JPMorgan Chase & Co. and Citigroup Inc. were among the banks that lost a bid to throw out a Federal Deposit Insurance Corp. lawsuit over $388 million in securities sold to a failed lender.
U.S. District Judge Louis Stanton in Manhattan today denied a motion to dismiss the suit, which also targets UBS AG, Deutsche Bank AG and Wells Fargo & Co. Stanton rejected defense arguments that FDIC filed the suit too late and that the agency failed to make a sufficient claim that could allow it to recover.
In the suit, filed last year, FDIC alleged that the banks misrepresented the quality of the loans underlying 11 residential mortgage-backed securities that Colonial Bank purchased in 2007.
Colonial Bank, of Montgomery, Alabama, was closed by the Alabama State Banking Department on Aug. 14, 2009, and the FDIC was named as a receiver for the institution.
The misrepresentations included inaccurate loan-to-value ratios based on inflated property values, according to the complaint. Many of the properties at issue also had second mortgages that weren't disclosed, the FDIC said.
"In many cases, the amount of the undisclosed additional liens was much greater than the owners' ostensible equity, putting the owner 'under water' on the day on which this securitization closed," the FDIC said in the complaint.