Alleged Misrepresentations in RMBS Offering Documents


Cornerstone Research worked on several phases of one of the earliest RMBS matters, including class certification, summary judgment, and expert Daubert motions.

In a case stemming from the housing and credit crises, the plaintiffs accused a major bank and other defendants of using misleading offering documents. The case was one of the earliest of the residential mortgage-backed securities (RMBS) matters and went through multiple phases: class certification, motion to dismiss, summary judgment, expert reports and depositions, and expert Daubert motions.

Counsel for the bank retained Dr. Allan Kleidon, a senior vice president at Cornerstone Research, to opine on issues related to class certification, damages, and loss causation. Cornerstone Research also worked with Mr. Charles Grice of CRI Compliance on due diligence practices, and with Professor Arnold Barnett of the MIT Sloan School of Management on statistical sampling issues.

Dr. Kleidon concluded that losses in question were not caused by the alleged misrepresentations and omissions.

The plaintiffs alleged that the offering documents related to the issuance of more than $1 billion of RMBS that the bank underwrote between 2006 and 2007 contained material misstatements and omitted material information concerning applicable home loan underwriting standards. The allegations included violations of Sections 11, 12, and 15 of the Securities Act.

Dr. Kleidon demonstrated that the overall performance of the loan pools in question was not statistically different from predictions, based on loans that were found to comply with underwriting guidelines by a third party during the original due diligence process. He also cited the poor overall market conditions during the relevant period and the consequent implications for the performance of the mortgages. Dr. Kleidon concluded that losses in the value of the underlying mortgage pools and subsequent certificate holder losses were not caused by the alleged misrepresentations and omissions.

Mr. Grice analyzed the due diligence processes and determined that all relevant practices employed by the bank met or exceeded typical industry practice at the time, both in terms of the number of loans reviewed and the level of scrutiny applied in these reviews. Professor Barnett identified multiple methodological errors in the plaintiffs’ sampling protocol and statistical conclusions.

The case settled in 2016.

For additional information on this matter, please contact Allan Kleidon or Ravi Sinha.

Case Experts

Arnold I. Barnett

George Eastman Professor of Management Science,
Professor of Statistics,
MIT Sloan School of Management,
Massachusetts Institute of Technology

Charles H. Grice

Managing Director, CRI Compliance

Allan W. Kleidon

Senior Advisor