MADISON, Wis. (1/19/12)--CUNA Mutual Group has filed a $72 million-plus lawsuit against RBS Securities Inc. seeking a rescission of 15 certificates in 10 separate residential mortgage-backed securities (RMBS) offerings CUNA Mutual bought from RBS before the financial crisis hit.
The suit was filed by CUNA Mutual Insurance Society, CUMIS Insurance Society Inc. and Members Life Insurance Co. in Dane County Circuit Court, but on Tuesday CUNA Mutual filed a notice to remove the case to the U.S. District Court for the Western District of Wisconsin.
The suit alleges that when CUNA Mutual bought the certificates between 2004 and 2007, RBS had made "representations about the credit quality of the pools of mortgage loans collateralizing those RMBS." The supporting documents for the investments contained "untrue or misleading statements concerning the loans underlying each separate RMBS offering," according to the court documents filed. The RMBS performed poorly and the certificates lost much of their value, CUNA Mutual maintained in its complaint.
"This action is about righting a wrong and is being taken in the best interests of CUNA Mutual Group and its policyholders," said Jim Buchheim, vice president of corporate communications at CUNA Mutal Group. "The complaint we filed fully explains why we took this action. However, because this issue is in litigation, we will not comment further on the lawsuit," he told News Now.
Before filing the suit, CUNA Mutual commissioned a forensic investigation of the loan pools collateralizing the 10 RMBS to test the accuracy of RBS's quantitative representations. CUNA Mutual analyzed 17,947 loans from the RMBS transactions or about 40% of all the loans in the pools, said the court documents. "The results of CUNA Mutual's forensic investigation revealed that RBS's quantitative representations in the offering documents of all 10 RMBS were false at the time they were made," alleged the court document.
The document also alleged that RBS made representations about the mortgage underwriting standards of the originators that issued the mortgage loans serving as collateral for the 10 RMBS. The representations "were also false at the time they were made. In truth, the originators had systematically abandoned their underwriting standards," said the document filed. RBS was also accused of inflating credit ratings to induce CUNA Mutual's purchase of the certificates.
The document named five originating lenders that are in bankruptcy or that are subsidiaries of bankrupt entities: Washington Mutual, First Magnus Financial Corp., Delta Funding Corp., New Century Mortgage Corp., and Fremont Investment & Loan.
In its summary citing its "justifiable reliance" on the representations by RBS, CUNA Mutual noted that "but for the misrepresentations and omissions in the offering documents, CUNA Mutual would not have purchased or acquired the certificates, and those representations and omissions were material to its decision to acquire the certificates."
The suit does not say that RBS intentionally or knowingly made the misrepresentations. CUNA Mutual seeks to exercise the rescission clause in the sale of the securities.
RBS also is being sued by the National Credit Union Administration (NCUA) related to $1.1 billion of mortgage-backed securities RBS allegedly sold to the now defunct Western Corporate FCU. NCUA has filed similar suits against Goldman Sachs, JP Morgan Chase and Wachovia Securities (now a unit of Wells Fargo and Co.).