Banks Hit Supreme Court Dead End in FHFA Securities Cases
The U.S. Supreme Court has declined to hear arguments by the world's biggest banks that the Federal Housing Finance Agency waited too long to sue them over losses on $200 billion in mortgage-backed securities. For the banks that haven't yet settled with the FHFA — including JPMorgan Chase & Co, Royal Bank of Scotland plc, and Bank of America Corp. — the decision nearly scuttles any hope of derailing a series of trials scheduled to kick off next summer.
In a two-sentence order issued on Monday, the Supreme Court refused to allow JPMorgan, RBS, BofA and other banks to revive their argument that the FHFA's claims are time-barred. The U.S. Court of Appeals for the Second Circuit rejected that argument in an April decision concerning UBS AG. In an unusual procedural twist, other banks targeted by the FHFA had sought permission to appeal that decision, even though they weren't parties to the UBS appeal.
Congress created the FHFA in September 2008 and tasked it with serving as conservator for Fannie Mae and Freddie Mac. The FHFA's lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres, & Friedman sued 18 banks in 2011, alleging that they misrepresented the quality of home loans pooled into securities that the banks sold to Fannie and Freddie. Sixteen of the 18 cases wound up before U.S. District Judge Denise Cote in Manhattan. The FHFA's suit against BofA's Countrywide Financial Corp unit is being refereed by U.S. District Judge Mariana Pfaelzer in Los Angeles, while FHFA's case against RBS is pending in U.S. district court in Connecticut but is assigned to Cote for pre-trial issues.
Hoping to win an early exit from the bulk of the FHFA's claims, the defendants almost immediately argued that the FHFA didn't bring its claims within the three-year statute of repose that applies to federal securities fraud claims. (A statute of repose is like a statute of limitations, except less easily tolled.) Cote rejected that argument in May 2012, reasoning that Congress must have intended to extend the statute of repose for FHFA claims when it created the FHFA through a statute known as the Housing and Economic Recovery Act. UBS and its lawyers at Skadden, Arps, Slate, Meagher & Flom appealed that decision to the Second Circuit. The other banks targeted by FHFA submitted an amicus brief supporting UBS's position, but weren't parties to the appeal. The Second Circuit affirmed Cote's ruling in April 2013.
After initially spearheading the defense, UBS agreed in July to pay $885 million to exit the litigation. The settlement followed similar deals struck by Citigroup Inc. and General Electric Co.'s banking unit. With UBS out of the picture, the 13 other banks doing battle with the FHFA before Judge Cote filed an emergency motion to intervene at the Second Circuit. They argued that the appeals court should allow them to seek Supreme Court cert even though they weren't parties to UBS's appeal. The Second Circuit denied the request on Sept. 5. The Supremes have now followed the same course, denying a last ditch request for leave to file a cert petition.
There's still a remote chance that the Supreme Court could revisit the defendants' statute of repose argument. The big banks have also been sued for alleged securities fraud by the National Credit Union Administration, an agency with powers similar to those of the FHFA. As in the FHFA litigation, the banks have argued that the NCUA's claims are barred by the statute of repose. The Tenth Circuit rejected that defense argument in a Aug. 27 decision involving Nomura Holding America Inc., which is also one of the remaining defendants in the FHFA litigation. Nomura has until late November to decide whether to file a cert petition appealing that ruling. A grant of cert would likely also stop the FHFA litigation in its tracks.
Cote has scheduled a wave of trials in the FHFA litigation. The first trial, slated for June 2014, features claims against JPMorgan and Bank of America'ss Merrill Lynch & Co. unit.