A federal judge has dismissed the majority of the Virgin Islands Government Employees Retirement System’s (GERS) class-action complaint alleging J.P. Morgan and three related entities violated federal securities laws by making misleading statements in securities-offering documents concerning the quality of underlying mortgages.

Judge John G. Koeltl of the U.S. District Court for the Southern District of New York said GERS lacked standing to sue with respect to most of the securities because they had not bought them.

In its second amended complaint, filed in July 2010, GERS alleged that 11 separate trusts sold investors hundreds of millions of dollars worth of certificates that fell in value as the subprime mortgage crisis unfolded in 2007.

The securities, called mortgage pass-through certificates, pay dividends drawn from principal and interest payments made by borrowers whose loans have been bundled into a trust.

J.P. Morgan moved to dismiss the complaint, which alleged the defendants made false and misleading statements related to underwriting appraisal standards and investment ratings.

Judge Koeltl agreed that the retirement system lacked standing to sue over 10 of the 11 offerings because it had only purchased one series.  He dismissed the plaintiff’s claims relating to the 10 offerings it did not purchase.

The judge allowed claims alleging misrepresentations concerning underwriting standards to proceed for the one remaining offering.

The amended complaint’s allegation that the loan originators deviated from underwriting standards as a matter of course was sufficient to survive dismissal, Judge Koeltl said.

The claims regarding appraisal standards also survived.

Allegations that loan underwriters failed to follow appraisal standards are actionable only if a complaint alleges the appraisers did not believe the truth of their appraisals at the time they gave them.

The allegations in the complaint that appraisers were ordered to and did produce “pre-determined, pre-conceived, inflated and false appraisal values” were sufficient to survive a motion to dismiss, the judge said.

Like appraisal standards, investment ratings must be disbelieved when given in order to be actionable, he explained.

The allegations were insufficient to support GERS’ claim because the complaint did not allege the ratings agencies believed their standards to be too lax or that they knew the loan data was flawed, Judge Koeltl concluded.

Employees’ Retirement System of the Government of the Virgin Islands v. JPMorgan Chase & Co. et al., No. 09-3701, 2011 WL 1796426 (S.D.N.Y. May 10, 2011).