Victory for Morgan Stanley on the eve of trial in longstanding RMBS case

After 12 years of hard-fought litigation, Davis Polk achieved a significant victory for Morgan Stanley when a securities fraud plaintiff conceded at an August 27, 2024, hearing that it could not prove its claims and asked the court to dismiss its complaint. The plaintiff’s request followed recent favorable rulings on Morgan Stanley’s motions in limine.

Since 2012, a Davis Polk team has defended Morgan Stanley in the Commercial Division of New York Supreme Court, New York County, against common law fraud claims brought by German bank IKB Deutsche Industriebank AG (IKB) arising from the sale of residential mortgage-backed securities (RMBS) between 2005 and 2007. Throughout the case, Davis Polk steadily narrowed IKB’s claims, including by obtaining dismissals of several claims at the pleading stage, defeating IKB’s subsequent motion to add a mutual mistake claim and successfully defending that victory on appeal. In 2023, Davis Polk obtained partial summary judgment for Morgan Stanley on the core of IKB’s case: its claim that Morgan Stanley allegedly misrepresented that the mortgage loans backing its RMBS complied with the loan underwriting guidelines of the originators who made those loans. Based on the undisputed evidence, the court concluded that Morgan Stanley had not made any representations about underwriting guideline compliance in the preliminary term sheets for the securitizations, the only documents that IKB’s investment managers received or relied upon in making purchase decisions. The court, however, permitted IKB to proceed to trial on the other two purported misrepresentations alleged in the complaint concerning the loan-to-value (LTV) ratios and owner occupancy status of the underlying loans. The court adjourned trial until October 2024 while the parties cross-appealed to the Appellate Division, First Department, of the New York Supreme Court, which affirmed the summary judgment order in full in March 2024. 

Following the Appellate Division’s ruling, the parties proceeded to prepare for trial. But, when IKB refused to withdraw proposed evidence and expert testimony concerning its now-dismissed underwriting guidelines claim, Morgan Stanley filed motions in limine to exclude that and other related evidence. On August 6, 2024, the court heard oral argument. Partner James Rouhandeh argued the motions along with partners Greg Andres and Dana Seshens. The court granted Morgan Stanley’s in limine motions in whole or substantial part, reaffirming that the trial would “be about LTV, [owner occupancy] and only as to the loans underlying the securities in this case.” The court struck the testimony of one of IKB’s experts in its entirety and significantly limited the testimony of two other IKB experts. In the following weeks, IKB acknowledged to the Court that its “case is no longer triable” and that few if any of its trial exhibits relate to LTV, owner occupancy or the loans backing the RMBS at issue. Nevertheless, IKB continued to refuse to revise its trial exhibits and witness list to conform to the in limine rulings. 

On August 26, 2024, Davis Polk sought an order directing IKB to revise its trial exhibits, witness list and deposition designations, and the court scheduled a hearing for the following day. At the hearing on August 27, IKB made the stunning admission that it “cannot prove scienter” and stated that it would ask the court to dismiss its complaint and enter final judgment, subject to its right to appeal. The order of dismissal was entered on August 29. This is an important victory in the last of Morgan Stanley’s financial crisis era cases.  

The Davis Polk trial team included partners James P. Rouhandeh, Greg D. Andres and Dana M. Seshens, counsel Daniel J. Schwartz and associates Matthew R. Brock, Tess Liegeois, Michael V. Pucci, Muhammad Sardar, Jaclyn Willner, Cristina Lauren Lang, John Chapman III, Zach Zaremba and Tony Sun. All members of the Davis Polk team are based in the New York office.