A securities subsidiary of JPMorgan Chase is suing the NCUA for breaching a $1.4 billion settlement agreement over toxic residential mortgage-backed securities sold to five corporate credit unions leading to their collapse and billions of dollars in losses.
Stemming from the 2013 settlement agreement, the Long Beach Securities Corp., a subsidiary of JPMorgan Chase, filed its lawsuit July 6 in U.S. District Court in Washington, D.C.
When the NCUA signed the settlement agreement with JPMorgan Chase and its subsidiary, the federal agency was pursuing claims against third parties involved in the faulty residential mortgage-backed securities.
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According to the lawsuit, however, the NCUA agreed to protect JP Morgan from additional liabilities from any third party claims that the federal agency was pursing.
Specifically, the NCUA agreed that if it were to obtain a claim against a third party, the federal agency would "reduce the judgement or award" in an amount sufficient to hold JPMorgan harmless from any claim from a third party claim against JP Morgan or Long Beach Securities Corp., according to the 16-page lawsuit.
At the time the NCUA reached a settlement agreement with JPMorgan, the federal agency was suing Credit Suisse Securities and Credit Suisse First Boston Mortgage Securities Corp. over investments in two residential mortgage-backed securities transactions that involved Long Beach Securities Corp. According to the lawsuit, these transactions were covered in the 2013 JP Morgan settlement agreement with the NCUA.
In April 2016, the NCUA accepted an offer of judgement from CS USA and CS First Boston.
Because CS USA acted as the underwriter for the residential mortgage-backed securities transactions, it made an indemnity claim against Long Beach Securities for more than $19 million. The indemnity claim came from a 2006 underwriting agreement between CS USA and Long Beach Securities.
In response to CS USA's indemnification demand, JP Morgan requested that the NCUA take steps to hold Long Beach Securities harmless that was required in the settlement agreement, but the federal agency refused to do so, according to the lawsuit.
CS USA and Long Beach Securities later agreed to settle the indemnification claim for $10 million. Long Beach Securities asked the NCUA to reimburse the $10 million payment but refused to do so.
In its lawsuit, Long Beach Securities is demanding a $10 million payment, plus fees and expenses, from the NCUA.
The NCUA declined comment when reached Friday.
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Peter Strozniak
Credit Union Times reporter covering credit union operations, fraud, M&As, leagues, business continuity, and breaking news.
