The court-appointed trustee overseeing the liquidation of Thornburg Mortgage Inc. says RBC Capital Markets shortchanged the company by $35 million when it improperly seized the assets backing repurchase agreements the mortgage lender had used to fund its business.
Joel I. Sher, the bankruptcy trustee overseeing Thornburg's liquidation, is suing RBC Capital Markets in a breach-of-contract lawsuit over what he alleges were improper margin calls and the subsequent seizure and sale of $573 million in mortgage-backed securities that Thornburg financed through RBC.
RBC Capital, the investment banking arm of Royal Bank of Canada, says Thornburg was in default and that it acted properly when it seized the securities and credited Thornburg's account for $573 million. It's seeking a dismissal of the trustee's suit for "failure to state a claim," namely that Thornburg suffered no damages because it received the value of what the securities were worth.
Not so, Sher says in a filing in U.S. District Court in Baltimore. Sher claims RBC Capital "took improper advantage" of the crumbling subprime mortgage sector by grabbing mortgage-backed securities Thornburg had pledged to the company under the terms of various repurchase agreements.
The lawsuit shows the securities firm credited Thornburg "with an amount, at minimum, $35 million less than the actual value" of the 27 mortgage-backed securities at issue, Sher said in court papers filed Tuesday.
A lawyer for RBC Capital wasn't available for comment.
Before its collapse, Thornburg financed its business, including its purchase of mortgage-backed securities, through a series of repurchase agreements and swaps deals with banks and securities firms like RBC. Those mortgage-backed securities were typically then pledged as collateral in the deals.
Sher claims RBC breached the provisions of their repo deal by improperly valuing Thornburg's collateral to create deficits that justified its inflated margin calls.
The trustee has filed similar lawsuits against Barclays Capital Inc. and Goldman Sachs Group Inc., alleging the companies made improper margin calls that helped drive the mortgage lender into bankruptcy. Barclays has denied wrongdoing.
Sher is also suing some of the biggest players in Wall Street's mortgage-finance assembly line for nearly $2 billion, claiming a number of banks — including JPMorgan Chase & Co., Citigroup Inc. and Credit Suisse Group — engaged in a series of "collusive" and "predatory" schemes that resulted in Thornburg's demise. The banks, in court papers, have denied wrongdoing and have moved to have the suit dismissed.
The suits allege that Thornburg, once the nation's second-largest independent mortgage company, was undone by a series of unlawful acts taken by investment banks during the mortgage crisis in 2007 and 2008.
