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Nomura, RBS Appeals Against $839M Mortgage Bond Case

RBS NMR

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The 2nd U.S. Circuit Court of Appeals in New York is anticipated to turn down the appeal made by two of the world’s biggest banks – Nomura Holdings, Inc. (NMR - Free Report) and The Royal Bank of Scotland Group plc (RBS - Free Report) regarding to a settlement agreed in 2015. Per the terms of the settlement, the banks were ordered to pay $839 million over misrepresentation of documents in selling of mortgage backed securities.

Notably, the banks were accused by the Federal Housing Finance Agency’s (‘FHFA’) of providing fraudulent details regarding mortgages sold to the government-backed mortgage financiers, Federal National Mortgage Association and Federal Home Loan Mortgage Corp. .

David Tulchin, Nomura's lawyer argued, "The district court excluded all evidence that Fannie Mae or Freddie Mac or any reasonable investor standing in their shoes knew about the underwriting practices at the time."

U.S. Circuit Judge Richard Wesley retorted with the statement "Couldn't Fannie and Freddie rely on you to do your job?"

The members of the three-judge panel enquired Tulchin and RBS's lawyer as to how the banks were not guilty if the quality of the loans represented by them on which Fannie and Freddie relied on while buying the mortgage bonds were fraudulent.

Background

The FHFA has accused the Japan-based Nomura, sponsor of the above mentioned securities, and Royal Bank of Scotland, the underwriter, of providing it with misleading details about securities worth $2 billion. Both were found guilty in May by U.S. District Judge, Denise Cote, in Manhattan after a non-jury trial and were directed to pay $806 million including $26.6 million to Fannie Mae and $779.4 million to Freddie Mac. Further, in Sep 2015, they were directed to pay an additional $33 million over and above $806 million.

Many financial institutions resorted to inappropriate, misleading, aggressive and fraudulent methods to boost their mortgage operations during the pre-crisis period that fuelled the sub-prime mortgage crisis. Consequently, Freddie Mac and Fannie Mae reached the brink of bankruptcy and the government intervened to rescue these lenders.

In order to avoid such fiascos in the future, the regulators started implementing stringent restrictions. Consequently in 2011, the FHFA sued 18 financial organizations, including Wall Street majors like The Goldman Sachs Group, Inc. GS and Bank of America Corp. BAC for selling faulty mortgage-backed securities to Freddie Mac and Fannie Mae that caused investors severe losses. FHFA has reached nearly $17.9 billion in settlements with several of these banks.

Conclusion

Banks across the globe have been facing increasing scrutiny for their business practices. Many of the firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Many investors have lost their hard-earned money as a result of such business malpractices. Such settlements help restore their confidence in law enforcement agencies. Moreover, it reduces the existing litigation burden of banks.

Nomura carries a Zacks Rank #2 (Buy), while Royal Bank of Scotland carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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