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Citi, Goldman, UBS to Pay $235M in RMBS Settlement

moneyThree financial institutions—Citigroup Global Markets [1], Goldman Sachs [2], and UBS Securities [3]—have agreed to a settlement for $235 million with a pension fund to resolve allegations of fraud on the part of the underwriters involving residential mortgage-backed securities (RMBS) sold by Residential Capital, according to media reports [4].

The plaintiffs in the case, New Jersey Carpenters Health Fund, filed a motion for preliminary settlement approval on Friday to end a lawsuit involving the sale of RMBS to the health fund and other investors by Residential Accredited Loans, Inc. (RALI) and other affiliates during the run-up to the financial crisis, in 2006 and 2007.

According to the class-action lawsuit [5], which was originally filed in September 2008, the underwriters made "material misstatements and omissions of material facts" in the offering documents, which was in violation of the Securities Act. The complaint also alleges that Residential Capital and the defendant underwriters "failed to conduct adequate due diligence with respect to the originators' compliance with the loan underwriting guidelines stated in the offering documents." According to the complaint, Residential Capital and the underwriter defendants also failed to disclose weaknesses in the loans for 59 offerings.

The plaintiffs allege that Residential Capital, which had become one of the world's largest issuers of mortgage-backed securities, sought out ratings agencies that gave favorable ratings to its subprime mortgages. These mortgages later received junk ratings when they went into default or foreclosure, according to the plaintiffs.

The defendants gained a partial victory in 2010 when a district judge threw out 55 of the offerings, leaving just four at issue in the case; however, on appeal, 13 of the offerings were restored to the case in April 2013, according to the motion filed on Friday. A partial settlement was reached three months later in July 2013 when the issuing defendants agreed to pay $100 million in cash to resolve the claims against them. The $235 million settlement was originally reached in November 2014 and agreed to on Friday, pushing the total of settlements in the case up to $335 million.

"Over seven years, the case had many difficult twists and turns, including an initial denial of class certification that would have meant an end to the case  had we not kept pursuing it," said Joel Laitman, attorney for the New Jersey Carpenters Health Fund. "In the end, it is a favorable result for investors, particularly in light of continued risks."

Spokespeople from Goldman Sachs and Citigroup declined to comment on the settlement. Representatives from UBS were not immediately available for comment.