The NCUA has sued RBS Securities for $685 million, alleging that that firm misled Western Corporate FCU (WesCorp) when it sold it mortgage-backed securities that led to its ultimate collapse.
The lawsuit, which was filed on July 18 in federal court in Los Angeles, is the third lawsuit filed by the NCUA stemming from the collapse of five corporate credit unions and the second against RBS. The agency said it plans to file between five and 10 lawsuits.
The NCUA’s lawsuit alleges that the sellers and underwriters of the questionable securities made numerous material misrepresentations in the offering documents. These misrepresentations caused WesCorp to believe the risk of loss associated with the investment was minimal when, in fact, the risk was substantial, according to the suit. The agency conserved the $19.3 billion WesCorp on March 20, 2009, the same day it took over the $30 billion U.S. Central Corporate Credit Union, the largest wholesale credit union
The agency doesn’t allege fraud, but in its lawsuit it contends that the securities
“were largely underwritten without adherence to the underwriting standards" and therefore were much riskier than RBS Securities led WesCorp to believe.
NCUA Chairman Debbie Matz said in a statement that the agency “continues to carry out our responsibility to do everything reasonable in our power to seek maximum recoveries. By these actions we intend to hold responsible parties accountable.”
The NCUA’s previous lawsuit against RBS Securities seeks $565 million in damages and a lawsuit filed against J.P. Morgan Securities seeks $278 million in damages. Both those lawsuits were filed on June 20 in Kansas City.
Last September, the NCUA sued 11 former WesCorp directors and four former executives, alleging fraud, negligence and breach of fiduciary duty. Earlier this month, U.S. District Judge George Wu said he plans to dismiss the charges against the former directors but plans to deny the motions by the four former executives to dismiss the charges.
After taking over five corporate credit unions (in addition to U.S. Central and Wes Corp, last September the agency conserved the $7.4 billion Members United Corporate FCU, the $9.5 billion Southwest Corporate FCU and the $1.2 billion Constitution Corporate FCU), the NCUA held bonds that had once been worth $50 billion. The agency sold the bonds in 13 guaranteed note transactions that netted $28.3 billion.
The collapse of five corporate credit unions caused the agency to design and implement a rescue plan that it estimates could cost credit unions approximately $20 billion. It involved borrowing money from the Treasury Department to set up the Temporary Corporate Credit Union Stabilization Fund. Natural person credit unions are paying for the rescue through assessments that are scheduled to continue through 2020.
For this year, the agency has recommended that credit unions set aside between 20 and 25 basis points for 2011 assessments.
However, the payments could be less, depending on whether enough credit unions pledge to participate in the prepayment program that the NCUA unveiled in May.
Credit unions have until July 29 to state whether they plan to participate. The NCUA has said the program can only go forward if there is an aggregate amount pledged of $500 million. The NCUA has said if the program goes forward, the assessment for natural person credit unions insured by the NCUSIF would drop 6.4 basis points.
The minimum participation amount is $1,000 or 0.05% (5 basis points) of March 31, 2011, insured shares and the maximum participation amount is 0.48% (48 basis points) of March 31, 2011, insured shares.