Our law firm is currently investigating claims on behalf of institutions and ultra high net worth (“Ultra-HNW”) investors who sustained losses in mortgage pass-through certificates sold by Merrill Lynch. In June 2011, a securities class action lawsuit filed against Merrill Lynch, a part of Bank of America (NYSE: BAC), Case No. 08-CV-10841, obtained class certification. The class action arises out of the sale of approximately $16.5 billion of certificates derived from pools of securitized home mortgages, referred to as mortgage pass-through certificates. The certified class includes “all persons or entities who purchased or otherwise acquired Merrill Lynch Alternative Note Asset Trust Series 2007-A3, 2007-AF1, 2007-F1, Merrill Lynch First Franklin Mortgage Loan Trust Series 2007-2, 2007-3, 2007-4, 2007 A, Merrill Lynch Mortgage Investors Trust Series 2006 MLN1, 2006-FM1, 2006FF1, 2006-RM5, MLCC 2006 2, 2006-AHL1, 2006-RM3, 2006-WMC1, 2006 WMC2, 2006 A1, Ownit Mortgage Loan Trust Series 2006-2 and who were damaged thereby.”
The class action was filed based on the sale of “asset-backed pass-through certificates (or, as commonly referred, mortgage pass-through certificates). Asset-backed passthrough certificates are securities entitling the holder to income payments from pools of loans and/or asset-backed or mortgage-backed securities. Fundamentally, the value for pass-through certificates depends on the ability of borrowers to repay the principal and interest on the underlying loans and the adequacy of the collateral in the event of default. [H]owever, the Offering Documents contained untrue statements and omissions concerning the quality of loans and the adequacy of collateral within the loan pools.”
The Complaint alleges, that “the Certificates were supported by pools of mortgage loans that the Merrill Depositor acquired from Merrill Lynch Mortgage Lending, Inc. (the “Merrill Sponsor”), First Franklin Financial Corporation (“First Franklin”) and Credit-Based Asset Servicing and Securitization LLC (“C-BASS”). The Merrill Sponsor, First Franklin and C-BASS originated and/or purchased the mortgage loans from various mortgage originators, including, among others, Countrywide Home Loans, Inc. (“Countrywide”), American Home Mortgage Corp. (“American Home Mortgage”), Ownit Mortgage Solutions, Inc. (“Ownit”), New Century Mortgage Corporation (“New Century”), IndyMac Bank, F.S.B. (“IndyMac”), WMC Mortgage Corporation (“WMC”), ResMAE Mortgage Corporation (“ResMAE”) and Fremont Investment & Loan (“Fremont”).
The Offering Documents contained untrue statements of material fact, or omitted to state material facts necessary to make the statements therein not misleading, regarding: (1) the underwriting standards purportedly used in connection with the origination of the underlying mortgages; (2) the maximum loan-to-value ratios used to qualify borrowers; (3) the appraisals of the properties underlying the mortgages; (4) the debt-to-income ratios permitted on the loans; and (5) the ratings of the Certificates.
The true facts which were omitted from the Offering Documents were:
1) The loan originators, including First Franklin, Countrywide, Ownit, American Home Mortgage, New Century, IndyMac, WMC, ResMAE, and Fremont had not followed their stated underwriting standards when issuing loans to borrowers;
2) The Merrill Sponsor, C-BASS and First Franklin failed to follow their loanpurchasing guidelines when acquiring many of the underlying mortgage loans;
3) The underlying mortgages were based on collateral appraisals that overstated thevalue of the underlying properties; and
4) The ratings stated in the Prospectus Supplements were based on outdated assumptions, relaxed ratings criteria, and inaccurate loan information.
As a result of these untrue statements and omissions in the Offering Documents, Plaintiffs and the Class purchased Certificates that were far riskier than represented and that were not of the “best quality,” or even “medium credit quality” and were not equivalent to other investments with the same credit ratings. Contrary to representations in the Offering Documents, the Certificates exposed purchasers to increased risk with respect to absolute cash flow and the timing of payments. The Rating Agencies have now downgraded nearly all of the Certificates. Virtually all of the Certificates represented to be investment-grade instruments in the Offering Documents have been downgraded to below investment-grade instruments. The Certificates, therefore, are no longer marketable near the prices paid by Plaintiffs and the Class.”
Institutions and Ultra-HNW investors who purchased these mortgage pass-through certificates from Merrill Lynch should consider whether they should participate in the class action or file a securities arbitration claim in the arbitration forum established by the Financial Industry Regulatory Authority (“FINRA”). FINRA’s Arbitration Department is where institutions and Ultra-HNW investors can go to seek redress as a result of sales practice violations committed by their brokerage firm.
KlaymanToskes reminds institutions and Ultra-HNW investors of the benefits of filing a securities arbitration claim against their broker dealer, as opposed to participating in the class action lawsuit. By participating in the class action lawsuit, investors will most likely recover only pennies on the dollar. As a result, it may be more beneficial to file a securities arbitration claim to recover investment losses. In 2003, we conducted a detailed study of securities arbitration versus class action. The study concluded that investors who file a securities arbitration claim traditionally obtain an overall higher rate of recovery as opposed to participating in a class action lawsuit. To view the full results of the comparison, click here.