Credit Suisse Group is facing multiple lawsuits from mortgage-backed securities investors for allegedly enabling fraudulent mortgages with bad underwriting to pass through the securitization process.
The investment banker defrauded Bankers Life Insurance Co. and other investors through deceit when marketing subprime mortgage-backed securities that became worthless or near worthless, according to a lawsuit filed by the insurance company.
Three other suits against Credit Suisse are being prepared on behalf of three other companies who invested in pieces of the same securities, according to attorney Dale Ledbetter of Ledbetter & Associates PA, Fort Lauderdale, one of two law firms representing Bankers Life.
A Credit Suisse spokesperson, when contacted by MortgageDaily.com, declined to comment on the Bankers Life suit.
“Two should be filed as early as later this week and one in the next two or three weeks,” Ledbetter told MortgageDaily.com. He declined to identify the plaintiffs.
In addition, Ledbetter said he has filed separate arbitration matters with the National Association of Securities Dealers against two NASD members, Raymond James & Associates and APS Financial Corp., who sold pieces of the same Credit Suisse-issued securities to two financial institutions — Sterling Federal Bank, of Sterling, Ill., and Americantrust Federal Savings Bank, of Peru, Ind.
Each claim charges violation of the Securities & Exchange Act and of state securities acts, common law fraud, breach of fiduciary duty, violation of NASD rules and negligence. Compensatory damages of $356,000 is sought from Raymond James in the Americantrust matter and $1.7 million from Raymond James and $425,000 from APS in the Sterling Federal matter.
Bankers Life lost $1,286,880 in principal and interest on the three pieces of two securities in which it had invested, the suit alleges. St. Petersburg, Fla.-based Bankers Life is seeking to recover that money, plus attorneys’ fees and costs, through the suit, which was filed on April 23 in U.S. District Court in Tampa, Fla.
The suit also charges that Credit Suisse withheld from Moody’s Investors Service, “material information on the true status of these securities service, which, if properly disclosed, would have resulted in a substantial downgrade of the Moody’s [initial] rating.”
The securities had a closing date in November 2001 and were purchased by Bankers Life in January and February of 2004. Two of the pieces, rated A2 prior to purchase, were downgraded five times during 2005 and 2006, ending with a Caa1 rating. The third piece was downgraded four times during 2005, with a final rating of Ca.
These downgrades, the suit maintains, “could have been substantially lessened or avoided had the representations made by defendants been true and had defendants fulfilled the fiduciary obligations owed to Bankers.”
The loans backing the securities, the suit charges, were originated with inadequate underwriting criteria by wholesale originators who were engaging in improper lending practices, including lack of appropriate verification of income and inadequate debt-to-income ratios of borrowers. The loans, described in the suit as “shoddy, inferior mortgage loans,” were adjustable rate mortgages with low initial payments that were made to subprime borrowers “without an appropriate analysis of the borrowers’ ability to make payments at the fully indexed rate,” the suit alleges.
Further, Bankers Life would not have purchased the securities had Credit Suisse and the other defendants performed all of their obligations, not made the alleged misrepresentations properly disclosed all material facts, the suit maintains.
Instead, according to the suit, Credit Suisse “carried out a plan, scheme and/or course of conduct which was intended to, and did manipulate and inflate the value of the securities.”
Triad Guaranty Insurance Corp., Winston-Salem, N.C.; Select Portfolio Servicing Inc., Salt Lake City, Utah; and Bank of New York, New York, also are named as defendants in the suit. They had been selected by Credit Suisse to, respectively, insure, service and sell the securitized loans, according to the suit.
Triad Guaranty’s insurance coverage was “illusory and allowed [it] to unilaterally declare mortgage loans to be fraudulent and not subject to insurance coverage,” the suit states. Select Portfolio failed to perform its servicing obligations.
In addition, originators were not made to repurchase fraudulent loans, instead fraud losses were “wrongfully charged to the over-collateralization account,” according to the litigation.
These and other actions and inactions increased Bankers Life’s losses “far beyond” what they otherwise would have been, the suit alleges.
Credit Suisse has until May 13 to respond to the suit or face judgment by default. But Ledbetter told MortgageDaily.com he expected that Credit Suisse will seek an extension of that deadline.
