A failure to prove that Deutsche Bank (DB) knowingly shared false misrepresentations about the value of subprime mortgages backing securities sold off to mortgage bond investors resulted in the dismissal of a major RMBS case filed against the investment bank.
U.S. District Court Judge Deborah Batts of the Southern District of New York dismissed the “In re Deutsche Bank AG Securities Litigation” lawsuit last week.
The case stems from allegations levied by investors who acquired billions in residential mortgage-backed securities packaged and sold off by the investment bank and other defendants. The investors allege that Deutsche Bank and related entities took part in the underwriting and offering of securities that “misrepresented or omitted” facts about exposures to high-risk subprime and nonprime residential mortgage markets through RMBS and CDO assets.
Early on, the case persisted with one motion to dismiss not working out in Deutsche’s favor, but that changed with a recent case that set up a higher standard in the Second Circuit for getting an RMBS complaint through.
Judge Batts ruled legal precedent established in the Fait v. Regions Financial Corp. case created a new standard in the Second Circuit where RMBS investors have to prove parties, like Deutsche Bank and other defendants, did not honestly believe the initial projections they made about the value of mortgages underlying RMBS securities.
Using Fait as a precedent case, Deutsche moved to have the case dismissed, and Judge Batts agreed to granting a dismissal.
“As the Second Circuit made clear in City of Omaha, even statements that defendants should have known that their valuation decisions were false or misleading will not state a plausible claim for relief under the Securities Act,” Judge Batts wrote. “After Fait, plaintiffs must allege that defendants did not believe their valuation statements at the time they made them.”
The initial May 2008 offering that caused the suit is being scrutinized by investors who claim the Deutsche relied on faulty value-at-risk metrics, leading to a trading loss that is 700% above the initial VaR limits set for risk.
However, Deutsche and related defendants argued that their estimations on losses were merely opinions, not knowing misrepresentations. The court following this same logic and precedent laid out in the Fait case dismissed the litigation.
