By Joe Light
Lawyers for the U.S. government said Nomura Holdings Inc.
executives knowingly sold mortgage-finance companies Fannie Mae and
Freddie Mac securities that were rife with errors and
misrepresentations, kicking off opening arguments in a $1.1 billion
civil lawsuit in New York.
The Federal Housing Finance Agency, which regulates Fannie and
Freddie, is bringing the suit against Tokyo-based Nomura and
co-defendant Royal Bank of Scotland Group PLC.
The banks are two of 18 financial institutions, including Bank
of America Corp. and Goldman Sachs Group Inc., targeted by the FHFA
in 2011 with lawsuits that so far have garnered about $18 billion
in settlements.
The outcome of the trial, which is taking place in Manhattan
federal court and is expected to last into April, will signal the
wisdom or folly of the banks that settled rather than fight the
government in court.
The cases center on mortgage-backed securities that Freddie and
Fannie invested in during the housing boom. The investments were
separate from Fannie's and Freddie's usual business of securitizing
and guaranteeing repayment on mortgage loans.
Although investments in such securities bolstered the companies'
profits for a time, they lost billions of dollars in value during
the real-estate crisis.
The companies were put into conservatorship by the government in
2008 and received almost $188 billion in bailout money.
The FHFA argues that the securities' offering documents were
inaccurate. In some cases, the FHFA said, the loans behind the
securities were for homes with values at far less than purported.
In others, the loans didn't go to owner-occupants as had been
claimed, the agency said.
In his opening statement on Monday, Philippe Selendy, a lawyer
for Quinn Emanuel Urquhart & Sullivan LLP, which is
representing the FHFA, said Nomura and RBS were "willing
participants in creating the worst financial crisis since the Great
Depression" in lying about the quality of the securities they
sold.
David Tulchin, an attorney for Sullivan & Cromwell LLP,
which is representing Nomura, said the company adequately disclosed
in securities' offering documents that there could be mistakes. He
also attacked government attempts after the fact to value the loans
and homes tied to them, calling the methods "litigation
driven."
Instead, Mr. Tulchin said, losses on the securities were due to
the housing crisis and weren't Nomura's fault.
The Nomura case is notable for reaching trial at all. Only one
other case, a separate one against RBS in Connecticut, hasn't
settled.
Some analysts have said Nomura and Edinburgh, Scotland-based RBS
might be more willing to fight the government because they are less
concerned about the risks of damaging their reputations in the
U.S.
"The banks that settled decided that closing the chapter on the
government's crisis-era claims was worth the upfront expense of a
settlement when considered in the context of both actual and
reputational cost," said Isaac Boltansky, an analyst with Compass
Point Research & Trading LLC in Washington.
Settlements from the securities cases, and other crisis-related
penalties, for the past couple of years have been a significant
source of profits for Fannie and Freddie.
At the trial, Thomas Rice, a lawyer with Simpson Thacher &
Bartlett LLP representing RBS, said Fannie's and Freddie's
expertise in the mortgage industry belied the notion that they
weren't aware of the risks and potential problems of the securities
they invested in.
"These are the largest, most sophisticated players in the
market," Mr. Rice said.
Write to Joe Light at joe.light@wsj.com
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