Nomura First to Fight U.S. Toxic Debt Claims at Trial

Nomura Holdings Inc. will defend claims by a U.S. regulator that it sold defective mortgage-backed securities to Fannie Mae and Freddie Mac before the 2008 financial crisis, becoming the first bank to take such a case to trial.

The Federal Housing Finance Agency, suing on behalf of the two government-owned companies, claims Nomura sold them $2 billion of bonds backed by faulty mortgages. The agency seeks more than $1 billion in damages in the trial, which is set to start Monday in Manhattan federal court.

Nomura, the Tokyo-based investment bank, is choosing to fight claims that 16 other banks settled after the blow-up of toxic mortgage bonds led to the global credit crunch. FHFA has reached $17.9 billion in settlements from banks including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs & Co. If Nomura prevails at trial, it may embolden other firms facing mortgage-related suits to defend themselves rather than settle.

“There’s going to be a very important signal sent, whether Nomura wins or loses,” said Robert Hockett, a professor at Cornell University Law School. If Nomura loses, the strategy of other banks to settle will be vindicated, said Hockett, who isn’t involved in the FHFA cases and has been an expert witness for investors in private suits.

Royal Bank of Scotland Group Plc, which joins Nomura as a defendant, underwrote three of the seven securitizations at issue in the trial.

Misleading Documentation

RBS, based in Edinburgh, was sued by FHFA in federal court in Connecticut for selling $32 billion of its own mortgage-backed securities to Fannie Mae and Freddie Mac. That case is expected to go to trial in 2016.

FHFA sued Nomura over securities issued from 2005 to 2007, claiming it misled the two finance companies about the quality of loans backing the bonds. Nomura marketed the securities with faulty appraisals, misrepresentations of home values and borrowers’ finances and misleading statements about underwriting criteria, the agency claims.

Nomura and RBS argue that the documents issued in connection with the bond sales adequately disclosed the risks and weren’t misleading.

Nomura and RBS also say that any alleged misstatements didn’t factor into Fannie Mae’s and Freddie Mac’s decision to buy the securities. The banks claim in court documents that some or all of the losses incurred by the companies were caused by the crash of the housing market.

Nomura said it properly reviewed the underwriting of the loans that were packaged into the securities. Nomura itself invested in the riskiest portion of the mortgage-backed securities it issued and lost money on them, the bank said.

Pretrial Rulings

Nomura, which sold fewer mortgage-backed securities to Fannie Mae and Freddie Mac than many of the other banks, risks less by going to trial. As a Japanese bank, the threat of public-relations damage from a U.S. trial isn’t as grave, said Stacey Slaughter, a partner with the Minneapolis firm Robins Kaplan LLP.

“Perhaps Nomura believes its position is different from others like JPMorgan and Goldman Sachs, whose reputations in the U.S. are impacted by headlines and popular opinion,” Slaughter said in an e-mail.

U.S. District Judge Denise Cote, who will hear the case without a jury, has issued a series of pretrial rulings that have gone against the defendants.

She barred Nomura from presenting evidence, including limiting the bank’s ability to prove its claim that Fannie Mae and Freddie Mac didn’t suffer damages from purchasing the mortgage-backed bonds. The judge also ruled Nomura didn’t have the right to have the case tried by a jury and that FHFA didn’t have to prove that the mortgage firms knew of Nomura’s alleged false statements.

More Careful

For Nomura and RBS to succeed, they will have to overcome Cote’s rulings as well as the widely held perception that banks packaged toxic debt and pushed it off on unsuspecting investors, said David Reiss, a professor at Brooklyn Law School.

Reiss said Nomura may believe it can show it was more careful than other banks in structuring mortgage-backed bonds and stands a good chance of winning.

As the trial approaches, a settlement becomes less likely, Bloomberg Intelligence analysts Elliott Stein and Alison Williams said yesterday. Stein said a resolution this late in the proceedings may exceed his earlier estimate of $100 million to $300 million, particularly if Cote’s rulings continue to favor FHFA.

Because there is no jury, the government and banks are submitting written testimony from their witnesses, who will then be questioned in court by the other side. The trial is expected to take a month.

The case is Federal Housing Finance Agency v. Nomura Holding America Inc., 11-cv-06201, U.S. District Court, Southern District of New York, (Manhattan).

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