The Federal Housing Finance Agency (FHFA) has filed a more than $1B residential mortgage-backed securities (RMBS) fraud lawsuit against Wells Fargo (WFC) on behalf of Freddie Mac. The government-owned mortgage company had invested in over $1B in RMBSs backed by NovaStar loans prior to the 2008 financial crisis. NovaStar, once a subprime lender, is no longer in operation.
While several banks underwrote the securities, the investor fraud case is targeting Wachovia Capital Markets, LLC, an ex-Wachovia brokerage firm, that is now Wells Fargo Securities, LLC. Wachovia was a Wells Fargo acquisition in 2008.
According to the RMBS fraud case, FHFA claims that offering documents sent to Freddie about the quality of the loans backing the RMBSs were misleading. The independent federal agency contends that Wachovia, which played a part in packaging these securities, put out registration statements that were also allegedly misleading and included misrepresentations that eventually resulted in Freddie Mac sustaining huge financial losses.
FHFA said that the NovaStar bonds dropped in value after it became clear that the documents not only had misrepresentations but also that it concealed the risks involved with the RMBSs.
Meantime, FHFA has been trying to get Freddie dropped from a different RMBS fraud case. That securities lawsuit has resulted in a finalized $165M class action securities fraud settlement between investors and the underwriters of half a dozen NovaStar-sponsored securitizations, including the two securitizations that are at issue in the RMBS fraud case against Wells Fargo. The class action plaintiffs also alleged misrepresentations and omissions in offering documents they received about NovaStar mortgage loans.
Wells Fargo Wants Out of Trial in $163M CDO Case
FHFA’s case against Wells Fargo Securities is not the only one that the brokerage firm is contending with. It’s trying to avoid going to trial in a $163M collateralized debt obligation case brought by Loreley Financing, which is located in the Channel Islands. Loreley claims that Wells Fargo let Magnetar Capital LLC, a hedge fund, control the CDOs even as it bet against them.
Loreley alleges that investors did not know that Wachovia Bank had granted Magnetar a veto right in two portfolio’s underlying housing collateral involving subprime RMBSs or that the hedge fund would profit if the housing bubble were to implode, which it later did.
Wells Fargo claims that there is no evidence that Magnetar had the kind of control that Loreley is alleging or that the defendants strayed from “ordinary care” standards. The bank also argued that without proof that the CDOs were meant to fail or that they were “somehow inferior,” there is no way that the plaintiffs can show that a CDO fraud existed.
Loreley, however, said that there is, in fact, a “mountain” of proof of a $163M CDO fraud. The plaintiff contends that Magnetar was involved in 27 CDOs and that, despite handing them over to Wachovia and other banks, the hedge fund secretly stayed in control of them in exchange for agreeing to purchase equity tranches. Magnetar then made short bets on the CDOs via credit default swaps, causing it to make money when the MBSs failed.
Loreley also said that Wachovia invested in Longshore 3, another CDO, for the purposes of fooling clients and garnering an inflated rate for junk. Wells Fargo, however, disputes that contention.
RMBS Fraud and CDO Fraud Cases
Our MBS fraud lawyers and our CDO fraud attorneys represent investors all over the US. Please contact Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) today and ask for your free, no obligation case consultation if you suspect your investment losses are due to fraud.