Pacific Investment Management Co. and other investors have filed suit accusing Citibank NA of ignoring widespread problems with toxic residential mortgage-backed securities (RMBS). The Plaintiffs claim $2.3 billion in losses in the proposed class action filed in a New York state court. It’s alleged that Citibank, in an effort to protect its own business interests, turned a blind eye to pervasive problems in how the underlying loans – allegedly worth more than $13.8 billion – were written or serviced.
Plaintiffs allege that the bank feared jeopardizing its relationship with loan servicers like Washington Mutual, Lehman Brothers Holdings Inc. and Wells Fargo Bank. The putative class action claims the bank breached contracts and its fiduciary duties as trustee for 25 private-label RMBS trusts from 2004 to 2007. Pacific Investments, Prudential Retirement Insurance and Annuity Co. and other investors are class Plaintiffs in the suit.
The Plaintiffs further allege that Citibank has been the target of government investigations and lawsuits over its allegedly deficient servicing operations. The complaint states:
The abysmal performance of the trust collateral – including spiraling defaults, delinquencies and foreclosures – is outlined on monthly remittance reports that Citibank, as trustee, publishes and publicly files with the government. Citibank did nothing to protect the trusts and certificate holders, choosing instead to deliberately ignore the egregious events of default for its own benefit and to the detriment of the class.
PIMCO and other Citibank shareholders previously filed a derivative class action in New York federal court accusing the bank of misrepresenting the health of mortgage-backed securities in some $17.4 billion worth of pools of loans that the bank trusteed. That suit is still pending.
Investors and federal regulators, including the Federal Deposit Insurance Corp. (FDIC), have claimed that, in its role as trustee, Citibank should have spotted heightened default rates, downgrades and other red flags and forced the sponsors of the securities to buy back faulty mortgages, but it failed to do so. In early September, U.S. District Judge Jesse M. Furman dismissed a large portion of the claims from a derivative class action accusing Citibank of mishandling mortgage-backed securities in more than $17 billion worth of pooled loans. Judge Furman found that the majority of the loans are not covered by federal law. Later that month, Judge Furman denied Citibank’s bid to relate the FDIC’s suit over the bank’s alleged failure as a trustee for mortgage-backed securities to a second suit accusing the bank of mishandling mortgage-based securities in pooled loans.
PIMCO, Prudential and the other investors filed the latest suit on their behalf and for all current certificate holders of the RMBS trusts at issue. Their complaint seeks, among other relief, unspecified damages. The Plaintiffs are represented by Jeroen Van Kwawegen of Bernstein Litowitz Berger & Grossmann LLP, and Blair A. Nicholas, Timothy A. Delange, Benjamin Galdston, Brett M. Middleton, Niki L. Mendoza and Lucas E. Gilmore of Bernstein Litowitz Berger & Grossmann LLP. The case is in the Supreme Court of the State of New York for the County of New York.
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