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N.Y. Fraudulent Inducement Claims In Countrywide RMBS Case Proceed

Friday, May 10, 2013
The U.S. District Court for the Central District of California May 6 allowed American International Group Inc. (AIG)to proceed with New York claims that it was fraudulently induced to purchase residential mortgage backed securities by Bank of America Corp. (BAC)division Countrywide, allegedly suffering $10 billion in losses as a result (American International Group Inc. v. Bank of America Corp., C.D. Cal., No. 2:11-CV-10549 MRP (Manx), 5/6/13).

Judge Mariana Pfaelzer noted that the court “has repeatedly denied motions to dismiss complaints alleging that Countrywide committed fraud against RMBS investors through misstatements in the offering documents.” She says this motion and complaint are “no different.” the court declared.

Company-Wide Culture
The court preliminarily determined that jurisdiction exists in this case and also declined AIG’s motion for a stay.

Continuing, it concluded that AIG plausibly alleged that the underwriting guidelines in the offering documents were false. Further, the court said, the amended complaint describes “a company-wide culture of abandonment of underwriting standards and wholesale use of ’exceptions’ to the normal standards.”

In other specifics, the court said AIG met its burden to plead “actual reliance by stating that it ’received, reviewed, and relied upon’” the offering materials and but for the misrepresentations and omissions in the offering materials, it would not have purchased or acquired the RMBS.

Causal Nexus
Specifically, the AIG entities alleged that they “purchased securities whose true risks greatly exceeded the represented ones,” the court continued. In particular, when borrowers began to default on the loans, the performance and value of the certificates allegedly dropped sharply, leading to rating downgrades and ultimately made the certificates unmarketable at prices “anywhere near the prices paid by AIG.

”The facts may prove otherwise,“ the court wrote, ”but for now those allegations suffice to demonstrate an adequate causal nexus between misrepresentation and damage.“

No Special Relationship
However, the court concluded that AIG did not adequately plead a claim for negligent misrepresentation. In New York, the court said, plaintiffs may recover for negligent misrepresentation when they have a special relationship with the defendants. In the commercial setting, such a relationship exists when the defendants possess unique or specialized expertise, or are in a special position of trust with the injured party. According to the court, AIG “has not pleaded that a special relationship exists.”

The court further determined that the defendants made misrepresentations regarding “third party deals.” The amended complaint alleged that the defendants made material misrepresentations as an “originator,” and “provided these misrepresentations to the RMBS sponsor, depositor, and underwriter knowing the information would be passed on to investors in the Offering Materials.”

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