The Second Circuit’s analysis has a basic flaw, said SIFMA, in that there is no such thing as “class standing.” To the contrary, that a suit may be a class action adds nothing to the question of standing. The standing analysis is the same regardless of whether a plaintiff purports to act on behalf of a class. Here, the plaintiff’s standing is limited by the Securities Act, which expressly permits a plaintiff to sue only with respect to the particular security it purchased.
The more specific question is whether purchasers of mortage-backed securities from one tranche of an offering have standing to represent a class that includes purchasers of different tranches of the same offering, or other mortgage-backed securities offerings, based on the same shelf registration. Mortgage-backed securities are divided into tranches with different rights, risk profiles and rates of return, noted amici, and each tranche is a separate and unique security with its own CUSIP.
The differences among such offerings are particularly acute, explained SIFMA, because each offering is backed by a unique securitization pool that typically does not exist until the specific mortgage-backed security is structured. To SIFMA’s knowledge, the Second Circuit ruling is the only decision in which a court concluded that such plaintiffs have standing to pursue a claim on behalf of purchasers of different mortgage-backed securities.
The Second Circuit’s “similar” or “same” set of concerns standard is also vague and indeterminate, argued amici, in contrast to the statutory test. It rewards a plaintiff that pleads its claim broadly and would unjustifiably multiply defendants’ potential liability under the Securities Act, further burdening already busy courts and resulting in increased vexatious litigation and coercive settlements to the detriment of the nation’s
Amici also predicted that the Second Circuit’s decision, if left intact, would not be limited in application to litigation involving mortgage-backed securities. Rather, the Second Circuit established a broad standard for determining class standing in any putative class action, whether the putative class claims concern violations of the federal securities laws related to mortgage-backed securities, other types of securities, or any other statutory or common law violation. The Second Circuit’s new standard will magnify the existing confusion among the lower courts regarding standing, creating uncertainty and inconsistent outcomes, as well as cumbersome litigation regarding the “same” or “similar” concerns standard.
In determining that the plaintiff below had standing to pursue claims on behalf of purchasers of securities it did not itself purchase, continued SIFMA, the Second Circuit ignored the limits on standing imposed by the Securities Act itself. Although Sections 11 and 12(a)(2) impose near strict liability for material misrepresentations in a registration statement or prospectus, they authorize only an actual purchaser of the particular security described in the offering materials to sue.