In a deal reached with the US Justice Department, Société Générale will pay $50M to settle civil charges accusing the bank of hiding that the residential mortgaged-backed securities (RMBS) that it promoted and sold were of poor quality. According to the government, the French bank made false representations involving the SG Mortgage Securities Trust 2006-OPT2, a $780M debt issue that it organized more than a decade ago. As part of the settlement, Société Générale admitted that it hid how many of the loans underlying the RMBS shouldn’t have been securitized or were not properly underwritten.
In a statement of facts, Société Générale took responsibility for its conduct. The bank admitted that it falsely represented that loans underlying the residential mortgage-backed security had been originated according to the underwriting guidelines of the loan originator. It also represented to investors that when the SG 2006-OPT2 was originated, no loans in the RMBS had a combined loan-to-value ratio or loan-to-value greater than 100%–this is a claim that Societe General is now admitting was false.
As a result of the bank’s actions, said the DOJ, investors lost “significant” amounts of money and they may lose more. Investors that were impacted include a number of financial institutions that are federally insured.
Other European banks to recently resolve mortgage securities cases with the US government include Credit Suisse (CS), which settled for $5.3B and Deutsche Bank (DB) for $7.2B
Deutsche Bank is Defendant in Another RMBS Lawsuit Involving Dozens of Trusts
Deutsche Bank is contending with yet another residential mortgage-backed securities fraud case. This week, U.S. District Judge Jesse Furman in Manhattan narrowed but would not dismiss a class action securities fraud case accusing the German lender of failing to execute its “essential duties” as trustee of over 60 trusts that issued notes backed by over $90B of home loans.
The plaintiffs include portfolios from Pacific Investment Management Co. (PIMCO) and BlackRock Inc. (BLK) and Prudential Investments-run funds. The complaint believes that the firm should be liable to investors for losses sustained on RMBS that were not properly underwritten. The plaintiffs are the owners of over $2.6B of notes that were issued by the trusts.
Although Judge Furman granted Deutsche Bank’s request to drop claims regarding conflict-of-interest, he allowed the event-of-default, servicer-notification, and representation-and-warranties claims to remain.
Jewish Charitable Trust Sues Deutsche Bank for $3B
Deutsche Bank also is dealing with a different kind institutional investor fraud lawsuit, this one brought by the Wertheim Jewish Education Trust LLC. The Jewish charitable trust is accusing the firm of wrongly withholding up to $3B from the heirs of the Wertheim family. The family members wants the funds back, as well as an accounting of assets.
The Wertheims had placed the funds in accounts set up at the financial institution that is now Credit Suisse Group during the 1930’s before the Nazis came to power. The accounts were later moved to Deutsche Bank. The charitable trust contends that the German lender is not cooperating with the heirs in the recovery and restoration of the funds.
Meantime, Deutsche Bank claims the accusations are “unfounded” and that all proceedings brought against the bank over this matter have been decided in its favor.
Société Générale Agrees To Pay $50 Million Penalty To Settle RMBS Fraud Claims, Justice.Gov, January 20, 2017
Deutsche Bank fails to end BlackRock, Pimco mortgage debt lawsuit, Reuters, January 24, 2017
Deutsche Bank Sued in U.S. by Jewish Trust Over $3 Billion, Bloomberg, January 19, 2017