RMBS Litigation: The Failures of Disclosure Regimes

FSA & DEXIA v DEUTSCHE BANK July 13, 2011
http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2011/07_-_July/dexiavdeutschebank.pdf

ALlstate v MORGAN STANLEY July 6, 2011
http://newsandinsight.thomsonreuters.com/uploadedFiles/New_York/News/2011/07_-_July/allstatevmorganstanley.pdf

1. The above complaints represent the proposition that a failure to disclose material information which may sway the mind of the potential investor is a violation of the US Securities Act 1933.

2. In both complaints, we have evidence that the issuers of the RMBS did not fully disclose their genuine opinions about the quality of the bonds they sold. In email communications to non-investors, the issuers disparaged and belittled the quality of that which they sold to investors. Given the overlapping time when these communications to third parties and lodgers to investors occurred, we are asked by plaintiffs' counsels to draw the inference that the issuers were perpetrating a fraud.

3. Lessons for Executive Behaviour

(a) Emails are discoverable and are evidence of the actual mental disposition of parties. In Hohfeldian terms, emails hold no immunity to the person who emails, nor does the emailer have privilege of privacy. In fact, the emailer has a negative liability under the Securities Acts and a duty to be honest.

(b) Holding Short Positions While Selling Longs. This is said to be the natural way a broker conducts its business. If so, then this may be reason enough to bring back the Glass-Steagall Act, in which deposit taking institutions are segregated from investment banks which buy and sell assets on a highly leveraged basis. Put another way, is it reasonable to expect an investment bank to make money if it is forced to disclose the information which gives its reason for survival?