NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co.

In NECA-IBEW v. Goldman Sachs, the Second Circuit arguably opened up a new door in class action litigation when it held that investors in one securities offering had standing to represent a putative class of investors in other offerings, as long as the fraud claims on both securities gave rise to “the same set of concerns.” (Our past coverage of that decision is here.) The Second Circuit’s recent decision in Policemen’s Annuity and Benefit Fund v. The Bank of New York Mellon, argued by our colleague Charles Rothfeld, clarifies and narrows that ruling, especially as to claims for breach of contract.

At issue in Policemen’s Fund were a series of residential mortgage-backed securities (RMBS) trusts. These trusts hold pools of mortgages and thus receive the stream of interest and principal payments from mortgage borrowers; beneficial ownership interests in the trusts are then sold to investors. The Policemen’s Fund plaintiffs are investors in 15 residential mortgage securitizations who sued the trustee (the Bank of New York Mellon) for alleged breaches of the trust agreements, state law duties, and the federal Trust Indenture Act. The question in the case was whether the named plaintiffs—who had invested in some RMBS trusts within the class definition but had not invested in many others —nonetheless had standing to sue on behalf of putative class members who had invested in those other trusts. (The case also involved questions about the scope of the Trust Indenture Act; the court ultimately decided that the TIA doesn’t apply to most RMBS; please see our report on the securities-law aspects of the decision for more details.)

The Second Circuit held that the named plaintiffs did not have standing to sue on behalf of the putative class members who had invested in trusts that the named plaintiffs had not. And helpfully for defendants, the court held that the named plaintiffs’ claims did not implicate the “same set of concerns” as those of the other class members by focusing on the proof required for each claim. Specifically, the court observed that “the absent class members’ claims” in NECA “were similar to those of the named plaintiffs in all essential respects,” because the alleged misstatements were in a shelf registration statement, and all of the securities were issued from the same shelf. In other words, the court explained, “the defendants’ alleged Securities Act violations inhered in making the same misstatements across multiple offerings.” By contrast, the court explained, the claims at issue in Policemen’s Fund required that the alleged misconduct “be proved loan-by-loan and trust-by-trust”; the claims depend upon the potentially varying conduct of the trustee and the entities the trustee purportedly should have supervised.

The Second Circuit’s analysis thus represents a rejection of a free-floating and malleable approach, which some commentators have argued that NECA permits, to the question whether the claims involve the “same set of concerns.” Indeed, the court shot down the plaintiffs’ arguments that relied on such a nebulous conception of class standing. First, the plaintiffs had suggested that it was the trustee’s allegedly common “policy of inaction” that was at issue, not its loan-specific conduct. That doesn’t solve the standing problem, the Second Circuit held, because “they would still have to show which [securitization] trusts actually had deficiencies that required BNYM to act in the first place.” Second, the plaintiffs proposed to use statistical sampling to show defects across securitizations. But the court held that such a methodology, (which we have criticized before) would require that plaintiffs “augment” the proof that they would have offered on their own claims; that prospect “does nothing to reassure us that Plaintiffs themselves have any real interest in litigating the absent class members’ claims.”

Policemen’s Fund is an important step toward reining in what—if NECA-IBEW were interpreted the wrong way—could have been an unbounded test for class standing (itself a novel and amorphous doctrine). Now, if the proof that the plaintiff would present on its own claim does not—at a minimum—go a long way toward proving the claims of absent class members, then the tag-along claims may be dismissed at the pleading stage for lack of standing rather than waiting for class certification. That aspect of the Policemen’s Fund ruling significantly limits the ability of plaintiffs’ firms to leverage small investor clients who are not representative of a proposed class to bring overly broad class actions.

Under the American Pipe rule, in federal court the filing of a class action tolls the statute of limitations for would-be class members. Otherwise, the Supreme Court reasoned in American Pipe, putative class members would have to intervene or file their own individual actions during the pendency of the class action in case class certification is denied to avoid having their claims become time-barred.

But does the American Pipe rule also apply to statutes of repose, which create an absolute right to be free from liability after a certain time frame? District courts had reached conflicting decisions on this issue with respect to the statute of repose for the Securities Act—Section 13.

The Second Circuit has now provided its answer. In Police & Fire Retirement System of City of Detroit v. IndyMac MBS, Inc. (pdf), — F.3d —-, 2013 WL 3214588 (2d Cir. June 27, 2013), the Second Circuit held that the filing of a class action does not toll Section 13’s statute of repose. Nor does intervention under Rule 24 or “relation back” under Rule 15(c) allow absent class members to avoid application of the statute of repose to claims dismissed for lack of jurisdiction.

The IndyMac case involved allegations by plaintiffs that offering documents for a host of IndyMac MBS mortgage pass-through certificates contained misstatements that violated the Securities Act. The district court dismissed the claims as to many of the certificates because the named plaintiff did not purchase those certificates and thus lacked standing to assert the claims. Several putative class members who purchased certificates beyond those purchased by the named plaintiff then moved to intervene in the suit and amend the complaint pursuant to the “relation back” doctrine of Rule 15(c). The district court denied the motion based on Section 13’s statute of repose, which had expired during the pendency of the case.

In affirming, the Second Circuit first rejected the argument that Section 13 should be tolled by the filing of a class action. The court reasoned that, whether the American Pipe tolling rule is “equitable” or “legal” in nature, it cannot be applied to Section 13. The Supreme Court has expressly held that equitable tolling principles do not apply to the repose period in Section 13. And the Rules Enabling Act does not allow a court to use Rule 23—the source of any “legal” tolling—to “abridge, enlarge or modify any substantive right,” which by the Second Circuit’s reckoning includes the repose promised by Section 13.

The Second Circuit also rejected the argument that the would-be intervenors should be allowed to “relate back” their proposed amended complaint to the prior, timely complaint. The court explained that untimely intervention could not cure the jurisdictional defect that led to dismissal of the claims that the proposed intervenors wanted to assert.

As sensible and welcome as the Second Circuit’s tolling and intervention holdings are, their importance is diminished somewhat by the same court’s decision in NECA–IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), which (as we have noted) allows named plaintiffs to bring some class claims regarding certain securities that the named plaintiff did not purchase. Still, the IndyMac decision offers a valuable tool to prevent belated expansion of securities class actions. And it may even be of use in other areas of the law when plaintiffs’ lawyers try to either prop up expansive class actions after a repose period has expired or use tolling to shop successive class actions in different courts until a favorable forum appears.

We’ve been blogging about the Second Circuit’s decision in NECA-IBEW Health & Welfare Fund v. Goldman Sachs (pdf), which held that a named plaintiff in a securities fraud suit might have standing in some situations to assert class action claims regarding securities that he or she never purchased. Yesterday, the Supreme Court denied (pdf) Goldman’s petition for certiorari (pdf) in that case. We’ll continue reporting on the aftermath of the Second Circuit’s decision.

In the meantime, defendants facing these sorts of claims should remember that the Second Circuit’s novel standing test requires that the claims regarding the unpurchased securities raise the same set of concerns as the claims regarding the securities that the named plaintiff actually bought. That limitation should help trim the sails of expansive securities fraud class actions.

In addition, defendants should emphasize that the fact that a named plaintiff may have standing to sue does not mean that he or she can represent a class of purchasers of securities that the named plaintiff never bought. At class certification, the defendant may be able to mount challenges to commonality, typicality, adequacy, and predominance based on the fact that the named plaintiff never bought some of the securities at issue.

I previously blogged about the Second Circuit’s troubling decision in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. (pdf), 693 F.3d 145 (2d Cir. 2012), which invented a “class standing” doctrine allowing a named plaintiff in a class action to assert Securities Act claims regarding securities that he or she never purchased. In the wake of that decision, plaintiffs have filed a flurry of motions to reconsider district court decisions that had dismissed claims like these for lack of standing.

So far, a few courts have granted those motions and revived some or all of the previously dismissed claims. E.g., New Jersey Carpenters Health Fund v. DLJ Mortg. Capital, Inc. (pdf), 2013 WL 357615 (S.D.N.Y. Jan. 23, 2013). But other courts have declined to do so, preferring to wait for a decision on the pending certiorari petition in NECA.

Defendants facing such reconsideration motions should consider asking for a similar delay and preserve the argument that NECA is wrongly decided. There is little point litigating those claims in earnest until we know whether NECA’s novel class-standing rule will be reviewed by the Supreme Court.

Alternatively, defendants could oppose reconsideration on the ground that the claims regarding the unpurchased securities don’t truly raise the same set of concerns as the claims regarding the purchased securities, as required by the Second Circuit’s new standing test. Indeed, in the New Jersey Carpenters case, the defendant was able to limit the reinstated claims by pointing to differences among the mortgage originators whose underwriting standards were allegedly misstated in the offering materials at issue.

Finally, if litigation of these revived claims re-commences, defendants should emphasize that NECA announced a mere standing rule—it did not decide that a named plaintiff who has bought security X can represent a class of purchasers of securities Y and Z. There likely will be ample fodder for challenging commonality, typicality, adequacy, and predominance at the class-certification stage.

Can a plaintiff who bought a security in one offering bring a class action on behalf of purchasers in other offerings if the plaintiff alleges a misstatement common to all of the offerings? In cases under Sections 11 and 12 of the 1933 Securities Act—particularly those involving mortgage-backed securities—the consensus view had been that a plaintiff lacked standing to assert class claims regarding offerings in which the plaintiff did not buy. On September 6, the Second Circuit rejected that consensus view in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. (pdf)., creating a split with the First Circuit’s decision in Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp. (pdf), 632 F.3d 762 (1st Cir. 2011). Plaintiffs’ lawyers may seek to use the NECA-IBEW decision to broaden class litigation against securities issuers and underwriters.

Continue Reading NECA-IBEW: Second Circuit Rules That Plaintiffs Sometimes Have Standing to Bring Class Claims Covering Securities Offerings Other Than Ones in Which They Bought