Bass, Berry & Sims attorney Chris Lazarini analyzed the decision in HSN Nordbank AG & HSH Nordbank Securities S.A. vs. RBS Holdings USA, Inc. & RBS Securities, Inc., in which the court examined Plaintiffs' common law fraud claims under the particularity standard of Rule 9(b). Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
HSN Nordbank AG & HSH Nordbank Securities S.A. vs. RBS Holdings USA, Inc. & RBS Securities, Inc., No. 13 Civ. 3303 (S.D. N.Y., 3/20/15)
Common law fraud allegations must be pled with particularity and must give rise to a strong inference of fraudulent intent, which may be established by showing that defendant had the motive and opportunity to commit fraud or by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.
Plaintiffs brought this action against RBS Holdings and its subsidiaries, alleging various improprieties in connection with Defendants' creation, offering, and sale of certain residential mortgage-backed securities. Plaintiffs alleged claims of common law fraud, aiding and abetting fraud, fraudulent concealment, and negligent misrepresentation and a right to rescission based on mutual mistake. The Court grants in part and denies in part Defendants' motion to dismiss.
The Court dismisses the claims of negligent misrepresentation and fraudulent concealment because Plaintiffs failed to allege facts demonstrating the existence of a fiduciary or other special relationship with Defendants imposing a duty on Defendants to disclose material information. The Court also dismisses the rescission claim, finding that the complaint focused on forward looking statements in the offering materials. The doctrine of mutual mistake applies only where the parties were mistaken as to facts existing at the time the contract was executed.
The Court examines Plaintiffs' common law fraud claims under the particularity standard of Rule 9(b), judging whether Plaintiffs alleged facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. The Court finds that Plaintiffs failed to raise a strong inference that Defendants knew, or were reckless in not knowing, that third party loan originators were systematically overstating appraisal values and owner-occupancy rates and dismisses those allegations. In contrast, the Court finds that Plaintiffs raised strong inferences that Defendants knew, or were reckless in not knowing, that loan originators had abandoned their underwriting guidelines and that credit ratings had been overstated such that Plaintiffs could move forward with those claims. The Court also finds that Plaintiffs adequately pled the materiality of the alleged misrepresentations regarding underwriting guidelines and credit ratings and Plaintiffs' justifiable reliance on the offering materials. Finally, the Court finds that Plaintiffs satisfied their burden of pleading loss causation at this stage of the proceeding, leaving the question of how the credit crisis impacted the values of the RMBS for decision after the record is complete.