Royal Bank Scotland PLCÂ (RBS, Financial) and Nomura Holdings Inc. (NMR, Financial) are under the scanner for allegedly misleading investors, according to a report by Financial Times. After the case procedures of four years, Denise Cote, a U.S. judge, ruled against the financial holding companies and in favor of Federal Housing Finance Agency. On trading day Monday, Nomura shares touched a high of $6.7499 with a previous close of $6.68 . Royal Bank Scotland, on the other hand, saw shares reach a high of $11.21 on trading day Monday.
Investor impact
Investors of both the financial institutions must be surely grappled with disbelief and anger. The judge has said that investors have been given the wrong impression about the mortgage backed securities. Denise, who has fought for the the federal securities and ERISA class-action lawsuits in the past, called this case an “enormous” deception. Who knows other financial institutions may now initiate attempts to settle claims on the one's that were made during the U.S. financial crisis of 2007–08.
The judgment
Denise Cote, who ruled without the support of a jury, said that the offering documents did not give a proper description of the mortgage loans. She also said that the extent to which the description given were untrue and incorrect were very large in size. The companies were accused of inflating values of homes behind some mortgages. Accusations were also made that these companies said that homes were owner-occupied, when in reality, it was the opposite. The Federal Housing Finance Agency (FHFA), an independent federal agency, received around $17.9 billion in settlements after settling claims with other financial institutions. Some of them were JP Morgan Chase & Co (JPM, Financial) and Goldman Sachs Group, Inc. (GS, Financial) to mention a few. Given a choice, many companies chose to settle allegations than facing court proceedings.
Memory lane
Fannie Mae and Freddie Mac had put their money, which ran into millions of dollars, in mortgage-backed securities. No doubt huge amounts of profit were generated in the past, but due to the bust, Fannie and Freddie suffered huge losses. This resulted in the federal takeover of the companies. For this case, around $450 million will be recovered by the the U.S. Regulator. Though it is not very clear how much damages will be awarded, the Federal Housing Finance Agency will have to provide a proposed judgment with updated damages latest by Friday. According to Denise, the FHFA is supposed to receive around $624.4 million. Out of this amount, $178 million has already been given in payments. RBS spokesperson Linda Harper has refused to comment on the ruling. A spokesperson of Nomura said that they would appeal as they were transparent and professional in its transactions. The company will challenge the ruling at the U.S. Court of Appeals,he said. Alfred M. Pollard, the General Counsel of FHFA said that they were happy with the judgement. The court found the facts presented to be true, he said. He also looked “ahead to sending suggested problems.”
Outlook
It seems that RBS investors are not a happy bunch. RBS is not only facing the heat for this mortgage loan issue, but also for selling $32 billion of its own mortgage-backed securities to Fannie Mae and Freddie Mac. Hearing for this case may begin in 2016, in all probability. However, one thing is clear. If RBS and Nomura had won the trial, other financial institutions would have questioned the prior settlement of record penalties. Nomura shares have not been performing well since quite some time now. Share value dropped in early trading Tuesday on the Tokyo trading exchange. Mitsushige Akino, an analyst at Ichiyoshi Asset Management Co. said that the drop may be because of the profit-taking by short-term investors. The overseas business of Nomura has been unprofitable given that the company spends a lot on legal costs. Now investors have to wait for the results after the ruling has been challenged. Though it may take a long time, Nomura has the opportunity to say that the losses suffered by the government on mortgage bonds were due to the wider housing crash.
