Wednesday, August 10, 2011

Deleware joins NY and files against Bank of America over their attempted settlement agreement to get Bank of New York off the liablity hook. 

From Naked Capitalism Post August 10, 2011 READ FULL POST HERE

The immediate basis for the objection sounds modest:

The Delaware Department of Justice objects to the proposed settlement on the basis that it does not have sufficient information to evaluate the reasonableness of the proposal.

But it builds up steam as it lists concerns, first, that many investors have been kept in the dark:

The Delaware Department of Justice… has significant concerns that the proposed settlement does not adequately remedy the harm suffered by the beneficiaries of the Covered Trusts, some of whom are undoubtedly Delaware investors. Many of these investors have not intervened in this litigation and, indeed, may not even be aware of it…With its intervention, the Delaware Department of Justice will ensure that the interests of absent Delaware investors are adequately represented.

Second, as we have said and has been echoed in other petitions, the Bank of New York has a massive conflict of interest:

The Delaware Department of Justice’s intervention is particularly important given the evidence suggesting that BNYM negotiated the settlement on behalf of the trust beneficiaries under a conflict of interest. The proposed settlement confers substantial direct benefits to BNYM, primarily by a provision, contained in a side letter to the proposed settlement agreement, in which BoA agrees to expressly guarantee the indemnification obligations of Countrywide to BNYM under the terms contained in the PSAs. This expanded indemnification provision also covers BNYM’s negotiation and implementation of the terms of the settlement. The potential conflicts of BNYM go directly to the heart of the issue in this special proceeding, which is “did BNYM act reasonably in negotiating this settlement?”

And it goes straight to an issue we flagged, that the trustee makes annual certification in SEC filings, and the bar for securities fraud is much lower than under contract law theories. Delaware’s securities laws follow SEC 10(b)5 language re disclosure (that it not merely be narrowly accurate, but that it be free of material omissions). Boldface ours:

The acts and practices ofBNYM alleged herein may have violated 6 Del. C. § 7303(2), in that BNYM may have made untrue statements of material fact and/or omitted to state material facts in order to make the statements made, in light of the circumstances under which they were made, not misleading. BNYM’s conduct as described above may have violated the Delaware Securities Act insofar as the Trust PSA requires the Trust annually to certify the following “servicing criteria”:

• “Collateral or security on mortgage loans is maintained as required by the transaction agreements or related mortgage loan documents.”

• “Mortgage loan and related documents are safeguarded as required by the transaction agreements;” and

• “Any addition, removals or substitutions to the asset pool are made, reviewed and approved in accordance with any conditions or requirements in the transaction agreements.” [See generally, Trust PSA, [Ex W to NY Petition]].

The Delaware investors in the Trusts may have been misled by BNYM into believing that BNYM would review the loan files for the mortgages securing their investment, and that any deficiencies would be cured.

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