The NCUA announced Monday it has filed its biggestmortgage-backed security fraud suit to date, alleging in federalcourt in Kansas that J.P. Morgan Securities and Bear, Stearns &Co. violated federal and state securities laws in the sale of $3.6billion in mortgage-backed securities to four failed corporatecredit unions.

The suit—the ninth the agency has filed to date—alleges Bear, Stearns &Co. made misrepresentations in connection with the underwriting andsubsequent 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 purchasedBear, Stearns & Co. in 2008 after the investment bankfailed.

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 soldfaulty securities to corporate credit unions, leading to theircollapse and enormous losses across the industry,” said NCUA BoardChairman Debbie Matz.

“Firms like Bear, Stearns acted unfairly by ignoring the rulesfor underwriting. They packaged these securities and then toldbuyers the paper was sound,” Matz said. “When the securitiesplunged in value, we learned the truth. NCUA is now working to holdthese underwriters accountable and secure recoveries on behalf offederally insured credit unions.”

The complaint alleges Bear, Stearns & Co. made numerousmisrepresentations and omissions of material facts in the offeringdocuments of the securities sold to the failed corporate creditunions.

The complaint states underwriting guidelines in the offeringdocuments were abandoned and the misrepresentations caused thecredit 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 frominception to perform poorly.”

NCUA has eight similar actions pending against Barcl1aysCapital, Credit Suisse, Goldman Sachs, J.P. Morgan Securities, RBSSecurities, UBS Securities, and Wachovia.

NCUA was the first federal regulatory agency for depositoryinstitutions to recover losses from investments in faultysecurities on behalf of failed financial institutions. To date, theagency has settled claims worth more than $170 million, less attorney's fees, with Citigroup, Deutsche Bank Securitiesand HSBC.

Recoveries from these legal actions will reduce TemporaryCorporate Credit Union Stabilization Fund assessments charged annually to federally insured creditunions, the NCUA has said.

As liquidating agent for the four corporate credit unions, theNCUA said it has a statutory duty to seek recoveries fromresponsible parties in order to minimize the cost of any failure toits insurance funds and the credit union industry.

“NCUA and credit unions have successfully worked together torestore stability to the credit union system,” Matz said. “Now weare holding responsible parties like Bear, Stearns accountable fortheir actions. It's the right thing to do.”