BOSTON (PAI) – In one of the first cases affecting unions and their members to emerge from Wall Street’s financial finagling, a federal appeals court in Boston gave the go-ahead to a class action suit by three union pension funds against a financial firm that cost them — and their members – money by investing in shoddy securities, and lying.
The AFL-CIO Building and Construction Trades Department hailed the Jan. 20 ruling by the 1st U.S. Circuit Court of Appeals, even though the court panel threw out several of the unions’ charges and even though the case still has a long way to go.
In its ruling, the court said Plumbers Local 12’s pension fund, the Plumbers and Pipefitters Welfare and Educational Fund and the NECA-IBEW Health and Welfare Fund could sue Nomura Securities for lying in Nomura’s prospectus about the quality of the mortgage-backed securities it sold them several years ago.
“The lawsuit sought redress for losses suffered when plaintiffs acquired trust certificates representing mortgage-backed securities,” the judges noted. Those are the shoddy securities comprised of subprime mortgages. Their collapse led to the market implosion and pushed the U.S. – and the world – into the Great Recession.
Nomura organized the mortgage-backed securities into trusts, marketed them as having high value and got the three union pension funds to buy them, the suit said. But Nomura also had the duty, under securities laws, not to lie about their value and assets.
When it registered the mortgage-backed securities for offering, Nomura was required “to explain in detail the characteristics of the mortgages that Nomura acquired and transferred to each trust. Federal securities laws impose liability for false or misleading statements causing harm to purchasers,” the judges noted.
After the market collapsed, and the mortgage-backed securities crashed – they were downgraded on Nov. 13, 2007 – the three union pension trusts sued, alleging Nomura lied about their value. A lower court backed Nomura; the appeals court didn’t.
The appellate judges found Nomura particularly let one of the key banks that sent it the mortgage-backed securities, from Nevada, violate underwriting guidelines by making home loans to people who couldn’t repay.
The ruling in Boston was the second win for unions in recent days in cases involving mortgage-backed securities. The first came when the Labor Department got C.S. Capitol Management Inc. of Atlanta to sign a consent decree where it repaid $1.09 million to the Plumbers National Pension Plan, which covers 123,000 people.
The money is “restitution for improperly investing $25 million in risky private placement bonds,” DOL said. The firm also paid a $110,000 fine to the feds.
The Plumbers pension plan hired C.S. to “evaluate and recommend” whether the pension plan should buy bonds issued by the Playa Vista development in Los Angeles. But the investment firm and its owner broke federal pension law (ERISA) by going ahead and buying the Playa Vista bonds on Nov. 9, 1998, without checking the development’s finances – or checking with the Plumbers.
“The bond issuer paid one interest payment to the plan in 2001 and has not made any interest or principal payments since. The suit also alleges the defendants acted imprudently by purchasing bonds with an unduly low rate of return compared to the risk assumed by the plan and by purchasing bonds that subordinated the plan’s investment to that of Playa Vista A bondholders. As a result, it was less likely that the plan would recover its investment and interest,” DOL said.