggan, Davis Polk & Wardwell L.L.P., New York, NY, Counsel for Defendants Boardman, Bramble, Colbert, Gifford, Holliday, Lozano, May, Ryan Scully.

James J. Capra, Jr., King & Spalding LLP., New York, NY, Counsel for PricewaterhouseCoopers LLP.

Fraser Lee Hunter, Jr., Wilmer, Cutler, Hale & Dorr, L.L.P, New York, NY, Counsel for Underwriter Defendants.

MEMORANDUM & ORDER
WILLIAM H. PAULEY III, District Judge.

Lead Plaintiff Pennsylvania Public School Employees' Retirement System (“Plaintiff”) brings this putative securities class action lawsuit against Bank of America Corporation (“BoA”), current and past officers and directors of BoA, twenty-seven underwriters, and PricewaterhouseCoopers LLP (“PwC”) (collectively, “Defendants”). Defendants move to dismiss the Consolidated Class Action Complaint (“the Complaint”). For the following reasons, Defendants' motions are granted in part and denied in part.

BACKGROUND

This action concerns allegations of BoA's purposeful concealment of its reliance on Mortgage Electronic Registration Systems, Inc. (“MERS”) and attendant exposure to billions of dollars of loan repurchase claims arising from the sale of mortgage-backed securities. (Consolidated Class Action Complaint, dated Sept. 23, 2011 (“Compl.”) ¶ 1.) BoA allegedly concealed this material information to facilitate the repayment of funds it borrowed from the federal government in connection with the Troubled Asset Relief Program

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(“TARP”). (Compl. ¶ 1.) The following is gleaned from the Complaint and assumed to be true for the purposes of this motion.

I. The Parties

BoA is the largest lender in the United States. (Compl. ¶ 34.) In July 2008, BoA acquired Countrywide Financial Corporation (“Countrywide”)—one of the biggest originators of subprime mortgages. (Compl. ¶ 35.) Following this acquisition, BoA oversaw $2.09 trillion in loans as of September 2010. (Compl. ¶ 94.) This action implicates Countrywide's role in originating loans and selling them to third parties or for securitization into mortgage-backed securities (“MBS”). It also concerns BoA's role as servicer for mortgages in MBS trusts.

Plaintiff also brings this action against the following past and current BoA officers: (1) Kenneth D. Lewis, Chief Executive Officer (“CEO”) from April 2001 to December 2009; (2) Joseph Lee Price, II, Chief Financial Officer (“CFO”) from January 2007 to January 2010; (3) Brian T. Moynihan, CEO from January 2010 to the present; (4) Neil Cotty, CFO from February 2010 to May 2010; and (5) Charles H. Noski, CFO from May 2010 through June 2011 (the “Executive Defendants,” collectively with BoA, the “BoA Defendants”).

The Complaint further names the following past and current BoA directors: William P. Boardman, Frank Paul Bramble, Sr., Virgis William Colbert, Charles K. Gifford, Jr., Charles Otis Holliday, Jr., Monica C. Lozano, Thomas John May, Thomas Michael Ran, and Robert W. Scully (collectively, the “Director Defendants,” with Defendant Price, the “Securities Act Defendants”). Additionally, the Complaint names over twenty underwriters to BoA's Common Equivalent Securities offering, which is discussed below (the “Underwriter Defendants”). Plaintiff also names PwC, the accounting firm that audited BoA's financial statements during the Class Period—February 27, 2009 to October 19, 2010.

Plaintiff is a public pension fund organized for the benefit of Pennsylvania public school employees. (Compl. ¶ 33.) It purchased BoA's securities during the Class Period, including the Common Equivalent Securities. (Compl. ¶ 33.) Plaintiff alleges that it suffered substantial damage as a result of these purchases. (Compl. ¶ 33.)

II. MERS

In almost every jurisdiction, a mortgagee must record the mortgage in the county where the property is located for it to take priority over other liens. (Compl. ¶ 2.) MERS is a private, computerized system for processing and tracking loans that purports to eliminate the need for physically recording mortgages. (Compl. ¶ 6.) When a mortgage is transferred from one MERS member to another, MERS only makes a notation of that transaction in its system. (Compl. ¶¶ 6, 76.) Thus, there is no public record of the transfer. (Compl. ¶ 76.) Additionally, instead of listing the name of the mortgagee, MERS lists itself as the mortgagee or the “nominee” for the mortgagee. (Compl. ¶¶ 6, 75.) However, MERS holds no interest in the loan. (Compl. ¶ 75.) Thus, the mortgage holder or servicer, and not MERS, receives payments on the loan. (Compl. ¶ 75.) BoA, Countrywide, and other financial institutions utilized MERS to avoid burdensome recording requirements and to ensure the speedy securitization of mortgages for sale on the secondary market. (Compl. ¶ 7.)

MERS operated seamlessly until 2008, when the country entered a recession and default rates rose sharply. (Compl. ¶ 5.) Then a number of courts made clear that it would be nearly impossible for mortgage holders or servicers to foreclose on loans

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processed or transferred via MERS. (Compl. ¶¶ 22, 84–85.) To foreclose on a mortgage, a party must have title to it. (Compl. ¶¶ 85, 87.) Courts reasoned that because MERS listed itself as the mortgagee, mortgage holders and servicers did not have standing to foreclose. (Compl. ¶ 85.) Some of these suits involved BoA and Countrywide in their capacities as a mortgage holder or servicer. (Compl. ¶ 84.) Plaintiff alleges that these publicly-filed court decisions were available to insiders, such as the BoA Defendants, but not to the public. (Compl. ¶ 87.)

Plaintiff additionally alleges that Countrywide routinely failed to transfer promissory notes when it sold mortgages. (Compl. ¶ 78.) To transfer a mortgage validly, an assignor or seller must endorse the promissory note and physically transfer it to the new mortgage holder. (Compl. ¶ 80.) If the promissory note is not endorsed and transferred, the loan is unsecured. (Compl. ¶ 80.) Like the standing issue, this practice hindered BoA's ability to foreclose on loans that it serviced. (Compl. ¶ 84.) Plaintiff contends that various judicial decisions involving BoA or Countrywide informed BoA about a mortgage holder's inability to foreclose on a mortgage when MERS was the nominee and the note was not properly assigned. (Compl. ¶ 84.) To remedy this problem, BoA enlisted employees, now known as robo-signers, to falsify affidavits representing that they had personal knowledge of facts underlying loans and that the notes supporting various loans had been properly transferred. (Compl. ¶¶ 22, 83.)

III. Repurchase Claims

Following its acquisition of Countrywide, BoA was responsible for underwriting 17% of the mortgage-backed securities market, thereby constituting the largest share of the market. (Compl. ¶ 94.) Plaintiff alleges that during the Class Period, BoA made representations and warranties (or assumed liability for representations Countrywide made) regarding mortgages it sold to third parties or bundled into mortgage-backed securities. (Compl. ¶ 11.) These representations and warranties included assurances that BoA had good title to the mortgages and that BoA and Countrywide adhered to certain underwriting standards. (Compl. ¶¶ 12, 104.) If BoA breached representations and warranties, purchasers could demand that BoA repurchase the loan. (Compl. ¶ 108.)

Plaintiff alleges that BoA breached its representation that it had good title because, as discussed above, courts said mortgage servicers and holders lacked standing to foreclose against borrowers in default due to the MERS system. (Compl. ¶ 107.) Similarly, Plaintiff alleges that BoA breached its representations concerning good title because Countrywide regularly failed to transfer promissory notes with their respective mortgages as required by law. (Compl. ¶ 107.)

Plaintiff also asserts that BoA breached because the underwriting standards utilized for those loans were far less stringent than represented. The lower standards resulted in unqualified borrowers obtaining loans and later defaulting. (Compl. ¶¶ 13–14.) Specifically, Plaintiff alleges that prior to the Class Period, Countrywide's priority was generating loans for securitization. (Compl. ¶ 100.) And because Countrywide transferred risks associated with its loans upon securitization, it cared little about whether borrowers could fulfill their loan obligations. (Compl. ¶ 100.)

Plaintiff claims that BoA is liable to investors for billions of dollars in repurchase claims as a result of these breaches and that the BoA Defendants misled investors about the magnitude of repurchase claims BoA faced. (Compl. ¶ 14.)

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IV. Repaying TARP and Common Equivalent Securities

In 2008, BoA suffered significant financial setbacks due to the financial crisis, which were exacerbated by its acquisition of Countrywide. (Compl. ¶ 63.) To remain solvent, BoA accepted $25 billion in loans from the federal government in October 2008 and another $20 billion in January 2009 (the “TARP funds”). (Compl. ¶¶ 15, 63.) As a condition of these loans, the government imposed onerous restrictions on executive compensation. (Compl. ¶ 15.) Accordingly, repaying the TARP Funds was a high priority for the Executive Defendants. (Compl. ¶¶ 16, 65.) Indeed, Lewis publicly stated that the restrictions, which applied to top management as well as the next twenty highly-compensated...