A U.S. District Court judge on Monday said Nomura Holdings Inc.
wasn't truthful in describing mortgage-backed securities sold to
Fannie Mae and Freddie Mac, giving a victory to the companies'
conservator, the Federal Housing Finance Agency.
Judge Denise Cote asked the FHFA to propose updated damages to
be paid by Nomura and co-defendant RBS Securities Inc., which
underwrote some of the investments. At the outset of the case, the
FHFA asked for about $1.1 billion.
The order brought to conclusion a rare trial addressing alleged
mortgage-related infractions committed during the housing boom.
Over the past few years, more than a dozen firms chose to settle
similar allegations brought by the FHFA rather than face a court
battle. The settlements have brought Fannie and Freddie $18 billion
in penalties.
In her decision, Judge Cote wrote that Nomura, in offering
documents for mortgage-backed securities sold to Fannie and
Freddie, didn't accurately describe the loans' quality.
"The magnitude of falsity, conservatively measured, is
enormous," she wrote.
During the boom, Fannie and Freddie invested billions of dollars
in mortgage-backed securities issued by such companies as Nomura.
Those investments bolstered profits but, in the bust, contributed
to steep losses that ultimately resulted in the companies' 2008
government takeover.
Nomura and RBS were two of 18 financial institutions, including
Bank of America Corp. and Goldman Sachs Group Inc., targeted in
2011 by the FHFA, which alleged that the companies lied about the
quality of the loans underlying the securities. During the nonjury
trial, lawyers for the FHFA said that Nomura and RBS inflated
values of homes behind some mortgages and sometimes said a home was
owner-occupied when it wasn't.
Nomura and RBS became the first defendants to take their case
all the way to trial. A separate case against the Royal Bank of
Scotland Group PLC in Connecticut is ongoing.
A Nomura spokesman said the bank would appeal.
"Nomura is confident that it was consistently candid,
transparent and professional in all of its dealings with Fannie Mae
and Freddie Mac and looks forward to bringing its case to the U.S.
Court of Appeals," said the spokesman.
Lawyers for Nomura and RBS had argued that Fannie's and
Freddie's losses on the securities should have been attributed to
the financial crisis rather than to misstatements in the offering
documents. They also said that Fannie and Freddie knew the
potential problems with the investments they were buying.
FHFA General Counsel Alfred M. Pollard said, "FHFA is pleased
with the court's decision and we are reviewing the various elements
of this important ruling. It is clear the court found that the
facts presented by FHFA were convincing. FHFA looks forward to
submitting proposed damages calculated under the formulae applied
in the court's opinion."
A lawyer for RBS didn't respond to a request for comment.
Write to Joe Light at joe.light@wsj.com
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