Bank of America Corporation (NYSE:BAC) and U.S. Bancorp (NYSE:USB) could face litigation over charges of neglect in their role as trustees of Washington Mutual Inc. The ruling of a federal judge Katherine Forrest ,was passed on Friday and held that both lender’s fails to protect the investor’s interest in mortgage-backed securities of the said pension fund.
The U.S. District Judge, narrowed the scope of the lawsuit from all charges initiated by the Chicago pension fund down to only a few saying the fund could press charges only to 41 of the many trusts managed by the bank.
The City of Chicago – Policemen’s Annuity and Benefit Fund charged a North Carolina based trustee Bank of America Corporation (NYSE:BAC) and also the Minneapolis based successor trustee, U.S. Bancorp (NYSE:USB), for causing multimillion dollar loss. The plaint alleged defendants did not take appropriate steps to ensure completeness of data regarding loans, secure possession of loan records ,and negotiate a buy back of defective loans with Washington Mutual.
Bank of America Corporation (NYSE:BAC) spokesman Lawrence Grayson refused to comment on the situation. U.S. Bancorp (NYSE:USB) spokeswoman Teri Charest and lawyer for the plaintiff pension fund, Max Schwartz also made no attempt at an immediate response.
The lawsuit was filed in April only eight days when William Pauley, another Manhattan federal judge, allowed the pension funds initiate legal proceedings against The Bank of New York Mellon Corporation (NYSE:BK). This was a precedent setting case where investors of mortgage-backed securities were allowed to brave a trustee under The federal Trust Indenture Act of 1939.
In the 44-page long final decision passed in a Manhattan court, Judge Forrest said the Chicago policemen’s fund had a valid case to institute proceedings against its trustees in respect of five trusts in which it invested. The Fund could also file a suit regarding holdings not owned by it if those were cross-collateralised by lenders that securitised its own certificates.
According to Forrest’s decision “investors holding trenches backed by the same loan group as plaintiff’s trenches have the ‘same set of concerns’ as plaintiff”Deciding on the case the Judge took precedence from a September 6th decision on a case against The Goldman Sachs Group, Inc.(NYSE:GS) that was passed in New York.
The 2nd U.S. Circuit Court of Appeals had also allowed a pension fund to sue on behalf of certificate not owned or controlled by it on the grounds that the inherent interest was the same irrespective of ownership. The defendant has filed for an appeal proceeding against the decision saying it could result in possibly “tens of billions of dollars of potential liability” to the Wall Street player.
Washington Mutual, was acquired by JPMorgan Chase & Co.(NYSE:JPM) on September 25, 2008, after the (then) largest savings and loan fund based in the U.S., had stumbled down. The FDIC oversaw the transaction till its completion.
The shares of U.S. Bancorp (NYSE:USB) were up 0.66% to $32.02 while the shares of Bank of America Corporation (NYSE:BAC) were up 1.72% to $1.64.
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