WASHINGTON and LOS ANGELES, Calif. (2/1/12)--The National Credit Union Administration (NCUA) Tuesday expressed disappointment at another tentative ruling Monday by a federal judge in California who said he plans to dismiss NCUA's $629 million lawsuit against RBS Securities Inc. over the mortgage-backed securities (MBS) it sold to the now defunct Western Corporate FCU.
The suit was filed by NCUA in July in the U.S. District Court for the Central District of California Western Division, Los Angeles. It claimed that RBS violated federal and state securities laws when it sold securities to San Dimas, Calif.-based WesCorp. The complaint alleged that RBS sellers and underwriters caused the corporate to believe the risk of loss associated with the investments was minimal.
On Monday, U.S. District Judge George H. Wu told NCUA's attorneys that an additional briefing submitted by NCUA after his Dec. 19 tentative ruling to dismiss had not convinced him that he'd erred in the earlier ruling. He noted the briefing was "insufficient." Wu said he would decide by the end of this week whether to dismiss NCUA's case or grant another leave to amend. The question, he said, was whether the insufficiency is in a manner that cannot be remedied in good faith.
"We are disappointed with Judge Wu's tentative ruling," said an NCUA spokesman. "As we indicated during yesterday's hearing, we believe he is imposing a heightened pleading standard not required by the law. Our allegations are quite specific and the vast majority of District Courts have upheld far less specific allegations in cases like this one," he told News Now.
The information NCUA submitted addressed specific allegations of reduced documentation underwriting guidelines, loan-to-value ratios, and loan originators, among other things. It noted the same information has resulted in the denial of motions to dismiss in other securities-related cases in separate courts.
NCUA attorneys noted in Monday's hearing that it has originator-specific allegations indicating the originators did not follow underwriting guidelines.
In the December tentative ruling, Wu had said NCUA relied mostly on "conclusionary" allegations tied to statistics that showed how the investments were affected by the housing market collapse. Without additional information, he had said, the complaint would fail the pleading standards outlined in Bell Atlantic Corp. v. Twombly and Ashcroft vs. Iqbal.
In that tentative ruling, he also said NCUA failed to show that RBS, Indymac MBS Inc., Wachovia Mortgage Loan Trust LLC, Nomural Home Equity Loan Inc. and other entities had disregarded underwriting standards when offering MBSs to WesCorp and that NCUA's federal claims were barred by the passage of statute of repose deadlines.
NCUA did not say whether it will appeal the final decision when asked by News Now.
The suit is one of several filed by NCUA, seeking about $2 billion total from companies that sold MBSs to corporate credit unions. It has sued J. P. Morgan Securities LLC, Goldman Sachs and Wells Fargo, which succeeded Wachovia Bank. In November, NCUA settled its suits with two other banks: Citigroup in a $20.5 million settlement and Deutsche Bank Securities for $145 million. Neither bank admitted any fault in the settlements (News Now Dec. 20). Also, on Dec. 7, Judge Wu ordered NCUA and RBS to start negotiations for a settlement.
RBS is also being sued by CUNA Mutual Group in a $72 million lawsuit seeking a rescission of 15 certificates in 10 separate residential MBS offerings it bought from RBS before the financial crisis hit (News Now Jan. 19).