Nomura Holdings Inc. and Royal Bank of Scotland Group Plc engaged in "enormous" deception in selling defective mortgage-backed securities, a judge ruled following a trial over a trigger to the 2008 financial crisis.

U.S. District Judge Denise Cote found them liable for misleading Fannie Mae and Freddie Mac in the first trial of claims that banks sold the government-owned mortgage companies defective securities. Cote ordered the Federal Housing Finance Agency, which filed the lawsuit, to propose how much the banks should pay in damages.

"The offering documents did not correctly describe the mortgage loans," Cote wrote in a 361-page ruling Monday. "The magnitude of falsity, conservatively measured, is enormous."

The ruling against the lenders may encourage other banks to settle mortgage-related suits rather than face the bad publicity and financial cost of a judgment against them. The FHFA has reached $17.9 billion in settlements with other banks, including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs & Co.

Jonathan Hodgkinson, a U.S.-based spokesman for Nomura, didn't immediately respond to an e-mail requesting comment. Linda Harper, a U.K.-based spokeswoman for RBS, declined to comment on the ruling.

FHFA is reviewing the ruling and "looks forward to submitting proposed damages," the agency's General Counsel, Alfred M. Pollard, said in an e-mailed statement.

During the three-week trial in Manhattan federal court, the banks blamed the housing crash that led up to the financial crisis for the collapse of the mortgage-backed securities.

Claim Rejected

The judge rejected the claim, saying Nomura was competing against other banks to buy the subprime loans and securitize them. Nomura's goal was to work with the sellers of the loans and do whatever it took to maintain a good relationship, the judge said.

The government had presented evidence from Nomura executives' e-mails that suggested the bank might be aware that it was selling troubled mortgage-backed securities.

One e-mail described some of its mortgages as "crap" and another warned "Danger Batman!!"

"It is unsurprising that even when there were specific warnings about the risk of working with an originator, those warnings fell on deaf ears," the judge wrote.

The banks may use a series of rulings against them by Cote, before and during trial, as issues to raise on appeal.

Barred Evidence

The judge barred Nomura from presenting some evidence, including limiting the bank's ability to prove its claim that Fannie Mae and Freddie Mac didn't suffer damages from buying the mortgage-backed bonds. The judge also ruled that FHFA didn't have to prove Fannie Mae and Freddie Mac knew of Nomura's alleged false statements.

The FHFA claimed Tokyo-based Nomura cheated Fannie Mae and Freddie Mac by selling them $2 billion of bonds backed by faulty mortgages. RBS underwrote three of the seven securitizations at issue in the trial.

Nomura and RBS argued that the documents issued in connection with bond sales adequately disclosed the risks and weren't misleading. The banks also said that any alleged misstatements didn't factor into decisions by Fannie Mae and Freddie Mac to buy the securities.

Expert Testimony

Most of the testimony in the trial was from experts reviewing the level of Nomura's diligence in packaging mortgages into securities, and the disclosures it made to Fannie Mae and Freddie Mac in selling them from 2005 to 2007.

"This case is complex from almost any angle, but at its core there is a single simple question," Cote wrote. "Did defendants accurately describe the home mortgages in the offering documents for the securities they sold that were backed by those mortgages?"

She said they didn't.

Cote heard the case without a jury. Elliott Stein, a Bloomberg Intelligence litigation analyst, wrote that Cote "expressed skepticism about some of Nomura's contentions and little to none about the FHFA's case" in the closing arguments on April 9.

Edinburgh-based RBS was sued separately by FHFA in federal court in Connecticut for selling $32 billion of its own mortgage-backed securities to Fannie Mae and Freddie Mac. That case is scheduled for trial next year.

The judge's decision may help chart the course for other lawsuits against banks tied to failed mortgages.

The case is Federal Housing Finance Agency v. Nomura Holding America Inc., 11-cv-06201, U.S. District Court, Southern District of New York, (Manhattan).


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