Thornburg MBS Litigation: Limited CRARA Preemption, No First Amendment Shield for Offering-Document Ratings, and American Pipe Tolling Despite Standing Defects

Introduction

This class action arises from three residential mortgage-backed securities (RMBS) offerings issued through the Thornburg Mortgage Securities Trusts: 2006-3, 2006-5, and 2007-4. Lead Plaintiffs Maryland-National Capital Park Planning Commission Employees’ Retirement System and Midwest Operating Engineers Pension Trust Fund alleged that various Depositors, Underwriters, Individual Defendants, and the major rating agencies (Moody’s, Standard & Poor’s, and Fitch) made materially false statements and omissions in offering documents. The claims span Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and New Mexico Securities Act claims.

Defendants moved to dismiss on numerous grounds, challenging Article III standing, statutes of limitations and repose, adequacy of misrepresentation allegations, reliance, control-person liability, causation, New Mexico Securities Act jurisdiction and scope, First Amendment defenses for ratings, and federal preemption (CRARA) of state-law claims against rating agencies. Judge James O. Browning’s extensive memorandum opinion grants in part and denies in part the motions, and supplies several important holdings at the intersection of RMBS litigation, rating agency liability, and class action procedure.

Summary of the Opinion

• Standing and tolling: Plaintiffs have constitutional standing. The Court applies American Pipe/Crown, Cork tolling (as interpreted by the Tenth Circuit in JOSEPH v. WILES) to both limitations and repose—even where the original class representative lacked standing for certain offerings—permitting later substitution by proper plaintiffs without time-bar.
• Limitations/repose: Claims are not time-barred; inquiry notice cannot be resolved on a Rule 12(b)(6) record here. Plaintiffs must, however, plead compliance with the one-year discovery rule under §13; leave to amend is granted to add those specifics.
• Material misstatements/omissions (non-CRA defendants): Sufficiently pled as to:
  • Systemic abandonment of underwriting standards (all offerings).
  • Appraisal inflation (2006-5 only).
  • Inflated LTV ratios (2006-5 only, hinged to appraisal allegations).
  • Credit ratings misstatements (2006-5 and 2007-4 offerings; not 2006-3 on the present pleadings).
  Bespeaks-caution disclaimers did not defeat allegations of wholesale disregard of underwriting standards.
• Ratings and the CRA defendants:
  • Ratings are opinions, but actionable if not honestly believed or lacking a basis; inclusion of ratings in offering documents can be actionable statements by other defendants.
  • Sufficient allegations as to S&P (McGraw-Hill/Standard & Poor’s) on the 2006-5 and 2007-4 offerings. Insufficient as to Moody’s and Fitch on the present pleadings (leave to amend granted).
  • First Amendment does not bar claims where ratings appear in offering documents disseminated to a discrete investor audience (private placement context), not the public at large.
  • CRARA partially preempts state-law theories against NRSROs that would regulate the “substance” of ratings or their “procedures and methodologies” (e.g., claims premised on outdated models, inadequate due diligence as a process requirement, or staffing/resource sufficiency). But it does not preempt misrepresentation-based theories (ratings not honestly held) under the New Mexico Securities Act.
• Section 12(a)(2): Adequately pled; at the pleading stage, plaintiffs need not identify the exact selling underwriter by name, and allegations that defendants offered/sold “by means of” the offering documents suffice.
• Reliance: For Section 11, plaintiffs need not plead reliance. MBS Form 10-D distribution reports are not “earning statements” under §77k(a), so the statutory reliance condition does not apply.
• Control-person liability: Adequately pled under Section 15 against the Individual Defendants and RBS Securities.
• Causation: Not a dismissal issue here; Section 11’s damages measure controls, and reliance/loss causation are not elements at this stage in Sections 11/12(a)(2) claims.
• New Mexico Securities Act: Plaintiffs failed to adequately plead the statute’s jurisdictional nexus (offer “made” in New Mexico) but are granted leave to amend. Rating agencies are not categorically immune from NM Securities Act liability.
• Leave to amend: Granted broadly to cure identified pleading defects (with specific instructions), including limitations pleading and New Mexico jurisdictional nexus.

Analysis

Precedents and Authorities Cited

• American Pipe & Crown, Cork: Tolling applies to putative class members until certification is denied; Tenth Circuit in JOSEPH v. WILES extends this to the three-year repose of §13 as legal tolling. The Court follows the Third and Eleventh Circuits (McKowan Lowe, Griffin) to apply tolling even when the original representative lacked standing on some claims, avoiding multiple protective suits and preserving efficiency.
• Twombly/Iqbal: Governs plausibility; but Securities Act claims (Sections 11 and 12(a)(2)) are not subject to the PSLRA scienter particularity standards unless grounded in fraud.
• Matrixx Initiatives v. Siracusano: Rejects categorical materiality rules. Applied here to: (i) cautionary language analysis; and (ii) the impropriety of bright-line immateriality holdings on conflicts/ratings.
• Grossman v. Novell; Halperin v. eBanker: Bespeaks-caution doctrine yields to allegations that real risks (wholesale abandonment of guidelines) were already occurring, and cautionary language did not directly address or expressly warn of those risks.
• Jefferson County Sch. Dist. v. Moody’s: Ratings are opinions, potentially actionable when implying false assertions of fact. Used to frame ratings analysis.
• Dun & Bradstreet v. Greenmoss Builders; Abu Dhabi: First Amendment protection is reduced/absent where communications are not of public concern and are directed to a limited, private audience; supports no-First-Amendment shield for offering-document ratings.
• Cipollone v. Liggett; Bates v. Dow; Medtronic v. Lohr: Guide express preemption analysis. CRARA’s clause is read narrowly; it does not wipe out general misrepresentation/fraud rules. It bars state regulation of rating “substance” and “methodologies,” not misrepresentation claims.
• JOSEPH v. WILES; ESPLIN v. HIRSCHI; Lucero v. BCR: Standing, relation back, and class action temporal continuity principles that together prevent dismissal and preserve claims through substitution of proper lead plaintiffs.

Legal Reasoning (Issue-by-Issue)

1) Standing, Tranches, and Relation Back

The Court rejects tranche-by-tranche standing as a threshold bar, reasoning that the same offering documents and alleged misstatements flow through all tranches of a single offering. It does, however, respect the offering-by-offering boundary—an original plaintiff without purchases in particular offerings lacked standing as to those offerings. The defect is remedied by substitution of lead plaintiffs with purchases in 2006-3 and 2006-5, with both relation-back principles and American Pipe tolling preserving the claims and avoiding repose/limitations bars.

2) Statute of Limitations/Repose and Inquiry Notice

Section 13’s one-year discovery and three-year repose periods do not bar the claims. Under Tenth Circuit law (Sterlin), inquiry notice is fact-intensive and ill-suited to Rule 12(b)(6), especially where public articles did not clearly link Thornburg’s trusts to fraud. Plaintiffs must still plead the time and circumstances of discovery—that defect is curable by amendment.

3) Material Misstatements/Omissions in Offering Documents (Non-CRA Defendants)

• Underwriting standards: Allegations of widespread abandonment suffice at the pleadings stage without identifying specific loans. General disclosures of possible exceptions or “stated income” loans do not defeat claims alleging systemic disregard.
• Appraisals and LTV ratios: Appraisals are opinions; actionable if not honestly believed or if they did not follow stated standards. Plaintiffs sufficiently tied Wells Fargo’s appraisal practices to the 2006-5 trust; not so for 2006-3 and 2007-4 on the current pleadings. LTV claims (opinion-based) rise and fall with appraisal allegations; viable for 2006-5 only.
• Ratings in offering docs: Ratings can be actionable statements when included in offering documents. Plaintiffs adequately pled that S&P’s ratings on 2006-5/2007-4 were not honestly held; insufficient as to Moody’s/Fitch on current facts; leave to amend allowed.
• “Sole remedy” cure/repurchase clause: Does not waive Securities Act remedies (15 U.S.C. § 77n). The Court rejects Lone Star’s narrow approach, aligning instead with decisions refusing to allow offering document cure provisions to displace federal remedies.
• Reliance & damages: Section 11 does not require reliance. MBS 10-D distribution reports are not “earning statements” under §77k(a). Section 11 damages measure (value at suit date vs. amount paid) controls; secondary market illiquidity warnings do not undercut statutory damages.

4) Section 12(a)(2) Pleading

Plaintiffs adequately allege that defendants “offered and sold” by means of the offering documents. Rule 8 does not require, at the pleading stage, identifying precisely which underwriter sold to which plaintiff, provided there are plausible allegations that defendants engaged in solicitation and sale using the prospectus.

5) Control-Person Liability

Section 15 claims are plausibly pled against Individual Defendants and RBS Securities. Allegations include executive roles, signing registration statements, participating in drafting/approving offering documents, and practical power to direct the primary violators’ policies and conduct.

6) New Mexico Securities Act (Jurisdiction, Scope, and Liability)

• Jurisdictional nexus: Plaintiffs must plead facts showing an offer to sell was “made” in New Mexico (e.g., offer originated in New Mexico). Current allegations are insufficient; leave to amend granted.
• Liability scope: NM’s antifraud provision (modeled on Rule 10b-5) reaches “any person” making untrue statements or misleading omissions “in connection with” a securities transaction. Rating agencies are not categorically exempt from state-law liability.

7) Rating Agencies—First Amendment and CRARA

• First Amendment: No bar where ratings are embedded in offering materials distributed to a defined investor group rather than broadly published; the statements are commercial in nature and not entitled to media-style actual malice protection in this context.
• CRARA (Credit Rating Agency Reform Act) preemption:
  • Preempts state laws (and claims framed to function as regulation) that would dictate or police rating “substance” or “procedures/methodologies” (e.g., obligation to use different models, mandatory due diligence as a process requirement, staffing/resource requirements).
  • Does not preempt misrepresentation-based theories—i.e., that a rating was not honestly held or omitted facts that made it misleading. The Court permits such claims to proceed under the New Mexico Securities Act (subject to the jurisdictional nexus being pled).

Impact and Practical Implications

• For class action practice (10th Cir.): The opinion cements a generous application of American Pipe tolling that extends to standing defects, aligning with the Third and Eleventh Circuits. Plaintiffs can rely on an initial class complaint while leadership and scope are sorted out, reducing pressure for duplicative protective suits.
• For RMBS issuers/underwriters: Boilerplate “exceptions” and risk warnings do not inoculate against allegations of systemic underwriting abandonment. Detailed program descriptions and quality control assertions in offering docs will be scrutinized against real-world origination and appraisal practices.
• For rating agencies: Two key lines are drawn:
  • No First Amendment shield in the offering-document context.
  • CRARA preempts claims that would tell NRSROs how to rate (substance/methods), but not claims that they misrepresented their opinions (i.e., did not genuinely believe them). Plaintiffs who can plead facts showing knowledge, internal acknowledgements, or contemporaneous doubts (as with S&P here) will clear the motion-to-dismiss threshold.
• For damages/reliance defenses: Section 11’s statutorily fixed measure controls; attempts to convert MBS distribution reports into “earning statements” to shift reliance burdens failed. Issuers cannot contract around federal remedies with “sole remedy” repurchase clauses.
• For state blue sky claims: The Court recognizes rating agencies as potential “persons” under the New Mexico Securities Act but insists on pleading the statute’s jurisdictional nexus (offer made in NM). Expect similar pleading rigor in other blue sky jurisdictions.

Complex Concepts Simplified

• RMBS and tranches: Mortgage pools are securitized into certificates. Tranches allocate cash flows by priority (senior “AAA,” mezzanine, and equity). One offering can have many tranches, but a single set of offering documents can control.
• Underwriting standards: Lender rules to verify borrower ability to repay. “Systemic abandonment” means widespread, routine disregard—not just case-by-case exceptions.
• Appraisals and LTV: Appraisals estimate collateral value; LTV = loan amount divided by the lesser of sale price or appraisal. If appraisals are inflated, LTVs are understated, making loans appear safer.
• Sections 11, 12(a)(2), 15 (Securities Act):
  • §11: Liability for material misstatements/omissions in a registration statement; strict liability for issuers; reliance generally not required.
  • §12(a)(2): Liability for offers/sales by means of a prospectus with material misstatements/omissions; no scienter or reliance required; covers direct sellers and active solicitors.
  • §15: Control-person liability for those with power to direct the primary violator’s management and policies.
• American Pipe tolling: Filing of a class action pauses limitations and (in the Tenth Circuit) repose for putative class members until certification is decided—applies even when the original representative lacked standing for particular securities, to avoid duplicative suits.
• Bespeaks-caution doctrine: Forward-looking statements may be non-actionable if accompanied by meaningful, specific warnings. It does not shield present-tense misrepresentations or warn of a risk that is already occurring (e.g., wholesale underwriting abandonment).
• Ratings as opinions: Actionable if not honestly believed or if key undermining facts are omitted. First Amendment protections are limited when ratings are part of offering materials provided to a discrete investor group.
• CRARA preemption: The SEC regulates NRSRO registration and oversight. States (and private litigants) cannot regulate rating “substance” or “methodologies,” but may pursue misrepresentation claims that do not functionally dictate how to rate.

Conclusion

Judge Browning’s opinion charts a careful middle course in RMBS litigation and rating-agency liability. It:

• Affirms the vitality of American Pipe tolling in the Tenth Circuit—even in the face of standing defects—preserving claims and promoting class action efficiency.
• Clarifies that “bespeaks caution” will not negate allegations of present, systemic defects in underwriting and appraisals.
• Confirms that ratings included in offering documents are not immune: First Amendment defenses do not bar such claims, and misrepresentation-based state blue sky claims are not preempted by CRARA.
• Distinguishes between permissible misrepresentation theories (ratings not honestly held) and impermissible attempts to regulate rating methodologies or processes (preempted).
• Provides practical guidance for Section 12(a)(2) pleading and rejects efforts to recharacterize MBS distribution reports as earning statements under §77k(a).

The decision will influence how plaintiffs frame RMBS claims and how rating agencies defend them. Plaintiffs should focus on contemporaneous facts showing that ratings were not genuinely held, that underwriting guidance was systemically ignored, and that appraisal practices inflated loan values. Defendants should expect limited success with generalized cautionary language or First Amendment defenses where ratings are woven into offering documents. And all parties must attend closely to class action tolling, jurisdictional pleading under state securities acts, and the CRARA line between regulating “how to rate” (preempted) and alleging “what was falsely said” (actionable).