Space Coast Goes After Wall St.
The $3 billion Space Coast Credit Union recently filed suit against Merrill Lynch, Wachovia Capital, Barclays Capital, Lehman Brothers’ former CEO Richard Fuld and 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 in Melbourne, Fla., acquired the financially troubled Eastern Financial in 2009 after it was placed in conservatorship by the NCUA and issued a cease and desist order for questionable loan practices. In large part, the mortgage securities’ losses resulted in the collapse of Eastern Financial and the loss of its independent strength, creating the need for a merger partner, said Space Coast President/CEO Doug Samuels.
The complaint, filed Feb. 6 in a Florida state court, alleges that the named investment banks and the rating agencies conspired to inflate allegedly toxic bonds into investment grade securities using alleged fraudulent credit ratings and that the investment banks allegedly dumped those inflated securities onto unsuspecting investors.
As a result, Eastern Financial sustained losses from 2008 to 2010, 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 wrote in a statement. “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.
Space Coast said the defendants allegedly knew that the credit rating models rested on fraudulent data due to the fact that the investment banks waived defective loans, allowing them to be included in the mortgage securities.
“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.
Samuels 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. “We strongly believe that these large brokers should be held accountable when they take advantage of locally owned, smaller financial institutions.”