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According to Reuters, the federal judge in New York has rescinded the bid filed by UBS AG (UBS - Analyst Report) regarding the dismissal of claims under a lawsuit charged against it and other major financial institutions. The lawsuit, filed by the Federal Housing Finance Agency (FHFA), accused the banks of misrepresenting documents related to mortgage-backed securities to Fannie Mae and Freddie Mac. FHFA was appointed as conservator of the mortgage investors in 2008.

Though UBS AG argued the lawsuit was filed too late under the federal law, the court’s ruling confirmed that the Housing and Economic Recovery Act of 2008 increased the filing period for such suits.

UBS AG has been accused of selling risky residential mortgage-backed securities worth $6.4 billion from Sep 2005 through Aug 2007. Therefore, the 2nd U.S. Circuit Court of Appeals has ordered the FHFA to pursue further proceedings over its claims against UBS AG.

Back Story

In Mar 2013, a joint petition was filed with the 2nd U.S. Circuit Court of Appeals in New York by 15 leading banks, which were dragged to court by the FHFA over the sale of perilous mortgage debt. The petition was filed as the banks alleged unfair handling of the litigation by the trial court judge.

The banks accused the U.S. District Judge Denise Cote of deliberately holding back evidence with which the latter could have pleaded their case. The banks also blamed Cote of issuing filings that were aimed at compelling settlements. Therefore, the banks have sought the help of the Appeals Court to give the lawsuit a fair chance.

The banks including UBS AG, JPMorgan Chase & Co. (JPM - Analyst Report), Citigroup Inc. (C - Analyst Report) and Bank of America Corporation (BAC - Analyst Report) had come with the demand of reversal of the judge’s rulings and requested access to information that Fannie Mae and Freddie Mac had before they obtained the risky loans (prior to the 2008 financial meltdown).

FHFA had filed the lawsuits in 2011, accusing the banks of selling faulty securities worth $200 billion, to Fannie Mae and Freddie Mac through misleading statements, which violated the securities laws. Out of the 18 lawsuits the FHFA filed, 16 were transferred to Judge Cote in Dec 2011.

Our Viewpoint

The regulators are proactively trying to recover losses through lawsuits against banks that were involved in malpractices related to the selling of mortgage-backed securities. The continuously increasing number of lawsuits will dent the banks’ reputation and financials. However, the investors, who were duped through such investments, should feel relieved.

Shares of UBS AG currently retain a Zacks Rank #5 (Strong Sell).

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