RBS Securities late last week asked a federal court in Los Angeles to dismiss securities claims against it by the National Credit Union Administration in the failure of WesCorp FCU, saying the now defunct wholesale institution was a sophisticated investor and knew the risks of investing in almost $1 billion of nonprime MBS.
Under state and federal securities laws, institutional investors who have sophisticated due diligence and risk management programs must meet more stringent criteria than mom-and-pop investors to prove they were misled into buying securities because they’re “big boys” and thus, responsible for their own actions.
In fact, said the securities unit of Royal Bank of Scotland in papers filed with the U.S. District Court Friday, WesCorp, “a sophisticated investor, purchased more than a billion dollars worth of mortgage-backed securities at the peak of the housing bubble, despite receiving numerous warnings about declining underwriting standards and other risks associated with the Certificates.”
“Rather than being the unsuspecting victim who was tricked into buying, WesCorp sought and bought subprime mortgage-backed securities years after NCUA warned WesCorp in May 2005 that “with the rise in home values and demand for home equity lending, many financial institutions relaxed underwriting standards associated with these loans.”
NCUA has filed two separate suits against RBS alleging violations of federal and state securities laws and misrepresentations in the sale of MBS to both WesCorp and U.S. Central FCU, the two biggest credit union failures ever.
NCUA has filed the suits as liquidating agents for the two corporate failures and has filed identical suits against JPMorgan Chase and Goldman Sachs, seeking a total of $1.5 billion in damages from the three Wall Street banks.
NCUA plans as many as ten suits against Wall Street underwriters of MBS sold to WesCorp, U.S. Central and the three other corporate failures.
According to RBS, NCUA “has not alleged that the Offering Documents misrepresented any specific characteristic of any particular loan underlying any particular Certificate. Nor has NCUA alleged how any of its generalized allegations regarding mortgage origination practices connect to a specific misrepresentation regarding a specific Certificate, much less a specific loan in the mortgage pool underlying each (MBS).”
The fact that delinquencies increased and actual losses exceeded expected losses does not mean RBS made any misrepresentations or abandoned their underwriting guidelines with respect to the Certificates at issue,” the firm argues in its filing.
RBS says NCUA, as documented in its own internal reports, warned WesCorp numerous times about the risks of private label MBS, and even expressed heightened concerns as the mortgage market began to deteriorate in 2007.
“(NCUA) must do more than just allege “the subprime market melted down and (WesCorp) were market participants, so they must be liable for my losses in my risky investment,” said the motion for dismissal.
A hearing on the motion to dismiss has been scheduled for Dec. 19.