Wells Fargo & Co., Deutsche Bank AG and the Royal Bank of Scotland PLC have agreed to pay $165 million to settle a class action lawsuit over their underwriting of $7.7 billion worth of mortgage-backed securities issued by bankrupt subprime lender NovaStar.

The proposed settlement, filed in federal district court in Manhattan, requires approval from U.S. District Judge Deborah A. Batts. If that approval is granted, the settlement would resolve longstanding claims from investors, including union pension funds, who allege that Deutsche Bank Securities Inc., RBS Securities Inc. and Wachovia Capital Markets LLC, (Wells Fargo Advisors LLC) lied in offering documents on securities issued by NovaStar Mortgage Inc.

When the bulk of the mortgages underlying those securities went into default during the financial crisis, the investors lost significant amounts of money. The settlement comes after years of litigation.

According to the settlement documents, Plaintiffs would receive $30.84 per $1,000 of face value of the securities they purchased, bringing it in line with previous residential mortgage-backed securities settlements. Holders of around $2.2 billion worth of NovaStar-issued mortgage-backed securities are expected to opt out of the settlement, according to the settlement documents. The settlement, if approved, would bring to an end litigation that started in June 2008.

The dispute arose in 2006, when NovaStar issued six securities tied to residential mortgage-based securities. The securities, which together held more than $7.7 billion in assets, were underwritten by Deutsche Bank, RBS and Wachovia. By June 2009, more than half the mortgages behind the securities had defaulted amid the housing collapse, causing massive investor losses, according to the suit, which a pension fund filed in June 2008.

The New Jersey Carpenters Health Fund, which had invested $100,000 in one of the securities, filed suit against subprime lender NovaStar, the underwriting banks, and ratings agency Defendants such as Moody’s and Standard & Poor’s. The ratings agencies were dismissed from the suit in April 2011. The class action alleged that offering documents filed when the securities were issued failed to disclose that NovaStar had “abandoned its underwriting standards” to increase the number of mortgages it could originate. After a pair of dismissals, the Second Circuit revived the suit in March 2013. Judge Batts then granted class certification.

The Plaintiffs are represented by Joel P. Laitman, Michael B. Eisenkraft and Christopher Lometti of Cohen Milstein Sellers & Toll PLLC. The case is New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group PLC et al. (case number 1:08-cv-05310) in the U.S. District Court for the Southern District of New York.

Source: Law360.com

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