A lawsuit filed by European bank LBBW Luxemburg S.A. over an alleged $1.5 billion subprime mortgage-backed securities (MBS) fraud scheme was upheld by a federal judge, who denied the bank's motions to dismiss. U.S. District Judge J. Paul Oetken let stand charges of fraud, breach of contract, negligent misrepresentation, and constructive fraud against Wells Fargo Securities LLC and Fortis Securities LLC.
"This was a significant ruling in a massive fraud case where the sellers greedily squeezed money from investors despite knowing the underlying securities were riskier than represented and not even worth the price," said David Warden of the Houston-based law firm Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing P.C. (AZA).
The lawsuit references a 2006 deal, in which Wells Fargo Securities sold $40 million of what it claimed were highly rated securities to LBBW. The bank alleges that Wells Fargo overvalued the securities, making them riskier than promised. In total, LBBW claims that $1.5 billion in securities—sold to the bank and other customers—were misrepresented.
After the sale, the securities were subsequently collateralized by subprime residential mortgages, and defaulted within a year.
Allegedly, the two companies affected not only LBBW, but also the employee pension fund for the Zuni Indian tribe, which according to the bank, led to the discovery of the fraudulent activity.
LBBW’s attorneys argue the alleged fraud was masked by the beginning of the economic crisis in 2007, and was only discovered later after the U.S. Securities and Exchange Commission (SEC) began administrative proceedings related to a $5.5 million investment made by the Zuni tribe’s employee fund.