Nomura and RBS misled investors

A US judge ruled that Nomura and Royal Bank of Scotland had misled investors in mortgage-backed securities, the first court verdict in a case that has lasted almost four years and seen the world's biggest banks pay more than $20bn to settle allegations of pre-crisis wrongdoing.

Denise Cote, a senior federal judge on the US district court for the southern district of New York, ruled on Monday that the "offering documents did not correctly describe the mortgage loans", with the securities constructed from loans to borrowers whose chance of repaying was much lower than advertised. "The magnitude of falsity, conservatively measured, is enormous," she said.

She ruled in favour of a government agency acting on behalf of Fannie Mae and Freddie Mac, whose vast portfolios of mortgage-backed securities plummeted in value during the crisis, jeopardising the companies' future and triggering a controversial government bailout.

The Federal Housing Finance Agency, conservator to Fannie and Freddie, sued 19 financial institutions in 2011. 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.

In an often scathing judgment, Judge Cote found that the defendants' case was flawed. Nomura had called appraisers to show that the values they ascribed to mortgaged properties were defensible. "This project largely backfired," she wrote.

Alfred Pollard, general counsel of the FHFA, said the agency was "pleased with the court's decision" and looked "forward to submitting proposed damages". The FHFA had originally sought $1.1bn from Nomura and RBS.

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"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.

RBS was an underwriter on some of the securities at question in this case but it is due to fight a separate case, with a much larger potential pricetag, in a separate court.

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

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