Morgan Stanley Target of New NCUA RMBS Suit

Posted by Marissa Anema Tuesday, September 03, 2013 11:25:00 AM

ALEXANDRIA, Va. – NCUA announced it has filed a new residential mortgage-backed securities (RMBS) case. The defendants in this newest case are Morgan Stanley & Co., Inc., Morgan Stanley ABS Capital I Inc., Morgan Stanley Capital I Inc., and Saxon Asset Securities Co.

The suit alleges violations of federal and state securities laws in the sale of more than $566 million in mortgage-backed securities to the U.S. Central and WesCorp corporate credit unions, according to the NCUA.

The complaint contends the offering documents of the securities sold to the failed corporate credit unions contained statements of material fact that were not true or omitted material facts. The originators systematically abandoned the stated underwriting guidelines in the offering documents and the securities were significantly riskier than represented, according to the complaint. The result, the complaint says, was that the securities were destined from inception to perform poorly.

Although filed August 16, the NCUA announcement of the lawsuit filing comes just three days after the regulator received some good news from the U.S. 10th Circuit Court of Appeals.

That court overturned a lower court ruling that claimed the NCUA's RMBS case against RBS Securities was time-barred and should be dismissed. By overturning that ruling, the appeals court enabled the regulator to proceed with its lawsuits against 12 firms, including RBS Securities, which claim losses stemming from residential mortgage-backed securities sold to corporate credit unions.

At the time of that decision, NCUA Chair Debbie Matz said the agency would "continue to pursue our claims against firms that sold faulty mortgage-backed securities to corporate credit unions. As liquidating agent for the corporate credit unions, NCUA has a duty to maximize recoveries from responsible parties in order to limit losses to federally insured credit unions."

NCUA has filed the RMBS lawsuits as the liquidating agent for the corporate credit unions. Its lawsuits claim that the brokers' offering documents for the RMBS had material misrepresentations about the underlying loans that backed the securities.

NCUA has filed lawsuits against Barclays Capital, Credit Suisse, Goldman Sachs, J.P. Morgan Securities, RBS Securities, UBS Securities, Wachovia, Washington Mutual, and Bear Stearns alleging violations of federal and state securities laws in the sale of mortgage-backed securities to the five corporate credit unions.

NCUA has settled similar suits with Bank of America, Citigroup, Deutsche Bank Securities, and HSBC, bringing in more than $335 million in funds that were lost due to the corporate credit union investments. NCUA has said that funds recovered through these cases will be used to help reduce the amount of future corporate stabilization assessments on credit unions. 

NCUA’s press release is available here.

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