Royal Bank of Scotland Ordered to Face Fraud Claims

Royal Bank of Scotland Group Plc, Britain’s biggest taxpayer-owned lender, must face a lawsuit by a bond insurer over what it claims was the bank’s sale of $1.15 billion of securities backed by “thousands of defective and fraudulently originated” home loans.

The insurer, Assured Guaranty Municipal Corp., sued RBS last year, alleging that it expected to pay $100 million in claims by investors in the securitization, Soundview Home Loan Trust 2007-WMC1.

U.S. District Judge John Koeltl in Manhattan on March 17 rejected RBS’s request to dismiss Assured’s claims of fraud and aiding and abetting fraud, according to a transcript of the hearing. Koeltl said Assured’s complaint is sufficient to raise “a strong inference of fraudulent intent.”

Assured claimed in its complaint that the loans, which were originated by WMC Mortgage Corp., failed to adhere to claimed lending standards. Investors lost money when many of the mortgages defaulted, causing the certificates to drop from AAA-rated to junk status, according to the insurer. Assured said it insured interest and principal payments on $291 million of the Soundview certificates.

“RBS Financial Products purchased and securitized the mortgage loans for the Soundview transaction without regard for the fact that WMC routinely ignored its stated underwriting guidelines and originated mortgage loans without regard to the borrowers’ ability to repay,” Hamilton, Bermuda-based Assured said in the complaint.

The judge granted RBS’s request to dismiss claims under New York insurance law.

A spokesman for Edinburgh-based RBS couldn’t be reached for comment after regular business hours.

The case is Assured Guaranty Municipal Corp. v. RBS Securities Inc., 13-cv-2019, U.S. District Court, Southern District of New York (Manhattan).

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