Space Coast CEO: Mortgage Securities Suit Not an Easy Battle
Doug Samuels, president/CEO of Space Coast Credit Union, acknowledged that its mortgage securities suit against several Wall Street giants may be an arduous undertaking but the financial institution is ready to fight on behalf of its members.
“This may not be an easy battle,” Samuels wrote in a statement. “However, we strongly believe that these large brokers should be held accountable when they take advantage of locally owned, smaller financial institutions.”
The $3 billion Space Coast in Melbourne, Fla., recently filed suit against Merrill Lynch, Wachovia Capital, Barclays Capital, Lehman Brothers’ Richard Fuld, and the major U.S. credit rating agencies Standard & Poor’s and Moody’s alleging that the defendants caused more than $100 million in losses to Eastern Financial Florida Credit Union.
Space Coast acquired Eastern Financial in 2009. Samuels said the acquired credit union sustained losses from 2008 to 2010. In large part, those losses resulted in the collapse of Eastern Financial and the loss of its independent strength thereby creating the need for a merger partner, Samuels said.
“It is our duty, on behalf of our members, to attempt to recover the loss and ultimate destruction of Eastern resulting from this sale of the mortgage-related securities,” Samuels said. “These mega-brokers knew at the time of sale that these securities were worth less than face value and took advantage of a less sophisticated buyer.”
Sam Rudman, an attorney representing Space Coast, said there is strong evidence to support the credit union’s claims.
Space Coast’s complaint identifies several ways that the defendants allegedly manipulated the credit ratings including making out-of-model or manual adjustments to the rating agencies’ credit rating models to obtain better ratings for the mortgage-related securities at issue in the case.
Space Coast said the defendants allegedly knew that the credit rating models rested on fraudulent data due to the fact that the investment banks waive defective loans allowing them to be included in the mortgage securities.
“The defendants never accounted for these defective loans when they built and sold the so-called investment grade mortgage bonds,” according to Space Coast. “Moreover, the suit alleges that all of the ratings that defendants used to sell the securities were graded on a curve because the investment banks paid the credit rating agencies more to rate mortgage-related securities than they paid the rating agencies to rate other, less lucrative securities such as government-issued debt.”
“Wall Street cannot create toxic securities, package them for sale as investment grade, and then expect buy-side investors to sit back and do nothing when their portfolios crash,” said Rudman, a partner with Robbins Geller Rudman and Dowd LLP, a securities litigation law firm.