Last week, Goldman Sachs & Co filed a petition for certiorari to the Supreme Court asking for review of the 2nd Circuit’s decision in NECA-IBEW Health & Welfare Fund v. Goldman, Sachs & Co. Just two months ago, the 2nd Circuit held that a union pension fund, NECA, had standing to represent a class of plaintiffs who purchased various mortgage-backed securities (MBS) certificates, including those who purchased wholly separate securities than NECA had.
The 2nd Circuit reviewed the lower court’s finding that NECA lacked standing to represent the putative class. There, Goldman had argued that, because of differences among the offerings, NECA lacked standing to represent certificate holders who purchased different notes than the fund had. Each MBS offering was made subject to a different “registration statement,” with distinct information as to the quality of those specific securities. Accordingly, Goldman argued, NECA could not have standing to represent plaintiffs who bought different securities and received different statements as to the strength of those securities.
Additionally, the prospectuses which accompanied each security contained information unique to each particular offering. The district court dismissed NECA’s claims because NECA lacked standing to sue on behalf of all purchasers of the securities and NECA did not sufficiently allege that its injuries were the same as those suffered by purchasers of different notes.
On appeal, the 2nd Circuit ruled that NECA had standing to represent all plaintiffs in the class. NECA could represent purchasers of other securities because all of the mortgages were issued by many of the same lenders and the plaintiffs shared “the same set of concerns”—a term the 2nd Circuit leaned heavily on throughout its opinion. This nexus connecting the putative class gave NECA proper standing to bring the suit. According to the 2nd Circuit, a plaintiff has such standing if he alleges that he personally suffered an injury as a result of the allegedly illegal conduct of the defendant and such alleged conduct implicates “the same set of concerns” as the conduct alleged to have caused the injuries to other putative class members who did not buy the same securities.
Goldman now petitions the Supreme Court to review the 2nd Circuit’s decision. Chief among its arguments is that the ruling could substantially increase liability in MBS litigation, citing its own case as an example—namely, NECA’s newfound ability to pursue a putative class action for several billions of dollars (as opposed to a much more modest amount based on a single offering). Goldman also argues that the NECA decision created a split with the 1st Circuit’s holding in Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., which dismissed, on standing grounds, class claims involving securities which “the named plaintiffs never purchased.” That split currently gives securities plaintiffs a strong incentive to bring their cases in the 2nd Circuit.
This standing issue sounds a lot like the “similarity of claims” determination for class certification, but these are distinct questions analyzed at separate times in the litigation. The 2nd Circuit was careful to stress this as well. Indeed, the court noted that these differences and idiosyncrasies between the offerings may well doom class certification down the line, but it did not destroy standing.
The 2nd Circuit’s decision creates more uncertainty in MBS litigation, specifically as to who can lead a suit and how easily a plaintiffs firm can leverage clients with minimal holdings into a massive class action. It also may result in more lawsuits and increased costs to banks that issued MBS. Not only could some putative classes previously dismissed on standing grounds seek to be reinstated, but, as Goldman stressed, the decision also provides a foundation for plaintiffs to build larger putative classes, seeking greater amounts in damages and ratcheting up settlement figures. As many courts have recognized, the mere fact of class certification—especially for a large class—often compels defendants to settle.
To state the obvious, depending on the facts of a particular case, the NECA case may well be distinguishable. The NECA claims were based on statements in a shelf registration statement that did, in fact, apply to all of the securities and included representations about overall underwriting policies (which are either true or false for all of the securities). By contrast, in any case with representations about collateral in a particular deal, the representation easily could be true for one security and false for another, making each security a separate case or controversy. This is not the only ground for distinguishing NECA—there are unquestionably others—but unless the Supreme Court grants certification and reverses the 2nd Circuit, defense counsel should start thinking (quickly) along these lines.