Nomura and RBS accused of 'deceit' in mortgage securities trial

Nomura and Royal Bank of Scotland were accused of "incompetence" and "deceit" in packaging toxic mortgages into securities, at the culmination of four-year-old US government litigation that has already extracted more than $20bn from other banks.

The Federal Housing Finance Agency sued 19 financial institutions in 2011 on behalf of Fannie Mae and Freddie Mac, the government-backed mortgage companies, which teetered during the financial crisis as their massive portfolio of securities plunged in value.

Seventeen of the institutions, ranging from JPMorgan Chase to Barclays, have agreed to pay more than $20bn to settle allegations that they mis-sold the securities to Fannie and Freddie.

Nomura and RBS are the only holdouts.

David Tulchin, a lawyer for Sullivan and Cromwell, representing Nomura, said that the decline in value in the mortgage-backed securities, for which the FHFA is seeking more than $1bn in compensation, was caused by the 2008 economic shock rather than any weaknesses in the loans that were bundled into securities.

The FHFA pointed to internal emails sent at the banks, with employees describing the quality of loans underpinning the securities. "Danger Batman!" wrote one Nomura employee. Another said loans included in a security were "crap".

"What we have seen at Nomura and RBS can only be described as colossal incompetence, ignorance and deceit," said Philippe Selendy, a lawyer for Quinn Emanuel, representing the FHFA.

The FHFA said the banks failed to ensure the loans met guidelines for loan-to-value and other metrics such as whether the borrower was intending to live in the property.

The banks said the underwriting documents never promised perfection but enough loans were sufficiently high quality.

The two sides battled, using a variety of mathematical models. Mr Tulchin told the district court in New York that the FHFA's case had relied on testimony from expert witnesses, which had used "entirely artificial" methodologies in models that had "never been used, tested or employed anywhere in the commercial world". He noted that one witness was paid more than $1m by the FHFA.

Judge Denise Cote is set to issue a ruling on the case in the coming weeks. RBS is due to fight a separate case, with a much larger potential pricetag, in a separate court.

If Nomura and RBS prevail it would call into question the decisions by the other institutions to settle for record penalties. But the banks have never rated their chances highly after a series of adverse rulings from the judge. Lawyers expect an appeal whatever the final judgment from Judge Cote.

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