The 2nd Circuit found that a lead plaintiff seeking to represent investors in 17 securities offerings had standing to sue Goldman Sachs based on several securities offerings backed by residential mortgage pools originated by several banks and mortgage companies. The mortgage-backed certificates in question were issued under one shelf registration statement, but were sold in 17 separate offerings using 17 different prospectus supplements.
The court held that the lead plaintiff, the NECA-IBEW Health and Welfare Fund (NECA) had standing to assert the claims of purchasers of certificates backed by mortgages originated by the same lenders that originated the mortgages backing plaintiff’s certificates, because such claims implicated “the same set of concerns” as the lead plaintiff’s claims. The court further held that NECA need not plead an out-of-pocket loss in order to allege a cognizable diminution in the value of an illiquid security under Section 11.
NECA alleged that contrary to generic representations in the offering documents, neither Goldman Sachs nor the loan originators they used employed standards aimed at determining the borrowers’ ability to repay the underlying loans. According to the complaint, at the time the trusts were created, “there were wide-spread, systematic problems in the residential lending industry” where “loan originators began lending money to nearly anyone, even if they could not afford to repay the loans, ignoring their own stated lending underwriting guidelines.”
The district court found that NECA lacked standing to bring claims on behalf of purchasers from 15 of the 17 trusts because the lead plaintiff had not invested in those offerings. According to the district court, the lead plaintiff failed to show that the injuries it alleges based upon purchases of certificates from two of the trusts were the same as those allegedly suffered by purchasers of certificates from other trusts backed by distinct sets of loans. The court rejected NECA’s argument that, because all of the purchasers were subject to the same misrepresentations from the same shelf registration statement with respect to the same types of securities, their injuries were sufficiently similar to confer standing upon NECA to assert claims on behalf of all.
The lower court also found that NECA failed to allege “a cognizable loss” under Section 11. The district court reasoned that NECA’s allegation that it was exposed to greatly enhanced risk with respect to both the timing and amount of cash flow under the Certificates was insufficient to plead injury because of the statements in the offering documents warning that the certificates might not be resalable.
Goldman Sachs argued that each offering was issued pursuant to a different “registration statement,” even if every offering’s registration statement included the same shelf registration statement. The defendants also noted that the shelf registration statement common to all the certificates contained no information about the loan originators or the mortgage collateral underlying them. That information was instead contained in the prospectus supplements unique to each offering.
The court rejected this argument, concluding that NECA had “class standing” to assert the claims of purchasers of certificates backed by mortgages originated by the same lenders that originated the mortgages backing the certificates that it purchased, even though they were in different offerings, because such claims implicated “the same set of concerns” as NECA’s claims. While not all claims were revived, NECA could bring class claims on behalf of those purchasers who met this commonality requirement.
With regard to the cognizable loss question, the court rejected the determination below that NECA suffered no loss because it did not allege any missed payment from the trusts and admitted that no payments had been missed. The 2nd Circuit rejected the idea that “a fixed income investor must miss an interest payment before his securities can be said to have declined in value.” According to the appellate panel, the reasonable inference from NECA’s allegations was that, because the loans backing the certificates were riskier than defendants represented, the future cash flows to which NECA was entitled under the certificates required a higher discount rate once the offering documents’ falsity was revealed, resulting in a lower present value.
NECA-IBEW Health and Welfare Fund v. Goldman Sachs & Co. .