The Federal Home Loan Bank of Seattle has filed 11 lawsuits against an array of Wall Street banks, seeking rescind $4 billion of mortgage-backed securities with interest, according to a Feb. 16 Wall Street Journal article by Nick Timiraos, “Home Loan Bank Sues Wall Street Firm.” The lawsuits were filed in late December in King County Superior Court in Washington. A spokeswoman for The Federal Home Loan Bank of Seattle said the institution had “a responsibility to its member shareholders to enforce its rights.”
The lawsuits allege that the Wall Street banks misrepresented and omitted to disclose material information about $4 billion of private-label mortgage securities sold to The Federal Home Loan Bank of Seattle. Private-label securities are based on mortgage loans that did not meet the lending standards of a government-sponsored entity, such as Fannie Mae or Freddie Mac. Many of the loans were subprime or Alt-A mortgages, which defaulted and led to the housing meltdown.
The lawsuits are being closely followed by similarly situated investors. “Other similarly-placed investors would take note, both in the U.S. and outside,” said Bert Ely, a banking consultant based in Alexandria, Va. An outcome favorable to The Federal Home Loan Bank of Seattle would “start a stampede” by other investors, Christopher Whalen, managing director for Institutional Risk Analytics said.
The largest seeks rescission of $719 million in securities bought between March 2006 and September 2007 from former Bear Stearns Cos., which was bought by J. P. Morgan Chase Co. in 2008. Morgan Stanley, Goldman Sachs Group Inc., and Countrywide Financial Corp., now a part of Bank of America, are also defendants in other similar suits.
Earlier, the Federal Home Loan Bank of Pittsburgh sued various banks and ratings agencies for misrepresenting the value of securities that carried a triple-A rating.
Brokerage firms and investment banks often argue that institutional and corporate investors do not deserve to be compensated because their officers were financially sophisticated and should have known better. However, this defense is simply not justified, because sophisticated people can’t bring their sophistication to bear when they are lied to ? as Merrill Lynch apparently recognized recently when it paid the Ohio State Teachers Retirement System $550 million.
The bedrock principle of the securities laws is the duty of complete and truthful disclosure. Once a broker undertakes to disclose any information about a security to an investor or potential investor, the disclosure must be complete and truthful in all material respects. This is an absolute requirement. It applies to every broker and brokerage firm (whether discount or full service), every security, and every person who receives any information about a security (rich or poor, financially sophisticated or not, whether or not that person has an account with the broker). If a broker fails to provide complete and truthful disclosure, and the undisclosed information would have been important in deciding whether or not to invest, the investor has a legal right of action against the broker and the firm to recover resulting losses and damages.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in subprime securities cases. For further information, please contact us.