Credit Unions’ Claims Accrued Before They Owned Securities, Says Federal Judge

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LOS ANGELES – A federal judge issued a ruling this morning suggesting that the statute of limitations may have expired on NCUA’s claims that Wall Street banks sold mortgage-backed securities they knew were faulty to corporate credit unions, potentially rendering NCUA suits filed earlier this year moot.

In a preliminary ruling filed in U.S. District Court, Judge George Wu said NCUA claims in a suit brought against RBS Securities for the sale of $1.2 billion of MBS to WesCorp FCU  are “insufficient thus far to demonstrate compliance with at least the applicable federal statute of limitations.”

The Judge’s ruling jeopardizes billions of dollars in claims brought by NCUA in five separate suits against Wall Street banks for the failure of WesCorp and four other corporates.

Wu, the same judge who dismissed NCUA’s civil claims against WesCorp directors earlier this year, said the relevant statute of limitations in such tort cases is three years from the time of the purchase of the securities, some of which were bought as early as 2005, and the clock began running even before NCUA took the one-time $34 billion corporate under conservatorship in March 2009. NCUA , which brought the suit in July as liquidating agent for WesCorp, has argued the clock on the statute of limitations should not start running until then.

NCUA’s argument that the clock did not begin until it took WesCorp under conservatorship is “misdirected,” wrote the Judge. “the correct question is whether the three-year period expired before (NCUA) filed this lawsuit.”

In fact, RBS argues that WesCorp should have known of the claims long before the NCUA take over. “Defendants assert that it is clear that WesCorp, had it been diligent, could have known about the basis for its claims (to the extent those claims have any basis) long enough ago that the applicable statutes of limitation would have run before (NCUA) implemented the conservatorship,” wrote Judge Wu.

“Ultimately,” wrote Judge Wu,“with respect to most claims, the defendants’ explanations for why WesCorp should have known of these particular claims earlier is insufficiently persuasive for purposes of ruling as a matter of law, at least at this stage, that the statutes of limitation have run.”

This morning’s ruling casts also doubt on four other suits brought by NCUA against Wall Street banks for their sale of faulty MBS to failed corporate, including U.S. Central FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution FCU, as well as WesCorp.  Defendants in the other suits include JP Morgan Chase, Goldman Sachs, Wachovia Securities ( now a unit of Wells Fargo), and numerous other Wall Street banking subsidiaries.

Judge Wu has asked NCUA and RBS to file supplemental briefs to bolster the cases and indicated he will issue a ruling on the RBS motion to dismiss in early 2012.