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NCUA Sets Sights On Wells

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A wave of litigation by the nation’s top credit union regulator has been expanded to include an investment banking unit picked up by Wells Fargo & Co. through its acquisition of Wachovia Corp. The federal regulator alleges that the unit contributed to the failure of two wholesale credit unions by overstating the quality of securitized loans.

A lawsuit was filed Monday in U.S. District Court for the District of Kansas by the National Credit Union Administration against Wachovia Capital Markets LLC, which is now known as Wells Fargo Securities LLC.

Wachovia is accused of violating federal and state securities laws by misrepresenting the quality of residential mortgage-backed securities purchased by U.S. Central Federal Credit Union and Western Corporate Federal Credit Union. Both financial institutions collapsed in March 2009 and were taken over by the NCUA as conservator.

U.S. Central and WesCorp were wholesale credit unions, which didn’t deal with retail members but instead provided wholesale financial services to other credit unions.

“NCUA’s complaint alleges that there were numerous material misrepresentations made by the sellers, issuers and underwriters in the offering documents of securities sold to the failed corporate credit unions,” the regulator said in its statement. “These misrepresentations caused the corporate credit unions that bought the securities to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial.”

Wachovia was on the verge of collapse when Wells Fargo acquired it on Dec. 31, 2009. Wachovia ran into trouble when it acquired Golden West Financial in October 2006 — just as the housing bubble was about to burst. Payment-option mortgages originated by Golden West subsidiary World Savings in what turned out to be some of the worst real estate markets helped sink Wachovia.

The RMBS cited in the NCUA’s lawsuit are NovaStar Mortgage Funding Trust, Series 2006-5; Wachovia Mortgage Loan Trust, Series 2006-ALT1; Wachovia Mortgage Loan Trust, Series 2006-ALT1; Wachovia Mortgage Loan Trust, Series 2006-ALT1; and Wachovia Mortgage Loan Trust, Series 2006-ALT1.

The NCUA filed similar lawsuits this past June against J.P. Morgan Securities LLC and RBS Securities, also in a federal court in Kansas. More than $800 million in damages are alleged because of the RMBS sales.

In August, the NCUA filed a $491 million lawsuit in U.S. District Court for the Central District of California against Goldman Sachs & Co.

Earlier this month, the NCUA announced a $145 million settlement with Deutsche Bank Securities and a $21 million settlement with Citigroup Inc. Both agreements resolved RMBS losses suffered by five failed wholesale credit unions.

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