Royal Bank of Scotland Group, PLC (“RBS”) may have to pay $ 13 billion in restitution to settle allegations in that it misled investors in mortgage-backed securities. The U.S. Federal Housing Finance Agency (“FHFA”) alleged, in a lawsuit filed on Monday in the U.S. District Court for the District of Connecticut, that RBS overstated the ability of borrowers to repay their mortgage loans by using false and misleading information. Philippe Selendy, a lawyer with Quinn Emanuel, estimated a $ 13 billion potential judgment against RBS based on a previous judgment against RBS in a similar lawsuit filed by the FHFA in the U.S. District Court for the Southern District of New York.
In that case, the judge ruled that the bank made false statements when they sold securities to Fannie Mae and Freddie Mac prior to the 2008 financial meltdown. In Judge Cote’s 361-page decision, she wrote that “[t]he offering documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous.”
Selendy added that given the massive exposure of both cases, it would likely mean that RBS could not afford to settle both cases. Elliott Stein, analyst for Bloomberg Intelligence, suggested that it is likely the bank will reach a deal with the FHFA before the case actually goes to trial, and at a lower price tag.
The U.K. bank, which is 78% owned by the British government, has already put aside £ 5.4 billion (approximately $ 8.5 billion) to cover the cost of past errors and misdeeds, according to its results of the first three months of 2015.
British officials call the lawsuit a blow to its plans to sell its stake in RBS. The sale could have allowed the British government to sell shares to private retail investors which the government accrued through a £ 45 billion (approximately $ 70 billion) bail-out during the 2007-2009 financial meltdown. Reuters reported that the chances of the government selling shares in RBS had risen in 2014 and that it saw a first sale as being possible in the next two years. However, uncertainty around the bank’s MBS settlement and pending lawsuit has overshadowed the bank’s share price.
The costs of this litigation also represent a blow to new RBS boss Ross McEwan, who has embarked on a radical overhaul of the bank since taking the helm in October 2013. He has warned of substantial job cuts and said he would not tolerate new errors. He told The Guardian that “[t]here are still many conduct and litigation hurdles looming on the horizon. I look forward to the day we can focus on the future rather than on legacy issues.”
Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London, told Bloomberg Business that RBS also faces a Justice Department probe regarding the sale of additional mortgage securities which may lead to a fine of about $2 billion in the next three months.
The Connecticut case is FHFA v. Royal Bank of Scotland, 11-cv-01383, U.S. District Court, District of Connecticut (New Haven).
The New York case is FHFA v. Nomura Holding America, 11-cv-06201, U.S. District Court, Southern District of New York (Manhattan.)