A federal judge declined yesterday to dismiss charges that Barclays Capital packed a CDO it sold to Eastern Financial Florida Credit Union with junk, hastening the demise of the one-time $2.4 billion credit union, the biggest natural person credit union failure ever.

U.S. Judge Louis Stanton said Space Coast Credit Union, which acquired the remnants of the huge credit union failure, and other purchasers of the $400 million of securities have made plausible fraud claims and their suit can proceed despite the Wall Street bank’s defense that it made adequate disclosures to the purchasers.

Barclays Capital is one of a handful of Wall Street giants that dominated the markets for MBS and financial derivatives, and eventually even repackaged almost $50 billion of underwater corporate assets to sell to the public as National Credit Union Administration Guaranteed Notes.

Eastern Financial, the one-time credit union for employees of Eastern Airlines, bought a total of $150 million of CDOs — $9.5 million in the Barclays deal — that went sour soon after the purchase, causing the credit union to charge off virtually the entire investment and prompting its acquisition by Space Coast Credit Union.

Yesterday’s ruling is important to a separate case filed in federal court in Miami by Space Coast earlier this month against numerous other Wall Street institutions in another deal for more than $100 million of fated CDOs, including Merrill Lynch (now a unit of Bank of America); Bear Stearns (now a unit of JPMorgan Chase); Wachovia Securities (now part of Wells Fargo Securities); UBS Securities; Barclays, Moody’s Investors Service; Standard & Poors and Richard Fuld, the former CEO of Lehman Brothers, the investment banking giant that failed in 2008. The claims against Fuld were dismissed yesterday.

In its Barclays suit, Space Coast claims the Wall Street bank intentionally packed a $400 million CDO, known as Markov 1, which were a pool of mortgage-backed derivatives comprised of other pools of mortgage-backed derivatives, with mortgages it expected to fail, then bet on those same investments to fail.

Space Coast says the CDO was intended to fail and did fail within six months, all the while earning Barclays millions because it bought insurance – betting the risky bond would fail. In yesterday’s ruling Stanton said if Barclays possessed material control over the collateral in the CDOs and used the control to pack the securities with collateral that served its short interest that is worth exploring in the suit. “The complaint alleges facts giving plausibility to those conclusions,” the Judge wrote.

Space Coast calls the Eastern Financial CDO “materially similar” to the controversial CDO sold by Goldman Sachs in 2007 called Abacus. Goldman agreed to pay $550 million to settle SEC charges that it sold the bonds, then bet for it to fail.

Space Coast claims the underwriters misled officials with failed Eastern Financial when they said State Street Bank would be choosing the collateral for the CDO, when it was actually Barclays that was choosing the collateral they thought was likely to fail.

Space Coast assumed to all legal rights in the case after it acquired Eastern Financial in a purchase and assumption agreement in June 2009. The deal turned Space Coast, based at the Kennedy Space Center in Melbourne, Fla., into one of the biggest credit unions in the country with $3.3 billion in assets.

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