Goldman wants to arbitrate – not litigate – credit union’s MBS claims
Remember the spate of fraud cases by the National Credit Union Administration in federal court in Manhattan earlier this fall? Perhaps emboldened by its quiet success in settling claims that failed credit unions were duped into buying fraudulently depicted mortgage-backed securities, NCUA filed complaints against nine banks that sold more than $2 billion of MBS to two credit unions that subsequently went under. The suits, which name Morgan Stanley, Barclays, JPMorgan Chase, Credit Suisse, RBS, UBS, Ally, Wachovia and Goldman Sachs, have all been transferred to U.S. District Judge Denise Cote, who has been notoriously tough on the same defendants (and others) in MBS fraud suits brought by the Federal Housing Finance Agency.
NCUA’s MBS litigation tends to be overshadowed by FHFA’s, given the much bigger losses suffered by FHFA’s wards, Fannie Mae and Freddie Mac, and the huge settlements FHFA has won from JPMorgan Chase and UBS. In the NCUA’s New York cases, in particular, bank defense counsel and the credit union group’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel; Patterson Belknap Webb & Tyler; and Korein Tillery will be making a lot of arguments Judge Cote has already heard in the FHFA suits. In MBS litigation – as you can see from the timeliness and risk disclosure defenses that Morgan Stanley’s lawyers from Davis Polk & Wardwell serve up in their new motion to dismiss the lead case in NCUA’s New York MBS campaign – there’s no longer much new under the sun.
That’s why I was tickled by a motion filed Wednesday by Sullivan & Cromwell, which is defending Goldman in NCUA’s case: Goldman wants to compel arbitration of claims stemming from Southwest Corporate’s purchase of $40 million of MBS. According to the motion, the failed credit union bought those mortgage-backed securities through its longstanding brokerage account with Goldman. And under the terms of Southwest’s umbrella account agreement with the bank, Goldman maintains, NCUA, as the credit union’s liquidating agent, is required to arbitrate any dispute over the investment.
When litigation over auction-rate securities was all the rage, purchasers often ended up in front of arbitration panels rather than judges and juries. But before Goldman filed its motion Wednesday, I hadn’t noticed any MBS defendant attempting to compel arbitration. Nor does Goldman’s brief cite any previous ruling that forced an MBS claimant out of court and into arbitration. When I checked with the Financial Industry Regulatory Authority, which oversees arbitration between brokerages and their clients, I found out that some disputes over collateralized debt obligations that reference mortgage-backed securities have been arbitrated, but there’s not enough MBS-related arbitration to warrant a separate category in FINRA’s database. Even though Goldman’s motion to compel arbitration involves claims on only $40 million of MBS, if Cote grants the motion, she will raise MBS arbitration from obscurity.
NCUA does have defenses against Goldman’s motion, which it laid out in a letter to the bank on Oct. 17. NCUA argues that the 1992 contract between Southwest Corporate and Goldman doesn’t govern NCUA’s claims because, as an initial matter, it was not in the credit union’s files and may have been repudiated by other missing agreements. More substantively, as Goldman explained in the brief it filed Wednesday, NCUA asserts that the statute that created the agency permits it to sidestep or otherwise repudiate Southwest Corporate’s agreement because it hinders the resolution of the credit union’s affairs. Goldman doesn’t think much of NCUA’s arguments, but I’m sure the agency’s positions will be presented more forcefully when it responds to the bank’s brief. NCUA counsel David Frederick of Kellogg Huber declined to comment, via email. Goldman counsel Richard Klapper of S&C didn’t respond to my phone message.
I should note that arbitration isn’t always a boon to defendants. A FINRA panel in 2009, for instance, socked Credit Suisse for an award of more than $400 million for the sale of auction-rate securities to its onetime client STMicroelectronics. Credit Suisse subsequently challenged the award in federal court, but it’s extremely difficult to reverse arbitration results and the bank’s effort failed. In fact, as my Reuters colleague Nate Raymond reported last spring, in the late stages of ARS litigation, plaintiffs often ended up opposing bank efforts to keep disputes in court rather than going to arbitration. Perhaps Goldman should be careful what it’s wishing for in NCUA’s Southwest Corporate case.
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