Lawyers for Barclays Capital last week told a federal court fraud claims regarding a failed CDO it sold to Eastern Financial Florida Credit Union, the biggest ever credit union failure, are barred by the statute of limitations on such securities suits and should be dismissed.
The Wall Street bank called allegations of fraud by Space Coast Credit Union, the Florida credit union that acquired the remnants of the one-time $2.4-billion credit union, “fanciful” and “bereft of facts.”
Barclays, the same bank that underwrote National Credit Union Administration’s (NCUA) $28 billion offering of corporate resolution bonds, sold Eastern Financial $10 million of the $100 million of CDOs that were the main cause of the 2009 undoing for the venerable Miami-area credit union giant.
The $10 million sold by Barclays to Eastern Financial was a slice of a $2 billion CDO known as Markov 1 sold to investors. Eastern Financial eventually purchased another $90 million in other CDOs, almost all of which also went bad. Lawyers for Space Coast said earlier they are planning additional suits over the other CDOs.
Space Coast alleges the CDOs were sold to Eastern Financial and other investors with the intent that they would go bad. Eastern Financial bought the $10 million of CDOs in June 2007 and the bonds were worthless six months later, in January 2008.
Barclays disputed claims of fraud and misrepresentation, noting that officials with Eastern Financial knowingly signed disclaimers acknowledging that they were capable of assessing and assuming all risks associated with the CDOs.
Furthermore, said Barclays, the Space Coast claims are now barred because the statute of limitations has expired under federal securities laws, which generally require that civil claims be filed within two years of when a dispute occurs. “Plaintiff, however, waited more than three and one-half years later, until April 26, 2011, to commence this lawsuit,” noted Barclay’s. Courts faced with similar facts have granted motions to dismiss, said the Wall Street bank.
Eastern Financial, chartered in 1937 to serve employees of Eastern Airlines, was the only natural person credit union authorized by regulators to invest in CDOs. A report last year by NCUA’s Office of the Inspector General found that the $100 million lost on its CDOs – 100% of its investment – was the major cause of the record failure, which was acquired in 2009 by Space Coast Credit Union, located about 90 miles north.
Securities laws generally set the starting point for such claims as when an investor may have bought the CDOs — and the dates it became clear, from a legal standpoint, that the bonds had problems due to heavy defaults by borrowers. The statute for federal securities suits can be as short as one year.
State laws vary, with some starting the clock running at the time of purchase and others at the time a fraud is discovered.
Claims that allege information documents for mortgage-backed securities were fraudulent fall under different laws, and investors may have as long as two years to file those claims.
Barclays said that although the failed CDO was liquidated in 2008, Space Coast waited until April 26, 2011 to file suit. “A plaintiff asserting claims under the Exchange Act must bring them within the earlier of two years after discovery of “the facts constituting the violation,” or five years after the violation,” said Barclay’s. “The statute of limitations period begins to run when a plaintiff ‘did in fact discover’ or a ‘reasonably diligent plaintiff would have discovered’ the facts constituting the violation.”
A fact is deemed “discovered” when “a reasonably diligent plaintiff would have sufficient information about that fact to adequately plead it in a complaint,” notes Barclays. All of the facts concerning the alleged fraud were known to credit union [Eastern Financial] at the time of its investment in the CDOs, or shortly thereafter, said Barclay’s, noting the failure of liquidation of the bonds just six months after issuance.
Similar statute of limitations claims are expected to be raised in ongoing suits by NCUA against Wall Street banks JPMorgan, Royal Bank of Scotland and Goldman Sachs in the failure of U.S. Central Federal Credit Union and WesCorp Federal Credit Union, as well as those brought last week by the regulator for Fannie Mae and Freddie Mac against several of the same institutions.