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Contesting Crisis-Era RMBS Litigation

The Switzerland-based wealth manager UBS has said that it plans to contest the litigation by the United States Government over UBS' issuance, underwriting, and sale of residential mortgage-backed securities (RMBS) during the financial crisis a decade ago. In a recent statement, UBS said that it was "confident in its legal position based on the facts and the law."

The Department of Justice (DOJ) has filed a civil complaint in the U.S. District Court for the Eastern District of New York against UBS, seeking monetary civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) regarding these RMBS transactions that took place in 2006-07.

The DOJ has alleged that instead of ensuring that their representations to investors were accurate and transparent, UBS affirmatively misled investors and withheld crucial information from them about the loans in its deals.

“UBS allegedly placed a higher priority on selling bonds and making profits than accurately representing the quality of the underlying loans to investors. These practices resulted in massive losses to investors, harmed homeowners, and ultimately jeopardized the banking system,” said United States Attorney Byung J. Pak for the Northern District of Georgia, who filed these charges along with Principal Deputy Associate Attorney General Jesse Panuccio, U.S. Attorney Richard P. Donoghue for the Eastern District of New York  and Associate Inspector General Jennifer Byrne, Federal Housing Finance Agency-Office of Inspector General (FHFA-OIG) in federal court for the Eastern District of New York.

However, UBS said that it did not cause losses for RMBS investors and fulfilled its disclosure obligations to sophisticated RMBS investors. Additionally, UBS said that it had suffered "massive losses on U.S. mortgage-related assets including the RMBS cited in the complaint, negating any inference of fraud." The wealth manager also plans to contest the allegations on the grounds that it was not a significant originator of U.S. Residential Mortgages and that any penalty sought by the DOJ would be limited at most to losses to federally-insured financial institutions.

While UBS has decided to contest the litigation, in another RMBS trustee litigation, Wells Fargo and Black Rock have reached a settlement to resolve two class action suits in federal and state court related to Wells Fargo's role as a trustee for some RMBS trusts created more than a decade ago. The litigation relates to a case where a group of institutional investors including finds affiliated with Black Rock Inc., and PIMCO were named as plaintiffs along with Wells Fargo.

Denying the claims made in the litigation, Wells Fargo said that it would pay $43 million under the settlement. According to a Wells Fargo statement, separate from the settlement amount that it is paying, up to $70 million from certain trust reserve accounts established in connection with the litigation will also be released.

“Consistent with our sound business practices, we believe that we appropriately fulfilled our duties as trustee by performing the responsibilities prescribed in the relevant contracts for these decade-old trusts,” said Troy Kilpatrick, Head of Wells Fargo Corporate Trust Services. “While we disagree with the allegations, it is in the best interest of all parties to put this protracted litigation behind us and we are satisfied with this settlement.”

Wells Fargo said that the agreement, which is subject to approval by the court, resolves claims regarding the fulfillment of Wells Fargo’s duties as trustee—including providing certain notifications to certificateholders—for 271 RMBS trusts created between 2004 and 2008.

The bank said that as trustee, its duties were limited to administering the trusts and that it had no role in the origination or servicing of the mortgages at issue. "The agreement resolves a significant portion of the claims asserted against the company in connection with its role as trustee for RMBS trusts," Wells Fargo said.

However, it pointed out that this agreement did not cover the separate lawsuits filed by certain other institutional investors concerning 58 trusts.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and copy-editor, and a reporter for DS News. She is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her masters degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha, also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Houston, Texas.
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