LOS ANGELES – RBS Securities on Friday asked a federal court to dismiss securities claims against it by NCUA in the failure of WesCorp FCU, saying the one-time $34-billion corporate credit union was a sophisticated investor and knew the risks of the almost $1 billion in residential mortgage-backed securities it bought from the Wall Street bank.
Under state and federal securities laws, institutional investors who have sophisticated due diligence and risk management programs must meet more stringent criteria than mom-and-pop investors to prove they were misled into buying securities because they’re “big boys” and thus, responsible for their own actions.
In fact, said the securities unit of Royal Bank of Scotland in papers filed with the U.S. District Court Friday, WesCorp “a sophisticated investor, purchased more than a billion dollars worth of mortgage-backed securities at the peak of the housing bubble, despite receiving numerous warnings about declining underwriting standards and other risks associated with the Certificates.”
“Rather than being the unsuspecting victim who was tricked into buying, WesCorp sought and bought subprime mortgage-backed securities” years after NCUA warned WesCorp in May 2005 that “with the rise in home values and demand for home equity lending, many financial institutions relaxed underwriting standards associated with these loans.”
NCUA has filed two separate suits against RBS alleging violations of federal and state securities laws and misrepresentations in the sale of securities to both WesCorp and U.S. Central FCU, the two biggest credit union failures. NCUA has filed the suits as liquidating agent for the two corporate failures and has filed identical suits against JP Morgan Chase and Goldman Sachs, seeking a total of $1.5 billion in damages from the three Wall Street banks. NCUA said it plans as many as 10 suits against Wall Street underwriters of securities sold to WesCorp, U.S. Central and the other three corporate failures, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU.
According to RBS, NCUA “has not alleged that the Offering Documents misrepresented any specific characteristic of any particular loan underlying any particular Certificate. Nor has NCUA alleged how any of its generalized allegations regarding mortgage origination practices connect to a specific misrepresentation regarding a specific Certificate, much less a specific loan in the mortgage pool underlying each [MBS].”
“The fact that delinquencies increased and actual losses exceeded expected losses does not mean RBS made any misrepresentations or abandoned their underwriting guidelines with respect to the Certificates at issue,” said RBS.
RBS said NCUA, as documented in its own internal reports, warned WesCorp numerous times about the risks of private label MBS, and even expressed heightened concerns as the mortgage market began to deteriorate in 2007. As early as May 2005, NCUA informed WesCorp of the existence of risky mortgage loans with relaxed underwriting guidelines, RBS told the court. Specifically, “NCUA issued guidance to its Federally Insured Credit Unions regarding managing credit risk in home equity lending [and] . . . indicated that . . . with the rise in home values and demand for home equity lending, many financial institutions relaxed underwriting standards associated with these loans, such as higher-loan-to-value and debt-to-income ratios.”
NCUA reiterated the existence of relaxed underwriting guidelines in October 2005 and in October 2006, said RBS. “Indeed, NCUA found it “concerning” that, despite NCUA’s multiple warnings in 2005 and 2006, “WesCorp [nevertheless] invested heavily in securities collateralized by these same higher risk mortgage loans that created exposure to increased credit risk.”
[NCUA] must do more than just allege “the subprime market melted down and [WesCorp] were market participants, so they must be liable for my losses in my risky investment,” said the motion for dismissal.
Specifically, RBS said despite NCUA’s claims of misrepresentations in the offering documents, the documents plainly and clearly disclosed the metrics used to gauge borrowers’ ability to repay, including FICO scores. RBS also said NCUA alleges a misstatement of appraisal values and loan-to-value ratios, but those values, notes RBS, were set by third-party appraisers.
In addition, RBS asserts that the statute of limitations has expired on most of the claims as long as two or three years ago. “Certain of NCUA’s claims are time-barred because WesCorp relies on the discovery rule and WesCorp had at least inquiry notice of the basis for its claims no later than March 19, 2007.”
A hearing on the motion to dismiss has been scheduled for Dec. 19.
