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Posted By Cliff Tuttle | December 13, 2010

No. 541

Federal Home Loan Bank of Pittsburgh v. J P Morgan Securities, LLC, J P Morgan Acquisitions Corp., J P Morgan Mortgage Acceptance Corporation I, Chase Home Finance LLC, Chase Mortgage Finance Corporation, JPMorgan Chase & Co, Moody’s Corporation, Moody’s Investor s Services, Inc., The McGraw-Hill Companies, Inc and Fitch, Inc.

No. GD09-016892

The securities suit brought by the Federal Home Loan Bank of Pittsburgh against a group of J P Morgan companies and the rating agencies they used, filed last year in the Allegheny County Court of Common Pleas, is being closely watched as a bellweather for similar cases filed by others in the FHLB system. One commentator saw the ruling in Pittsburgh as a positive sign for  FHLB plaintiffs in San Francisco, Seattle, Chicago and Indianapolis, whose cases have not yet advanced to this point, since the Pittsburgh FHLB’s case survived preliminary objections on general allegations of fraud.

In an opinion filed on November 29, 2010, Judge R Stanton Wettick partially sustained preliminary objections of the rating agencies who were named as defendants in the above-captioned securities case. He also held that one of the several J P Morgan corporate defendants can be be sued for fraudulent misrepresentation claims.

The Federal Home Loan Bank of Pittsburgh (FHLB) purchased eight mortgage-backed security certificates issued by five separate trusts.  The total purchase price, according to the amended complaint, was $1.7 Billion, but the certificates are only worth 60% of that amount today.

FHLB states, according to the decision, “that it would not have purchased the certificates if defendants had provided complete and accurate information regarding risks of non-payment.”

Identical issues are presented in three companion cases before the court, each involving similar investments and a cast of defendants that are partially identical. However, according to the opinion, the ruling in the instant case is being applied by the court in the three other cases.

Prior to placing the loan pool certificates on the market, the J P Morgan defendants worked with various rating agencies to direct the payment stream into tranches so that some of the certificates could receive highest ratings (AAA in the opinion), since certain investors are required, or desire, to purchase only AAA certificates.

The court considered each of the causes of action asserted against the rating agencies. With respect to the claim under Section 11 of the Securities Act, the court found that it would be necessary to characterize the rating agency defendants as “underwriters”, which they were not.  “The rating agencies had no involvement in the distribution of securities.” In reaching that conclusion, Judge Wettick relied primarily upon two 2010 cases, discussed extensively in the opinion.

Next, the court addressed the claim based upon negligent misrepresentation. Initially, the court noted that where there is no direct contractual relationship between the plaintiff and a defendant, claims based on negligence will not be permitted when the damages are economic, unaccompanied by physical injury or property damage. However, there is an exception, born of the case   entitled Bilt Rite v. Architectural Studio, 866 A.2d 270 (Pa. 2005), involving the negligent supplier of information. Through analysis of a case where in 2007 the Superior Court limited Bilt Rite to design professionals (Excavation Technologies, Inc. v. Columbia Gas Co., 936 A.2d 111) the court concluded that Bilt Rite was not intended by the Supreme Court to be applied to this situation. In addition, First Amendment concerns applied when the number of recipients of the information provided by the rating agencies could be very large, perhaps in the hundreds of thousands. Moreover, such reports could be classified as predictions of the future, which under applicable law would not be actionable unless the rating agency didn’t believe its predictions.

On the other hand, lack of privity does not protect rating agency defendants from fraudulent misrepresentation claims.  There, the plaintiff must show that the rating agency did not believe its own statements.

The court held that there is privity between the J P Morgan entity that acted as underwriter and that fraudulent misrepresentations may proceed based upon what the underwriter knew.  However, those Morgan entities whose activities ended before the activities occurred which lead to the alleged fraudulent misrepresentations.

A thorough discussion of all of the issues raised and addressed in this opinion  would take too much space for a blog post. Here is a link to the full opinion.


CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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