RMBS Cases and Institutional Fraud: Morgan Stanley to Pay $62.9M, Hedge Funds File Lawsuit Against TWC Asset Management, and Deutsche Bank Must Contend With Allegations Claiming Investor Losses of $3.1B

Morgan Stanley Settles RMBS Case with FDIC
Morgan Stanley (MS) will pay $62.9M to resolve allegations that it misrepresented residential mortgage-backed securities prior to the 2008 financial crisis. The deal was reached with the Federal Deposit Insurance Corp., which sued the investment bank on behalf of Colonial Bank in Alabama, Security Savings Bank in Nevada, and United Western Bank in Colorado. All three banks failed after or during the crisis. By settling, Morgan Stanley is not denying or admitting liability.

According to the FDIC, in offering documents Morgan Stanley misrepresented claims for 14 RMBS mortgage backed securities. This is not the first time the investment bank has reached a deal over RMBS with the FDIC. In 2015, the firm resolved similar claims brought on behalf of Franklin Bank in Texas for $24M.

Also last year, Morgan Stanley arrived at a deal for $2.6B to resolve a U.S. Department of Justice probe into mortgage bonds. The government accused the investment bank of misrepresenting the quality of home loans packed into bonds.

Assett Management Firm Must Face RMBS Lawsuit Brought by Hedge Funds
A New York Court refused to grant TCW Asset Management Company’s motion to dismiss RMBS fraud claims brought Basis Yield Alpha Fund and Basis Pac-Rim Opportunity Fund. The Cayman Island hedge funds claim that TWC Asset Management marketed a system for dealing with the RMBS market that it claimed could determine which were the good investments. The purported strategy involved the collateralized debt obligation Dutch Hill Funding II, Ltd., which took a net long position on high-risk RMBS.

The two hedge funds invested over $28.1M in Dutch Hill in May 2007. By July, their investment had become worthless. They sued TCW Asset Management Company in 2012, accusing the firm of fraudulent misrepresentations and a failure to choose Dutch Hill’s RMBS collateral in the ways that it promised. The Basis Funds contended that the defendant knew that the investment strategy couldn’t get the job done.

In its ruling, the Supreme Court of New York said that this was unlike the typical RMBS fraud case because the hedge funds were not “duped” into believing that residential mortgage-backed securities were, in general, an asset class that was “sound” and they knew about the risks involved in the market. Instead, at issue, said the court, is whether the hedge funds, which are both investors, “could have reasonably believed in the firm’s marketed “unique abilities.”

Judge Says Deutsche Bank Must Face Lawsuit Alleging $3.1B in Investor Losses
Also, a federal judge in the U.S. said that Deutsche Bank AG DB (DB) must face an institutional investor fraud lawsuit accusing the German bank of failing as the trustee for 10 RMBS, purportedly causing investors over $3.1B. U.S. District Judge Alison J. Nathan turned down Royal Park Investments SA/NV claims accusing Deutsche Bank of not doing the necessary steps to push loan sellers to repurchase or replace shoddy loans. She says the plaintiff may proceed with its case.

Royal Park wants class action status for its RMBS fraud lawsuit, which accuses Deutsche Bank National Trust Company of breach of contract and 1939 U.S. Trust Indenture Act violations, which addresses trustee duties. The investment company contends that the bank knew about deficiencies in the loans.

Morgan Stanley to Pay $63 Million to Settle Mortgage-Bond Suit, The Wall Street Journal, February 2, 2016

Federal Deposit Insurance Corp.

N.Y. Court Denies Summary Judgment In Unique RMBS Case Involving Sophisticated Investors, The Race to the Bottom, February 2, 2016

Deutsche Bank must face U.S. lawsuit over $3.1 billion mortgage loss: judge, Reuters, February 3, 2016