Sixth Circuit Dings RMBS Suit by Blue Grass Bank's Blue Sky Law Claims

Your bank in Louisville spent $50 million on fancy paper that a nice salesman at Bear Stearns told you would earn the bank a decent return without much risk. But things didn't turn out as the kindly broker said. The fancy paper — residential mortgage-backed securities (or RMBS)s — proved pretty much worthless once the Great Recession cranked up in 2007-08.

So the bank sues Bear Stearns, the sales guy, and the outfit that bought Bear Stearns as it teetered on the cusp of oblivion (JPMorgan Chase).

Does the bank win? No.

Why not? Do you really have to ask?

Yes. Okay then.

Your bank lost because the brochure you received from the fellow who got you into this mess would have told you — if you had taken the time to leaf through it — that the RMBSs involved a good bit more risk than the seller-dude led you to believe. Also because your complaint didn't say enough about why things he told you or forgot to mention amounted to fraud that caused the bank's losses. Stuff like that. Republic Bank & Trust Co. v. Bear Stearns & Co., No. 10-5510 (6th Cir. June 20, 2012).

Bonus (quotes from the opinion):

"He succeeded."

"Republic appeals."

"Institutional investors, while sophisticated, are not omniscient."

"The difference is one of degree."

"The defect is fatal."

"This argument fails for two reasons."

"This argument is unavailing for three reasons."

"Failure to do so vitiates its claims."

"This claim is untenable."

"Mere omissions will not do."

Extra bonus:

The court relies on dicta . . . that cites no authority . . . and appears in a footnote . . . of an unpublished Kentucky court of appeals opinion . . . to conclude that the Kentucky version of negligent misrepresentation, unlike the versions in the 49 other states, "plainly understood, requires an allegation of duplicity" and therefore sounds in "fraud" and calls for details about time, place, content, and so forth. Id. at 8 (quoting Thomas v. Schneider, No. 2009-CA-002132-MR, 2010 WL 3447662, at *1 n.2 (Ky. App. Sept. 3, 2010)). Although the footnote ends by saying "we have not been asked to address" any of the misrepresentations to which it refers, the Republic opinion praises the state court's "reasoning" as "correct".

Negligent misrepresentation does not sound in fraud. Unless you allege fraud. And then it does. So there.