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Last week, DZ Bank AG, a German lender, filed a lawsuit against Citigroup Inc. (C - Analyst Report) and The Royal Bank of Scotland Group plc (RBS - Snapshot Report), for misrepresentation of documents while selling mortgage-backed securities (MBS). Moreover, RBS along with UBS AG (UBS - Analyst Report), faced another lawsuit filed by German lender, HSH Nordbank AG over the same issue.

The lodged complaints indict banks of presenting modified documents related to the sale of over $845 million in residential mortgage-backed securities (RMBS). Notably, Citi is involved in $362 million worth of securities, while RBS involves securities worth $279 million in the DZ Bank AG case. Moreover, the HSH Nordbank case against UBS is over $150 million in bonds while the RBS suit involves $54 million.

The Allegations

The German lenders accused the banks of issuing misleading statements with omissions related to MBS and concealment of risks associated with these securities. The plaintiff claims that the documents used for offering the securities contained fraudulent statements or omissions regarding the risks associated with the investments. Misinterpretation of these risks led to the investments, which incurred losses at current levels.

The cases have been filed in the New York State Supreme Court in Manhattan and the lenders demand compensation for the damages. However, banks have refrained from commenting on the issue.

Others Facing Similar Issues

This year, similar actions have been taken against other banking majors, including JPMorgan Chase & Co. (JPM - Analyst Report), HSBC Holdings Plc. , Bank of America Corporation (BAC - Analyst Report), Morgan Stanley (MS - Analyst Report) and The Goldman Sachs Group Inc. (GS - Analyst Report).

Legal Woes Continue

Trouble has been brewing for banks for quite sometime now owing to fraudulent representations and breach of contract tied to RMBS. Banks face several other charges related to the sale of defective mortgage securities.

Litigation overhangs have been a common problem for major U.S. banks since the financial meltdown. In effect, these lawsuits are expected to tarnish their reputation and financials over time. However, investors and other financial institutions bearing the brunt of these faulty practices are expected to be fairly compensated.

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