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Court NCUAs Wall St. bank suits can proceed
TOPEKA, Kan. (7/27/12)--A U.S. District Court judge in Kansas has given the go-ahead to continue a combined lawsuit filed by the National Credit Union Administration (NCUA) against RBS Securities Inc. and Wachovia Capital Markets Inc. over losses from mortgage-backed securities (MBS) the banks sold to the now defunct U.S. Central FCU and Western Corporate FCU.

The decision by U.S. District Judge Richard D. Rogers of the U.S. District Court for the District of Kansas was filed Wednesday in Topeka. Rogers supported NCUA on two key questions:

  • Whether NCUA had met the statute of limitations requirement in filing the suit with an extension of time, called an "extender clause";  and
  • Whether the agency had provided enough evidence to make a "plausible" claim of misrepresentation by the banks regarding the risk of the securities bought by the corporates.
"NCUA is pleased that the court recognized the central merits of our complaints and allowed the cases to move forward," said NCUA Board Chairman Debbie Matz Thursday. "The Wall Street firms that created and sold these securities materially misrepresented the inherent level of risks to investors," she said.

"We will continue to vigorously pursue these lawsuits, and the others previously filed. As liquidating agent for U.S. Central, NCUA has a duty to maximize recoveries from responsible parties, in order to limit losses to the federally insured credit union system."

The certificates in question were offered and sold to U.S. Central in 2006 and 2007, more than three years before NCUA filed the lawsuit on June 20. 2011. The banks had argued that NCUA had not met the required statute of limitations.

"But plaintiff (NCUA) was not appointed conservator or liquidator of U.S. Central until March 20, 2009 and, therefore, had littleor, as defendants allege, no time to assess whether to bring the claims it brings here, unless the time to do so was extended," said the judge in his ruling.

Rogers said the extender statute applies in NCUA's case.  "In cases involving ambiguous limitations provisions impacting actions brought by the government, courts generally construe those provisions in favor of the government," he wrote, noting that "when the sovereign elects to subject itself to a statute of limitations, the sovereign is given the benefit of the doubt if the scope of the statute is ambiguous."

Rogers said NCUA had not waited too late to file its suits. "Given the time it apparently took rating agencies to react to the delinquency and default data and the dispute between the parties concerning the time and ease of performing loan-level analysis, the court cannot say that it is irrefutably clear from this data that a reasonably diligent investor would have sufficient notice to file a plausible claim by March 2008," the court said in the ruling.

It also said government agencies such as NCUA could not have known the details of the offerings until after taking an entity into conservatorship, and the corporates could not have known at the time they purchased the securities that there were potential misstatements of fact or omissions of facts in the offering documents.

The court denied the banks' motion for dismissal of all of NCUA's arguments--except the agency's claim that credit enhancement statements in prospectus supplements of the MBS offerings were material and untrue representations. "The court does not believe the allegations in the complaint state a plausible claim that the alleged credit enhancement language was untrue and material."

The suit against North Carolina-based Wachovia was tied to actions it took before being taken over by Wells Fargo in a government-arranged sale in 2008.

U.S. Central and WesCorp in 2006 each purchased around $44 million in residential mortgage-backed securities from Wachovia, and U.S. Central bought an additional $112 million in Wachovia-underwritten securities that were originated by a third party, NovaStar Mortgage Funding Trust (News Now April 3).

NCUA has also filed similar lawsuits against Goldman Sachs & Co. and JP Morgan Chase.


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