The First Department determined plaintiff had sufficiently alleged fraud and aiding and abetting fraud in connection with defendants’ sale of defective residential mortgage backed securities (RMBS):
Defendants argue that in order to establish justifiable reliance, plaintiffs were required to allege that they sought additional information from defendants about the truthfulness of the representations made in the offering documents or that they requested the loan files for the loans underlying the RMBS. The level of due diligence advocated by defendants requires a prospective purchaser to assume that the credit ratings assigned to the securities were fraudulent and to verify them through a detailed retracing of the steps undertaken by the underwriter and credit rating agency. We do not require this heightened due diligence standard to support justifiable reliance in a pleading concerning such sales of securities by prospectus … .
… The element of scienter, that is, the requirement that the defendant knew of the falsity of the representation being made to the plaintiff, is, of course, the element most likely to be within the sole knowledge of the defendant and least amenable to direct proof” … . All that is required to defeat a motion to dismiss a fraud claim for lack of scienter is “a rational inference of actual knowledge” … . The allegations that defendants were informed about defects in the loans they were securitizing because they obtained this information through their own due diligence are sufficient to plead scienter … . IKB Intl. S.A. v Morgan Stanley, 2016 NY Slip Op 05779, 1st Dept 8-11-16
FRAUD (FRAUD ALLEGATIONS RELATED TO SALE OF DEFECTIVE RESIDENTIAL MORTGAGE BACKED SECURITIES SUFFICIENT TO WITHSTAND MOTION TO DISMISS)/SECURITIES (FRAUD ALLEGATIONS RELATED TO SALE OF DEFECTIVE RESIDENTIAL MORTGAGE BACKED SECURITIES SUFFICIENT TO WITHSTAND MOTION TO DISMISS)/RESIDENTIAL MORTGAGE BACKED SECURITIES (FRAUD ALLEGATIONS RELATED TO SALE OF DEFECTIVE RESIDENTIAL MORTGAGE BACKED SECURITIES SUFFICIENT TO WITHSTAND MOTION TO DISMISS)