Neca-Ibew Health & Welfare Fund v. Goldman Sachs & Co.

Facts

These Certificates are securities backed by pools of residential real estate loans acquired by GSMC through two primary channels: (1) the 'Goldman Sachs Mortgage Conduit Program' (the 'Conduit Program'), and (2) bulk acquisitions in the secondary market. Under the Conduit Program, GSMC acquired loans from a variety of sources, including banks, savings-and-loans associations, and mortgage brokers. Major originators of the loans in the Trusts included National City Mortgage Co. (National City) (six Trusts); Countrywide Home Loans (Countrywide) (five Trusts); GreenPoint Mortgage Funding, Inc. (GreenPoint) (five Trusts); Wells Fargo Bank (Wells Fargo) (four Trusts); SunTrust Mortgage (SunTrust) (three Trusts); and Washington Mutual Bank (WaMu) (two trusts). Each Certificate provides its holder with an ownership interest in principal and/or interest payments from the pool of loans within the Trust through which it was issued. Each tranche has a different risk profile, paying a different rate of interest depending on the expected time to maturity and the degree of subordination, or protection against the risk of default. In October 2007, P purchased $390,000 of the Class A2A Certificates of the GSAA Home Equity Trust 2007-10 (the '2007-10 Certificates') directly from D in a public offering. In May 2008, it purchased approximately $50,000 of the Class 1AV1 Certificates from Group 1 of the GSAA Home Equity Trust 2007-5 (the '2007-5 Certificates'). The Certificates' Offering Documents contained numerous disclaimers, including one which warned that: Your Investment May Not Be Liquid[.] The underwriter intends to make a secondary market in the offered certificates, but it will have no obligation to do so. We cannot assure you that such a secondary market will develop or if it develops, that it will continue. Consequently, you may not be able to sell your certificates readily or at prices that will enable you to realize your desired yield. Each of the 17 Offerings that P seeks to challenge is registered pursuant to a separate registration statement consisting of the same Shelf Registration Statement and a unique Prospectus Supplement. P alleges that the Offering Documents contained false and misleading information about the underwriting guidelines of the mortgage loan originators, the property appraisals of the loans backing the Trusts, and the risks associated with the Certificates. Contrary to these representations in the Offering Documents, P alleges, that neither Ds nor the loan originators they used through the Conduit Program employed standards aimed at determining the borrowers' ability to repay their loans. 'There were wide-spread, systematic problems in the residential lending industry' wherein 'loan originators began lending money to nearly anyone - even if they could not afford to repay the loans - ignoring their own stated lending underwriting guidelines . . . as well as those of Ds' Conduit program.' P alleges, by the Offering Documents' failure to disclose that the originators of the loans backing the Trusts falsely inflated (or coached borrowers falsely to inflate) their income; steered borrowers to loans exceeding their borrowing capacity; and approved borrowers based on 'teaser rates' knowing they would be unable to afford payments once the rates adjusted. P alleges that the originators allowed non-qualifying borrowers to be approved for loans they could not afford under exceptions to the underwriting standards based on so-called 'compensating factors' when such 'compensating factors' did not exist or did not justify the loans. Nor, allegedly, did the Offering Documents disclose that appraisers were ordered by loan originators to give predetermined, inflated appraisals to ensure loan approval; that the 'comparable properties' used to generate appraisals were not comparable; and that property appraisals did not, in fact, conform to USPAP. P alleges, that approximately 35%-40% of the loans in the 2007-5 Trust and 30-35% of the loans in the 2007-10 Trust were made with no determination of the borrower's ability to repay. And at least 47% of the loans in the 2007-5 Trust, and at least 41% of those in the 2007-10 Trust, were based on property value appraisals that were inflated by 9% or more. P made specific allegations against some of the companies that originated the loans in its Certificates. Only the Prospectus Supplements unique to each individual Offering identified the originators of the loans in the Trusts and set forth their respective lending guidelines. P alleged that Ds’ documents were complete misrepresentations. The truth about the Certificates' was discovered in mid-2008. The rating agencies put negative watch labels on the Certificate[s]... and downgraded previously-assigned ratings,' the 'delinquency rates on the underlying mortgage loans . . . skyrocketed,' the Certificates were 'no longer marketable at prices anywhere near the prices paid by P and the Class,', and that 'holders would likely receive less absolute cash flow in the future and receive it, if at all, on an untimely basis' given that they were 'exposed to much more risk with respect to both the timing and absolute cash flow to be received than the Offering Documents represented.' P alleged that 'the value of the Certificates had diminished greatly since their original offering, as had the price at which members of the Class could dispose of them. P continued to hold the Certificates and had yet to sell any of them. The district court granted Ds' motion to dismiss in that D lacked standing to bring claims under §§ 11 and 12(a)(2) on behalf of purchasers of Certificates from any of the 15 other Trusts because it did not purchase Certificates from Trusts other than 2007-10 and 2007-5 Trusts and 'has not shown that the injuries it alleges based upon purchases of [Certificates from] those two Trusts are the same . . . as those allegedly suffered by purchasers of [Certificates from] outlying [T]rusts backed by distinct sets of loans.' The court held that P could 'only represent the class of persons or entities that purchased the particular . . . [C]ertificate from the particular tranche from the particular [T]rust' from which P purchased its Certificates. It held that P failed to allege 'a cognizable loss' under § 11. The allegation that it was exposed to greatly enhanced risk with respect to both the timing and amount of cash flow under the Certificates was insufficient to plead injury because of the Offering Documents' 'specific warning . . . about the possibility . . . that the [Certificates may not be resalable.' Because P knew the Certificates might not be liquid, it could not allege injury based on the hypothetical price of the Certificates in a secondary market at the time of suit. The court rejected P's argument that 'the risk of diminished cash flow in the future establishes a present injury cognizable under [§] 11,' reasoning that '[§] 11 does not permit recovery for increased risk.' The court held that 'NECA must allege the actual failure to receive payments due under the Certificates' in order to allege an injury cognizable under Section 11.' P appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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