Judge Dismisses Hedge Fund Suit Over Mortgage Disclosure
District judge Richard Berman in a written decision Thursday granted a motion by Countrywide Financial to dismiss claims by a hedge fund that it misrepresented the risk of certain mortgage portfolios. On June 18, 2009, SRM Global Fund filed an amended claim against Countrywide Financial, now known as Bank of America Home Loans following the acquisition of Countrywide. The suit was failed against former Countrywide officers and directors Angelo Mozilo, David Sambol, Eric Sieracki, and against Bank of America (BAC) and former BofA CEO Kenneth Lewis. SRM owned roughly 50m shares of Countrywide in 2008, an investment that "lost nearly 90% of its value in just nine months as the truth about the problems at Countrywide concealed by Defendants' misrepresentations and omissions were gradually revealed," according to the complaint. The alleged misrepresentations and omissions include, among others, that Countrywide on Sept. 26, 2006 "knew they were 'flying blind' with respect to the value of [Countrywide's] substantial pay-option adjustable rate mortgage (pay-option ARM) portfolio and thus … had no reasonable basis for [their] assurances about Countrywide's financial condition," according to Berman's statement. On Oct. 26, 2007, Countrywide announced its Q307 financial results, which included a $1.25bn loss, Countrywide's first quarterly loss in 25 years, according to the SRM complaint. Countrywide also disclosed a $1bn write-down of its loans and mortgage-backed securities and a threefold increase in loan loss provisions over the previous quarter, a nearly 25-fold increase over the prior year. SRM claimed that Countrywide misrepresented in certain 2006-2007 regulatory filings its viability and liquidity. But Berman wrote that SRM "does little more than summarize statements contained in the [Securities and Exchange Commission] filing regarding substantial losses sustained by Countrywide and does not explain how these statements were misleading or deficient." "[SRM] has failed to allege that the Defendants made a material misstatement or omission ... [and] failed to plead facts showing a primary violation of the securities laws by the allegedly controlled persons," Berman wrote. Additionally, SRM had requested the ability to file a second amended complaint to incorporate new documents and data, but Berman "respectfully denied" the SRM's request, as the hedge fund "was given ample advance notice" of the basis for the defendant's motion to have the claims dismissed. Write to Diana Golobay. Disclosure: the author holds no relevant investments.