ResCap: $7.5M Claim By Investment Board That ‘Bet’ On RMBS Should Be Rejected

by Tara Arick on September 24, 2013 · 0 comments


Bankrupt Residential Capital LLC (ResCap) on Sept. 19 filed a brief in the U.S. Bankruptcy Court for the Southern District of New York objecting to a $ 7.5 million claim filed against its estate by the West Virginia Investment Management Board (WVIMB) (In Re: Residential Capital LLC, No. 12-12020, Chapter 11, S.D. N.Y. Bkcy.).

ResCap filed for Chapter 11 bankruptcy on May 14, 2012.

Fraud Alleged

The WVIMB filed a proof of claim for $ 7.5 million against ResCap’s estate, contending that ResCap was guilty of fraud and negligent misrepresentation in its business dealings with WVIMB.

ResCap maintains that WVIMB cannot prove any material misstatement and that even if it could, “any purported misstatement was immaterial.” Moreover, WVIMB cannot show that it reasonably relied on any alleged misstatement, ResCap adds.

In 2007, WVIMB’s financial adviser responded to the weakening housing market by pushing its clients to “attempt to achieve above-market returns simply by making the ‘macro’ bet that calamity does not occur,” ResCap contends.

Risk Made ‘Knowingly’

WVIMB made that bet and bought millions of dollars in residential mortgage-backed securities (RMBS) from ResCap. “Calamity occurred”, ResCap says, because the housing market worsened, which is the very thing WVIMB had bet against. ResCap says that WVIMB sued, trying to recover “severe losses.”

ResCap argues that the law does not permit WVIMB to sue ResCap because as an investor, WVIMB knowingly made a “risky, contrarian ‘bet,’” and now it seeks to shift its losses through a fraud lawsuit that should be rejected.

WVIMB cannot prove that ResCap made any misstatement with fraudulent intent, ResCap says. Furthermore, ResCap contends that it warned WVIMB that its underwriting reviews of the RMBS at issue “generally [would] not be conducted with respect to any individual mortgage pool related to a series of certificates.”

Thus, even if the mortgages differed materially from the descriptions in the offering materials, ResCap would not have known that at the time the statements were made, ResCap maintains.

ResCap is represented by Gary S. Lee, Joel C. Haims and James J. Beha II of Morrison & Foerster in New York.

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