FHFA Sues Wells Fargo Regarding Underwriting of RMBS


On June 3, the Federal Housing Finance Agency (FHFA), as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac), filed a lawsuit in the United States District Court for the Southern District of New York against Wells Fargo Securities, LLC (Wells Fargo) (as successor to Wachovia Capital Markets, LLC (Wachovia)), alleging a violation of Section 11 of the Securities Act. FHFA’s lawsuit alleges losses resulting from Wachovia’s underwriting of two NovaStar securitizations purchased in 2006. FHFA alleges that Freddie Mac was misled about the quality of the loans in the bond deals, and that Wachovia, which Wells Fargo acquired in 2008, participated in drafting the registration statements at issue. These registration statements allegedly contained material misstatements and omissions. FHFA further alleges that its claims are timely because of various tolling agreements entered into between FHFA, Freddie Mac and Wells Fargo. The two deals at issue in FHFA’s Complaint are among six securitizations subject to a $165 million class-action settlement between investors and underwriters, including Wells Fargo, from 2017. FHFA has made multiple unsuccessful bids to be excluded from the settlement, including an appeal that the Second Circuit denied in January of this year, where it argued that the settlement would infringe on the agency’s statutorily-authorized conservatorship powers. FHFA has since filed another appeal, which the agency contends permits it to pursue the claims in this Complaint against Wells Fargo.

Barclays and Wachovia Settle with NCUA

On October 19, 2015, Barclays PLC and Wachovia Capital Markets LLC agreed to pay $325 million and $53 million, respectively, to settle claims brought by the National Credit Union Administration Board (NCUA), as liquidating agent of five credit unions, regarding residential mortgage backed securities purchased by those credit unions.  NCUA alleged in the actions (filed in New York, California, and Kansas federal courts) that the characteristics of the RMBS and the underlying loans were misrepresented in the offering documents.  NCUA Press Release on Barclays.  NCUA Press Release on Wachovia.  We previously covered two of NCUA’s actions against Wachovia here and here.

Federal Court Allows RMBS Case Against RBS Securities and Wachovia Capital Markets to Proceed

On July 25, Judge Richard D. Rogers of the United States District Court for the District of Kansas denied defendants’ motion to dismiss the National Credit Union Administration Board’s suits against RBS Securities and Wachovia Capital Markets.  The two consolidated actions allege violations of Sections 11 and 12(a)(2) of the federal Securities Act of 1933, as well as violations of the Kansas Uniform Securities Act, in connection with the sale of residential mortgage-backed securities.  The court concluded that plaintiffs’ claims were not barred by the applicable statutes of limitations or repose.  The court also denied in large part defendants’ motion to the extent that it was based on failure to state a claim, but granted defendants’ motion to dismiss as to plaintiffs’ allegations of systematic disregard of underwriting guidelines as to certain certificates for which plaintiffs failed to identify specific originators or underwriting practices, as well as plaintiffs’ allegations that defendants had misrepresented the benefits of the credit enhancement associated with the certificates at issue.  Decision.

NCUA Sues Wachovia Over Credit Unions’ RMBS Investments

On November 28, 2011, the National Credit Union Administration (“NCUA”), an independent federal agency that supervises and charters federal credit unions, filed a complaint in the federal district court for the District of Kansas against Wachovia Capital Markets LLC. NCUA is suing in its capacity as the liquidating agent of two failed credit unions, U.S. Central Federal Credit Union (“U.S. Central”) and Western Corporate Federal Credit Union (“WesCorp”). NCUA seeks approximately $200 million in damages based on alleged untrue statements and omissions in the offering documents for 5 RMBS purchased by U.S. Central and WesCorp. NCUA asserts causes of action under Sections 11 and 12(a)(2) of the federal Securities Act, as well as violations of the California and Kansas securities laws. Complaint.

Wells Fargo and KPMG Agree to Settle Wachovia Section 11 Claims for $627 Million

On August 5, 2011, Wells Fargo and KPMG announced an agreement to settle with a class of investors asserting claims based on Wachovia’s 2006 acquisition of Golden West Financial Corp., a mortgage originator based in California. Wells Fargo has agreed to pay $590 million, and KPMG will pay $37 million, for a total settlement value of $627 million. In the suit, brought in 2008 in New York federal court, plaintiffs alleged Golden West originated loans that allowed borrowers to choose from a number of payment options, including payment for less than the interest due, called “Pick-A-Pay” loans. The complaint further alleged that when Wachovia acquired Golden West it began selling the “Pick-A-Pay” loans, as opposed to the traditional, less risky fixed-rate loans, without adequately disclosing the risks to investors or valuing these loans properly on its balance sheet. Plaintiffs brought claims under Sections 11, 12(a)(2), and 15 of the ’33 Act. The settlement was preliminarily approved by Judge Richard Sullivan of the Southern District of New York on August 9, 2011, and is set for a final settlement hearing in November 2011. Motion.

Wells Fargo Pays $11.2 Million to Settle SEC Investigation Relating to Alleged ’33 Act Violations by Wachovia in Sales of CDOs

On April 5, 2011, Wells Fargo agreed to pay $11.2 million to resolve SEC regulatory claims that Wachovia, acquired by Wells Fargo in 2008, improperly sold two CDOs tied to the performance of certain RMBS. The SEC alleged that Wachovia charged “undisclosed excessive markups” to the Zuni Indian Tribe and other investors and falsely claimed that assets purchased from an affiliate at above-market prices were arm’s-length purchases at fair market prices. Settlement Order. The $11.2 million settlement consists of $6.75 million in disgorgement and $4.45 million in civil penalties. Wells Fargo resolved the matter without admitting or denying wrongdoing by Wachovia. Wells Fargo SEC Settlement Order.

S.D.N.Y. Grants in Part and Denies in Part Motion to Dismiss Multiple Actions Against Wachovia

In re Wachovia Equity Sec. Litig., No. 09 Civ. 4473 (S.D.N.Y. Mar. 31, 2011) (Sullivan, J.)

Investors in equity and debt securities of Wachovia brought four related actions against Wachovia and several related entities and individuals, Wachovia’s underwriters and its auditors alleging claims under Section 10(b) of the ’34 Act, and Rule 10b-5 thereunder, and Sections 11, 12(a)(2), and 15 of the ’33 Act. In considering four complaints and seven motions to dismiss, the court granted in part and denied in part the motions. The court found that the Section 10(b) claims, which included allegations of fraudulent concealment of the true value of Wachovia’s CDO holdings, failed for insufficient allegations of scienter. The court also found that: (1) plaintiffs cannot assert claims based on offerings they did not purchase; (2) tolling of the ’33 Act’s one-year statute of limitations was appropriate due to a pending class action; (3) allegations of misstatements of loan-to-value ratios in Wachovia’s mortgage lending portfolio were sufficient; and (4) the Section 11 claim against Wachovia’s auditor survives because a due diligence defense cannot be evaluated on a motion to dismiss. Decision.