NCUA Sues Bear Sterns in Largest Corporate Securities Suit Yet
The NCUA announced Monday it has filed its biggest mortgage-backed security fraud suit to date, alleging in federal court in Kansas that J.P. Morgan Securities and Bear, Stearns & Co. violated federal and state securities laws in the sale of $3.6 billion in mortgage-backed securities to four failed corporate credit unions.
The suit—the ninth the agency has filed to date—alleges Bear, Stearns & Co. made misrepresentations in connection with the underwriting and subsequent sale of MBS to U.S. Central FCU, Western Corporate FCU, Southwest Corporate FCU and Members United Corporate FCU.
J.P. Morgan Securities is named in the suit because it purchased Bear, Stearns & Co. in 2008 after the investment bank failed.
All four corporates became insolvent and were liquidated as a result of losses from these faulty securities, the agency said in a release.
“Bear, Stearns was one of several Wall Street firms that sold faulty securities to corporate credit unions, leading to their collapse and enormous losses across the industry,” said NCUA Board Chairman Debbie Matz.
“Firms like Bear, Stearns acted unfairly by ignoring the rules for underwriting. They packaged these securities and then told buyers the paper was sound,” Matz said. “When the securities plunged in value, we learned the truth. NCUA is now working to hold these underwriters accountable and secure recoveries on behalf of federally insured credit unions.”
The complaint alleges Bear, Stearns & Co. made numerous misrepresentations and omissions of material facts in the offering documents of the securities sold to the failed corporate credit unions.
The complaint states underwriting guidelines in the offering documents were abandoned and the misrepresentations caused the credit unions to believe the risk of loss was minimal. In fact, these securities were “significantly riskier than represented” and “routinely overvalued, the complaint said, and “were destined from inception to perform poorly.”
NCUA has eight similar actions pending against Barcl1ays Capital, Credit Suisse, Goldman Sachs, J.P. Morgan Securities, RBS Securities, UBS Securities, and Wachovia.
NCUA was the first federal regulatory agency for depository institutions to recover losses from investments in faulty securities on behalf of failed financial institutions. To date, the agency has settled claims worth more than $170 million, less attorney’s fees, with Citigroup, Deutsche Bank Securities and HSBC.
Recoveries from these legal actions will reduce Temporary Corporate Credit Union Stabilization Fund assessments charged annually to federally insured credit unions, the NCUA has said.
As liquidating agent for the four corporate credit unions, the NCUA said it has a statutory duty to seek recoveries from responsible parties in order to minimize the cost of any failure to its insurance funds and the credit union industry.
“NCUA and credit unions have successfully worked together to restore stability to the credit union system,” Matz said. “Now we are holding responsible parties like Bear, Stearns accountable for their actions. It’s the right thing to do.”