Judge Rakoff agreed with Deutsche Bank and dismissed two investor lawsuits involving the sale of residential mortgage backed securities the bank internally referred to as “crap,” “pigs,” and generally “horrible.” And “crap” they were, as we all know now (and it appears that Deutsche Bank knew before they sold them to investors). The mortgages were made to folks—did they even have jobs?—who could hardly make monthly payments on homes that were surely well overvalued (as appraisers too were willing to play in the game).
All these lies were then forgotten (or at least swept under the rug) by a AAA investment rating brought to you proudly by Standard & Poor’s. With that investment-grade rating, they were able to attract the money of pension funds, in this case the Teachers Insurance and Annuity Fund.
What is so maddening is Judge Rakoff refused to even let the suit proceed beyond the mere filing of the Complaint. “Done, over, go home, nothing to see here, thanks for playing the game.” He wrote that investors had not included allegations of “fraud” specific enough to go forward. “Ah come on now.” The Complaint ran over 100 pages long. At a minimum, the investors demonstrated in detail Deutsche Bank’s knowledge that these securities were questionable by the bank’s decision to short them; after all, the bank bet against them in the market.
What more did they need? And how can investors obtain more specifics without being allowed discovery? AAA bonds that Deutsche Bank is shorting and internally calling “crap,” and investors are not even allowed to get to first base? It’s a travesty. Allow investors to obtain documents and testimony (under oath) to see if behind the smoke there is fire. If not, so be it. But don’t slam the courthouse doors in their faces—and why? To protect Deutsche Bank?
If Judge Rakoff is so concerned about the burden of this suit on Deutsche Bank, or more generally about investor suits claiming fraud, then significantly limit discovery. Allow investors just one or two depositions and documents on a narrow issue they have failed to include in their Complaint. But slamming the door on investors not only denies them a remedy; worse, it allows the Deutsche Banks of the world to avoid scrutiny, and you know where that ends. They will try it again and again knowing the courts have their back.