Seeking $15 million in damages, the government sued First Union Capital Markets Corp. on Wednesday for selling risky collateralized mortgage obligations to the now-defunct Capital Corporate Credit Union.

The National Credit Union Administration claimed that the First Union Corp. unit failed to register its representative, John F. FitzHugh, to sell securities in Maryland, as required by state law.

As a result, the NCUA-which owns Lanham, Md.-based Cap Corp.'s assets- said it is entitled to recover $15 million. The funds represent the institution's losses on the $346 million in collateralized mortgage obligations it purchased between 1993 and 1995.

"We plan to vigorously defend the firm and its representative," a First Union spokesman said.

Regulators seized Cap Corp. in 1995 after it lost more than $100 million on its $1.1 billion portfolio of collateralized mortgage obligations. On Tuesday, the NCUA reprimanded 16 former Cap Corp. officials for their role in the failure, but it did not assess any civil money penalties.

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