PENSION TRUST FUND FOR OPERATING ENGINEERS; Individually and on behalf of itself and all others similarly situated, Appellant
MORTGAGE ASSET SECURITIZATION TRANSACTIONS, INC.; DAVID MARTIN; PER DYRVIK; HUGH CORCORAN; PETER SLAGOWITZ; UBS REAL ESTATE SECURITIES, INC.; UBS SECURITIES, LLC; UBS AMERICAS INC.
Argued June 25, 2013.
On Appeal from the United States District Court for the District of New Jersey (D.C. No. 2-10-cv-00898) District Judge: Honorable Claire C. Cecchi.
Douglas S. Wilens, Esq. (ARGUED) Robbins Geller Rudman & Dowd Counsel for Appellant Pension Trust Fund for Operating Engineers.
Peter S. Pearlman, Esq. Cohn, Lifland, Pearlman, Herrmann & Knopf Park, Counsel for Appellant Pension Trust Fund for Operating Engineers.
Rukhsanah Singh, Esq. Liza M. Walsh, Esq. Connell Foley, Counsel for Appellees Mortgage Asset Securitization Transactions, Inc., David Martin, Per Dyrvik, Hugh Corcoran, UBS Real Estate Securities, Inc., UBS Securities, LLC, Peter Slagowitz, and UBS Americas Inc.
Lawrence J. Zweifach, Esq. (ARGUED) Gibson Dunn, Counsel for Appellees Mortgage Asset Securitization Transactions, Inc., David Martin, Per Dyrvik, Hugh Corcoran, UBS Real Estate Securities, Inc., UBS Securities, LLC, Peter Slagowitz, and UBS Americas Inc.
Before: FUENTES, FISHER and CHAGARES, Circuit Judges.
FISHER, Circuit Judge.
Lead Plaintiff Pension Trust Fund for Operating Engineers (the "Operating Engineers") appeal from the District Court's initial order dismissing without prejudice their amended class action complaint (the "Amended Complaint"), which alleged violations of the Securities Act of 1933, 15 U.S.C. § 77a et seq., by subsidiaries and employees of UBS AG ("UBS"), for failure to plead compliance with the one-year statute of limitations set forth in Section 13 of the Securities Act, 15 U.S.C. § 77m. The Operating Engineers also appeal from the District Court's subsequent order dismissing with prejudice their second amended class action complaint (the "Second Amended Complaint") as untimely under an inquiry notice standard. Although we hold that a Securities Act plaintiff need not plead compliance with Section 13 and that Section 13 establishes a discovery standard for evaluating the timeliness of Securities Act claims, we nonetheless conclude that the class action claims in the original complaint (the "Original Complaint") were untimely. Therefore, we will affirm.
This appeal involves mortgage-backed securities, investment vehicles that were among the casualties of the financial crisis of the late 2000s. In a traditional mortgage, a lending institution, known as the originator, extends credit to a borrower. In exchange, the borrower promises to repay principal and interest on the loan, and the borrower's real property serves as collateral in case of her default. The originator follows guidelines, known as underwriting standards, to ensure that it receives a return on its investment.
For example, to evaluate the borrower's creditworthiness, the originator assesses the ratio of her monthly mortgage-related obligations to her monthly gross income (the "debt-to-income ratio"). And to assess the collateral's worth, the originator evaluates the ratio of the outstanding mortgage obligation to the property's appraised value (the "loan-to-value ratio").
For mortgage-backed securities, the originator sells the loan to a financial institution to realize immediate profit and to reduce future risk of default. The financial institution pools the loan with others, deposits the loans into a trust, and sells certificates issued by the trust to investors. Investors are entitled to receive cash flows from the principal and interest payments made by the borrowers on the loan pool in the trust. The rate of return on the securities partially depends on the riskiness of the underlying loans, which, in turn, is partially measured by the debt-to-income and loan-to-value ratios.
The mortgage-backed securities in this case, known as the MASTR Pass-Through Certificates, Series 2007-3 (the "Certificates"), were offered to the public on May 14, 2007. UBS Real Estate Securities, Inc. ("UBS Real Estate"), the sponsor of the Certificates, purchased the underlying loans from originators, including Countrywide Home Loans, Inc. ("Countrywide") and IndyMac Bank, F.S.B. ("IndyMac"). UBS Real Estate then sold the loans to Mortgage Asset Securitization Transactions, Inc. ("MASTR"), the depositor of the Certificates. MASTR next placed the loans into the MASTR Adjustable Rate Mortgages Trust 2007-3 (the "MASTR Trust"), the issuer of the Certificates. UBS Securities, LLC ("UBS Securities"), the underwriter of the Certificates, finally sold the Certificates to investors like the Operating Engineers, who purchased Series 12A1 Certificates with a face value of $5, 123, 977 on September 18, 2007.
The Certificates were issued pursuant to a Securities and Exchange Commission ("SEC") Form S-3 Registration Statement filed on December 16, 2005, as amended by an SEC Form S-3/A supplemental pre-effective Registration Statement on April 4, 2006 (together, the "Registration Statement"), and an SEC Form 424B5 Prospectus Supplement filed on May 14, 2007 (the "Prospectus Supplement" and, together with the Registration Statement, the "Offering Documents"). The Registration Statement was signed by MASTR's officers and directors, including David Martin, Per Dyrvik, Hugh Corcoran, and Peter Slagowitz.
The Offering Documents stated that Countrywide originated about 52% and IndyMac originated about 40% of the mortgages backing the Certificates. The Offering Documents assured investors that the underlying loans were originated pursuant to particular underwriting policies, practices, and procedures and in compliance with federal and state laws and regulations. For example, the Offering Documents indicated that the availability of the loans was limited to those borrowers whose creditworthiness, as revealed by the debt-to-income ratio, was within accepted limits. Additionally, the Offering Documents provided that the real property that was collateral for the loans was appraised pursuant to the generally-accepted Uniform Standards of Professional Appraisal Practice and that certain quantities of the loans were within specific ranges of loan-to-value ratios. Finally, the Offering Documents represented that no material legal proceedings were pending against "the sponsor, the depositor or the issuing entity" of the Certificates. App. at 1728. Based on these guarantees, Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P's" and, together with Moody's, the "Ratings Agencies") rated the Series 12A1 Certificates as AAA, the highest quality investment grade, in September 2007.
However, because Countrywide and IndyMac "systematically ignored" and "completely" and "wholly disregarded" proper underwriting standards, UBS's statements in the Offering Documents about the loans underlying the Certificates were materially false and misleading. Id. at 382 ¶ 9, 384 ¶ 14, 411 ¶ 86. In particular, the debt-to-income ratios were inaccurate because they were based on inflated income figures, and the loan-to-value ratios were skewed because they were based on inflated property appraisals. As a result of UBS's untrue statements and omissions about the underwriting standards, the Certificates were substantially more risky than disclosed in the Offering Documents.
From late 2007 through early 2009, many news articles linked the high delinquency rates of mortgages originated by Countrywide and IndyMac to the abandonment of accepted underwriting standards. For example, on April 30, 2008, the Wall Street Journal reported on the "mounting evidence of serious problems with [Countrywide's] underwriting of many home loans, " which included allegations that the company "deliberately overlooked inflated income figures for many borrowers, " and relaxed its lending standards regarding the estimated values of the real estate. Id. at 1949. Also in 2008, the non-profit Center for Responsible Lending released a pair of reports criticizing Countrywide's and IndyMac's underwriting standards. See, e.g., id. at 1960 (describing how Countrywide's "appraiser was being 'strongly encouraged' to inflate property values on homes, " and "employees were coaching borrowers to falsify their incomes on their applications"). Throughout this time, numerous class action securities suits were filed against Countrywide and IndyMac related to their lax underwriting standards.
On February 20, 2009, citing inappropriate underwriting standards, Moody's reduced the rating of the Series 12A1 Certificates to B2, a speculative grade. Similarly, on August 13, 2009, S&P's reduced the rating of the Series 12A1 Certificates to B. By February 2010, because of the deficient underwriting standards, about 61% of the underlying loans were in delinquency, default, or foreclosure, and the value of the Certificates on the secondary market had decreased by 40% to 50%. As a result, the monthly distributions that the Operating Engineers received from the MASTR Trust for their Certificates were significantly reduced. And if the Operating Engineers had sold their Certificates on the secondary market, then they would have suffered a substantial loss.
On February 22, 2010, one year after Moody's downgraded the rating of the Certificates,  an investor filed the Original Complaint asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C. §§ 77k, 77l(a)(2), and 77o, against MASTR, UBS Real Estate, UBS Securities, Martin, Dyrvik, Corcoran, Moody's, and S&P's parent company in the United States District Court for the District of New Jersey. "On March 29, 2010, in the course of the usual monitoring of its investment portfolio, " the Operating Engineers "learned of significant losses to the value of the Certificates" and "the existence of potential claims." App. at 464 ¶ 193. Pursuant to the Private Securities Litigation Reform Act ("PSLRA"), Pub. L. No. 104-67, 109 ...