Securities Law Alert
In This Edition:• D.C. Circuit: (1) Forward-Looking Statements Fall Within the PSLRA’s Safe Harbor Only If Accompanied
by Tailored Company-Specific Warnings; and (2) Descriptions Such as “Very Strong” May Be Actionable If
Tied to a Specific Product and Time Period• Southern District of New York: Plaintiffs’ Counsel Should Notify Proposed Confidential Witnesses and Verify
Statements to Be Attributed to Those Witnesses Before Quoting Confidential Witnesses in a Complaint• Southern District of New York: The Second Circuit’s Decision in Newman Did Not Change the Standard
for the SEC to Plead an Insider Trading Claim Against an Alleged Tippee Under the Federal Rules of Civil
Procedure• New York Court of Appeals: Claims for Breach of Representations and Warranties in Connection with theSale of Mortgage-Backed Securities Accrue on the Date Those Representations and Warranties Are Made
June 2015

Simpson Thacher’s“[i]mpressive bench
is notably well-versedin complex securities
class actions.”– Chambers USA 2015

D.C. Circuit: (1) ForwardLooking Statements Fall
Within the PSLRA’s Safe
Harbor Only If Accompanied
by Tailored CompanySpecific Warnings; and (2)Descriptions Such as “VeryStrong” May Be Actionable If
Tied to a Specific Product andTime Period
On June 23, 2015, the D.C. Circuit revived
a securities fraud action against Harman
International Industries. In re Harman
Int’l Indus. Sec. Litig., 2015 WL 3852089(D.C. Cir. 2015) (Rogers, J.). The court
found the complaint “plausibly allege[d]”that two forward-looking statements were
not entitled to safe harbor protection under
the Private Securities Litigation Reform Act(“PSLRA”) because the statements were not(1) “accompanied by warnings specific to the[c]ompany” that were (2) “tailored to the

Simpson Thacher & Bartlett LLP

specific forward-looking statements” madeand (3) “consistent with the historical facts
when the statements were made.” The court
further held that a third statement describing
product sales as “very strong” was “plausibly
understood” as something other than “mere‘puffery’” because it was “specific about [both]product and time period” and contained“specifics that an investor could use toevaluate the statement’s veracity.”

Background
Plaintiffs alleged that Harman International
Industries and three of its officers had made“materially false and misleading statements”
regarding “the status of the [c]ompany’s
personal navigation device (‘PND’) products”
between April 2007 and September 2007,
when the company was being considered for
acquisition.
On April 26, 2007, the same day that
defendants announced a potential buyout,
Harman’s CEO said during an analyst
conference call that the company “planned
to reduce [high PND inventories in Europe]
to normal levels at year-end.” Specifically,1

he stated that the company expected tosell more than 600,000 PND units thatyear. Several months later, on September
29, 2007, Harman’s CFO stated during ananalyst conference call that the company was“continu[ing] the growth and expansion of[the PND] business primarily in Europe.”
Both calls were preceded by announcementsthat the discussions would include “forwardlooking statements” that were “subject to risks
and uncertainties.”
On August 29, 2007, the company filed its
Form 10-K which stated that “[s]ales ofaftermarket products, particularly PNDs,
were very strong during fiscal year 2007.”
The Annual Report “stated that it ‘contains
forward-looking statements’” and cautioned“that readers should ‘not place undue relianceon these statements.’” The Annual Report
also “included a detailed account of the ‘risk
factors’” that “may cause fluctuations in[the company’s] operating results.”
Plaintiffs alleged that all three statements
were “materially false and misleading” inlight of “the historical evidence of growing
inventory, widespread obsolescence, andstagnant sales” of PNDs. Defendants moved
to dismiss plaintiffs’ complaint. On January
17, 2014, the district court for the Districtof Columbia granted defendants’ motion todismiss, finding that “the statements [made]during the conference calls fell within the[PSLRA’s] safe harbor for forward-looking
statements accompanied by meaningful
cautionary statements, and the statementin the FY 2007 Annual Report was ‘mere
puffery’ and inactionable.” Plaintiffs appealed.

D.C. Circuit Holds the PSLRA’s Safe
Harbor Applies Only to ForwardLooking Statements Accompanied
by Factually Accurate, CompanySpecific Warnings Tailored to theSpecific Statements Made
On appeal, the D.C. Circuit explained thatin order “[t]o come within the [PSLRA’s]
statutory safe harbor, a statement must not
only be forward looking (and identified assuch), but also ‘accompanied by meaningful
cautionary statements’” (quoting 15 U.S.C.
§ 78u-5(c)(1)(A)(i)). The court found that“‘[t]he requirement for ‘meaningful’ caution
calls for substantive company-specificwarnings based on a realistic descriptionof the risks applicable to the particular
circumstances’” (quoting Southland Sec.
Corp. v. INSpire Ins. Solutions, 365 F.3d
353 (5th Cir. 2004)). The court determinedthat cautionary statements cannot be “mereboilerplate” but must instead be “tailored tothe specific future projections, estimates or
opinions in the [forward-looking statements]”(quoting Institutional In’vrs Grp. v. Avaya,
564 F.3d 242 (3d Cir. 2009)). The court
explained that this requirement “follows fromthe statutory requirement that cautionary
language must warn of what ‘could cause
actual results to differ materially from thosein the forward-looking statement’” (quoting
15 U.S.C. § 78u-5(c)(1)(A)(i)) (emphasis
added by the court).
The D.C. Circuit emphasized that “cautionary
language cannot be ‘meaningful’ if it is‘misleading in light of historical fact[s]’”(quoting Slayton v. Am. Express Co., 604
F.3d 758 (2d Cir. 2010)). “If a company were
to warn of the potential deterioration of
one line of its business, when in fact it wasestablished that that line of business had
already deteriorated, then … its cautionary
language would be inadequate to meet thesafe harbor standard.” The court explainedthat “there is an important difference between
warning that something ‘might’ occur andthat something ‘actually had’ occurred.”
The D.C. Circuit recognized that “Congress
did not require the cautionary statement
warn of ‘all’ important factors, so long as‘an investor has been warned of risks of asignificance similar to that actually realized,’such that the investor ‘is sufficiently on noticeof the danger of the investment to make an
intelligent decision about it according to her
own preferences for risk and reward.’” Thecourt noted that “[p]erfect clairvoyance may
be impossible because of events beyond a
company’s control of which it was unaware.”

D.C. Circuit Finds the Complaint
Plausibly Alleged Defendants’
Conference Call Statements Were
Not Accompanied by Meaningful
Cautionary Statements
The D.C. Circuit then turned to the questionof “whether the [c]ompany’s statements
during the two conference calls wereaccompanied by warnings specific to the[c]ompany and tailored to the specific2forward-looking statements, not mere
boilerplate, and consistent with the historicalfacts when the statements were made.”With respect to the cautionary statements,
the court determined that the complaint’s
allegations “plausibly show” that “the general
information provided by the [c]ompany
about its plan to reduce its substantial
inventory did not disclose historical facts that
could have affected the success of the plan
being discussed” and that “[r]eferences toamassed [PND] inventory did not convey thatinventory was obsolete, as opposed to stockedwith the latest, cutting-edge models.” Thecourt found that the complaint sufficiently
alleged “a misleading picture withregard to the impact of ‘a large inventory ofolder generation, obsolete PNDs which[the company] could not sell or was forced tosell at a substantial loss.’”

D.C. Circuit Finds Defendants’Representation of “Very Strong”
PND Sales Was Potentially an
Actionable Misstatement Rather
Than Mere “Puffery” Because It
Specifically Described a Particular
Product and Time Period
With respect to defendants’ representationin the company’s 2007 Annual Report of“very strong” PND sales, the D.C. Circuit
explained that “‘statements of reasons,opinions, or beliefs’ can be actionable”(quoting Va. Bankshares, Inc. v. Sandberg,
501 U.S. 1083 (1991)). The court noted that“‘conclusory terms [like ‘high’ value and‘fair’] in a commercial context are reasonably
understood to rest on a factual basis thatjustifies them as accurate, the absence of
which renders them misleading’” (quoting Va.
Bankshares, 501 U.S. 1083).
The D.C. Circuit determined that “given
the context in which it was made,” “the‘very strong’ statement in the FY 2007
Annual Report [was] plausibly understoodas a description of historical fact rather
than unbridled corporate optimism, i.e.,
immaterial puffery.” The court explained that
“PNDs were part of the [c]ompany’s largest
division and had been the focus of recent
public statements.” Moreover, the court foundthat “[t]he ‘very strong’ statement was specificabout product and time period,” and not “toovague to be material.” The court noted that
puffery, on the other hand, encompasses

statements that are “‘too untethered toanything measurable, to communicate
anything that a reasonable person would
deem important to a securities investment
decision’” (quoting City of Monroe Employees
Ret. Sys. v. Bridgestone Corp., 399 F.3d 651(6th Cir.2005)).
Defendants attempted to rely on the Sixth
Circuit’s decision in City of Monroe to argue
that “the ‘very strong’ statement [was] puffery
because it ‘lacked a standard against whicha reasonable investor could expect [it] to be
pegged’” (quoting City of Monroe, 399 F.3d651). Rejecting this contention, the D.C.
Circuit found “[n]othing” in the Sixth Circuit’s
City of Monroe decision that “purports
to render inactionable any statement that
does not contain its own metric.” The court
explained that the statements at issue in Cityof Monroe—such as claims that “Bridgestone
sold ‘the best tires in the world’”—were “morein line with generalized boasting” and were“more ‘squishy’ … than the [c]ompany’s reportof ‘very strong’ PND sales” (quoting City ofMonroe, 399 F.3d 651).
The D.C. Circuit reversed dismissal ofplaintiffs’ complaint, and remanded theaction for further proceedings consistent with
its opinion.

Southern District of New
York: Plaintiffs’ Counsel
Should Notify Proposed
Confidential Witnesses andVerify Statements to Be
Attributed to Those Witnesses
Before Quoting Confidential
Witnesses in a Complaint
On May 29, 2015, the Southern Districtof New York considered a case in whichplaintiffs had voluntarily dismissed a putative
securities class action in light of inaccuracies
in and recantations of quotations from
confidential witnesses (“CWs”) referenced
in their complaint. In re Millennial Media,
Inc. Sec. Litig., 2015 WL 3443918 (S.D.N.Y.
2015) (Engelmayer, J.). The court found thatthe case “raise[d] serious questions” as to(1) whether plaintiffs’ counsel had “take[n]proper care to verify the statements attributed3

to the CWs before the [complaint] was filed;”and (2) whether the CWs were “fairly treated
when, without notice, they were designatedas CWs in a [c]omplaint.” The court statedthat the case “underscore[d] why it is a bestpractice—if not an ethical imperative—for
counsel, before designating a person as a
CW in a [c]omplaint, to notify that personof counsel’s intent to do so and to verify thestatements that counsel propose to attributeto him or her.”BackgroundIn the case before the court, plaintiffs’ counsel
attributed statements in the complaint to“persons identified there[in] as CWs, without
ever (1) confirming with the CW the accuracyof the statements attributed to him or her, or(2) notifying the CW that counsel intended toquote him or her as such.” Plaintiffs’ counsel
had never spoken to ten of the eleven CWs
mentioned in the complaint. The quotations
from those ten CWs were based on interviews
with an investigator. When plaintiffs’ counsel
notified the CWs that they had been quoted in
the complaint, after the complaint was filed,“four CWs asked that all references to thembe dropped,” and “four CWs reported material
inaccuracies in statements the [complaint]
had attributed to them.” Following disclosureof these challenges to the CW quotations,plaintiffs voluntarily dismissed the action.

Southern District of New York
Finds Plaintiffs’ Counsel Should
Have Confirmed the Accuracy of theConfidential Witness Statements
Prior to Filing the Complaint
In light of plaintiffs’ voluntary dismissalof their suit, the court had “no occasion
to rule on the propriety of counsel’spractices with respect to quoting persons
designated as CWs.” The court neverthelessexpressed its view that counsel’s failure
to confirm beforehand the quotations it
planned to attribute to the CWs in thecomplaint “create[d] significant potential
for inaccuracy.” The court observed that if
counsel had verified in advance “the facts andquotations that counsel proposed to attributeto” the CWs, then many of the “deficiencies[in the complaint] could have been avoided.”
The court explained that “[t]he necessaryrefinements could have been made to ensurethat quotes were used accurately; that

information was presented in proper context;
and that opinions, assumptions, hearsay,
and speculation were not commingled
and confused with representations of facts
acquired firsthand by a percipient witness.”
The court found it “difficult to come up with agood reason why counsel would not attempt
to confirm with a witness, let alone any of the
11 CWs, the accuracy of the statements that
counsel intended to attribute to them in the[c]omplaint.” The court surmised that“[p]erhaps counsel feared that, confronted
with such statements, the witness might
repudiate, or unhelpfully modify orcontextualize, the investigator’s account of
his earlier statements.” However, the court
explained that these are “not good reasons to
refrain from checking factual accuracy.”
In the court’s view, the failure to make any“attempt to confirm the quotes of a witness
on whom counsel proposes to rely in a public
filing” does not comport with “Rule 11’scommand that counsel conduct ‘an inquiry
reasonable under the circumstances.’” Thecourt stated that Rule 11 “does not require
counsel personally to participate in an
initial witness interview.” However, once
counsel is ready to file a complaint, “it isreasonable to expect counsel … to attempt
to confirm with the witness the statementsthat counsel proposes to attribute to him andto assure that the [c]omplaint is presenting
these statements in fair context.” The court
noted that “common sense explains why an
investigator’s memo of an initial witness
interview is an inadequate substitute forcounsel’s independent confirmation of
accuracy.” For instance, “[t]he investigator
may have taken notes hurriedly while
conducting the interview,” or “may havemistaken hearsay, opinion, or conjecture
for facts.” Given “the growing body of cases
chronicling the repudiation by CWs ofstatements attributed to them in securities
class-action complaints,” the court found it
particularly important that plaintiffs’ counsel“check, and double-check” the accuracy of CW
statements prior to filing a complaint quoting
those CWs.

4

Southern District of New York
Finds It Unfair for Counsel to
Quote a Confidential Witness in aComplaint Without First Notifying
the Witness and Obtaining the
Witness’s Consent
The court further observed that quoting
from CWs in a complaint without their“foreknowledge … raises issues of fairness to[those] witnesses.” The court explained thatdesignating a witness as a CW in a complaint“does not by any means assure the witness
anonymity throughout the litigation.” Infact, there is “a meaningful possibility that a
court will order counsel to reveal the namesof CWs, so as to enable these presumably
knowledgeable fact witnesses to be deposed.”
During an interview with an investigator,
a witness “may be unaware that, even if
described as a ‘Confidential Witness,’ he is
at risk of being identified by name if the caseproceeds to discovery.”
The court stated that there is no “case or
ethics canon requiring that plaintiffs’ counsel
notify a witness of an intention to quote him
or of the possibility that being designated as
a CW may result in his identification.” Thecourt further acknowledged that the “highpleading hurdles” of the Private Securities
Litigation Reform Act “no doubt may tempt
plaintiffs’ counsel not to alert a helpful
witness of the risks to him of being quoted as
a CW in a [c]omplaint, lest the witness backaway.”
Nevertheless, the court found that “basic
decency” requires counsel to notify anindividual prior to designating him or her asa CW in a complaint. The court explained that“[w]hen counsel designates an interviewee
as a CW, counsel exposes the interviewee tothe risk of public disclosure of his name and,potentially, professional or personal tumult.”
It is possible that the witness “may still workat the defendant company, or in the same
industry or community.” The court noted that“[d]isclosure of the interviewee as a source ofnegative information or leads may affect his
employment, employability, or reputation,”and “may also harm the interviewee’s
co-workers, friends, or family.”
Here, the court found that plaintiffs’ counsel
had “treated [the CWs] shabbily” with “noconsideration given to their situations andinterests.” The court expressed its “hope andexpectation … that, in future cases, counsel
will aspire to better.”Southern District of New York:The Second Circuit’s Decision
in Newman Did Not Change
the Standard for the SEC
to Plead an Insider Trading
Claim Against an Alleged
Tippee Under the Federal
Rules of Civil Procedure
On June 8, 2015, the Southern District of New
York found that the Second Circuit’s ruling in
United States v. Newman, 773 F.3d 438 (2dCir. 2014)1 did not warrant reconsiderationof its earlier decision declining to dismiss
the SEC’s insider trading claims against
two alleged tippees. SEC v. Jafar, 2015 WL
3604228 (S.D.N.Y. 2015) (Oetken, J.) (Jafar
II). The court found that “Newman did notchange the standard” for the SEC to plead an
1. Please click here to read our prior discussion of the Newman
decision.

5

insider trading claim “under Rules 8 and 9 of
the Federal Rules of Civil Procedure, and that,
under this standard, the SEC ha[d] pleadeda plausible insider trading claim” against thealleged tippees.

BackgroundIn the case before the court, the SEC “[knew]
neither the identity of the tipper nor how thetip was relayed to [d]efendants.” However, theSEC did “plead[ ] ‘on information and belief’
that the tip was made in breach of a fiduciary
duty, and that … [d]efendants knew that the
tip was made in breach of a fiduciary duty.”
The SEC also alleged “specific facts” detailing“a similar [insider trading] scheme involving
three of the same actors.”
Defendants moved to dismiss the SEC’s
complaint for failure to state a claim.
On September 29, 2014, the Southern
District of New York denied defendants’
motion to dismiss. SEC v. One or MoreUnknown Traders in the Securities of
Onyx Pharmaceuticals, 2014 WL 5026153(S.D.N.Y. 2014) (Oetken, J.) (Jafar I). The
court found the allegations “sufficient to statea plausible claim that [defendants] [were]
liable for insider trading.”
Following the Second Circuit’s decision
in Newman, defendants moved forreconsideration of the court’s decision.
Defendants contended that the Newman
decision “‘redefine[d] the SEC’s burden ofproving tippee liability’ in such a way that‘compels reconsideration’ of the [court’s]
denial of their motion to dismiss.” Jafar II,2015 WL 3604228.

Southern District of New York
Rejects Defendants’ Contention
That Newman Heightened the
Pleading Requirements for
SEC Insider Trading Claims
Against Tippees
In considering defendants’ motion forreconsideration, the Southern District of New
York rejected defendants’ contention that
“Newman established a more burdensome
standard for proving tippee liability” ininsider trading cases brought by the SEC. The
court explained that Newman addressed theGovernment’s burden of proof with respect tothe “personal benefit” requirement of tippee

liability. Under Newman, the Government
must establish that “‘the tippee [knew] of
the personal benefit received by the insider
in exchange for the disclosure’” of material
nonpublic information (quoting Newman,
773 F.3d 438). Moreover, “the mere fact ofa casual or social friendship is not enough;there must be evidence of the relationshipbetween tipper and immediate tippeethat ‘suggests a quid pro quo from the[immediate tippee] … or an intention tobenefit [the immediate tippee]’” (quoting
Newman, 773 F.3d 438).
The Jafar II court acknowledged that“the Second Circuit’s holding in Newman
may make it more difficult for the SEC toultimately prevail on its insider trading
claims in this action.” However, the court“agree[d] with the SEC that Newman did
not change the standard for pleading a claim
under Rules 8 and 9 of the Federal Rules ofCivil Procedure.”

Southern District of New York
Finds Rule 9(b)’s Particularity
Requirements Are “Relaxed” for
SEC Insider Trading Claims Against
Tippees If the Scheme’s Details Are
Known Only by the Tippees and the
TipperTurning to the allegations of the complaint,
the court found that “the SEC [had pled] aplausible insider trading claim.” The court
noted that the SEC had not pled “specific facts
that illuminate[d] whether the tip was part ofa quid pro quo relationship and whether …
[d]efendants knew that the tip was exchanged
as part of a quid pro quo relationship.”
However, the court found that because“[t]his information [was] peculiarly within theknowledge of [d]efendants and the tipper,” “itwould be ‘impractical’ … to require the SEC
to allege with particularity these details of thealleged insider trading.”
The court determined that in these types ofsituations, “the standard under Rule 9(b) isrelaxed.” The court held that the SEC may
satisfy Rule 9(b)’s requirements in cases likethis by simply “plead[ing] a belief about thenature of the tip and [d]efendant’s knowledgeof the nature of the tip, coupled withparticular facts supporting that belief.”

6

Applying this standard to the complaint
before it, the court deemed the SEC’s
allegations “sufficient to state a plausible
claim that [d]efendants [were] subject totippee liability as defined in Newman.” Thecourt found it significant that the SEC had
alleged “two similar instances in which[d]efendants … [had] placed substantial,
well-timed, risky bets that two different
companies would experience sudden
increases in their stock prices.” Both “trades
proved highly profitable,” and “both involved
a newspaper article written by the samejournalist.” The court found it “plausible toinfer from the similar nature of the two events
that the person who tipped the confidential
information received a personal benefit of thequid pro quo variety required by Newman.”
Finally, the court found that “the parallel
nature of the alleged events, just six months
apart, strongly support[ed] an inference that[d]efendants, experienced traders, knew orshould have known that the tipper received apersonal benefit in exchange for the tip.”
The court therefore denied defendants’
motion for reconsideration of its earlier orderdenying their motion to dismiss.

New York Court of Appeals
Holds Claims for Breachof Representations andWarranties in Connection with
the Sale of Mortgage-Backed
Securities Accrue on the Date
Those Representations andWarranties Are MadeOn June 11, 2015, the New York Court ofAppeals held that a cause of action “forbreach of representations and warranties”
in connection with the sale of residential
mortgage-backed securities “accrued at the
point of contract execution.” ACE Sec. Corp.
v. DB Structured Products, Inc., 2015 WL
3616244 (N.Y. Ct. App. 2015) (Read, J.).2 The
court further held that the seller’s “refusal torepurchase the allegedly defective mortgages”
pursuant to a contractual cure or repurchaseobligation “did not give rise to a separate
2. Simpson Thacher represents DB Structured Products andargued the appeal in this action.

cause of action” for purposes of determining
whether the statute of limitations had run.
The court ruled that the “cure or repurchaseobligation was not a separate and continuing
promise of future performance,” nor was it
an “independently enforceable right” that“continue[d] for the life of the investment.”

Background
On March 28, 2006, ACE Securities Corp.
executed a Mortgage Loan Purchase
Agreement (the “MLPA”) with DB Structured
Products, Inc. (“DBSP”) for the purchaseof certain residential mortgage-backed
securities (“RMBS”). That same day, ACE“transferred the loans and its rights under
the MLPA” to the ACE Securities Corp.
Home Equity Loan Trust, Series 2006-SL2(the “Trust”) pursuant to a Pooling andServicing Agreement (the “PSA”). DBSP madenumerous representations and warranties
in the MLPA “regarding the credit quality
and characteristics of the pooled loans ‘asof the Closing date.’” The MLPA provided
that “the Trust’s ‘sole remedy’ in the event
DBSP ‘breach[ed] any of the representations
and warranties contained in’ the MLPA
was for DBSP to cure or repurchase a nonconforming loan.”Six years after the execution of the MLPA,
two investment funds that held certificates in
the Trust brought suit, alleging “breaches ofrepresentations and warranties” in connection
with the RMBS and that DBSP had “refus[ed]to comply with its repurchase obligation.”
Several months later, on September 13, 2012,
the Trustee of the Trust substituted itself forthe funds as plaintiff. The Trustee claimed
that “it had promptly notified DBSP of thebreaches of representations and warrantieson” various dates beginning on February 8,
2012, and asserted that “each of these notices
specified the defective or non-conforming
loans, detailed specific breaches for each loanand supplied supporting documentation.” In
response, “DBSP moved to dismiss the Trust’scomplaint as untimely” in light of the six-year
statute of limitations applicable to contractcauses of action in New York. See N.Y. CPLR
§ 213(2). DBSP argued that the Trust’s “claims
accrued as of March 28, 2006, more than six
years before the Trust filed its complaint.”
DBSP also argued that the complaint filed by
the Trustee on behalf of the Trust could not be
deemed timely by virtue of the funds’ earlier7

filing, since the funds lacked standing to sue
under the PSA’s “no action” clause, and had
not afforded DBSP a 90-day pre-suit notice
period, as required under the PSA.
On May 13, 2013, the New York Supreme
Court denied DBSP’s motion to dismiss. The
court “reasoned that DBSP could not havebreached its repurchase obligations until it‘fail[ed] to timely cure or repurchase a loan
following discovery or receipt of notice ofa breach of a representation or warranty’”(quoting ACE Sec. Corp. v. DB Structured
Products, Inc., 40 Misc. 3d 562 (N.Y. Sup.
Ct. 2013) (Kornreich, J.)). The court foundthat “DBSP’s cure or repurchase obligation
was recurring and that DBSP committed an
independent breach of the PSA each time it
failed to cure or repurchase a defective loan.”
DBSP appealed.
On December 19, 2013, the New YorkAppellate Division, First Department,
reversed the Supreme Court’s decision. The
First Department “held that ‘the [Trust’s]
claims accrued on the closing date of the
MLPA, March 28, 2006, when any breach of
the representations and warranties contained
therein occurred,’” and also sided with DBSP
on its standing and pre-suit notice arguments(quoting ACE Sec. Corp. v. DB Structured
Products, Inc., 112 A.D.3d 522 (N.Y. App. Div.
2013) (Tom, J.P., Andrias, DeGrasse, Richter,JJ.)). The Trust appealed.

New York Court of Appeals Holds
That DBSP’s Cure or Repurchase
Obligation Was Not “Independently
Enforceable” as a “Separate
and Continuing Promise of
Future Performance”
On appeal, the Trust contended that “itsclaim did not arise until DBSP refused tocure or repurchase, at which point the Trust… had six years to bring suit.” The Trustargued that “the repurchase obligation [was]a distinct and continuing obligation that
DBSP breached each time it refused to cureor repurchase a non-conforming loan.” Inessence, the Trust claimed that “the cureor repurchase obligation [was] a separate
promise of future performance that continued
for the life of the investment (i.e., themortgage loans).”

The New York Court of Appeals found that
“DBSP’s cure or repurchase obligation
could not reasonably be viewed as a distinct
promise of future performance.” The court
underscored that DBSP “never guaranteed thefuture performance of the mortgage loans.”
Rather, DBSP “represented and warranted
certain facts about the loans’ characteristics
as of March 28, 2006, when the MLPA andPSA were executed.” The court explainedthat “DBSP’s cure or repurchase obligation
was the Trust’s remedy for a breach of
those representations and warranties, not apromise of the loans’ future performance.”
The court emphasized that “nothing in thecontract specified that the cure or repurchaseobligation would continue for the life of theloans.”
From a practical perspective, the court
explained that “it makes sense that DBSP,
as sponsor and seller, would not guarantee
future performance of the mortgage loans.”
The court observed that “[a] sponsor does
not guarantee payment for the life of thetransaction because loans may default 10
or 20 years after they have been issued forreasons entirely unrelated to the sponsor’s
representations and warranties.” In viewof this possibility, “[t]he sponsor merely
warrants certain characteristics of the loans,and promises that if those warranties andrepresentations are materially false, it will
cure or repurchase the non-conforming
loans within the same statutory period inwhich remedies for breach of contract (i.e.,
rescission and expectation damages) could
have been sought.”
Had DBSP not agreed to a cure or repurchaseobligation, the court explained that “theTrust’s only recourse would have been tobring an action against DBSP for breach of
the representations and warranties … within
six years of the date of contract execution.”
The court determined that DBSP’s cure or
repurchase obligation simply provided theTrust with an “alternative remedy” for alleged
breaches of representations and warranties,
not an entirely separate cause of action.
The court found no basis for the Trust’scontention that “the cure or repurchaseobligation transformed a standard breachof contract remedy, i.e. damages, into one
that lasted for the life of the investment—
decades past the statutory period.” The court8determined that “nothing in the parties’agreement evidences such an intent.”

New York Court of Appeals Rejects
the Trust’s Contention That theCure or Repurchase Obligation
Was a Substantive Condition
Precedent to the Trust’s Claim for
Breach of DBSP’s Representationsand Warranties
The Trust also contended that “the cure or
repurchase obligation was a substantive
condition precedent to suit that delayed
accrual of [its] cause of action” against DBSP.
According to the Trust, “it had no right at law
to sue DBSP until DBSP refused to cure or
repurchase the loans within the requisite time
period.”Rejecting this argument, the New York Courtof Appeals found that “[t]he Trust suffereda legal wrong at the moment DBSP allegedly
breached the representations and warranties.”
From that point forward, “a cause of action
existed for breach of a representation andwarranty.” The court explained that “[i]f
DBSP’s purchase obligation were truly theseparate undertaking the Trust alleges, DBSP
would not have breached the agreement
until after the Trust had demanded cure andrepurchase.” But in the case at hand, thecourt determined that “DBSP breached therepresentations and warranties in the parties’agreement, if at all, the moment the MLPA
was executed.” The court found that “[t]heTrust simply failed to pursue its contractual
remedy within six years of the alleged
breach.”The Securities Law Alertis edited by Paul C. Gluckow(pgluckow@stblaw.com/+1-212-455-2653), Peter E. Kazanoff(pkazanoff@stblaw.com/+1-212-4553525) and Jonathan K. Youngwood(jyoungwood@stblaw.com/+1-212-455-3539).

9

New York

Los Angeles

Mark G. Cunha+1-212-455-3475
mcunha@stblaw.com

Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

Michael D. Kibler+1-310-407-7515
mkibler@stblaw.com

Paul C. Curnin+1-212-455-2519
pcurnin@stblaw.com

Thomas C. Rice
+1-212-455-3040
trice@stblaw.com

Chet A. Kronenberg+1-310-407-7557
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Michael J. Garvey+1-212-455-7358
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Mark J. Stein+1-212-455-2310
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Palo AltoPaul C. Gluckow+1-212-455-2653
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Craig S. Waldman+1-212-455-2881
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Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

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David J. Woll
+1-212-455-3136
dwoll@stblaw.com

Joseph M. McLaughlin+1-212-455-3242
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Jonathan K. Youngwood+1-212-455-3539
jyoungwood@stblaw.com

Alexis S. Coll-Very+1-650-251-5201
acoll-very@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com

Washington, D.C.
Peter H. Bresnan+1-202-636-5569
pbresnan@stblaw.com
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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11