Deutsche Bank AG’s Ace Securities was sued in New York state court for fraud for allegedly misrepresenting the quality of $512 million worth of residential mortgage-backed securities by Phoenix Light SF Ltd.
Phoenix Light, which bought and later sold the securities, is seeking at least $300 million in damages, according to a summons filed yesterday. It accuses Ace Securities of making “material misrepresentations and omissions” regarding underwriting standards used to issue the mortgage loans that were pooled together into the offerings, according to court filings.
Ace Securities knew about problems with the mortgages underlying the securities because of reports they received from mortgage-review firm Clayton Holdings, yet still included them in the offerings that were sold to the plaintiffs, according to Phoenix Light.
“The securities have performed worse than expected due to the poorer-quality collateral, and defendants’ wrongdoing has led directly to plaintiffs’ damages, which include loss of market value on the securities,” Phoenix Light said in the filing. “Plaintiffs have lost the entire value of certain of the securities.”
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.
Duncan King, a New York spokesman for Frankfurt-based Deutsche Bank, said in a phone interview that the claims had no merit and the company would fight the suit.
The case is Phoenix Light SF Ltd. v. Ace Securities Corp., 650422/2012, New York State Supreme Court (Manhattan).