Opinion
SUCV201101533BLS1
08-29-2019
FEDERAL HOME LOAN BANK OF BOSTON v. ALLY FINANCIAL, INC. et al.
MEMORANDUM OF DECISION AND ORDER ON THE MOTIONS FOR SUMMARY JUDGMENT BROUGHT BY THE CREDIT SUISSE DEFENDANTS, NOMURA DEFENDANTS, AND RBS DEFENDANTS
Mitchell H. Kaplan, Justice
This 2011 case finds its genesis in the residential mortgage crisis of the previous decade. Plaintiff Federal Home Loan Bank of Boston (the Bank) is one of the many institutional investors that purchased residential mortgage-backed securities (RMBS) before the market for this type of security collapsed. The purchases still at issue in this case occurred in 2006 and 2007. The remaining defendants are referred to as the "Credit Suisse Defendants" (Credit Suisse), "Nomura Defendants" (Nomura), and "RBS Defendants" (RBS). The Bank alleges the offering documents used to market these RMBS contained materially false representations concerning underwriting standards, loan-to-value ratios, and credit ratings. It asserts claims against these defendants for violations of the Massachusetts Uniform Securities Act (MUSA), G.L.c. 110A, § § 410(a)(2) and 410(b), negligent misrepresentation, and violations of G.L.c. 93A, § 11. The matter is presently before the court on motions for summary judgment filed by Nomura and RBS and a motion for partial summary judgment filed by Credit Suisse. For the reasons that follow, both motions are ALLOWED in part and DENIED in part.
The Credit Suisse Defendants consist of: Credit Suisse (USA), Inc.; Credit Suisse First Boston Mortgage Securities Corp.; Credit Suisse Holdings (USA), Inc.; Credit Suisse Securities (USA), LLC; and DLJ Mortgage Capital, Inc. The Nomura Defendants consist of: Nomura Asset Acceptance Corporation; Nomura Credit & Capital, Inc.; Nomura Holding America, Inc.; and Nomura Securities International, Inc. The RBS Defendants consist of: RBS Holdings USA, Inc. f/k/a Greenwich Capital Holdings, Inc. and RBS Securities, Inc. f/k/a Greenwich Capital Markets, Inc.
BACKGROUND
The claims against Nomura, RBS, and Credit Suisse relate to several RMBS trust certificates each apparently including a number of so-called Alt-A mortgage loans. For the purposes of these motions, it is sufficient to note that Alt-A mortgage loans have characteristics that tend to make them at greater risk of default than traditional, prime mortgages.
Between July 2006 and July 2007, the Bank acquired six "certificates" representing ownership interests in income streams generated by pools of residential mortgages that Nomura had sponsored: NAAC 2006-AR4, NAAC 2006-AF2, NAAC 2007-1, and NAAC 2007-3. It purchased two of the certificates (NAAC 2006-AF2 and NAAC 2006-AR4 certificates) directly from Nomura/RBS in 2006 and four of the certificates (two NAAC 2007-1 certificates, a NAAC 2006-AR4 certificate, and a NAAC 2007-3 certificate) from Bear, Stearns & Co., Inc. (Bear Stearns) in 2007. Nomura/RBS prepared or assisted in preparing the offering documents (e.g., free writing prospectuses and prospectus supplements) through which the certificates were marketed.
For the purposes of their motions the defendants have, for the most part, not distinguished between the roles of Nomura and RBS in the creation and sale of these trust certificates and therefore for simplicity this group of defendants will simply be referred to as Nomura/RBS unless it is necessary to distinguish between them.
Between February 2006 and September 2007, the Bank also acquired nine certificates, again representing income streams from pooled residential mortgages that were sponsored by Credit Suisse and Chevy Chase Funding, LLC (Chevy Chase): ARMT 2006-1, ARMT 2006-2, ARMT 2006-3, ARMT 2007-1, ARMT 2007-2, CCMFC 2006-2A, CCMFC 2007-1A and CCMFC 2007-2A. It purchased six of the certificates (five ARMT certificates and one CCMFC certificate) from Credit Suisse and three certificates (all CCMFC certificates) from Barclays. Barclays and Credit Suisse acted as co-underwriters in connection with the CCMFC certificates, each purchasing 50% of the certificates for resale to investors.
The Bank committed to purchase the ARMT certificates from Credit Suisse between February 2006 and May 2007 and the CCMFC certificate from Credit Suisse in March 2007. The Bank committed to purchase the other three CCMFC certificates from Barclays between May 2006 and September 2007.
DISCUSSION
As noted, the Bank asserts the same three claims against Nomura/RBS and Credit Suisse: (1) violation of MUSA; (2) negligent misrepresentation; and (3) violation of c. 93A. The claims asserted against Nomura/RBS concern two categories of certificates: (1) those the Bank purchased from Bear Stearns; and (2) those the Bank acquired directly from Nomura/RBS. The claims asserted against Credit Suisse also concern two similar categories of certificates: (1) those the Bank purchased from Barclays; and (2) those the Bank purchased directly from Credit Suisse. Nomura/RBS and Credit Suisse make similar arguments in support of their motions each differentiating the claims involving securities that they sold directly to the Bank from those where Bear Stearns or Barclays was the Bank’s seller.
Although they have filed separate briefs, Credit Suisse and Nomura/RBS have adopted and incorporated each other’s arguments, except that Credit Suisse does not argue for dismissal on the grounds that the offering materials do not contain any misstatements of fact (while not conceding that they do). Credit Suisse has also repeated many of the same arguments in its briefing as those asserted by Nomura/RBS. Unless otherwise noted, if an argument made by Nomura/RBS is rejected by this Court, the argument is also rejected in so far as it applies to Credit Suisse for the same or similar reasons.
Summary judgment is granted when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Mass.R.Civ.P. 56(c); Cassesso v. Commissioner of Corr., 390 Mass. 419, 422 (1983). To prevail on a motion for summary judgment, the moving party must affirmatively demonstrate the absence of a triable issue, and that the summary judgment record entitles it to a judgment as a matter of law. Pederson v. Time, Inc., 404 Mass. 14, 16-17 (1989). "[A]ll evidentiary inferences must be resolved in favor of the [nonmoving party]." Boyd v. National R.R. Passenger Corp., 446 Mass. 540, 544 (2006).
A. MUSA
MUSA imposes liability on any person or entity who "offers or sells a security by means of any untrue statement of a material fact or any omission ... [of] a material fact." G.L.c. 110A, § 410(a)(2). Liability as a seller under the statute extends to "[a] person who successfully solicits the purchase motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Cohen v. State Street Bank and Trust Co., 72 Mass.App.Ct. 627, 635, quoting Stolzoff v. Waste Sys. Intl., Inc., 58 Mass.App.Ct. 747, 766 n.21 (2003). To establish a violation of MUSA, a plaintiff must prove that: "(1) the defendant ‘offers or sells a security’; (2) in Massachusetts; (3) by making ‘any untrue statement of a material fact’ or by omitting to state a material fact; (4) the plaintiff did not know of the untruth or omission; and (5) the defendant knew, or ‘in the exercise of reasonable care [would] have known,’ of the untruth or omission." Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 52 (2004), quoting G.L.c. 110A, § 410(a)(2). MUSA claims are subject to a four-year statute of limitations. G.L.c. 110A, § 410(e).
1. Claims Against Nomura/RBS
With regard to the four certificates purchased from Bear Stearns, the MUSA claims asserted against Nomura/ RBS are dismissed. While Nomura/RBS created the trusts that held the mortgages and prepared the offering documents used to market them, it was not the seller of the certificates to the Bank, as the term "seller" is construed under MUSA and the cognate federal securities laws. See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1216 (1st Cir. 1996) ("[N]either involvement in preparation of a registration statement or prospectus nor participation in ‘activities’ relating to the sale of securities, standing alone, demonstrates the kind of relationship between defendant and plaintiff that could establish statutory seller status") (emphasis in original). The court finds the Bank’s arguments to avoid the settled case law in this area unavailing. Indeed, the court has addressed some of these arguments in deciding other motions in this case. See Memorandum of Decision and Order on Plaintiff’s Motion for Reconsideration, dated June 26, 2018 . With respect to those certificates purchased from Bear Stearns, there is no evidence that Nomura/RBS was more than the seller’s seller. See Pinter v. Dahl, 486 U.S. 622, 644-47 (1988).
Nomura/RBS is, however, undisputedly the "seller" with respect to the other two Nomura certificates. As to these certificates, Nomura/RBS argues that: (i) the MUSA claims are time barred; and (ii) the Bank has failed to establish an essential element of a MUSA claim, namely, that the offering documents contained an "untrue statement of a material fact." G.L.c. 110A, § 410(a)(2). The court disagrees.
Nomura/RBS asserts that the MUSA claims are time barred because, by March 2007 (more than four years before the Bank filed its complaint), the Bank noticed or should have noticed that something was amiss with regard to the representations in the offering documents to the effect that the mortgages represented by the certificates had been reviewed and determined to comply with applicable underwriting and property appraisal guidelines. See Genovisi v. Nelson, 85 Mass.App.Ct. 43, 47 (2014), quoting Marram, 442 Mass. at 54 n.20 ("A claim under MUSA accrues when a reasonable investor would have noticed that something was ‘amiss’ "). Nomura/RBS points out that between February and March 2007: Bank officers and its regulator, the Federal Housing Finance Board (FHFB), exchanged and discussed news articles regarding the growing delinquency problem with Alt-A loans and the potential effects of this phenomenon on the Bank’s RMBS portfolio; Bank officers asked the Bank’s Credit and Treasury Department to analyze the Bank’s exposure to RMBS backed by Alt-A loans in light of the developing turmoil in the Alt-A mortgage market; and the chairman of the Bank’s Finance Committee expressed concern regarding the Bank’s exposure to problems within the subprime sector. This evidence is certainly relevant and shows that the Bank was concerned about Alt-A mortgages generally and the possibility that the delinquency problem could affect its portfolio. But, it does not establish as a matter of law that the Bank was on inquiry notice that Nomura/RBS had misrepresented the underwriting and real estate appraisal standards that it had used in reviewing the mortgages that it pooled to create the certificates. See In re Countrywide Fin. Corp. Mortg-Backed Sec. Litig., 2012 WL 1322884, at *4 (C.D.Cal. Apr. 16, 2012) (where the court observes that: "2007 was a turbulent time during which the causes, consequences, and interrelated natures of the housing downturn and subprime crisis were still being worked out"). As a result, the court cannot conclude as a matter of law that the Bank was on inquiry notice of its claim in March 2007 and that therefore its claims are time barred. This is a question that must be resolved at trial.
Based on a 2015 unpublished decision from a Massachusetts Federal District Court, the Bank argues that the "discovery rule" rather than the inquiry notice standard articulated in Genovisi governs the date on which the cause of action accrued. See Massachusetts Mut. Life Ins. Co. v. DB Structured Prods., Inc. (Mass Mutual), 2015 WL 3964560, at *8 (D.Mass. June 19, 2015). In Mass Mutual, the District Court concluded that the discovery rule should apply to MUSA’s statute of limitations because the Supreme Court’s decision in Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 653 (2010) held that the discovery rule applies to claims brought under section 10(b) of the Securities Exchange Act of 1934. The District Court reasoned that Massachusetts courts would hereafter apply the discovery rule since Section 410(e) of MUSA uses similar "discovery" language to that found in the Securities Exchange Act and Securities Act and Massachusetts courts would reassess their interpretation of the trigger point for the statute of limitations in light of this Supreme Court decision. The Court need not address this argument because, as discussed below, the claim survives even under the less demanding inquiry notice standard.
Turning to Nomura/RBS’s second argument, the court also finds that there are genuine issues of disputed fact on the question of whether the offering documents contained untrue statements of a material fact. The Amended Complaint alleges that Nomura/RBS misrepresented the underwriting standards it used in selecting the pooled mortgages and the loan to value ratios of the residential property securing the mortgages. Nomura/RBS maintains that to the extent the claims are based on these representations, the claims fail because the Bank’s experts witness opinions are inadequate to support jury questions concerning whether these statements were untrue. Again, the court disagrees.
With respect to underwriting standards, the so-called prospective supplements (pro-supps) for the certificates stated: "All of the Mortgage Loans have been purchased by the sponsor from various banks, savings and loan associations, mortgage bankers and other mortgage loan originators and purchasers of mortgage loans in the secondary market, and were originated generally in accordance with underwriting criteria described in this section." Another section of the pro-supps stated that the mortgages had been originated in accordance with each originator’s underwriting guidelines. Whether these representations could reasonably be interpreted to mean that the mortgage loans complied with generally used underwriting standards applied by Nomura in its due diligence and/or the standards used by each loan originator is a question of fact to be decided at trial. The Bank has offered expert reports that state that, based on a review of a number of loan files selected in a statistically appropriate manner, these loans did not meet either underwriting standard. To the extent that Nomura/RBS moving papers suggest possible flaws in the plaintiff’s expert’s opinions, that goes to the creditability and weight of the opinions and does not preclude their admissibility.
The pro-supps also contained representations concerning the loan to value ratios (LTV) of the loans being pooled, including that the property values had been determined by appraisals that conformed to the Uniform Standards of Professional Appraisals. Although an appraisal of the value of a property is an opinion, this court has held that statements concerning LTVs may constitute materially false statements if they can be shown to be both objectively false and subjectively false. See Cambridge Place Inv. Mgmt., Inc. v. Morgan Stanley & Co, Inc., 2012 Mass.Super. LEXIS 272, at *57 (Sept. 28, 2012) (Billings, J.) . Additionally, statements that certain professional standards were used in determining property values can be false, if those standards were not actually employed. Id. at *58-59. The Bank’s valuation experts reviewed the same sampling of loans reviewed by the underwriting guideline experts and opined that statistically significant percentages of the property valuations were materially overstated. With respect to subjective falsity, this clearly does not require testimony from the individuals who reviewed the appraised values at the time Nomura purchased the loans to the effect that they were aware of the inflated values. State of mind almost always has to be proved by reliance on circumstantial evidence. For example, in criminal trials, where the jury must find that scienter has been proven beyond a reasonable doubt, evidence offered to prove the defendant’s state of mind is often circumstantial. See, e.g., Commonwealth v. Zanetti, 454 Mass. 449, 470 Appendix (2009) (providing model instruction on aiding and abetting liability).
2. Claims Against Credit Suisse
Credit Suisse only moves for summary judgment on the MUSA claims against it that are based on the three CMFC certificates that the Bank purchased from Barclays. With regard to those certificates, Credit Suisse, like Nomura/RBS, argues that it cannot be liable under MUSA because it did not offer or sell these certificates. Credit Suisse’s relationship to these sales is not the same as Nomura/RBS’s relationship to its certificates sold by Bear Stearns.
Credit Suisse has not moved for summary judgment to the extent the Bank’s MUSA claims are based on the certificates it directly sold to the Bank.
Credit Suisse’s Vice President admitted that "Credit Suisse and Barclays ... marketed deals together to get marketing power," a road show agenda for CCMFC 2007-2 shows that Credit Suisse and Barclay’s made a joint presentation to the Bank, and the record contains electronic communications in which both Credit Suisse and Barclays apparently solicited the Bank to purchase each of the CCMFC certificates at issue. Indeed, it is not clear from the summary judgment record why the Bank purchased certain certificates that were owned by Barclay’s rather than Credit Suisse, i.e., how or why certain purchases were allocated to one underwriter as opposed to the other. In any event, the evidence permits an inference that Barclays and Credit Suisse jointly solicited the Bank to purchase the CCMFC securities, including the certificates purchased from Barclays, and that Credit Suisse engaged in this joint marketing effort in service of its own financial interests. Under these circumstances, a reasonable jury could conclude that Credit Suisse was a "seller" of these certificates under MUSA. See Cohen, 72 Mass.App.Ct. at 635, quoting Stolzoff, 58 Mass.App.Ct. at 766 n.21 (liability as a seller under the statute extends to "[a] person who successfully solicits the purchase motivated at least in part by a desire to serve his own financial interests or those of the securities owner"); In re WorldCom, Inc. Sec. Litig., 294 F.Supp.2d 392, 423 (S.D.N.Y. 2003) (alleged participation in "road show" meetings indicated that defendants actively solicited the sale of the notes issued under Section 12(a)(2) of the Securities Act). Cf. Fed. Hous. Fin. Agency v. Stanley, 2012 WL 5868300, at *4 (S.D.N.Y. Nov. 19, 2012) (defendant could not be liable under Section 12(a)(2) because plaintiff only alleged that defendant assisted in some unspecified marketing efforts and assisted in the preparation and filing of a registration statement).
B. Negligent Misrepresentation
1. Claims Against Nomura/RBS
With respect to the certificates Nomura/RBS itself sold to the Bank, the defendants argue that the Bank’s negligent misrepresentation claims fail because the Bank cannot establish that it relied on the information in the pro supps. See Gossels v. Fleet Nat’l Bank, 453 Mass. 366, 372 (2009) (justifiable reliance element of negligent misrepresentation claim). It argues that reliance was not possible because the pro supps were issued after or on the same day the Bank purchased the certificates. However, negligent misrepresentation claims such as those asserted here may be based on the preliminary offering documents, such as a free writing prospectus (FWP). There is evidence in the record that the FWPs for the certificates at issue contained the same representations as the pro supps, and that the Bank relied on the FWPs in deciding to purchase the certificates. See Federal Hous. Fin. Agency v. Nomura Holding Am., Inc., 68 F.Supp.3d 499, 503 (S.D.N.Y. 2014), aff’d sub nom. Federal Hous. Fin. Agency for Fed. Nat’l Mortg. Ass’n v. Nomura Holding Am., Inc., 873 F.3d 85 (2d Cir. 2017), quoting 17 C.F.R. § 230.433(c)(1)(i) (explaining that governing SEC regulations mandate that a FWP "not conflict with [i]nformation contained in the filed registration statement, including any prospectus or prospectus supplement"); Landesbank Baden-Wurttemberg v. RBS Holdings USA, Inc., 14 F.Supp.3d 488, 511 (S.D.N.Y. 2014) (plaintiffs could rely on FWPs where they contained same representations as pro supps); In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 932 F.Supp.2d 1095, 1115 (C.D.Cal. 2013).
The defendants contend that the cautionary disclaimers contained in the FWPs to the effect that the information therein was subject to change rendered the Bank’s reliance upon them unjustifiable. The court finds that this cautionary language is insufficient to establish lack of reasonable reliance, as a matter of law. See Federal Hous. Fin. Agency v. Deutsche Bank AG, 903 F.Supp.2d 285, 289 (S.D.N.Y. 2012) (rejecting contention that cautionary disclaimers in FWPs precluded the plaintiff from pleading reasonable reliance as a matter of law). The court does not understand the facts of this case to be such that the defendants’ position with respect to the LTVs or the underwriting guidelines used, if at all, to review the mortgage loans subsequently changed. Rather, this part of the FWPs and pro-supps referred to historic actions undertaken or not undertaken at the time the loan pools were assembled by the sponsors. Also, whether any Bank personnel actually reviewed these documents and reasonably relied upon them is a question of fact for the jury. Reasonable reliance may be proven with circumstantial evidence.
Turning next to the negligent misrepresentation claims that are based on the Bear Stearns sales, a difficult question is presented concerning choice of law: does New York or Massachusetts law govern these claims? This question is important to the outcome of this motion because, unlike Massachusetts, New York has not adopted § 552 of the Restatement (Second) of Torts which, as relevant to this case, defines the class of plaintiffs who may bring an action based on representations made by professionals with whom the plaintiff is not in privity. See Nycal Corp. v. KPMG Peat Marwick, LLP, 426 Mass. 491, 495-96 (1998) (holding that near-privity test adopted under New York law is inconsistent with the standard Massachusetts courts have applied and adopting and interpreting § 552).
The court applies Massachusetts choice of law rules to determine which law governs the claims. See Clarendon Nat. Ins. Co. v. Arbella Mut. Ins. Co., 60 Mass.App.Ct. 492, 495 (2004). Massachusetts has adopted a functional choice-of-law approach guided by the Restatement (Second) of Conflict of Laws (1971) (the Restatement of Conflicts). Cosme v. Whitin Mach. Works, Inc., 417 Mass. 643, 646-47 (1994); Clarendon Nat. Ins. Co., 60 Mass.App.Ct. at 496. If, as here, a claim involves alleged misrepresentations in which the defendant’s misrepresentation and the plaintiff’s reliance occurred in different states, the court applies the factors set out in § 148(2) of the Restatement to determine which state has the most significant relationship to the claim. Those factors include: "(a) the place, or places, where the plaintiff acted in reliance upon the defendant’s representations, (b) the place where the plaintiff received the representations, (c) the place where the defendant made the representations, (d) the domicile, residence, nationality, place of incorporation and place of business of the parties ..." Restatement of Conflicts § 148(2). The relative importance given to each factor "should be determined in the light of the [general] choice-of-law principles stated in § 6 with emphasis upon the purpose sought to be achieved by the relevant tort rules of the potentially interested states, the particular issue and the tort involved." Id., cmt. (e). § 6 identifies the following principles: "(a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied." Id., § 6(2).
Section 145 of the Restatement of Conflicts, which discusses principals applicable to all tort actions, similarly provides that of the principles set forth in § 6, the following are most relevant to consider in a tort action: "the needs of the interstate and international systems, the relevant policies of the forum, the relevant policies of other interested states and particularly of the state with the dominant interest in the determination of the particular issue, and ease in the determination and application of the law to be applied." Restatement of Conflicts § 145, cmt. (b).
In arguing that New York law governs, Nomura/RBS passes by the § 148(2) analysis to focus on the § 6 factors. And, as to these factors, Nomura/RBS does not actually perform a factor-by-factor analysis but instead relies on Judge O’Toole’s consideration of this issue, when the case was before him in federal court prior to remand, on motions presented by the rating agencies, Moody’s and S&P. There, Judge O’Toole held that misrepresentation claims asserted against those defendants were governed by New York law. See Federal Home Loan Bank of Boston v. Ally Fin., Inc., 2013 WL 5466628, at *1-2 (D.Mass. Sept. 30, 2013). In that decision, Judge O’Toole explained:
Although factor (c) favors New York law because the alleged misrepresentations were made there, factors (a), (b), and (d) favor Massachusetts law because the Bank relied on and received the alleged misrepresentations in Massachusetts and is headquartered in Massachusetts. See Restatement of Conflicts § 148, cmt. (i) (with regard to factor (d), explaining that "[t]he domicil, residence and place of business of the plaintiff are more important than are similar contacts on the part of the defendant").
The Bank argues that Section 148 of the Restatement overwhelmingly favors the application of Massachusetts law, as Massachusetts is where the Bank received and relied on the Rating Agency Defendants’ representations. That emphasizes only some of the considerations, however, at the expense of others. Instead of mechanically applying Section 148, I am to view the factors in light of the general choice-influencing factors of Section 6 ... New York has a strong interest in overseeing the conduct of financial institutions operating within its borders. Further, the Rating Agency Defendants did not specifically communicate their ratings to the Bank in Massachusetts; rather, the ratings were disseminated broadly by various entities. For the sake of uniformity and predictability, it is preferable that New York law should apply to these claims, rather than the law of the various and numerous States to which the ratings ended up being disseminated. Therefore, I conclude that New York law governs all three claims against the Rating Agency Defendants.Id. (internal quotation marks and citations omitted). Nomura and RBS contend that the same reasoning applies here. The court disagrees.
In rendering his conclusion, Judge O’Toole stressed the need for "uniformity and predictability" (factor (f)). Some courts have questioned whether uniformity and predictability concerns are paramount in the context of negligent misrepresentation claims of the type asserted here. See Tidemark Bank for Sav., F.S.B. v. Morris, 57 F.3d 1061, 1995 WL 368418, at *4 (1st Cir. 1995) (unpublished) (Factor (d) "is insignificant in negligence actions where the parties probably acted without considering the significance of the applicable rule of law"). See also Restatement of Conflicts § 148, cmt. (e) (uniformity and predictability not among the § 6 factors to be emphasized when weighing the relative importance given to each § 148 factor); id., § 145, cmt. (b) (including the uniformity and predictability factor as one of factors that are of "relative insignificance" when § 6 analysis is conducted with regard to tort claim). But, in any event, such concerns are of very different weight in deciding the choice of law for the claims asserted against the present investment banking defendants, who are in a very different relationship with the Bank, than the rating agency defendants. Unlike Moody’s and S&P, the investment banking defendants were the sponsors and/or marketers of these securities. They made the representations at issue in this case for the purpose of selling the securities and chose to sell them in a number of different states, including Massachusetts. They were aware of the states in which the securities could be marketed and the public policy decisions that governed the law of professional misrepresentation that applied in each.
Furthermore, the other relevant Section 6 factors are either neutral or weigh in favor of Massachusetts, where the impact of the alleged misrepresentations will be experienced and, as with most states, § 552 of the Restatement (Second) of Torts has been adopted. The § 148 factors also point to Massachusetts. The court concludes that Massachusetts law applies to the negligent misrepresentation claims concerning the Bear Stearns sales.
Nomura/RBS also raises two arguments for summary judgment under Massachusetts law. First, it contends that the Bank’s negligent misrepresentation claims are time barred under the applicable three-year statute of limitations. Second, it asserts that the Bank cannot satisfy essential elements of its negligent misrepresentation claims.
Nomura/RBS contends that the claims are time barred because, more than three years before the Bank filed its complaint, another investor filed a class action complaint against Nomura, which alleged many of the same misrepresentations concerning underwriting practices and credit quality of the loans pooled to create the certificates. See Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., SUCV 2008-00544 (Plumbers’ Union ). According to the defendant, the filing of the Plumbers’ Union complaint is dispositive evidence that a reasonable investor in the Bank’s position would have had reason to know of the alleged misconduct at issue no later than January 31, 2008. See Bowen v. Eli Lilly & Co., 408 Mass. 204, 206 (1990) (limitations period for tort claim begins to run when the plaintiff "knew or had reason to know that [it] had been harmed by the defendant’s conduct").
Nomura/RBS is unable to cite any relevant Massachusetts authority to support this proposition. Moreover, the case law it does cite from other jurisdictions generally indicates that the filing of a third party’s complaint, without more, is not sufficient to trigger the statute of limitations as a matter of law. See, e.g., In re American Funds Securities Litigation, 556 F.Supp.2d 1100, 1105-10 (C.D.Cal. 2008) (detailed news articles in prominent national publications, SEC press releases discussing enforcement orders in several proceedings addressing similar issues, and a prior complaint filed by other investors that alleged a nearly identical scheme of wrongdoing were sufficient to put the plaintiffs on inquiry notice for purposes of claim under Section 10(b) of the 1934 Act); Domenikos v. Roth, 288 F.App’x 718, 720 (2d Cir. 2008) (a class action complaint filed in the wake of a substantial decline in stock price that received extensive media coverage put plaintiffs on inquiry notice). The court does not find the filing of a complaint by another party triggers the running of the statute of limitations in the absence of evidence that the plaintiff was aware of the complaint and what was alleged in it or of the facts alleged disclosed in other sources.
Normura/RBS also argues that the claims are time barred because the record evidence demonstrates that the Bank was on inquiry notice of its claims more than three years before the filing of the complaint. The defendant points out that: between August and September 2007, the Bank’s Credit Department, Chief Risk Officer, and Portfolio Manager expressed concern about the unexpected risk posed by NAAC 2006-AR4; in September 2007, the Bank stopped purchasing private label RMBS on the advice of the FHFB (the Bank’s regulator), which expressed concern that the underlying loans would default; and in March 2008, Moody’s put three certificates (NAAC 2006-AR4, NAAC 2006-AF2, and NAAC 2007-1) on review for downgrade. Again, this is relevant evidence, but not conclusive, as a matter of law, that the Bank was on inquiry notice that the specific representations made in the offering materials regarding the due diligence undertaken in assembling the loans for these particular certificates were false.
Nomura/RBS also points out that the Bank’s Chief Risk Officer admitted that by early 2008 and into mid-2008, NAAC 2006-AR4 "sort of stood out as a bond that carried more risk" than originally believed.
Nomura/RBS further notes that on April 9, 2008, the Bank’s Enterprise Risk Management Group prepared a preliminary other-than-temporary-impairment analysis of the Bank’s RMBS portfolio. However, this analysis concluded that none of the Bank’s RMBS were other than temporarily impaired. In other words, the report indicated that, at that point, there was no reason to believe that the RMBS would not perform as anticipated if held to maturity. Thus, the report does not establish that the statute of limitations was necessarily triggered the date it issued. In fact, it could be argued that the report suggested that the RMBS would perform adequately if held to maturity.
Nomura/RBS also argues that the Bank has failed to provide evidence necessary to satisfy essential elements of their negligent misrepresentation claims concerning those sales. In situations, such as the one in the present case, where a plaintiff asserts a negligent misrepresentation claim against a defendant who supplied information for the guidance of others in a business transaction and who was not in contractual privity with the plaintiff, Massachusetts has specifically adopted the reasoning of the Restatement (Second) of Torts, § 552 (1977). See Nycal Corp., 426 Mass. at 495-96. Under the Restatement: "One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information." Id., quoting Restatement (Second) of Torts § 522. The SJC has interpreted this standard to require that a plaintiff establish that the defendant had "actual knowledge ... of the limited- though unnamed- group of potential [third parties of which the plaintiff was a member] that will rely on the [defendant’s advice], as well as actual knowledge of the particular financial transaction that such information is designed to influence." Id. at 498, quoting First Nat’l Bank of Commerce v. Monco Agency, Inc., 911 F.2d 1053, 1062 (5th Cir. 1990). Nomura/RBS contends that there is no record evidence that it had actual knowledge of the Bear Stearns sales (i.e., the transaction that its alleged misrepresentation was designed to influence). It also contends that there is no record evidence that it had actual knowledge of the group of potential third parties, such as the Bank, that would rely on the alleged misrepresentations. The court disagrees.
First, actual knowledge of the specific transaction- here the Bank’s purchases from Bear Stearns- is not required. Actual knowledge of a "substantially similar transaction" is sufficient. See Restatement (Second) of Torts § 552; North Am. Specialty Ins. Co. v. Lapalme, 258 F.3d 35, 40-41 (1st Cir. 2001). Second, there is sufficient evidence in the record to create a triable question of fact as to whether Nomura/RBS had actual knowledge that Bear Stearns intended to supply the offering materials to a group of sophisticated institutional investors with very substantial financial resources available for investment in RMBS, like the Bank, for their use in deciding whether to purchase the certificates. There even appears to be some evidence suggesting that Nomura/RBS knew that the Bank, in particular, was among these potential purchasers.
RBS/Nomura argues, without citing authority directly on point, that the population of institutional investors that may have relied on the offering documents it created is simply too large to support a negligent misrepresentation claim. However, at least two other courts, applying the Restatement test in a manner consistent with Nycal, have rejected this position. See Public Employees’ Ret. Sys. v. Moody’s Investors Serv., Inc., 226 Cal.App.4th 643, 669-70 (2014) ("CalPERS and the other [qualified institutional investors/qualified purchasers] constitute a sufficiently narrow and circumscribed class that would have access to and rely upon the ratings when deciding whether to purchase the SIV products"); Anschutz Corp. v. Merrill Lynch & Co., 785 F.Supp.2d 799, 826 (N.D.Cal. 2011) ("although the class of [qualified institutional buyers] might number in the thousands, it is still a circumscribed and identifiable group that the Ratings Defendants not only knew would have access to the ratings but who necessarily rely on the ratings in order to purchase investment grade securities").
2. Claims Against Credit Suisse
a. Loss Causation
Credit Suisse contends that it is entitled to summary judgment on all the negligent misrepresentation claims asserted against it (whether they arise from the certificates the Bank purchased from Barclays or from the certificates it purchased directly from Credit Suisse) because there is no record evidence that the Bank’s losses were proximately caused by the alleged misrepresentations in the offering documents. In making this argument, Credit Suisse principally relies on the United States Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 343-46 (2005). It asserts that, by application of the principles announced in Dura, it is entitled to summary judgment because the Bank has not proffered expert testimony demonstrating that its losses were attributable solely to the misstatements allegedly set out in the certificates rather than the effects of the Great Recession or other market conditions affecting RMBS. Credit Suisse’s reliance on Dura is misplaced. Dura was a securities fraud class action in which the plaintiff class asserted reliance on a false statement under the theory of "fraud on the market," where the market price of a publicly traded security in an efficient market is deemed to reflect any inflated value attributable to a false statement. In holding that the complaint failed to state a claim, the Supreme Court explained that the plaintiffs had not alleged that when the truth was revealed to the market, the stock price moved. In other words, there was no factual allegation that the allegedly false statement had inflated the market price at the time of purchase and caused the plaintiff class any loss.
Credit Suisse also points out that the Bank has not offered any expert testimony on damages.
This is not a fraud on the market case. In this case, if the Bank can prove that the alleged misrepresentations were a substantial factor in causing it to purchase the certificates, it is then entitled to recover any resulting "pecuniary loss ..., if [its] reliance is a substantial factor in determining the course of conduct that results in [its] loss." See Reisman v. KPMG Peat Marwick, LLP, 57 Mass.App.Ct. 100, 112 (2003), quoting Restatement of Torts § 546. Reisman defines Massachusetts law in the context of common-law claims for fraud or negligent misrepresentation of the type alleged in this case. See id. at 120 (rejecting application of the type of loss causation rule proposed by Credit Suisse and stating that "we [do not] think this troubled concept a desirable addition to our jurisprudence"). See also Lawrence Sav. Bank v. Levenson, 59 Mass.App.Ct. 699, 707 (2003) ("The question of causation is generally one of fact for the jury, and a plaintiff need only show that there was greater likelihood or probability that the harm complained of was due to causes for which the defendant was responsible than from any other cause ...") (internal quotation marks omitted).
Credit Suisse’ reliance on Vaso Active Pharm., Inc. v. Robinson & Cole, LLP, 2009 WL 971161, at *8 (Mass.Super. Jan. 23, 2009) (Fabricant, J.) [25 Mass.L.Rptr. 424], is misplaced. In that unusual case, the question was whether the defendant’s alleged legal malpractice caused any injury to the plaintiff corporation, as opposed to its shareholders who had already settled a securities class action. The question was whether the defendant law firm’s alleged failure to detect a misrepresentation in an SEC filing caused any loss to the enterprise value of the corporate plaintiff, as the decline in the market price of the plaintiff’s stock appeared to be the result of the disclosure of the true state of affairs not any act attributable to the defendant.
b. The Barclay’s Sales
Summary judgment will enter on the negligent misrepresentation claims based on the Barclays sales. It is undisputed that Chevy Chase, not Credit Suisse, made all the representations in the offering materials for the CCMFC certificates. Because Credit Suisse did not make the challenged misrepresentation or sell the certificates to the Bank, it cannot be held liable for negligent misrepresentation. See Savers Prop. & Cas. Ins. Co. v. Admiral Ins. Agency, Inc., 61 Mass.App.Ct. 158, 169 (2004) (defendant entitled to directed verdict on negligent misrepresentation claim where plaintiff "offered no evidence that [defendant] made any representations, let alone misrepresentations, for the guidance of [the plaintiff] that [plaintiff] relied on to its pecuniary detriment"). The Bank contends that simply passing along false information is sufficient for liability and therefore Credit Suisse may be liable because there is evidence that it sent the offering documents to the Bank. The court finds no law that supports this contention. The single Superior Court decision cited by the Bank, Schoembs v. Schena, 2015 WL 1012065 (Mass.Super. Mar. 13, 2015), actually stands for the converse, i.e., passing along false information contained in a report prepared by another does not make one liable for a false statement contained in that report, even if the defendant recommended to the plaintiff the professional who prepared the report.
In a footnote in its opening brief, Credit Suisse asserts, in conclusory fashion, that New York law applies to the extent the Bank’s negligent misrepresentation claims are based on the Barclays sales. See Def. Brief at 11, n.9. For the reasons already explained, the court does not find that New York has the most significant relationship to the claims.
C. G.L.c. 93A
1. The Direct Sales Claims
With respect to the c. 93A claims based on the direct sales by Nomura/RBS and Credit Suisse to the Bank, the defendants contend that the claims should be dismissed because the Bank failed to establish that any of the negligent misrepresentations that underlie the claims are extreme or egregious. See Marram, 442 Mass. at 62 ("a negligent misrepresentation may be so extreme or egregious as to constitute a violation of G.L.c. 93A, § 11"). A negligent misrepresentation may be extreme or egregious "if the truth could have been reasonably ascertained." Quinlan v. Clasby, 71 Mass.App.Ct. 97, 102 (2008); see also Golber v. BayBank Valley Trust Co., 46 Mass.App.Ct. 256, 261 (1999), quoting Glickman v. Brown, 21 Mass.App.Ct. 229, 235 (1985) ("negligent misrepresentation of fact the truth of which is reasonably capable of ascertainment is an unfair and deceptive act or practice under G.L.c. 93A, § 2(a)"). Whether the alleged misstatements at issue here are "extreme or egregious" presents a question of fact for resolution at trial.
2. Bear Stearns and Barclay Sales
The last paragraph of G.L.c. 93A, § 11 (par. 8), provides that:
No action shall be brought or maintained under this section unless the actions and transactions constituting the alleged unfair method of competition or the unfair or deceptive act or practice occurred primarily and substantially within the commonwealth. For the purposes of this paragraph, the burden of proof shall be upon the person claiming that such transactions and actions did not occur primarily and substantially within the commonwealth.
The unfair method of competition or unfair or deceptive act or practice occurred "primarily and substantially" in Massachusetts when "the center of gravity of the circumstances that give rise to the claim is primarily and substantially within the Commonwealth." Kuwaiti Danish Comp. Co. v. Digital Equip Corp., 438 Mass. 459, 473 (2003). To determine the center of gravity, the court "[l]ook[s] only to the allegedly unscrupulous conduct" and examines "factors ... includ[ing], but ... not ... limited to, the place of conduct, and the ‘situs of loss.’ " Skyhook Wireless, Inc. v. Google, Inc., 86 Mass.App.Ct. 611, 622 (2014).
Nomura/RBS and Credit Suisse argue that even though they have the burden of proof on this element, they have met their burden with regard to the claims arising from the Bank’s purchases of RMBS certificates from Bear Stearns and Barclays, respectively. The defendants’ arguments concerning the center of gravity of the c. 93A claims asserted against them with respect to the certificates sold to the Bank by other investment banks are not without merit. This is particularly true with respect to Credit Suisse, as it did not even prepare the offering materials used to market the RMBS sponsored by Chevy Chase. Nonetheless, the court finds that the c. 93A claims ought not be unbundled in the manner proposed by the defendants. Rather, their course of conduct in respect of the sale of the certificates and their relationship to the Bank should be viewed in its entirety in deciding the center of gravity of any unscrupulous conduct that may be proved at trial.
In this case, the direct sale c. 93A claims will be tried, all of the negligent misrepresentation claims with respect to the Nomura certificates will be tried, and all the MUSA claims with respect to Credit Suisse will be tried. As a result, it does not appear that any additional evidence will be required at trial with respect to the c. 93A claims associated with the Bear Stearn’s and Barclay’s transactions. Prudence suggests that if unfair or deceptive conduct is proven at trial with respect to either Nomura/RBS or Credit Suisse, the court consider the center of gravity of that conduct in the context of all the relevant evidence presented at trial.
It is a well "established principle that the absence of privity of contract does not bar a claim under the statute so long as the parties [were] engaged in more than a minor or insignificant business relationship." Imprimis Inv’rs, LLC v. KPMG Peat Marwick, LLP, 69 Mass.App.Ct. 218, 230 (2007) (internal quotation marks omitted). Nomura/RBS suggests that with regard to the certificates sold by Bear Stearns, the c. 93A claim fails because the Bank did not have a commercial relationship with it. Although Nomura/RBS had no direct contact with the Bank in connection with these sales, its business relationship with the Bank was such that liability under c. 93A is not foreclosed as a matter of law because of a lack of privity.
ORDER
For the forgoing reasons:
1. The Nomura and RBS Defendants’ motion for summary judgment is ALLOWED with respect to the claims for violation of MUSA that are based upon the Bear Stearns sales, but otherwise DENIED ; and
2. The Credit Suisse Defendants’ motion for partial summary judgment is ALLOWED with respect to the claims for negligent misrepresentation that are based on the Barclays sales, but otherwise DENIED .