CUNA Mutual Group filed five different civil fraud suits in federal court in Madison, Wis., on Thursday against major Wall Street banks seeking to force the banks to buy back $285 million worth of residential mortgage-backed securities gone bust.
The suits, filed in U.S. District Court for the Western District of Wisconsin, make similar claims to those filed against some of the same banks by NCUA for the sale of faulty MBS to the five failed corporate credit unions, mostly that the banks sold CMG and its affiliates the bonds knowing that the mortgages underlying the securities did not meet their underwriting standards.
The $121 million of MBS purchased from Banc of America Securities and Merrill Lynch, now a B of A subsidiary, “are now either worthless or worth only pennies on the dollar,” according to one of the suits, alleging securities fraud.
The suits all ask the court to direct the banks to allow CUNA Mutual to exercise its rights of rescission. Under rights of rescission, a buyer of securities can demand the seller buy them back if a violation of the sales agreement can be proved.
CUNA Mutual has been litigating similar claims for the past year against RBS Securities, another Wall Street bank being sued by NCUA for the sale of faulty MBS to the corporates.
In its suit against Goldman Sachs, the credit union insurer claims the Wall Street bank induced CUNA Mutual to purchase that certificate by misrepresenting the fundamental attributes of, and thus the credit risk associated with, the pools of mortgage loans collateralizing the RMBS. “After CUNA Mutual made its purchase, the mortgage loans in the pools began to default at high rates consistent with their true attributes, causing CUNA Mutual to suffer millions of dollars in losses,” the suit says.
“Under Wisconsin law, Goldman’s misrepresentations of material fact justify CUNA Mutual’s rescission of these purchases, regardless of whether Goldman made those misrepresentations intentionally, recklessly, negligently, or even innocently,” according to CMG.
CUNA Mutual says rescission is appropriate because the company was mistaken about a basic assumption and expectation underlying this MBS transaction: that the loans in the pools were issued in compliance with the originators’ underwriting standards (as Goldman represented them to be). “Representations of originator compliance with underwriting standards were ubiquitous in the RMBS industry. Thus, absent an explicit disclosure to the contrary, the public offering of RMBS represented to investors that the loans in the pools were underwritten in accordance with the relevant originators’ underwriting standards. Under Wisconsin law, rescission based on mistake is appropriate regardless of whether Goldman was also mistaken about the originators’ compliance with their underwriting standards.”
