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Wall Street uses Wal-Mart bias ruling in MBS defense

A Wal-Mart sign is seen in Miami, Florida
A Wal-Mart sign is seen in Miami, Florida

By Tom Hals

WILMINGTON, Delaware (Reuters) - The U.S. Supreme Court's dismissal of a massive sex-bias case against Wal-Mart Stores Inc may have handed Wall Street a new weapon in its battle against angry investors who lost billions on securitized home loans.

At first glance, last month's ruling in the Wal-Mart case may seem far removed from lawsuits over complex mortgage investments blamed for helping to trigger the global financial crisis in 2008.

But attorneys are seizing on the Supreme Court decision as they fight to prevent pension fund investors from banding together as a class to pursue claims they were misled about bonds built from flimsy mortgages.

In the Wal-Mart case, the Supreme Court on June 20 found that 1 million current and former female employees from 3,400 of the retailer's stores had too little in common to form a class. The court's language about issues of a "common question" could, according to attorneys arguing for the banks, also bar mortgage bond investors from suing en masse.

Lawyers defending a unit of Washington Mutual argue that the "commonality" that was missing among the female Wal-Mart workers is also missing among investors in securitized mortgages, even when they invested in the same pool of loans.

They made the argument in court papers filed on June 22 arguing against certifying a class of investor plaintiffs suing Washington Mutual. The case is pending in District Court in Seattle.

If successful, the defense tactic could prevent investors in mortgage-backed securities from pooling their resources and bringing a case as a group. That could make it more difficult for them to pursue cases against big issuers of mortgage bonds, such as Bank of America Corp and JPMorgan Chase & Co.

The Washington Mutual legal team referred questions to JPMorgan, which bought the bank in 2008. JPMorgan declined to comment on Friday.

CLASS SYSTEM

The Wal-Mart case was closely watched and the ruling is expected to make it tougher to bring class-action cases, which are often used in drug and product liability lawsuits and have led to mammoth settlements with consumers or shareholders.

The Supreme Court decision steers courts away from certifying broad classes of plaintiffs while leaving the door open to breaking out sub-classes later, said James Cox, a professor at Duke University Law School.

In the mortgage market, banks securitized home loans by collecting large pools of mortgages and placing them with a trust. The trust then issued bonds cut into "tranches," each carrying a different credit rating. The higher-rated tranches were paid first from the money flowing from homeowners.

Courts already have denied class status to investors who sued on behalf of all others who bought bonds issued by different trusts that were set up by a particular bank or mortgage company, such as Countrywide Financial.

The Supreme Court's Wal-Mart decision may help narrow the class scope further, separating tranches within a particular loan pool trust.

In their court papers, Washington Mutual lawyers cite the Wal-Mart decision for their argument that each tranche of the mortgage-backed security needs to be analyzed separately to determine which loans back which tranche, and whether those loans were properly written.

"Even if plaintiffs seek to ask the same question across all loan groups and all securities, unless they can be assured of getting the same answer, no class can be certified," the court filing says.

The Wal-Mart ruling is the first case cited in Washington Mutual's argument. The company's lawyers also cite the decision to make their point that each tranche must be evaluated separately, not lumped together merely because they have common legal claims, according to the court papers.

Thomas Hatch, an attorney who has brought mortgage-backed securities cases but is not involved in the Washington Mutual lawsuit, said courts are right to narrow classes to a single trust, but he disagreed with cutting to the tranche level.

"The defendants are wrong in claiming you have to be in the same tranche to be in the same class," said Hatch, because those various slices of the bond rely on the same offering document. "It isn't tranche specific, it is trust specific."

The Seattle federal court will take up the Washington Mutual class certification issue on July 27.

The case is In re Washington Mutual Mortgage Backed Securities Litigation; U.S. District Court, Western District of Washington, No. 09-00037

(Reporting by Tom Hals; editing by Martha Graybow, Gary Hill and Andre Grenon)

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