WICHITA, Kan. – A federal court yesterday rejected separate bids by two Wall Street banks to dismiss claims by NCUA over the banks sale of billions of dollars of mortgage-backed securities to two failed corporate credit unions, U.S. Central FCU and WesCorp FCU, ruling the suits must proceed.
The ruling by the U.S. District Court for the District of Kansas not only gives hope to NCUA in suits against RBS Securities, a unit of Royal Bank of Scotland, and Wachovia Capital Markets, now a unit of Wells Fargo, but also in separate suits filed against JP Morgan Chase and Goldman Sachs & Co. for the sale of some $2 billion of MBS that helped push the two corporate giants and three other corporate credit unions to failure.
NCUA’s suits claim the Wall Street banks made numerous misstatements in offering documents provided the two corporate giants about the nature of the mortgages packaged into MBS. All of the MBS securities experienced dramatic, unprecedented declines in value soon after their purchases by U.S. Central and WesCorp, prompting their takeover by NCUA in March 2009. The two failures are projected to cost $12 billion to resolve.
Corporate credit unions are similar to so-called bankers’ banks and provide liquidity and investment services to the nation’s 7,200 regular credit unions. The failures of U.S. Central and WesCorp and three other corporates—Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU—are projected to cost as much as $20 billion to resolve.
Yesterday’s decision contained two main points that could affect dozens of suits brought against Wall Street banks for their roles in the financial crisis.
The first is that NCUA’s June 2011 filing was not too late under relevant statutes of limitations, even though it was brought six years after the securities were sold to U.S. Central. The Court ruled that U.S. Central, then NCUA as conservator of the one-time $52 billion corporate credit union, could not have known at the time that there were potential misstatements of facts in the offering documents. The federal court said, among other things, that government agencies, like NCUA and the FDIC, must be granted additional leeway in bringing such claims because the regulators could not have known the details of the offerings until after taking an entity under conservatorship.
“The court has reviewed the risk disclosures and the court concludes that it is not irrefutably clear that these disclosures would lead a reasonably diligent investor to find the information needed to file a plausible claim prior to March 20, 2008,” said the decision, referring to the nominal three-year statute of limitations from thes 2005 sale of the MBS to U.S. Central for federal securities suits.
Just as important, the court dismissed the Wall Street banks’ defense that the offering documents contained adequate warnings about the risks inherent in the MBS. “Risk disclosures in offering documents did not provide sufficient notice of the misrepresentation and omission alleged in the complaint,” ruled the court. “The court does not believe that the warnings and public information cited by defendants are sufficient for the court to find that plaintiff has failed to state a plausible claim.”
The court did agree to dismiss some of the claims against subprime mortgage originators that were named as codefendants in the case.
NCUA filed the suit in Kansas because the federal court has jurisdiction over U.S. Central, which was based in Lenexa, Kan. NCUA has separate suits filed in the federal court in Los Angeles, which has jurisdiction over WesCorp, which was based in nearby San Dimas, Calif.