Legal Mess Continues for Banks

According to Bloomberg, the U.S. Court of Appeals in Manhattan turned down the dismissal of a lawsuit by a lower court ruling on Friday. The lawsuit was filed by the New Jersey Carpenters Health Fund against The Royal Bank of Scotland Group plc (RBS), Deutsche Bank AG (DB - Snapshot Report), Wells Fargo & Company (WFC - Analyst Report) and NovaStar Mortgage Inc.

The lodged complaint claims that these banks misrepresented documents as an underwriter in the sale of over $1.3 billion in mortgage-backed securities in 2007. The fund alleged that the banks deceptively sold the mortgage-linked securities that gradually failed and also misrepresented the value of instrument by providing materially misleading statements.

Moreover, the New Jersey pension fund alleges that the banks failed to expose NovaStar’s ignorance in complying with its own underwriting standards and the company’s use of overstated appraisals. The banks have been blamed for overlooking these issues while buying loans from NovaStar and selling them as securities to investors. Eventually, the market showed a downtrend, resulting in huge losses for common investors.

Previously, the pension fund sued a larger group of securities in six offerings worth $7.7 billion. However, in 2011, U.S. District Judge, Deborah Batts dismissed the complaint, claiming that the fund invested in just one offering and therefore a lawsuit cannot be filed for the other five offerings. Moreover, the judge highlighted the absence of supporting documents related to the case.

After the dismissal of the case, the pension fund again filed the lawsuit in 2011 over 2007 securities. Currently, the appeals court approved the allegations and regarded them as adequate for proceeding with the case. Moreover, the lower court has been intimated to analyze whether other offerings can be sued by the fund.

However, spokesmen from the banks refrained from commenting on the issue.

The continuously increasing number of lawsuits is apprehended to dent the reputation of the banks and financials. However, investors who lost their hard-earned money in such investments should get some reprieve.

Among other banks, JPMorgan Chase & Co. (JPM - Analyst Report) and Citigroup have also been legally accused of distorting documents related to mortgage-backed securities and other losses in 2011.