Wednesday, July 27, 2011

The Rights of Foreign Victims of U.S. Real Estate or Mortgage-Backed Securities Scams

A few previous blogs touched on the subject of real estate fraud that crosses national boundaries, and how difficult it can be for American victims to seek redress in foreign courts. I might have sounded xenophobic by focusing on scammers in Latin America, Canada and China, but international real estate fraud works both ways. There are also foreign victims of U.S.-based frauds.

Ethical standards in the U.S. should not be considered different from ethical standards elsewhere. It is not the nationality that matters, but the type of people the real estate industry attracts – people who want to make lots of money. If the real estate industry instead attracted saints, perhaps Mother Theresa herself would have devoted her life to selling condos to foreigners.

Prestige and fame matter little, too, in protection from fraud, as this blog will focus on extensive litigation against Goldman Sachs, an institution once so hallowed that our last three U.S. presidents have selected Goldman executives to become U.S. Secretary of the Treasury, including the present one.

U.S. Securities Laws are not Extra-Territorial

An overseas investor might also be surprised to find that U.S. securities laws do not apply to U.S. real estate investment securities marketed overseas, which includes mortgage-backed securities and real estate syndications.

For instance, Australian hedge fund Basis Yield Alpha recently lost its lawsuit against Goldman Sachs for a $78 million loss on its investment in a Goldman-sponsored CDO (collateralized debt obligation) known as Timberwolf 2007-1, which specialized in subprime mortgage loans. Goldman profited by betting against this CDO, as they have been known to do, even letting John Paulson design another CDO in which he was able to pick the nonprime packages that were “most likely to fail” and then invest in credit default swaps. The U.S. Securities and Exchange Commission sued Goldman and settled for $550 million one year ago this month.

Goldman, for this reason, faces other investor lawsuits from domestic investors, but Judge Barbara Jones dismissed the Australian lawsuit solely because U.S. securities law only governs securities sold within the United States. (As you may recall, This jurisdictional exception was upheld by the U.S. Supreme Court last year in the landmark case, Morrison v. National Australia Bank Ltd. This decision serves to bar the extraterritorial application of the U.S. Securities Exchange Act of 1934. In that case, although the lead plaintiff, Morrison, was American, the remaining plaintiffs were Australian and were victims of NAB’s (National Australia Bank) inaccurate accounting for its American mortgage servicing subsidiary, HomeSide Lending. The plaintiffs argued that the overvaluation of mortgage assets occurred in Florida, where the subsidiary was located, and U.S. securities laws should therefore apply, but the Court found that the securities were sold in Australia, by Australians, to Australians, and therefore U.S. law did not apply. Morrison, the American, could not prove damages, either.

Korean insurer Heunkuk Life Insurance is similarly affected in its lawsuit against Goldman Sachs.

These recent Federal court decisions do not preclude plaintiffs from suing in state courts or foreign courts.

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