May 13, 2011

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Mortgage pass-through certificates entitle the investor to distributions from underlying pools of mortgages. A key aspect of these securities are the credit ratings given to them by the ratings agencies. In In re Lehman Brothers Mortgage-Backed Securities Litigation, 2011 WL 1778726 (2d Cir. May 11, 2010), the court considered whether these ratings agencies, by allegedly helping to "determine the composition of loan pools, the certificates' structures, and the amount and kinds of credit enhancement of particular tranches" could be liable under Section 11 of the '33 Act for misstatements in the certificates' offering documents.

The plaintiffs' argued that the ratings agencies activities made them "underwriters" of the securities and therefore subject to Section 11 liability. The court disagreed, finding that "to qualify as an underwriter under the participation prongs of the statutory definition, a person must participate, directly or indirectly, in purchasing securities from an issuer with a view to distribution, in offering or selling securities for an issuer in connection with a distribution, or in the underwriting of such an offering." The fact that the ratings agencies played a role in "structuring or creating" the securities was insufficient to find that they acted as underwriters. Nor had the plaintiffs adequately alleged that the ratings agencies controlled the primary violators. The court found that "allegations of advice, feedback, and guidance fail to raise a reasonable inference that the Ratings Agencies had the power to direct, rather than merely inform, the banks' ultimate structuring decisions."

Holding: Dismissal of claims against ratings agencies affirmed.

Posted by Lyle Roberts at May 13, 2011 10:31 PM | TrackBack
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