Bass, Berry & Sims attorney Chris Lazarini examined a case in which plaintiffs sued a broker dealer, seeking to rescind the purchase of 12 RMBS certificates. While expressing that it would be difficult to find a broker responsible where there was mutual mistake with its buyer, the Court nevertheless denied Defendant's summary judgment motion, finding the decision on rescissionary relief better made on a complete trial record. 

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication.

CMFG Life Insurance Company vs. Credit Suisse Securities (USA) LLC, No. 14-cv-249 (W.D. Wis., 10/12/17)

Rescission is a remedy when there is a mutual mistake, meaning that neither party is culpable, and the question for the trier of fact is whether it is equitable to leave the loss with the plaintiff or transfer it to the defendant. 

Plaintiffs sued Defendant broker-dealer, seeking to rescind purchases of twelve RMBS certificates. Defendant moved for partial summary judgment (a) dismissing the claims for one certificate sold to Plaintiffs which Defendant did not underwrite, (b) preventing Plaintiffs from claiming the aggregated loan data in all the certificates was false and (c) preventing Plaintiffs from offering multiple pre-judgment interest calculations. For the motion, the parties agreed that Plaintiffs generally could not perform due diligence on the quality of the underlying securitized loans, unlike the issuers and underwriters.

On the certificate it did not underwrite, Defendant argued it could not be culpable because it did not acquire the loans, securitize them or make any representations in the offering documents. Defendant also highlighted testimony from Plaintiffs' corporate representative who acknowledged that Defendant and Plaintiffs had the same information about the certificate. Finally, Defendant relied on Plaintiffs' inability to identify any misrepresentations or omissions by Defendant. Plaintiffs countered that Defendant was a significant participant in the RMBS market and touted the quality of its due diligence practices and unique perspectives on loan originators. Plaintiffs also argued that Defendant ignored mounting evidence of material flaws in the RMBS market generally and in Bear Stearns certificates particularly.

The Court questions Plaintiffs' focus on culpability, when the basis for rescission is mutual mistake and the equitable transference of loss to Defendant; however, it also recognizes undisputed facts suggesting Defendant knew or should have known the poor quality of some loans securing the certificate. While the Court states it is "hard-pressed" to see why a broker should be responsible for a mutual mistake with its buyer, the Court concludes that the decision is best made on a complete trial record and denies this part of the motion.

On the aggregated loan data, Defendant challenged Plaintiffs' expert’s extrapolation of alleged errors in random samples of loans to the full loan pools. Plaintiffs countered that the trier of fact can draw reasonable inferences from errors identified in the samples. The Court denies this part of the motion, but instructs the parties to prepare proffers and counter-proffers on the statistical reliability of Plaintiffs' expert's extrapolations.

Finally, on prejudgment interest, Plaintiffs' expert calculated pre-judgment interest three ways. First, he calculated pre-judgment interest on Plaintiffs' cost basis, without considering principal and interest payments received. Next, he accounted for only the principal payments received. Finally, he accounted for both principal and interest received. Defendant argued that the first two methodologies should be excluded because they over-compensated Plaintiffs. Plaintiffs acknowledged rescission restores a party to its original position, but argued the motion is premature and asked the Court to allow the evidence to inform its ruling on the damages presentation. The Court finds no persuasive reason to defer its ruling or award prejudgment interest using a method that does not recognize payments received and grants this part of the motion.