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The Second Circuit Held “Same Set of Concerns” was Sufficient to Establish Class Standing in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co.

In NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., No. 11-2762-cv, 693 F.34 145 (2d Cir. Sept. 6, 2012), the Second Circuit Court of Appeals affirmed in part, vacated in part and remanded the dismissal of the plaintiff’s claims under Sections 11, 12(a) and 15 of the Securities Act of 1933 (“Securities Act”). The plaintiff, NECA-IBEW Health and Welfare Fund (“NECA” or “Plaintiff”), brought a securities class action against defendants Goldman Sachs & Co. (“Goldman”) and Goldman Sachs Mortgage Securities (“Goldman MS”) (collectively “Defendants”), for Defendants’ roles in underwriting and issuing allegedly misleading mortgage-backed securities purchased by NECA and other members of the potential class.

According to the complaint, the securities at issue were mortgage-backed certificates underwritten by Goldman and issued by Goldman MS pursuant to the same shelf registration statement.  The certificates, however, were sold in seventeen separate offerings using seventeen separate prospectus supplements.  Plaintiff purchased certificates in only two offerings but was asserting claims on behalf of purchasers from all seventeen offerings.

NECA alleged that Goldman’s prospectuses featured misleading statements relating to underwriting guidelines, property appraisals and risks associated with the certificates.  Particularly, NECA attacked statements alleging that no fraud had been committed in originating the loans or appraising the properties because the originators allegedly coached the borrowers to falsely inflate their incomes, approved unqualified borrowers based on “compensating factors” that were non-existent and ordered appraisers to inflate values to ensure loan approval. 

Sections 11 and 12(a)(2) of the Securities Act “impose liability on certain participants in a registered securities offering when the registration statement or prospectus associated with the offering contains material misstatements or omissions.”  Under Section 11, an issuer or signatory is subject to strict liability, and an underwriter is subject to a negligence standard.  Likewise, “Section 12(a)(2) imposes liability under similar circumstances against certain ‘statutory sellers’ for misstatements or omissions in a prospectus.”  Finally, “[Section] 15 imposes liability on individuals or entities that ‘control any person liable’ under [Sections] 11 or 12.”

Defendants challenged Plaintiff’s standing to bring the class action.   NECA purchased certificates  in two of the seventeen offerings.  At issue was whether Plaintiff had standing to sue on behalf of purchasers in other related offerings.  The court acknowledged a tension in Supreme Court jurisprudence “as to whether ‘variation’ between (1) named plaintiff’s claims and (2) the claims of putative class members ‘is a matter of Article III standing . . . or whether it goes to the propriety of class certification pursuant to Fed. R. Civ. P. 23.”

The court concluded that to have class standing in a putative class action, a plaintiff must “plausibly allege (1) that he [or she] ‘personally has suffered some actual . . . injury as a result of the putatively illegal conduct of the defendant’ and (2) that such conduct implicates ‘the same set of concerns’ as the conduct alleged to have caused injury to other members of the putative class by the same defendants.” (emphasis added)  Accordingly, the court held that Plaintiff had standing to assert the Section 11 and 12(a)(2) claims against common originators, but it cautioned that having standing to assert the claim did not equate to being able to certify the class.

The court then turned to whether Plaintiff properly alleged cognizable damages under Section 11.  Under Section 11, “a plaintiff need not plead damages, [but] it must satisfy that it has suffered a cognizable injury under the statute.”  The court held that a loss of value, but not necessarily a loss in market price, can equate to a cognizable injury.  Here, Plaintiff alleged, and the court agreed, that because the risk profile increased as a result of ratings downgrades and less certain future cash flows, the certificates lost value.  Accordingly, the court held that Plaintiff cognizably alleged plausible damages. 

The court vacated the district court’s dismissal of the Section 11 claims and ordered that they be reinstated.  Furthermore, the court ordered that on remand, Plaintiff should be granted leave to amend its complaint to seek damages rather than rescission. 

The primary materials for this case may be found on the DU Corporate Governance website.

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