PERS v. Merrill Lynch: District Court Certifies Massive Mortgage-Backed Securities Class Action

Southern District of New York Judge Jed Rakoff, long recognized as an innovative thinker on matters concerning class actions, has granted certification in a class action brought by investors concerning residential mortgage-backed securities initially valued at $16.5 billion. See Public Employees’ Retirement System of Mississippi v. Merrill Lynch & Co., Inc., No. 08-cv-10841 (S.D.N.Y. June 16, 2011) (order granting certification) (available here). The plaintiffs allege that the $16.5 billion valuation was massively overstated, as it was premised on unrealistic assumptions about the ability of individuals to repay home loans, and that Merrill Lynch knew but failed to disclose that fact to investors. Judge Rakoff’s ruling is the first certification of a class of mortgage-backed securities purchasers, and the case is expected to be closely watched not only as to developments in the still-inchoate substantive law around mortgage-backed securities, but also as to procedural devices proposed or actually employed for the determination of liability and damages.

Although titled with a Mississippi-based public employee pension plan as the first-named plaintiff, this action was brought on behalf of several similar plans in Wyoming, Connecticut, and California, including the massive Los Angeles County Employees Retirement Association. The plaintiffs are represented by the Bernstein Litowitz Berger & Grossmann firm, while Merrill Lynch is represented by Skadden Arps.

In opposing class certification, the Skadden lawyers followed a familiar formula: focusing on a purported lack of commonality and urging Judge Rakoff to follow a colleague’s certification ruling in a similar case. They argued that the plaintiffs failed to establish that common issues will predominate, and frequently pointed Judge Rakoff toward the order denying certification in New Jersey Carpenters Health Fund v. Residential Capital, LLC, No. 08-cv-8781(S.D.N.Y. Jan 18, 2011) (order denying certification).

Judge Rakoff declined to adopt the reasoning of the earlier mortgage-backed securities action, but did not elaborate, opting to save his explanation for “a forthcoming written opinion” which has yet to be issued. Order at 2. Though not expressly stated in the Order, it seems likely that Judge Rakoff was deferring the issuance of a fully-reasoned order until the Supreme Court’s issuance of its Dukes v. Wal-Mart decision (which occurred a mere four days later). It is notable that, while Judge Rakoff implicitly acknowledged that Dukes is likely to alter the terms of certification, the fact of certification is presumed to be unaffected.