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Media Alerts - Federal Housing Fin. Agency v. UBS Americas Inc. - Second Circuit
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April 5, 2013
  Federal Housing Fin. Agency v. UBS Americas Inc. - Second Circuit
Heading: Second Circuit Holds That Fraud Lawsuit Can Proceed Against UBS Regarding the Sale and Marketing of Mortgage-Backed Securities to Fannie Mae and Freddie Mac

Area of Law: Securities; Administrative Law

Issue(s) Presented: Whether the Housing and Economic Recovery Act of 2008 established the statute of limitations for the Federal Housing Finance Agency ("FHFA") to file securities fraud claims against UBS Americas Inc, and whether FHFA had standing to bring such claims.

Brief Summary: On July 27, 2011, the Federal Housing Finance Agency ("FHFA"), as conservator of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), sued UBS Americas Inc., certain affiliated entities, and several officers (collectively, "UBS") in the United States District Court for the Southern District of New York for fraud and misrepresentation in connection with the marketing and sale of mortgage-backed securities. UBS filed motions to dismiss the case on grounds that (1) the action was untimely, since all the sales were completed more than three years before FHFA filed the lawsuit, and (2) the FHFA lacked legal standing to bring suit. The district court denied the motions and the Second Circuit affirmed. To read the full opinion, please visit: http://www.ca2.uscourts.gov/de...723691363d9/1/hilite/


Extended Summary:
On July 30, 2008, the Housing and Economic Recovery Act of 2008 ("HERA") was signed into law. Congress enacted HERA because it was concerned about the financial condition of the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), and other government-sponsored entities ("GSEs"). Congress conferred upon FHFA broad power to appoint itself conservator or receiver of GSEs, to "take such action as may be . . . necessary to put the [GSEs] in a sound and solvent condition, and to "collect all obligations and money due the [GSEs]."

On July 27, 2011, FHFA, acting as conservator of Fannie Mae and Freddie Mac, filed a lawsuit against UBS Americas Inc., certain affiliated entities, and several officers (collectively, "UBS") in the United States District Court for the Southern District of New York for fraud and misrepresentation in connection with the marketing and sale of $6.4 billion in residential mortgage-backed securities sponsored or underwritten by UBS. The lawsuit was filed more than three years after the last securities offering in question, but within three years of FHFA's appointment as conservator.

In the lawsuit, FHFA claimed that UBS falsely represented that the mortgage loans serving as collateral for the securitizations were underwritten in accordance with established guidelines to ensure that borrowers could meet their payment obligations. As a consequence of their reliance on these false representations, Fannie Mae and Freddie Mac purchased the securities and subsequently sustained massive losses. FHFA has filed seventeen similar actions against other financial institutions involved in the mortgage-backed securities industry. In the district court, UBS filed motions to dismiss the case on the grounds that the action was untimely, and because the FHFA lacked legal standing to bring the suit. The district court denied these motions and the Second Circuit affirmed.

On the issue of timeliness, the Second Circuit held that the Housing and Economic Recovery Act of 2008 ("HERA") established the statutes of limitations for FHFA to file actions as a conservator or receiver, and therefore the lawsuit was timely. The HERA statute provides in part that "the date on which the statute of limitations begins to run . . . shall be the later of -- (i) the date of the appointment of the Agency as conservator or receiver; or (ii) the date on which the cause of action accrues." UBS argued that the timeliness of securities fraud lawsuits are governed by "statutes of repose," which run without interruption once a triggering event such as the sale of a security occurs, rather than "statutes of limitations," which may be tolled or suspended for equitable reasons. As a result, UBS claimed that the extended statutes of limitations in HERA were not applicable to FHFA's securities fraud claims, and thus they were time-barred.

However, in examining the words and intent of HERA, the Second Circuit concluded that a reasonable reader could only understand the HERA statutes of limitations provisions to apply to both the federal and state claims in this case. While acknowledging that statues of "limitations" and "repose" may be theoretically distinct, the Second Circuit noted several examples where the Supreme Court, the Second Circuit, and Congress have used the term statutes of limitations to refer to the limitations period for the exact type of securities fraud alleged by FHFA. Accordingly, the Second Circuit held that HERA applied, and since FHFA filed its case within three years of its appointment as conservator, the case was not time-barred.

Regarding the issue of standing, UBS argued the FHFA lacked legal standing because the appointments of James B. Lockhart III and Edward DeMarco as Acting Directors of FHFA were unconstitutional, as Lockhart was appointed by Congress without being nominated by the President and DeMarco was appointed by the President without Senate confirmation. In upholding FHFA's legal standing, the Second Circuit found that the functions assigned to Lockhart by Congress as Acting Director of FHFA were "germane" to the functions he had previously served as Director of the Office of Federal Housing Enterprise Oversight ("OFHEO"). Therefore, since Congress essentially converted OFHEO into FHFA and transferred OFHEO's functions to FHFA, Lockhart's FHFA appointment was permissible. Further, since Lockhart was legally the FHFA Director, HERA authorized the President to appoint Deputy Director DeMarco Acting Director upon Lockhart's resignation. Accordingly, the Second Circuit held that FHFA has legal standing to pursue its case.

To read the full opinion, please visit:
http://www.ca2.uscourts.gov/de...723691363d9/1/hilite/

Panel
: Circuit Judges Chin and Lohier; District Judge Gardephe

Argument Date: 11/26/12

Date of Issued Opinion: 04/05/13

Docket Number: No. 12-3207

Decided: Affirmed

Case Alert Author: Matthew Auten

Counsel: KATHLEEN M. SULLIVAN (Philippe Z. Selendy, Christine H. Chung, Adam M. Abensohn, William B. Adams, on the brief), Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York, for Plaintiff-Appellee.

JAY B. KASNER (Scott D. Musoff, Joseph N.Sacca, Robert A. Fumerton, Alexander C. Drylewski, on the brief),Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, for
Defendants-Appellants.

Author: Circuit Judge Chin

Case Alert Circuit Supervisor: Professor Emily Gold Waldman

    Posted By: Emily Waldman @ 04/05/2013 04:32 PM     2nd Circuit  

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