ALEXANDRIA, Va. (UPDATED: 4:15 P.M. ET, 11/29/11)--Wachovia could become the latest financial institution to face the National Credit Union Administration in court after the agency filed suit alleging violations of federal and state securities laws and misrepresentations in the sale of securities to now-failed U.S. Central FCU and Western Corporate FCU.
The suit, which was filed in the Federal District Court for the District of Kansas, is tied to actions that North Carolina-based bank Wachovia took before it was taken over by Wells Fargo in a government-arranged sale in 2008.
U.S. Central and WesCorp in 2006 each purchased around $44 million in residential mortgage-backed securities from Wachovia, and U.S. Central bought an additional $112 million in Wachovia-underwritten securities that were originated by a third party, NovaStar Mortgage Funding Trust.
The NCUA suit claims that Wachovia as a seller and underwriter made several material misrepresentations in the offering documents, leading the corporates to believe the risk of loss associated with their investments was minimal, when in fact the risk was substantial. The mortgage-backed securities experienced dramatic, unprecedented declines in value, effectively rendering the corporates insolvent, the agency added.
The NCUA complaint adds that "NovaStar routinely and systemically disregarded its own underwriting standards and guidelines in order to generate more loan origination business, from which it reaped enormous profits."
U.S Central, WesCorp, and several other corporates bought substantial amounts of highly rated mortgage-backed and asset-backed securities before 2009. These securities were severely devalued as a result of the turmoil in the overall mortgage market. Credit unions continue to pay for the losses that these investments brought upon the credit union system.
NCUA Chairman Debbie Matz said the agency "continues to do everything within [its] authority to seek maximum recoveries and ensure that those who caused the problems in wholesale credit unions pay for the losses incurred by retail credit unions."
The NCUA is currently attempting to reclaim billions in securities-related corporate credit union losses from other Wall Street firms, and has requested nearly $2 billion in combined damages from Goldman Sachs, RBS Securities and J.P. Morgan.
Citigroup and Deutsche Bank Securities earlier this month elected to avoid legal proceedings and settle with the agency, with Deutsche Bank agreeing to pay the agency $145 million, and Citigroup will pay $20.5 million, under the terms of the separate settlements.
Neither Citigroup nor Deutsche Bank Securities admitted any fault in the settlements.
The agency may take between four and nine additional legal actions.