Regulators have taken an aggressive posture against issuers of mortgage-backed securities — filing new lawsuits and extracting settlements on behalf of injured investors. Some of the activity involves failed financial institutions.
Settlements with J.P. Morgan Securities LLC and Credit Suisse Securities in excess of $400 million were announced by the Securities and Exchange Commission on Nov. 16. Settlement proceeds will be forwarded to impacted investors.
In J.P. Morgan’s case, the company allegedly misstated information about the delinquency status of mortgages that provided collateral for an RMBS offering in which it was the underwriter. While J.P. Morgan received more than $2.7 million in fees, investors sustained losses of at least $37 million because of the undisclosed delinquent loans. In addition, the company was charged for Bear Stearns’ failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that were sold into RMBS trusts.
J.P. Morgan agreed to pay $296.9 million to settle the SEC’s charges.
Credit Suisse, which also is accused of disclosure inadequacies on cash retained from originators, is additionally alleged to have made misstatements in SEC filings about when it would repurchase mortgage loans from trusts if borrowers missed the first payment due. It gained $55.7 million off its bulk settlement practices while investors lost more than $10 million.
Credit Suisse agreed to pay $120 million.
A previously disclosed Wells notice from the SEC to Wells Fargo & Co. resulted in an investigation into MBS disclosures. An SEC filing by Wells Fargo indicated that it received notice from the SEC on Nov. 20 that the investigation has been completed and the SEC staff doesn’t intend to recommend any enforcement action.
Commonwealth Advisors Inc. and Walter A. Morales were charged by the SEC in a Nov. 8 complaint filed in Louisiana with hiding losses suffered during the financial crisis from RMBS investors, an SEC announcement indicated. Through a collateralized-debt obligation known as Collybus, more than 150 manipulative cross-trades between hedge funds advised by Commonwealth enabled the defendants to allegedly conceal $32 million in losses.
“Morales and Commonwealth lied to investors about the amount and value of mortgage-backed assets held in the hedge funds, and they created phony internal documents to justify their false valuations,” the SEC claims.
A lawsuit was filed in Kansas federal court by the National Credit Union Administration against J.P. Morgan Securities as successor-in-interest to Washington Mutual Bank, which failed and was acquired by JPMorgan Chase & Co. in September 2008. The regulator alleges violations of federal and state securities laws in the sale of $2.2 billion in mortgage-backed securities to three failed institutions — U.S. Central, Western Corporate and Southwest Corporate federal credit unions.
“The complaint states underwriting guidelines in the offering documents were ‘systematically abandoned,’ and the misrepresentations caused the credit unions to believe the risk of loss was minimal,” the NCUA announcement said. “In fact, these securities were ‘significantly riskier than represented in the offering documents’ and that the faulty securities ‘were destined from inception to perform poorly.'”
A month earlier, the NCUA filed a lawsuit in the very same court against JPMorgan-subsidiary Bear, Stearns & Co. over alleged violations of state and federal securities laws in the sale of $3.6 billion in MBS to the three corporate credit unions identified in the other lawsuit plus a fourth failed institution, Members United Corporate Federal Credit Union. The regulator noted that the lawsuit was the largest it has filed to date.
“Firms like Bear, Stearns acted unfairly by ignoring the rules for underwriting,” NCUA Board Chairman Debbie Matz said in a statement. “They packaged these securities and then told buyers the paper was sound. When the securities plunged in value, we learned the truth. NCUA is now working to hold these underwriters accountable and secure recoveries on behalf of federally insured credit unions.”
New York Attorney General Eric T. Schneiderman filed a lawsuit against Credit Suisse Securities (USA) LLC and affiliates on Nov. 20. The action was the result of work by President Obama’s Residential Mortgage-Backed Securities Working Group. The state alleges that the investment banker deceived investors as to due diligence given loans packaged into RMBS prior to 2008. Losses from the $93.8 billion in securities issued by Credit Suisse are estimated at around $11.2 billion.
“It systematically failed to adequately evaluate the loans, ignored defects that its limited review did uncover, and kept its investors in the dark about the inadequacy of its review procedures and defects in the loans,” the attorney general’s announcement stated. “The loans in Credit Suisse’s mortgage-backed securities included many that had been made to borrowers who were unable to repay the loans, were very likely to default, and ultimately did default in large numbers.”
Sen. Carl Levin (D-Mich.), who is chairman of the Senate Permanent Subcommittee on Investigations, issued a statement on the same day the Credit Suisse lawsuit was filed stating, “It is good to see the Schneiderman task force doing the yeoman’s work necessary to hold accountable financial institutions responsible for the toxic mortgage securities that ignited the financial crisis.”
