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News Now

CU System
Federal court stays Space Coast CU suit over CDOs
FORT LAUDERDALE, Fla. (2/11/13)--A federal judge in Fort Lauderdale, Fla., has issued a stay in Space Coast CU's lawsuit against Wall Street big banks and ratings agencies Moody's and Standard & Poor's over losses from collateralized debt obligations (CDOs) sold to the now-defunct Eastern Financial Florida CU.

Eastern Financial Florida CU, Miramar, Fla., lost over $100 million from the CDOs, a type of  mortgage-backed securities it bought from the companies. Melbourne, Fla.-based Space Coast acquired Eastern Financial in 2009 and filed the lawsuit as its successor.

U.S. District Judge James I. Cohn Tuesday granted the motion for a stay of discovery on all written discovery, depositions and obligations to produce documents, pending a ruling on the defendants' motion to dismiss the case.

Space Coast's suit alleges the banks' 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 most investors rely on the credit ratings. It also alleges the banks made "material misrepresentations and/or omissions" to induce Eastern Financial to purchase the notes.

The stay was filed on the same day that the Justice Department announced it was bringing civil fraud charges against Standard & Poor's and its parent company, McGraw-Hill, for inflating ratings that misrepresented the true risks behind many investment products that caused the subprime mortgage meltdown that led to the Great Recession. In that lawsuit, Eastern Financial and the now defunct Western Corporate FCU were noted among the buyers of CDOs (News Now Feb. 6).

The Space Coast lawsuit names as defendants: Merrill Lynch, Pierce, Fenner & Smith Inc.; Merrill Lynch Credit Corp. (Merrill Lynch Home Loans); Wells Fargo Securities LLC (former Wachovia Capital Markets LLC); JP Morgan Securities Inc. (former Bear Stearns & Co. Inc.); UBS Securities LLC; Barclays Capital Inc.; Richard S. Fuld Jr.; Moody's Investors Service Inc.; and McGraw Hill Cos. Inc. (formerly Standard & Poor's Ratings Services).


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