Two lawsuits filed by the regulator of federal credit unions allege that investment bankers deceived corporate credit unions about the risk tied to mortgage-backed securities they were peddling — leading to the failure of five such institutions. Additional lawsuits are likely to follow.
Both lawsuits were filed Monday by the National Credit Union Administration in U.S. District Court for the District of Kansas, according to copies of the complaints. More than $800 million in damages are claimed.
The regulator alleges that the defendants — including JPMorgan Chase & Co.’s investment banking unit and RBS Securities Inc. — violated federal and state securities laws and misrepresented the sale of hundreds of securities to five failed credit unions that the NCUA took over as liquidating agent.
“NCUA’s legal actions are based on ongoing investigations of individuals and entities responsible for selling these securities to the failed institutions,” NCUA Chairman Debbie Matz said in the statement. “By these actions we intend to hold responsible parties accountable.”
The investigations uncovered “numerous material misrepresentations” by the underwriters in the offering documents, according to the regulator. Relying on the misrepresentations, the credit unions believed the chances of losses were lower than the substantial risk actually associated with the investments.
Ultimately, the MBS experienced “dramatic, unprecedented declines in value” and brought down the institutions, including U.S. Central, Western Corporate, Southwest Corporate, Members United Corporate, and Constitution Corporate.
The NCUA is attempting to work out settlements with additional sellers, issuers and underwriters and is prepared to resort to more litigation if no agreements are reached.
“Additional law suits may follow in order to recover losses from the purchase of securities that caused the failures of five, large wholesale credit unions,” the NCUA stated. “As liquidating agent for the failed corporate credit unions, NCUA has a statutory duty to seek recoveries from responsible parties in order to minimize the cost of any failure to its insurance funds and the credit union industry.”
Damages from potential additional defendants are allegedly in the billions of dollars.
Any recovery from the cases will either go to the Temporary Corporate Credit Union Stabilization Fund or the National Credit Union Share Insurance Fund.
The NCUA pointed out that it has already re-securitized problematic MBS from the failed credit unions — generating $28.3 billion in proceeds in the process.
National Credit Union Administration Board, as Liquidating Agent of U.S. Central Federal Credit Union Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union, and Southwest Corporate Federal Credit Union, Plaintiff, v. J.P. MORGAN SECURITIES LLC., J.P. MORGAN ACCEPTANCE CORPORATION I, AMERICAN HOME MORTGAGE ASSETS LLC, INDYMAC MBS, INC., and BOND SECURITIZATION, LLC, Defendants.
Case 2:11-cv-02341-EFM -JPO, June 20, 2011 (U.S. District Court for the District of Kansas).
National Credit Union Administration Board, as Liquidating Agent of U.S. Central Federal Credit Union, Plaintiff, v. RBS SECURITIES, INC., f/k/a GREENWICH CAPITAL MARKETS, INC., GREENWICH CAPITAL ACCEPTANCE, INC., FINANCIAL ASSET SECURITIES CORP., FREMONT MORTGAGE SECURITIES CORP., RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC., INDYMAC MBS, INC., NOVASTAR MORTGAGE FUNDING CORP., NOMURA HOME EQUITY LOAN, INC., LARES ASSET SECURITIZATION, INC., SAXON ASSET SECURITIES CO., and WACHOVIA MORTGAGE LOAN TRUST LLC, Defendants.
Case 2:11-cv-02340-RDR -KGS, June 20, 2011 (U.S. District Court for the District of Kansas).
