Fulton County Courthouse
Fulton County Courthouse (File photo)

The Federal Home Loan Bank of Atlanta has settled the final claims in a complex suit alleging financial institutions defrauded it of hundreds of millions of dollars in the years leading up to the Great Recession.

The FHLB, which helps member banks provide low-interest loans to make housing affordable, claimed it invested more than $6 billion in private-label mortgage-backed securities, believing that they had been vetted by underwriters to ensure that borrowers were creditworthy and had sufficient collateral. Instead, FHLB claimed, its officials discovered they bought the securities on the basis of “false and misleading” information provided by, among others, defendants UBS Securities, J.P. Morgan Securities and Countrywide Financial Corp. (now part of Bank of America.)

The details of settlements are not revealed in court filings, and attorneys for the parties either did not respond to requests for comment or said they could not discuss the case. The suit in Fulton County State Court involved nearly 40 lawyers. Bondurant, Mixson & Elmore partners H. Lamar “Mickey” Mixson, David Brackett and Ronan Doherty, and associates Bret Hobson and Naveen Ramachandrappa represented the plaintiff.

Defense counsel included B. Warren Pope, Bethany Rezek and Katherine Grayson of King & Spalding and Halsey Knapp of Krevolin & Horst for Countrywide; Bank of America’s team included Thomas Richey and William Custer of Bryan Cave; while Eric Taylor and Scott Zweigel of Parker, Hudson, Rainer & Dobbs and Jo Meeks of James Bates Brannan Groover represented UBS.

Sharon Cook, director of corporate communications for FHLB, said only, “We are pleased to have completed the litigation process and pleased with the outcome.”

The suit was one of many that sprang from the collapse of the housing bubble in late 2007, when financial institutions across the country were shaken and in many cases destroyed by having invested in mortgage-backed securities.

In 2013, JPMorgan Chase—J.P. Morgan Securities’ parent company—paid $13 billion to settle U.S. Department of Justice claims regarding its role in the sale of such securities. Countrywide settled a federal suit in California last year for $500 million in what the plaintiffs’ lawyers described as the nation’s largest mortgage-backed securities class action.

On Aug. 19, attorneys for the final defendant in the Atlanta litigation, UBS Securities, signed a mutual dismissal with prejudice with FHLB in Fulton County State Court. Countrywide, Bank of America and J.P. Morgan Securities settled last year.

The suit filed in January 2011 included as defendants three Countrywide entities and Bank of America, as successor to Countrywide; J.P. Morgan Securities and Bear Stearns & Co. which Morgan acquired in 2008; and USB Securities. There were also 50 “John Doe” defendants who were to be named later.

“This action concerns the [FHLB]‘s investment in more than $6 billion in Private Label Mortgage Backed Securities,” the complaint said. “Although the details of those securities can be complex, the misconduct that gives rise to this case is not. Simply stated, the defendants that created and offered these securities for sale did not tell the truth in the documents they used to sell their securities to the bank and other investors.”

The FHLB had been assured that the securities were backed by mortgages that had been screened according to specific “underwriting standards” it said. “It has now become apparent, however, that those representations were false because the underwriting standards described in the offering documents were abandoned.”

For example, it said, testimony and documents released by the Securities and Exchange Commission showed that Countrywide “repeatedly ignored its underwriting standards to originate any mortgage that Countrywide thought it could sell to investors like the [FHLB] as part of a mortgage-backed security.”

The defendants themselves, the complaint said, were aware that “nearly half the mortgages used to back the securities they were selling did not adhere to the underwriting standards represented in the offering documents,” but proceeded to sell them anyway.

The complaint included allegations that Countrywide and J.P. Morgan engaged in a pattern of racketeering activity including theft by taking, theft by deception, residential mortgage fraud and violations of the Georgia Securities Act. The FHLB also claimed the defendants violated federal law by making false statements to a federal home loan bank and that they committed bank fraud. The suit sought treble damages on the racketeering counts.

Similar suits elsewhere were removed to federal courts, and the defendants tried the same tactic here. But U.S. District Judge Thomas Thrash ordered that it be remanded to state court.

In response pleadings, the defendants argued that the FHLB had been thoroughly informed as to the hazards associated with the securities. The offering documents and others cited by FHLB “establish that plaintiff, a Federal Home Loan Bank with extensive resources and sophistication in the home mortgage market, purchased billions of dollars of senior residential mortgage-backed securities (RMBS) despite prominent disclosures about the risks of purchasing RMBS and access to extremely detailed information about the mortgage loans underlying the securities,” said a 2011 defense brief in support of a motion to dismiss.

“The offering documents expressly disclosed that there would be exceptions to and departures from mortgage underwriting guidelines, and provided a mechanism for curing such anticipated defects,” it said. “Multiple courts have dismissed similar claims because of precisely such disclosures about departures from underwriting guidelines.”

“It is well settled that no fraud, RICO, or negligent misrepresentation case can proceed where the allegedly concealed information was, in fact, openly shared with the plaintiff, and where plaintiff’s own pleading alleges, or incorporates, that fact,” the defense filing said.

“Despite the fact that plaintiff held the certificates during the darkest days of the mortgage and global financial crisis,” the defense filing said, “it did not and could not even allege that there was a single missed principal or interest payment on the certificates it purchased. Plaintiff’s inability to allege that it failed to receive the payments it bargained for reveals its accusations of fraud and RICO conspiracies for what they are: a cynical attempt by a multibillion-dollar RMBS investor to use Georgia’s laws to extract a windfall recovery.”

The cases were Federal Home Loan Bank of Atlanta v. Countrywide Financial Corp. and J.P. Morgan Securities, Nos. 11EV011779-01 and 02.