WICHITA, Kan. – A federal judge issued a show cause order yesterday, jeopardizing NCUA’s suit against Wachovia Securities for the sale of failed mortgage backed securities to WesCorp FCU and U.S. Central FCU because NCUA has yet to legally serve the Wall Street bank, now a unit of Wells Fargo, more than two months after bringing the suit.
In a notice and order to show cause filed yesterday by Judge Julie Robinson, NCUA was directed to show good cause in writing by Feb. 26 why the suit “should not be dismissed for lack of prosecution.” Typically, defendants are served a summons simultaneously with or a few days after a suit such as this one is filed.
The suit is filed in the U.S. District Court for the District of Kansas, which has jurisdiction over U.S. Central, a one-time $52-billion corporate credit union which is based in nearby Lenexa, Kan.
NCUA on Thursday said it would not comment on the judge’s order or the status of the Wachovia suit.
The judge’s order came the same day a separate federal judge in California filed a preliminary ruling indicating he is preparing to dismiss NCUA’s suit against RBS Securities for the sale of more than $1 billion of MBS to failed corporate credit unions.
In a tentative ruling filed with the U.S. District Court for the Central District of California, Judge George Wu said NCUA has not made its case that the Wall Street bank violated its own underwriting standards and misrepresented the nature of the MBS sold to WesCorp, a one-time $34-billion corporate that failed in 2009.
NCUA claims RBS made numerous material misrepresentations to WesCorp in the offering documents for the securities that went bad just months after their sale. These misrepresentations caused WesCorp to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial, according to NCUA. The mortgage backed securities experienced dramatic, unprecedented declines in value, effectively rendering WesCorp insolvent. NCUA estimates the WesCorp failure will cost $7 billion, which will be accrued to all federally insured credit unions in the form of corporate assessments.
The Wachovia suit was the fifth brought by NCUA against Wall Street banks for the sale of faulty MBS to the failed corporates, with previous actions naming JP Morgan Chase, Goldman Sachs and two naming RBS Securities. Wachovia Securities sold about $200 million of MBS to the failed corporates.
NCUA agreed to out of court settlements with Citicorp and Deutsche Bank Securities over their sale of MBS to the failed corporates. The separate agreements called for the two banks to pay NCUA $165 million.
