MIAMI (3/12/12)--Space Coast CU (SCCU), Melbourne, Fla., has sued a who's who list of Wall Street investment banks and ratings agencies over $100 million in losses from collateralized debt obligations (CDOs) sold to Eastern Financial Florida CU, a Miramar, Fla.-based credit union acquired by Space Coast in 2009.
The $3 billion asset Space Coast filed the suit as successor-in-interest to Eastern Financial, whose collapse was the largest natural-person credit union failure in history. Florida's Office of Financial Regulation issued an emergency order on June 30, 2009, authorizing the merger of Eastern Financial into Space Coast, according to the complaint filed Thursday in the Circuit Court of the 17th Judicial Circuit for Broward County, Florida.
The suit seeks to recover more than $100 million in investment capital paid by Eastern Financial for the CDOs and damages.
Named as defendants are: Merrill Lynch and its credit corporation, Merrill Lynch Home Loans; Wells Fargo Securities (formerly Wachovia Capital Markets); J.P. Morgan Securities (formerly Bear Stearns & Co. Inc.; UBS Securities; Barclay's Capital Inc.; Richard S. Fuld Jr., who ran Lehman Brothers at the time; Moody's Investors Service Inc. and The McGraw Hill Cos., Inc. (formerly Standard & Poor's Ratings Services).
"This suit was commenced on behalf of our members to seek reimbursement for losses sustained by Eastern Financial in the 2008 to 2010 timeframe," said Space Coast CU President/CEO Douglas Samuels. "It is our duty, on behalf of our members, to attempt to recover the loss and ultimate destruction of Eastern resulting from this sale of the mortgage-related securities. These mega-brokers knew at the time of sale that these securities were worth less than face value and took advantage of a less sophisticated buyer. The Eastern members had built a valued and respected credit union over the course of 70 years that was irrevocably damaged by this misrepresented investment.
"This may not be an easy battle. Space Coast is only a $3 billion financial institutions going up against the Wall Street giants," he noted. "However, we strongly believe that these large brokers should be held accountable when they take advantage of locally-owned, smaller financial institutions."
In the complaint filed, SCCU said the CDOs "generated phony demand for residential mortgage loans, fueling one of the worst economic catastrophes that Florida's investors and homeowners have ever faced."
The complaint alleges that the process of "creating and selling CDOs revolved around shoe-horning residential mortgage securities into Moody's and S&P's credit rating models to generate 'investment grade' ratings," and that the "most sophisticated investors in the world rely on those credit ratings." The ratings agencies are gatekeepers to "structured' credit markets because Wall Street must satisfy their tests and financial models to sell rated CDO notes, said the court document.
The defendants violated the Florida Securities and Investor Protection Act and that they "knowingly, or in reckless disregard of the truth, made a number of material misrepresentations and/or omissions" to induce Eastern Financial to purchase the notes, they "employed devices, schemes, and artifices to defraud," according to the court document.
The suit also alleges common law fraud related to the credit quality of the CDOs; negligent misrepresentations of facts that induced the credit union to buy the CDOs; unjust enrichment by rating CDOs more highly that they should have been rated under the rating agencies' own criteria, to earn profits and fees from Wall Street banks at the expense of" Eastern Financial; and a claim for constructive trust because the banks "promised to deliver 'Investment Grade' Rated CDO Notes" and had a "superior access to confidential information about the quality of the collateral comprising the CDOs.
Representing Space Coast in the suit is Robbins Geller Rudman and Dowd LLP, a firm that represents U.S. and international investors and consumers in contingency-based complex litigation. With nearly 200 attorneys in nine offices, the firm represents more institutional investors and pension funds in securities and corporate litigation than any other law firm in the world, said Space Coast.