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NCUA Sues Morgan Stanley and Eight Others over Faulty Securities
Tuesday, September 24, 2013 6:50 AM

The National Credit Union Administration today filed nine lawsuits in Federal District Court in New York against Morgan Stanley & Co., Inc. and eight other institutions over the sale of nearly $2.4 billion in mortgage-backed securities to Southwest and Members United corporate credit unions.

“We continue to pursue accountability and recovery in the wake of billions of dollars in sales of faulty securities that led to the collapse of several corporate credit unions and handed the industry the costly bill of paying for the losses,” NCUA Board Chairman Debbie Matz said. “All the credit unions we supervise and insure are sharing those costs. The people who are responsible should be required to shoulder that burden, as well.”

Defendants Morgan Stanley & Co., Inc. and Morgan Stanley Capital I Inc., Barclays, J.P Morgan/Bear Stearns, Credit Suisse, Royal Bank of Scotland and UBS sold faulty securities to both corporate credit unions. Goldman Sachs, Wachovia and Residential Funding Securities, LLC, now Ally Securities, sold faulty securities to Southwest. The suits make claims under either federal or state securities laws.

In all, five corporate credit unions failed as a result of the purchase of faulty mortgage-backed securities.

Southwest and Members United corporate credit unions paid more than $416 million for the securities in question in the Morgan Stanley suit and more than $1.9 billion for securities sold by the other defendants.

NCUA’s suits allege the firms made misrepresentations in connection with the underwriting and subsequent sale of the mortgage-backed securities. The corporate credit unions became insolvent, were subsequently placed into NCUA conservatorship and later liquidated as a result of losses from these faulty securities. These failures subsequently caused significant losses to the credit union system.

NCUA’s complaints allege the offering documents of the securities sold to the failed corporate credit unions contained statements that were not true or omitted material facts. The originators systematically abandoned the stated underwriting guidelines in the offering documents, according to the complaints, with the result that the securities were significantly riskier than represented.

NCUA was the first federal regulatory agency for depository institutions to recover losses from investments in faulty securities on behalf of failed financial institutions. The agency has settled claims worth more than $335 million with Citigroup, Deutsche Bank Securities, HSBC and Bank of America.

As liquidating agent for Southwest and Members United corporate credit unions, NCUA has a statutory duty to seek recoveries from responsible parties in order to minimize the cost of any failure to its insurance funds and the credit union industry.

Recoveries from these legal actions will further reduce the total losses resulting from the failures of Southwest and Members United. Losses from those failures must be paid from the Temporary Corporate Credit Union Stabilization Fund. Expenditures from the Stabilization Fund must be repaid through assessments against all federally insured credit unions, so any recoveries would help reduce future assessments on credit unions.

Corporate credit unions are wholesale credit unions that provide various services to retail credit unions, which in turn serve consumers, or “natural persons.” Retail credit unions rely on corporate credit unions to provide them such services as check clearing, electronic payments and investments.

The complaints are available on NCUA’s website here.