ALEXANDRIA, Va. (9/24/13)--Morgan Stanley & Co. Inc. and eight other institutions were the subjects of nine lawsuits filed Monday by the National Credit Union Administration in federal district court in New York. The lawsuits were over the sale of nearly $2.4 billion in mortgage-backed securities to Southwest and Members United corporate credit unions.
The agency also filed suit in federal district court in Kansas Monday against 13 international banks, including J.P. Morgan Chase. That suit alleges violations of federal and state anti-trust laws transacted by manipulation of interest rates through the London Interbank Offered Rate--LIBOR--system. (See related story: NCUA Sues 13 Alleging LIBOR Manipulation.)
Both actions, said NCUA Chairman Debbie Matz in releases announcing the suits, reflect the agency's responsibility to pursue recoveries against those whom the NCUA charges caused billions of dollars of losses to credit unions.
"All the credit unions we supervise and insure are sharing those costs. The people who are responsible should be required to shoulder that burden, as well," Matz said.
According to the NCUA, in all, five corporate credit unions failed as a result of the purchase of faulty mortgage-backed securities. The agency said the defendants in the cases file in New York--Morgan Stanley & Co., Inc. and Morgan Stanley Capital I Inc., Barclays, J.P Morgan/Bear Stearns, Credit Suisse, Royal Bank of Scotland and UBS--sold faulty securities to both corporate credit unions. And Goldman Sachs, Wachovia and Residential Funding Securities LLC, now Ally Securities, sold faulty securities to Southwest. The suits make claims under either federal or state securities laws.
Southwest and Members United corporate credit unions paid more than $416 million for the securities in question in the Morgan Stanley suit and more than $1.9 billion for securities sold by the other defendants, the NCUA said.
The agency said its suits allege the firms made misrepresentations in connection with the underwriting and subsequent sale of the mortgage-backed securities. The corporate credit unions became insolvent, were subsequently placed into NCUA conservatorship and later liquidated as a result of losses from these faulty securities. These failures subsequently caused significant losses to the credit union system.
NCUA's complaints allege the offering documents of the securities sold to the failed corporate credit unions contained statements that were not true or omitted material facts. The originators systematically abandoned the stated underwriting guidelines in the offering documents, according to the complaints, with the result that the securities were significantly riskier than represented.
NCUA was the first federal regulatory agency for depository institutions to recover losses from investments in faulty securities on behalf of failed financial institutions. The agency has settled claims worth more than $335 million with Citigroup, Deutsche Bank Securities, HSBC, and Bank of America.
The NCUA said that as liquidating agent for Southwest and Members United corporate credit unions, it has a statutory duty to seek recoveries from responsible parties in order to minimize the cost of any failure to its insurance funds and the credit union industry.
The Credit Union National Association strongly commends the agency's aggressive, leading efforts to pursue those that irresponsibly sold mortgage-backed securities. The agency has had a good record of wins in the cases it already has been suing, CUNA said.