Financial Crisis Related On The Subprime Mortgage Market And The U.s. Housing Market

1713 Words May 13th, 2016 7 Pages
b. RELIANCE
Another component of fraud crimes is reliance. For the government to prevail on fraud charges, it has to establish reasonable reliance on the alleged misrepresentations or omissions. Most financial crisis related investigations focused on mortgage backed securities that banks sold consisted of subprime mortgages that are doomed to be defaulted. The misrepresentation argument goes that banks failed to disclose the low quality of the mortgages and substantial risks of default that are associated with them. However, banks can conveniently raise the defense that the securities are sold to sophisticated investors, such as pension funds and mutual funds, who could have known what was going on in the subprime mortgage market and the U.S. housing market in general. As Professor Richman stated no one has demonstrated how to overcome defenses of good-faith reliance on purportedly adequate disclosure . . . to sophisticated buyers of derivatives who ere well-informed about the housing market.”
Judge Rakoff pointed out that prosecutors can counter the defense by showing that such securities at issue are often bought and sold “at lighting speed,” therefore, even sophisticated counterparty would have detected the problems with the “arcane, convoluted mortgage-backed derivatives they were being asked to purchase.” However, courts have interpreted reliance standards quite differently. In Emergent Capital Inv. Management, the Second Circuit rejected the argument that…
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