ORLANDO, Fla. – Space Coast CU, which has launched a new legal offensive against Wall Street banks over investments sold to Eastern Financial Florida CU, last week changed gears to defend itself against a suit claiming the failed credit union giant it acquired in 2009 sold faulty loan participations.
In a new filing with the U.S. District Court for the Middle District of Florida, Space Coast asserts that the agents working for Eastern Financial’s wholly owned CUSO, CU Business Capital LLC, were working for distinct legal entities when the CUSO sold almost $4.5 million of participations in member business loans to Sperry Associates FCU in New York.
The merger of Eastern Financial has put Space Coast in the unusual position of both offense and defense over the actions of the one-time $2.4 billion credit union, the biggest natural person credit union failure ever.
The two cases illustrate the ongoing disputes over liability of the mortgage market crash and the perils of loan participations market, over which NCUA has proposed tightening regulation. Sperry Associates, for example, has been burned by other participation deals and was forced by NCUA to charge-off $2 million in participations it bought from failed Cal State 9 CU.
The suit against Space Coast says Sperry Associates bought the loans based on the underwriting of CU Business Capital and the loans have been significantly devalued because of the Florida real estate bust. The $310-million credit union asserts Space Coast CU, as the successor to Eastern Financial, is responsible for any losses it has realized from the loans.
In its court filing last week, Space Coast said Sperry Associates has not provided any evidence that the two CUBC employees that sold them the participations were working for Eastern Financial, which was a separate legal entity than its CUSO. Neither of the CUBC employees, says the credit union in its motion to dismiss the suit, “were agents of Eastern.”
Space Coast’s defense in the Eastern Financial case comes as the $3.3-billion credit union has filed suit against several of the biggest Wall Street banks it says sold Eastern Financial $140 million worth of risky investments, collateralized debt obligations – or CDOs – that precipitated the failure of the one-time Miami credit union giant when they went bad soon after the sale.
The suit, naming Merrill Lynch (now a unit of Bank of America), Bear Stearns (now a unit of JP Morgan Chase), Wachovia Securities (now part of Wells Fargo Securities), UBS Securities, Barclay’s Capital, Moody’s Investors Service, Standard & Poor’s, and Richard Fuld, former CEO of Lehman Brothers, claims the Wall Street players engaged in fraud and negligent misrepresentation in the sale of the CDOs purchased by Eastern Financial. Eastern Financial was the only natural person credit union in the country to invest in CDOs, by special permission of the Florida credit union regulator.
Eastern Financial, a 72-year-old credit union originally chartered to serve employees of now-defunct Eastern Airlines, lost almost its entire investment on the CDOs and was subsequently acquired by Space Coast, a $1.6-billion credit union 175 miles north along Florida’s Space Coast, in Melbourne.
