RBS, Deutsche Bank Lose Appeal in Mortgage-Bond Lawsuit

Royal Bank of Scotland Group Plc, Deutsche Bank AG and Wells Fargo & Co. must face claims from a pension fund over $1.3 billion in mortgage bonds and potentially billions more, a federal appeals court ruled.

The U.S. Court of Appeals in Manhattan today reversed a lower-court ruling that dismissed the case against the banks and NovaStar Mortgage Inc. over loans bundled into securities before the financial crisis.

The claims by the New Jersey Carpenters Health Fund “permit us to draw the reasonable inference” that the banks are liable under federal securities laws, the appeals court said in its decision.

The New Jersey fund filed a class-action complaint over $1.3 billion in bonds sold to investors in 2007, according to court papers. The fund claimed that the securities were riskier than promised and that offering documents contained material misstatements and omissions about the loans backing them.

RBS, Frankfurt-based Deutsche Bank and Wachovia, now part of San Francisco-based Wells Fargo, were underwriters, according to court papers. They failed to conduct adequate due diligence related to NovaStar’s loan origination practices and compliance with underwriting guidelines, according to the complaint.

Lacked Standing

The pension fund had tried to sue over a wider group of securities in six offerings of about $7.7 billion, according to court documents. U.S. District Judge Deborah Batts dismissed the complaint in 2011. She ruled the fund lacked standing to sue over five offerings because it invested in only one. She also said it provided “no specific factual allegations to support its statements.”

In her ruling, Batts described the complaint as “102 pages of ‘The subprime market melted down and defendants were market participants, so they must be liable for my losses in my risky investment.’”

The fund filed a new complaint in 2011 over the 2007 securities, which Batts again dismissed last year, saying the claims “are not sufficiently specific.”

The appeals court said the allegations were sufficient for the case to proceed. It also ordered the lower court to review whether the fund could sue on the other offerings based on a ruling by the appeals court in a separate case.

‘Obviously Gratified’

That could potentially increase the amount of securities at issue in the lawsuit, said Joel Laitman, an attorney for the pension fund at law firm Cohen Milstein Sellers & Toll Pllc in New York.

“We’re obviously gratified that we can proceed with this $1.3 billion offering and potentially five additional billion-dollar offerings,” he said in a phone interview.

Ed Canaday, a spokesman for Edinburgh-based RBS, along with Vickee Adams, a spokeswoman for Wells Fargo, and Deutsche Bank spokeswoman Amanda Williams, declined to comment on today’s ruling.

The case is New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group Plc, 12-1707, U.S Court of Appeals for the Second Circuit (Manhattan).

(Updates with Deutsche Bank’s response 12th paragraph.)
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