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Michigan Credit Union League Home » Information Services » Publications » News Articles  

NCUA Sues Investment Firms in Wake of Corporates Meltdown   (Misc News: June 20, 2011)

The NCUA filed suit against two securities firms, alleging violations of federal and state securities laws and misrepresentations in the sale of securities. The federal agency added that it might file more lawsuits seeking total damages in the billions of dollars.

The NCUA filed suit in U.S. District Court in Kansas against J.P. Morgan Securities and RBS Securities. The investment firms sold mortgage-backed securities to corporate credit unions, five of which the NCUA has taken into conservatorship and liquidated.

“While this is a very positive step and the agency should be commended for taking it, the fact is that a very tough road remains ahead,” CUNA cautioned in response to the NCUA’s lawsuits. “The institutions being sued by NCUA have significant resources to defend their actions, and will no doubt use those resources to the fullest extent.”

As liquidating agent for the failed corporate credit unions, NCUA said it 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.

The NCUA claims the sellers, issuers and underwriters of the questionable securities made material misrepresentations in the offering documents. These misrepresentations caused the corporate credit unions that bought the notes to believe the risk of loss associated with the investment was minimal, when, in fact, the risk was substantial, it said. The mortgage-backed securities experienced dramatic, unprecedented declines in value, effectively rendering the institutions insolvent. These suits are the culmination of lengthy investigations into the circumstances surrounding the purchases of these securities. 

“NCUA has a responsibility to do everything in our power to seek maximum recoveries from those involved in the issuing, underwriting and sale of the faulty securities that resulted in the failures of five of the largest wholesale credit unions,” NCUA Board Chair Debbie Matz said. “NCUA’s legal actions are based on ongoing investigations of individuals and entities responsible for selling these securities to the failed institutions. By these actions, we intend to hold responsible parties accountable.”

Matz said that the first two actions involve damages in excess of $800 million. Total damages from all actions could be in the “billions of dollars,” she added.

“Those who caused the problems in the wholesale credit unions should pay for the losses now being paid by retail credit unions,” Matz said.

CU Journal reported Monday that the NCUA is deflecting questions about the statute of limitations by saying that the suits were filed within the one-year timeframe after the discovery of the untrue statement or omission. Some of the securities were sold to the corporates as early as 2006.

The Journal also reported that the NCUA is seeking $565 million from RBS and $278 million from J.P. Morgan.

NCUA has sold $28 billion worth of NCUA Guaranteed Notes securitized by $50 billion in MBS held by the five corporates, which suggests losses of around $20 billion, the Journal estimated. Credit unions have already paid almost $7 billion, first by the elimination of $5.5 billion of their capital in the corporates, then by more than $1.1 billion in corporate assessments the past two years.

Any recoveries from these legal actions would reduce the total losses resulting from the failure of the five corporate credit unions, the NCUA said. Losses from those failures must be paid from the Temporary Corporate Credit Union Stabilization Fund or the National Credit Union Share Insurance Fund. Any recoveries would help to reduce the amount of future assessments on credit unions. 

The five wholesale credit unions placed into NCUA conservatorship and now liquidated are: U.S. Central, Western Corporate, Southwest Corporate, Members United Corporate and Constitution Corporate. 

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