Countrywide Sub Prime Suit May Proceed
Many securities lawsuits arising out of the sub-prime mortgage lending debacle are not showing much promise of success. But an important exception may be that concerning Countrywide. Kevin LaCroix provides analysis of the 112-opinion issued last week denying most defendants’ motions to dismiss the Countrywide securities class action complaint.
The opinion contains several points of special interest because they may seem to go against the weight of authority. This may simply reflect the procedural stage of the case. But they may also suggest that the scale and unusual nature of the sub-prime market may invite judicial reconsideration of some traditional securities law doctrines.
First, the puffery doctrine may not apply to statements the company made. Usually, statements such as “high quality” are not actionable, the judge acknowledges, but as alleged in this complaint, Countrywide’s actual practices were so at odds with its assertions about its “high quality” that the doctrine may not provide a defense.
Second, the judge expressed skepticism that the defendants could prevail on arguments that the company’s alleged disclosure deficiencies concerned general market information—illiquidity and asset impairments plaguing all financial institutions—rather than firm-specific information peculiar to Countrywide. A causal link may exist between certain broader market developments and statements the company made about itself, the judge explains.
Third, the judge rejected defendants’ arguments that the complaint did not allege scienter with sufficient particularity. She pointed to allegations of insider trading and managerial access to detailed loan origination data to rebut defendants’ assertions that the complaint failed to meet the heightened pleading standards as to claims of fraud.
The judge did dismiss claims against the company’s outside auditor, Grant Thornton, on the other hand, reinforcing a sense that auditors may escape crushing liability risk for their part in the ongoing meltdown.