JPMorgan Chase on Wednesday told a federal court in Wichita, Kansas that National Credit Union Administration’s (NCUA) negligence suit against top executives of WesCorp Federal Credit Union proves that it was the shortcomings of corporate executives – and not any misrepresentations by the Wall Street bank’s sales force in the sale of mortgage-backed securities – that caused the failure of WesCorp and three other corporate credit unions.

“Although the [NCUA] Board now contends that “public information was not sufficiently material to dissuade a reasonable investor from purchasing the MBS, it took exactly the opposite position when it sued the WesCorp directors for ignoring the disclosed risks,” the Wall Street bank argued in a motion to dismiss filed yesterday with the U.S. District Court for the District of Kansas.

In its suit against JPMorgan, NCUA alleges violations of federal and state securities laws and misrepresentations by JPMorgan in the sale of $1.5 billion of MBS to four of the five failed corporates – including U.S. Central Credit Union, Members United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union, as well as WesCorp. The suit is filed in U.S. District Court in Kansas, which has jurisdiction over Lenexa, Kan.-based U.S. Central.
NCUA has filed similar suits in the failure of the corporates against RBS Securities, Goldman Sachs and Wachovia Securities [now a unit of Wells Fargo].

But yesterday JPMorgan claimed that NCUA’s own case against the WesCorp managers proves it was the managers’ negligence that caused the demise of the one-time $34-billion corporate and not alleged misrepresentations by Wall Street salesmen.

In its filings, JPMorgan pointed to a tentative ruling issued last month in NCUA’s suit against RBS Securities in which Judge George Wu, judge for the U.S. District Court for the Central District of California, questioned NCUA’s claims of malfeasance in the sale of MBS to WesCorp by RBS Securities. Wu issued a preliminary ruling that the credit union regulator has failed to show the Wall Street bank disregarded its own underwriting standards in the creation of and sale of the MBS.

In its motion to dismiss, JPMorgan asserted NCUA has failed to demonstrate that the Wall Street bank made material misrepresentations in its offering documents for the failed MBS. “The [NCUA] Board has failed to do so,” argued JPMorgan, “instead relying on ‘naked assertions devoid of further factual enhancement’ and conclusory pleading tactics” that are, at most, “simply ‘consistent with’ liability,’” as Wu ruled in the RBS case last month.

“As in RBS, [NCUA] comes out on the losing side of the debate” as to whether an allegation of systematic disregard is a factual allegation, not merely a conclusion,” argued JPMorgan.

For instance, it asserts that NCUA relies heavily on post-purchase loan performance statistics and similar measurements to argue that the originators of the loans “must have systemically disregarded their underwriting guidelines.” “But,” insisted JPMorgan, “reliance on statistics to draw conclusions about underlying causes is an example of the conclusory pleading tactic” rejected by the judge in the RBS suit.

Most of the NCUA allegations, stated JPMorgan, refer to the relaxation of underwriting standards and not the abandonment or “systematic disregard,” an important distinction. NCUA itself, says Morgan, concedes that the relaxation of underwriting standards is not the same thing as a disregard.

JPMorgan also insisted the relevant three-year statute of limitations on securities suits such as this one expired long before NCUA filed the suit last July because the MBS were sold to the corporate no later than 2007.

According to JPMorgan, Section 13 of the Securities Act provides: “In no event shall any such action be brought . . . more than three years after the security was bona fide offered to the public, or more than three years after the sale.” The bank said it is undisputed that each of the MBS at issue was bona fide offered to the public and sold to the credit unions before July 25, 2007.

“[NCUA’s] assertion that none of the sales or public offerings occurred more than three years prior to [NCUA] stepping in as WesCorp’s conservator is misdirected; the correct question is whether the three-year period expired before [NCUA] filed this lawsuit.”
NCUA does not comment on pending litigation.

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