Photo of Christopher Lometti (left) and Joel Laitman by Laura Barisonzi.
After the financial crisis, the loss of trillions of dollars in wealth in such a short period of time had left much of the world stunned. But lawyers who represent investors had little time to waste if they wanted any chance of recouping losses for their clients. In this challenging and complex effort, many institutional investors were happy to have Joel Laitman and Christopher Lometti on their side. The New York-based partners at Cohen Milstein Sellers & Toll have played lead roles in several of the most significant mortgage-backed securities (MBS) class actions, netting more than $1 billion in settlements so far. Laitman, a Georgetown University Law Center graduate, and Lometti, who earned his J.D. at Fordham Law, both joined Cohen Milstein in 2009 from Schoengold Sporn Laitman & Lometti, where they were name partners.
Lawdragon: You began filing MBS claims relatively early in the timeline of the crisis. How did you start to put together these cases in the beginning?
Joel Laitman: I often think about that question because the answer reminds me that while success requires hard work it also often happens because of timing – which we generally have no control over. For several years prior to the commencement of the MBS cases we had been prosecuting two class cases as sole lead counsel – Dynex and Bombardier. Both cases alleged securities fraud claims on behalf of investors against issuers of bonds collateralized by mobile-home loans. These bonds were virtually identical to MBS except, instead of investors getting paid from pools of residential mortgages, they were paid from pools of mobile-home loans. So, essentially, when the financial crisis hit and we saw the enormous damages sustained by our pension fund clients from their MBS investments, we were already quite familiar with these kinds of financial products.
By the way, the Dynex and Bombardier cases broke new legal ground, requiring appeals to the Second Circuit – both of which I argued. Dynex established the legal standard for pleading intent in a fraud case, and Bombardier established the standard for demonstrating market efficiency so as to permit class certification of claims for these kinds of bonds.
LD: What were some of the early challenges you faced in terms of how the courts were viewing these attempts at accountability for what had happened? What hurdles did you have to get over to be where we are now?
Chris Lometti: Two principal strategies were employed in an effort to defeat the MBS cases. First, defendants argued that the bonds were bought primarily by funds and other investment banks who knew the risks involved. Judge Baer accepted this argument in both the RALI and Harborview cases, and initially denied class certification. However, following an appeal to the Second Circuit and the presentation of evidence demonstrating that no investor – no matter how sophisticated – ever saw the adverse results of the underwriter banks’ re-underwriting of sample offering loans just before the offering, Judge Baer reversed himself, finding that all investors had been kept in the dark and certifying the two MBS classes. The RALI case ultimately settled for $335 million and Harborview for $275 million.
JL: The second defense strategy was to attempt to cut the scope of the classes to either just a limited number of tranches in a single offering or a limited number of offerings emanating from a common registration statement. The argument was that even though the tranches and offerings were sold by the same defendants, there was insufficient standing or commonality to include them in a single case or class. The law was unsettled in both areas, but was ultimately resolved mainly in favor of investors as courts became more familiar with the products and the MBS process.
LD: The litigation has lasted a long time. As an attorney, what type of mentality does it take to keep pushing forward for several years?
CL: Basically, you have to have the ability to shoulder setbacks and devise strategies to overcome them. In the MBS context, this meant going to the Second Circuit three times. In RALI and Harborview, we went up to reverse the denial of class certification; in Novastar, we went up to reverse the district court’s dismissal of the case; and in Lehman, we went up to reverse the dismissal of the claims asserted against the rating agencies. This willingness and ability to appeal adverse rulings – which requires years of additional work – is possible only if you have a very deep belief in the underlying validity of your clients’ claims.
LD: Not all firms would be able to assume such risk or to assemble the necessary resources. Can you describe the type of team that is needed to handle such massive and complex litigation?
JL: Our teams consisted of an extremely talented group of Cohen Milstein partners and associates as well as numerous contract lawyers hired to assist with the review of millions of pages of documents. Still, Chris and I were very hands on. I took the lead role in arguing motions, conducting hearings and taking critical depositions in RALI, Harborivew, HEMT, Lehman and Novastar. Chris was central to and active in all these cases, as well as being central to the prosecution of the Countrywide, Bear Stearns and Washington Mutual cases.
LD: Can you tell our readers a little bit about the type of clients you have represented in these cases, and what you have learned about how the crisis affected them?
CL: All of our clients in these cases were institutional investors. You have to remember that MBS were marketed as very safe, triple-A rated fixed-income investments, and, as a result, institutional investors were the prime candidates for acquiring MBS. However, once the truth about the MBS was revealed and investors began to understand that the loans backing them were often in violation of the supposed loan underwriting guidelines, the MBS were downgraded to junk and the market prices collapsed. It was particularly painful for these investors to bear these losses because they were being incurred in their bond portfolios, which were supposed to be safer, more secure portfolios than their equity counterparts.
LD: What do you see in the years ahead for your practice? How long will the MBS litigation play out?
CL: The MBS cases that we filed – all of which were based on Securities Act violations – are winding down. And while there are still some cases based on contractual put-back claims and some governmental cases that are still being litigated, it’s safe to say that the bulk of the MBS cases that were filed have been resolved.
JL: Beyond that, as for what lies ahead for our practice, it’s hard to say with certainty, but one thing we both know: greed is unfortunately part of the human condition, and so it’s only a matter of time before another scam rears its head.