As a leading provider of litigation services, Oakleaf follows the securities litigation industry very closely. To support our clients in this arena we provide modeling expertise, loan file underwriting, data analytics and testifying expertise. Below we have summarized a recent ruling that is particularly pertinent to that work: an appeal decision for the first mortgage-backed security fraud case which originally went to trial in 2015.
FHFA vs. Nomura and RBS
The defendants Nomura and Royal Bank of Scotland (RBS) lost their appeal of a 2015 trial loss to the Plaintiff, the Federal Housing Finance Authority “FHFA”, which is a conservator for Freddie Mac and Fannie Mae, by a unanimous decision on September 28, 2017. The appeal panel consisted of three 2nd district court judges.
This victory is ground breaking for several reasons:
- This appeal stems from the first RMBS fraud case to go to trial.
- The size of this award was 2.3x larger than the second largest FHFA settlement – potentially increasing higher future settlement amounts.
- This case tested the solidity of the Securities Act – relating to full disclosure.
- The plaintiffs were successful proving that the losses on the securities were not a result of the broader economic crisis in 2008.
Circuit Judge Wesley wrote on behalf of the panel: “Defendant may not hide behind a market downturn that is in part their own making simply because their conduct was a relatively small part of the problem.”
The original fine was $839 million, which included as much as $33 million in legal fees. The defendants are required to take back the subject securities, believed to be valued in the range of $400-$475 million, based on a 2015 estimate. Nomura sponsored $2 billion of securities sold to Fannie and Freddie, and RBS underwrote the deals. Based solely on the fine the amount awarded equals 40.3% of the total subject securities.
As you can see based on the following table – the rewards associated with the trial far exceeded FHFA’s prior settlement rewards:
Bank | Settlement | MBS In Complaint | Settlement as % of |
|---|---|---|---|
Nomura, RBS | 0.8 | 2.0 | 40.3% |
RBS | 5.5 | 32.1 | 17.1% |
UBS | 0.9 | 6.4 | 14.1% |
Deutsche Bank | 1.9 | 14.2 | 13.4% |
Morgan Stanley | 1.3 | 10.6 | 12.3% |
JPM | 4.0 | 33 | 12.1% |
Goldman Sachs | 1.2 | 11.1 | 10.8% |
BofA/ML/Countrywide | 5.8 | 57.4 | 10.1% |
HSBC | 0.6 | 6.2 | 9.7% |
Citigroup | 0.3 | 3.5 | 8.6% |
Ally Financial | 0.5 | 6 | 8.3% |
Credit Suisse | 0.9 | 14.1 | 6.4% |
Barclays | 0.3 | 4.9 | 6.1% |
Source: FHFA.gov, Bloomberg
While this case could be seen as positive for plaintiffs in securities litigation, the decision to pursue litigation is a complex decision and in doing so you should engage expertise to guide you through the process. For the full ruling, please click here.