Nomura Holdings America and affiliates will pay a $480 million penalty to resolve allegations that it misled investors about the quality of shoddy mortgage-backed securities during the run-up to the financial crisis, according to the Justice Department.
The US Attorney’s Office for the Eastern District of New York claimed that Nomura’s investors, including university endowments, retirement funds and federally insured financial institutions, suffered “significant losses” due to the bank’s misconduct.
“This settlement holds Nomura accountable for its fraudulent conduct in connection with its residential mortgage-backed securities offerings, which caused substantial harm to investors and contributed to the financial crisis of 2008,” said US Attorney Richard P. Donoghue. “The Department of Justice, this office and our partners will continue to aggressively pursue wrongdoing in our financial markets, including, as appropriate, financial crisis-era misconduct.”
“The actions of Nomura resulted in significant losses to investors, including Fannie Mae and Freddie Mac, which purchased Nomura residential mortgage-backed securities backed by defective loans,” said Jennifer Byrne, assistant inspector general with the Federal Housing Finance Agency-Office of Inspector General.
According to the Justice Department, Nomura knowingly securitized defective mortgages in its RMBS and misled investors about the quality and characteristics of those loans. Among the governments claims:
- In presentations about its RMBS program, Nomura claimed that its due-diligence process was “extensive,” “disciplines” and “carefully developed.” The bank also told investors that it worked only with “hand-picked” and “industry leading” due diligence vendors, and that its “loan performance should surpass industry standards.” According to the Justice Department, those claims were false; Nomura knew that thousands of loans it had securitized in its RMBS did not comply with guidelines or were supported by “inflated and potentially fraudulent appraisals.” Nomura purposely withheld these deficiencies form investors. The bank also allegedly securitized many defective loans as “favors” to originators – including “loans that one originator openly described to Nomura as ‘dogsh*t,’” according to the Justice Department.
- The bank also allegedly knew that a significant number of loans it securitized hadn’t even gone through its own due diligence process – a process the bank allegedly knew was already compromised. Nomura’s head of RMBS due diligence said that the bank was “turning into the lemming of the mortgage business,” “following the herd,” and compromising its standards “to comply with the masses in pursuit of volume.”
- Despite knowing it was compromised, Nomura allegedly failed to address weaknesses in its due diligence process and continued to do business with originators that, according to its own due diligence employees, were “extremely dysfunctional,” had “systemic” underwriting issues and employed “questionable” origination practices.
- Despite knowing that its due diligence was already ineffective, in min-2006 Nomura introduced “more liberal” underwriting guidelines – guidelines so lax that they allowed for the purchase of loans that the bank’s own due diligence team described as “sheer lunacy.”