The Supreme Court has rebuffed an effort by some of the country’s largest banks to halt several financial crisis-era lawsuits that could result in tens of billions of dollars in legal costs.
The banks, including Wells Fargo, Credit Suisse and Deutsche Bank, had asked the justices to review an appeals court ruling that regulators filed their claims against the banks in a timely manner, despite a 1930s securities law that gave them only three years to do so. The claims were related to billions of dollars in mortgage-backed securities that banks packaged and sold to other institutions before the financial crisis in 2008.
On Monday, the court rejected the banks’ petition, returning the case to the Federal District Court for the Southern District of New York.
“We’re disappointed and hope the court decides to review this important legal issue in a later case,” Robert J. Giuffra Jr., of Sullivan & Cromwell and the lead lawyer for the banks, said.
The petition at issue involved Colonial Bank of Montgomery, Ala., which failed in 2009 in one of the largest financial company collapses in American history.
In August 2012, the Federal Deposit Insurance Corporation sued the banks that issued or underwrote the $300 million in mortgage-backed securities that Colonial bought in 2007 that contributed to its failure. Regulators said the disclosures on the securities contained false information or misrepresented the health of the underlying mortgages.
The government has said the lawsuit was filed on time under a 1980s law known as the Financial Institutions Reform, Recovery and Enforcement Act, which gives the F.D.I.C., when acting as receiver, additional time to bring claims to court by overriding statutes of limitations set forth elsewhere.
The banks argued that the F.D.I.C and regulators overseeing credit unions and mortgages that are subject to nearly identical provisions had not applied the law properly. They contended that so-called extender provisions did not apply to the Securities Act of 1933, which imposes a stricter three-year deadline from when a security is offered or sold to the public.
A spokesman for the F.D.I.C. declined to comment on the Supreme Court’s rejection of the banks’ petition, which was issued with a flurry of other rulings.
Lawyers for the banks have estimated that damages related to about $37.5 billion in securities are at stake in at least a dozen pending suits stemming from the financial crisis. They have argued that the suits should be barred based on the Securities Act deadline. The cases were brought by the F.D.I.C., the Federal Housing Finance Agency and the National Credit Union Administration.
A Federal District Court judge sided with the banks in the Colonial Bank case in 2014, but a panel of the Court of Appeals for the Second Circuit in Manhattan backed the government’s stand in a 2-to-1 vote in May. The Supreme Court has denied similar petitions from the banks twice before.
The court’s latest decision will probably end efforts to end the pending cases with one “killer shot,” said Donald Hawthorne, of Axinn, Veltrop & Harkrider, who has followed the litigation.
“What’s happened when these cases have gone forward with a motivated party is that there’s been a pattern of very substantial settlements, and the few cases that have gone to trial have been successful for the plaintiff,” he said. “The banks are now going to have to face up to the reality of a significant liability.”
(Published by The Wall Street Journal - January 10, 2017)