Continuing the recent trend of more closely scrutinizing possible pleading deficiencies, the Sixth Circuit last week affirmed dismissal of a case concerning mortgage-backed securities.  Republic Bank & Trust Co. v. Bear Stearns & Co. (.pdf)   

Republic Bank & Trust Company purchased more than $50 million in residential-mortgage-backed securities from Bear Stearns.  Republic’s investments significantly declined in value when the economic crisis of 2007 and 2008 hit, and it brought suit against Bear Stearns and one of its employees in the Western District of Kentucky asserting claims based on various theories of fraud, negligent misrepresentation, and under Kentucky’s securities laws.  Republic’s fraud and misrepresentation claims were based on a number of allegations including that the defendants represented that the securities were “reasonably safe,” that defendants omitted to state that certain underwriting standards were not followed when making the underlying mortgage loans, that defendants omitted to state the risk of default of the underlying loans, and that Bear Stearns made these same misrepresentations to rating agencies to induce people to buy the securities.

Republic’s claims were dismissed by the district court.  The Sixth Circuit, in affirming the dismissal of Republic’s claims, stated bluntly that Republic’s complaint “fails adequately to plead actionable misrepresentations or omissions of fact, complains of risks disclosed in offering documents that it failed to read before investing tens of millions of dollars in risky securities, and attempts to maintain claims that are clearly time-barred.”  The Court walked through each of Republic’s allegations, but found them all to be insufficient to stave off dismissal, particularly with the heightened pleading requirement in fraud-based cases.  The fact that Republic ignored warnings in the key documents by which it bought the securities helped drive the Court’s decision.  The case also contains a helpful (and in-depth) discussion of several nuances of Kentucky law concerning fraud, negligent misrepresentation, and securities claims.