The Federal Deposit Insurance Corp. has filed lawsuit in the Circuit Court of Montgomery County, Ala., and in the U.S. District Court in New York, against eight of the largest international investment banks. Securities fraud that contributed to the 2009 collapse of Colonial BancGroup was alleged in the suits. Named as Defendants in the complaints filed by the FDIC are Bank of America, Merrill Lynch, Citicorp Mortgage Securities, Citigroup Financial Products, Credit Suisse Securities (USA) LLC, J.P. Morgan Securities, RBS Securities, UBS Securities, HSBC Securities and a host of mortgage servicing companies, including Countrywide.
The suits allege that 31 mortgage-backed securities sold to Colonial were sold in criminal violation of the Alabama Securities Act and the U.S. Securities Act of 1933. The complaints say the Defendants lied about the credit quality of the loans that backed the securities, including loan-to-value ratios and the number of properties that were not primary residences. The 31 securities were said to be worth a total of $816 million. The FDIC says it can prove that more than 50 percent of the mortgages that backed them were fraudulently represented.
The three suits together call for damages of not less than $425.5 million. Colonial BancGroup, then the second largest bank in Alabama, was put into receivership by the FDIC in 2009, shut down with $25.4 billion in assets. It is the third largest bank failure in the U.S. since 2008, the first full year of the financial crisis.
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