As expected, defendants associated with the Enterprise Mortgage Acceptance Co. (EMAC) lawsuit moved to dismiss earlier this month in the U.S. District Court, Southern District of New York.

As several parties are named in the complaint, the motions came in several distinct flavors from the various law offices: Weil, Gotshal & Manges is representing EMAC; Kramer Levin Naftalis & Frankel is representing three former underwriting and management personnel at EMAC (Kenneth Saverin, Charlene Chai, and Sean Stalfort); Skadden, Arps, Slate, Meagher & Flom is representing Koch Capital and Koch Industries; Bryan Cave is representing Jeffrey R. Thompson; and Morrison & Foerster is representing Jeffrey Knyal.

Some believe the outcome of the EMAC lawsuit will be precedent setting, as many of the allegations are grounded in the idea that EMAC manipulated the performance of the securitizations at the loan level; i.e., extended "prop up" loans to certain large borrowers so that they would stay current, allowing EMAC to market itself again as an issuer. Of course, the plaintiffs also allege that EMAC was lending recklessly and in contrast to guidelines described in its offering memoranda.

The defendants counter on several levels, each from the perspective of his/her/its own involvement with the EMAC and its underwriting during the years it was a functioning lender (1996 to 2000).

On Koch's behalf, Skadden argues that, even if EMAC's practices were to exhibit securities fraud, the link to Koch - the "deep pocket" majority equity investor in EMAC - is unsupported. "Such culpable participation' is an indispensable element of any secondary liability claim, and it must be supported with specific allegations of fact that simply are missing from the Complaint in this case," the attorneys state in the motion.

Similarly, Thompson's lawfirm Bryan Cave points out that Thompson served as an outside director until October 2000, when he was made CEO and Chairman of the Board of EMAC "after Plaintiffs made their purchases of the EMAC Securities." Further, the motion claims that any "working capital loans" Thompson approved would have happened long after the 2000 securitization.

Though preliminary statements of each motion were more or less similar (and in some cases refer to one another), on EMAC's behalf, Weil provided the harshest and most colorful opening remarks, which follow:

Plaintiffs, which include some of the largest, best-known, and most sophisticated of institutional investors, contend that EMAC violated [securities laws] when... EMAC sold plaintiffs interests in pools of loans made - not to Fortune 500 companies - but to gasoline stations, car washes, "quick lube" businesses, and convenience stores.

Plaintiffs' core claim is that they were supposedly misled into believing that their investments were safe - a claim that beggars belief. After all, not only were the borrowers in the loan pools hardly gilt-edged, but it also does not take institutional investors, employing squadrons of securities analysts, to figure out that earnings of these borrowers - and hence their ability to repay their loans - were hostage to the historically volatile price of gasoline.

Moreover, Weil highlights the disclosures in the EMAC private placement memoranda (PPM), in which the issuer offers the token disclaimer, "[I]nvestors should make an investment decision ... on the basis of their own projections as to the defaults, losses and prepayments to be experienced on the loans." The PPM also states that the EMAC-originated portfolio had a relatively short period of seasoning, and that "EMAC's experience to date may not be indicative of results to be experienced in the future." Further, according to Weil, the PPM stated that EMAC was entitled to continue extending "working capital" loans to existing securitized borrowers, representing itself as "the only available lending source" to many of the concepts.

Several plaintiffs

Since the original complaint filed by Teachers Insurance and Annuity Association in early 2002, several investors in EMAC securitizations have filed additional separate complaints, while others have joined Teachers in the "amended consolidated" complaint. The consolidated complaint includes Teachers, ING Investment Management, USG Annuity & Life Co., Security Life of Denver Insurance Co., Equitable Life Insurance Co. of Iowa, Life Insurance Co. of Georgia, Southland Life Insurance Co., Northern Life Insurance Co., and ReliaStar Investment Research.

The groups of independent filers includes Aetna Life Insurance Co., Aetna Health and Life Insurance Co., Nationwide Life Insurance Co., Nationwide Mutual Insurance Co., Nationwide Mutual Fire Insurance Co., and Nationwide Life Insurance Co. Separate Account OH, Great Southern Life Insurance Co. and Americo Financial Life and Annuity Insurance Co.

While there are apparently several groups of plaintiffs, certain defendants chose to address certain groups jointly, as per similarities in the claims.

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