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From Securities Regulation Daily, June 11, 2014

Federal claims in RMBS action untimely, plausibly alleged state-law claims may proceed

By Amy Leisinger, J.D.

The U.S. District Court for the Southern District of New York dismissed as untimely Securities Act claims brought by the National Credit Union Administration Board (NCUA) against UBS Securities, LLC arising out of the sale of residential mortgage-backed securities (RMBS) purchased by two credit unions. However, claims brought under the Illinois and Texas securities laws were allowed to proceed after the court found that the NCUA plausibly alleged that the offering documents used to market and sell the RMBS to the credit unions contained material misstatements or omissions (National Credit Union Administration Board v. UBS Securities, LLC, June 10, 2014, Cote, D.).

Background. This action is one of seven brought by the NCUA as liquidating agent of Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Unionagainst various financial institutions involved in the packaging, marketing, and sale of RMBS purchased by the credit unions between 2005 to 2007. According to the complaint, the credit unions purchased over $400 million in RMBS underwritten or sold by UBS.

In its complaint, the NCUA alleged that the offering documents prepared by UBS contained materially false statements and omissions with respect to whether the underlying mortgage loans were underwritten in accordance with certain risk guidelines and to certain statistics regarding the quality of the underlying loans. Approximately $35 million of these purchases were invested in the MASTR Adjustable Rate Mortgage Trust 2007-HF2 Certificates offering. The certificates were AAA-rated at the time of purchase, but they were later downgraded to junk status while numerous loans in the securitization became delinquent, according to the complaint. The credit unions suffered significant losses, the NCUA asserted, because the market value of the RMBS declined.

Securities Act claims. The court dismissed the federal Securities Act claims against UBS as untimely based on its reasoning in the related action ofNCUA v. Morgan Stanley & Co., Inc. (covered in the Securities Regulation Daily Wrap Up for January 23, 2014).

State-law claims. UBS argued that the NCUA’s state securities claims alleging misrepresentations and omissions in the offering documents were inadequately pleaded. Further, UBS contended that the complaint “suffers from a ‘dearth of originator-specific allegations’” because NCUA provided originator-specific allegations of misconduct for less than 10 percent of the loans underlying the MASTR 2007-HF2 offering and none for the largest originator.

The court noted that Rule 8(a) of the Federal Rules of Civil Procedure requires that a complaint contain a plain statement of the claims that are plausible on their face. The NCUA has alleged reasons to believe that the certificates issued by UBS included numerous loans not issued in compliance with their underwriting guidelines, according to the court. Among other evidence in support of its allegations, NCUA pointed to a surge in mortgage delinquency for the loans in RMBS shortly after the offerings were made; these allegations were sufficiently linked to government reports and other information showing that the originators failed to comply with their reported underwriting practices, the court found. Concluding that the NCUA provided originator-specific allegations “‘suggestive of’ systemic disregard of the underwriting guidelines” and that UBS’ due diligence did not “weed out” improper loans, the court found that the allegations viewed in their totality render NCUA’s claims plausible.

The case is No. 13 Civ. 6731 (DLC).

Attorneys: Andrew M. Hetherington (Kellogg Huber Hansen Todd Evans & Figel PLLC) for National Credit Union Administration Board. Jay B. Kasner (Skadden Arps Slate Meagher & Flom LLP) for UBS Securities, LLC.

Companies: National Credit Union Administration Board; UBS Securities, LLC

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