The National Credit Union Administration (NCUA) said this afternoon if filed another suit against a big investment firm over the sale of MBS to failed corporate credit unions, this one naming defunct Wachovia Bank and its subsidiaries as defendants.
The suit alleges violations of federal and state securities laws and misrepresentations in the sale of securities to now-failed U.S. Central Federal Credit Union and WesCorp Federal Credit Union. The latest action was filed in U.S. District Court in Kansas, which has jurisdiction over Lenexa, Kan.-based U.S. Central. Both U.S. Central and WesCorp were taken over by NCUA in March 2009, then liquidated in 2010, with the losses for the two corporate giants projected to reach as much as $12 billion.
Wachovia Capital Markets, the main defendant in the case, is now part of Wells Fargo, which bought the banking giant after it failed in 2009. Wachovia sold about $200 million of MBS to the two corporates, according to the suit.
The suit is the fifth brought by NCUA against big firms for the sale of faulty MBS to the failed corporate, with previous actions naming JPMorgan Chase, Goldman Sachs and two naming RBS Securities. NCUA recently agreed to out of court settlements with Citicorp and Deutsche Bank Securities over their sale of MBS to the failed corporates. The separate agreements called for the two banks to pay NCUA $165 million.
“NCUA continues to do everything within our authority to seek maximum recoveries and ensure that those who caused the problems in wholesale credit unions pay for the losses incurred by retail credit unions,” said NCUA Board Chairman Debbie Matz. “By filing these suits, we intend to hold responsible parties accountable for their actions.”
NCUA’s complaint alleges that there were numerous material misrepresentations made by the sellers, issuers and underwriters in the offering documents of securities sold to the failed corporate credit unions. These misrepresentations caused the corporate credit unions that bought the securities to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial.
Any recoveries from these legal actions would reduce the total losses resulting from the failure of the five corporate credit unions. Losses from those failures must be paid from the Temporary Corporate Credit Union Stabilization Fund or the National Credit Union Share Insurance Fund.
The expenditures from these funds must be repaid through assessments against all federally insured credit unions. Thus, any recoveries would help to reduce the amount of future assessments on credit unions. Credit unions have been paid $3.3 billion in corporate assessments over the past three years to pay for the resolution of the corporate failures.