Risk & Compliance

Nomura, RBS Facing $800M Penalty in Securities Fraud Case

The FHFA said two-thirds of the mortgage loans underlying securities the banks sold had underwriting defects.
Matthew HellerMay 12, 2015

Nomura Holdings and Royal Bank of Scotland Group could be facing a judgment of more than $805 million after a New York judge ruled they made false statements about the loans underlying securities they sold to Fannie Mae and Freddie Mac.

U.S. District Judge Denise M. Cote’s decision concluded a bench trial of securities fraud claims that were brought against the two banks by the Federal Housing Finance Agency after the mortgage meltdown. Nomura and RBS were the only two of 18 financial firms in the case that elected to go to trial rather than settle with the government.

“The magnitude of falsity, conservatively measured, is enormous,” Cote wrote in finding that the banks did not accurately describe home mortgages in the offering documents for securities that were backed by those mortgages.

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The FHFA, which oversees Fannie Mae and Freddie Mac, said two-thirds of the mortgage loans underlying securities had underwriting defects.

Cote ordered the Federal Housing Finance Agency to propose how much the banks should pay in damages. An attorney for the agency told Reuters that amount could exceed $805 million, plus attorney’s fees and costs. A proposed judgment is expected to be filed Friday.

The seven deals at issue in the case were issued from 2005 to 2007. While Nomura was the securities’ sponsor, RBS underwrote four of the deals.

The banks’ claimed that the housing crash, and not defects in the loans, was responsible for the collapse of the securities. But Judge Cote soundly rejected that defense, saying banks’ misconduct aggravated the crisis.

“The origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factor that defendants say caused the losses,” she wrote, “but once that collapse started, improperly underwritten loans were hit hardest and drove the collapse even further.”

David Reiss, a professor at Brooklyn Law School, called Cote’s ruling “incredibly thorough.” The judge included detailed factual rulings that may make it difficult for Nomura and RBS to win on appeal, he told Bloomberg.