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BUSINESS | August 10, 2012, 7:15 p.m. ET
Lenders Sued in Colonial Bank Failure
By DAN FITZPATRICK
The Federal Deposit Insurance Corp. sued 11 major banks, alleging they misled failed Colonial Bank when they sold the Alabama mortgage lender $388 million in mortgage-backed securities.
The FDIC on Friday sued units of banks, including five of the biggest U.S. mortgage companies, J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc. The FDIC alleges the banks misrepresented the risk of mortgage-backed bonds they sold Colonial Bank, by making untrue or misleading statements about the financial health of mortgage borrowers and property appraisals.
The agency seeks at least $189 million in damages, plus court costs and attorney fees.
A Wells Fargo spokesman said, "We believe the allegations are entirely without merit, and we intend to defend ourselves in court." Bank of America, Citigroup and Ally declined to comment. J.P. Morgan didn't immediately respond to a request for comment.
The action, filed Friday afternoon in U.S. District Court for the Southern District of New York, resembles in form and substance a suit filed last September by the Federal Housing Finance Agency, the federal agency that oversees government-backed mortgage investors Fannie Mae and Freddie Mac. That suit alleged misrepresentations on $196 billion of mortgage securities that the mortgage companies purchased, mostly between 2005 and 2008.
Colonial, a Montgomery, Ala., unit of Colonial BancGroup Inc., failed Aug. 14, 2009, in the biggest U.S. bank failure since the 2008 collapse of Washington Mutual Inc. The company had $25 billion in assets at the time of its collapse, which the FDIC estimated will cost its federal deposit-insurance fund $2.8 billion. The suit's filing just days before the three-year anniversary of the collapse may indicate the agency faced a deadline for pursuing claims. The FDIC didn't immediately respond to a request for comment.
Lee Farkas, former chairman of Taylor, Bean & Whitaker Mortgage Corp., was sentenced last summer to 30 years in prison after being convicted of running a multibillion-dollar fraud that led to the collapse of Colonial.
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