Nomura Holdings Inc. and Royal Bank of Scotland Group Plc may face $500 million in damages for what a judge called an “enormous” deception in the sale of defective mortgage-backed securities, a ruling that may spur other banks to settle similar claims tied to the 2008 financial crisis. 
 
 Nomura and RBS were excoriated in a 361-page opinion by U.S. District Judge Denise Cote in Manhattan, whose ruling followed the first trial of claims that banks sold flawed securities to government-owned mortgage companies. After a three-week trial, Cote said they misled Fannie Mae and Freddie Mac and set a damages formula that may result in the government winning about half its original claim of $1 billion. 
 
 “The offering documents did not correctly describe the mortgage loans,” Cote, who heard the case without a jury, wrote Monday. “The magnitude of falsity, conservatively measured, is enormous.” 
 
 Before the trial, FHFA had reached $17.9 billion in settlements with other banks, including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. The ruling against Nomura and RBS may encourage other banks to settle mortgage-related suits brought by regulators and private investors rather than face the bad publicity and cost of an adverse judgment, said Robert C. Hockett, a professor at Cornell Law School. 
 
 “They look pretty bad,” Hockett said in an interview. “They look like the strategy has blown up in their faces.” 
 
 Cote ordered the Federal Housing Finance Agency, which filed the case, to propose how much the banks should pay as a result of her ruling. 
 
 ‘Consistently Candid’ 
 
 “Nomura is confident that it was consistently candid, transparent and professional in all of its dealings with Fannie Mae and Freddie Mac,” Jonathan Hodgkinson, a U.S.-based spokesman for the bank, said in an e-mailed statement. Nomura will appeal, he said. 
 
 Linda Harper, a U.K.-based spokeswoman for RBS, declined to comment on the decision. 
 
 FHFA is pleased with the ruling and “looks forward to submitting proposed damages,” the agency’s general counsel, Alfred M. Pollard, said in an e-mailed statement. 
 
 Nomura Shares 
 
 Shares of Nomura fell 2 percent, the most among companies on the Topix index of securities firms, to 787.9 yen at the close of trading in Tokyo, paring this year’s gain to 14 percent. 
 
 “The drop may be due to profit-taking by short-term investors,” said Mitsushige Akino, executive officer at Ichiyoshi Asset Management Co. in Tokyo. “The lawsuit could be the catalyst, although the impact won’t last long because this has been expected.” 
 
 Legal costs are hampering Nomura’s efforts to return its overseas operations to profit. The Japanese firm had a fifth straight annual loss in its businesses abroad in the year ended March as it set aside an unspecified sum for lawsuits in the fourth quarter, financial results showed last month. 
 
 Cote rejected the banks’ claim that the housing crash, and not defects in the loans, was responsible for the collapse of the mortgage-backed securities. 
 
 David Reiss, a professor at Brooklyn Law School, called Cote’s ruling “incredibly thorough.” The judge included detailed factual rulings that may make it difficult for Nomura and RBS to win on appeal, he said. 
 
 ‘Danger Batman!!’ 
 
 The U.S. presented evidence from Nomura executives’ e-mails that suggested the bank might be aware it was selling troubled mortgage-backed securities. One e-mail described some of its mortgages as “crap.” 
 
 Another warned: “Danger Batman!!” 
 
 “The reason for Nomura’s lackluster due diligence program is not hard to find,” Cote said. The bank, competing to buy and securitize loans, sought to foster a “good relationship” with mortgage lenders and ignored “specific warnings about the risk of working with an originator,” she said. 
 
 The banks may use a series of rulings against them by Cote, before and during trial, as issues on appeal, lawyers said. 
 
 The judge barred Nomura from presenting some evidence, including limiting the bank’s ability to prove its claim that Fannie Mae and Freddie Mac didn’t suffer damages from buying the mortgage-backed bonds. The judge also ruled that FHFA didn’t have to prove Fannie Mae and Freddie Mac knew of Nomura’s alleged false statements. 
 
 ‘Expressed Skepticism’ 
 
 Elliott Stein, a Bloomberg Intelligence litigation analyst, wrote that Cote “expressed skepticism about some of Nomura’s contentions and little to none about the FHFA’s case” in closing arguments April 9. 
 
 The FHFA claimed Tokyo-based Nomura cheated Fannie Mae and Freddie Mac by selling them $2 billion of bonds backed by faulty mortgages. RBS underwrote four of the seven securitizations at issue in the trial. 
 
 Nomura and RBS argued that the documents issued in connection with bond sales adequately disclosed the risks and weren’t misleading. The banks also said that any alleged misstatements didn’t factor into decisions by Fannie Mae and Freddie Mac to buy the securities. 
 
 Most of the trial testimony came from experts reviewing Nomura’s diligence in packaging mortgages into securities and disclosures it made to Fannie Mae and Freddie Mac in sales from 2005 to 2007. 
 
 “This case is complex from almost any angle, but at its core there is a single simple question,” Cote wrote. “Did defendants accurately describe the home mortgages in the offering documents for the securities they sold that were backed by those mortgages?” 
 
 ‘Disturbing Examples’ 
 
 In concluding they didn’t, Cote cited what she called “disturbing examples” from Nomura’s files showing it was willing to securitize defective loans. 
 
 In at least 184 of 672 sample loans that were reviewed, home values were inflated and appraisers didn’t believe the figures they provided were correct, Cote said. 
 
 The FHFA also proved that from 45 percent to 59 percent of the loans backing the mortgage securities had underwriting defects that increased their credit risk. 
 
 “Guidelines were systematically disregarded,” she said. 
 
 Edinburgh-based RBS was sued separately by FHFA in federal court in Connecticut for selling $32 billion of its own mortgage-backed securities to Fannie Mae and Freddie Mac. That case is scheduled for trial next year. 
 
 The case is Federal Housing Finance Agency v. Nomura Holding America Inc., 11-cv-06201, U.S. District Court, Southern District of New York (Manhattan). ||||| NEW YORK A U.S. judge on Monday ruled that Nomura Holdings Inc (8604.T) made false statements in selling mortgage-backed securities to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) ahead of the 2008 financial crisis. 
 
 U.S. District Judge Denise Cote in Manhattan ruled for the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, in a ruling that could allow the U.S. regulator to recover around $450 million. 
 
 Cote, who presided over a non-jury trial, said the FHFA was entitled to judgment against Nomura and the Royal Bank of Scotland Plc (RBS.L), which underwrote some of the $2 billion in mortgage-backed securities, in light of misstatements they made in offering documents. 
 
 "The offering documents did not correctly describe the mortgage loans," the judge wrote in a 361-page decision. "The magnitude of falsity, conservatively measured, is enormous." 
 
 The exact amount of damages to be awarded was unclear. Cote ordered the FHFA to submit a proposed judgment with updated damages figures based on her ruling by Friday. 
 
 But Cote, citing figures previously submitted, said the FHFA was entitled to $624.4 million, minus over $178 million in payments it received since launching the lawsuit in 2011. 
 
 The FHFA, which has acted as conservator for Fannie and Freddie since the government took them over in 2008, welcomed the ruling, which nonetheless appeared to deliver less than the $1 billion it sought at trial. 
 
 "It is clear the court found that the facts presented by FHFA were convincing," FHFA General Counsel Alfred Pollard said in a statement. 
 
 Tokyo-based Nomura said in a statement that it plans to appeal, saying it was "confident that it was consistently candid, transparent and professional in all of its dealings with Fannie Mae and Freddie Mac." 
 
 A spokeswoman for RBS declined comment. 
 
 The lawsuit was the first to reach trial out of 18 the regulator filed in 2011 over some $200 billion in mortgage-backed securities that various banks sold Fannie Mae and Freddie Mac. 
 
 The FHFA previously obtained nearly $17.9 billion in settlements with banks including Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and Deutsche Bank AG (DBKGn.DE). Those deals followed a series of adverse rulings by Cote. 
 
 The seven deals at issue in Nomura's case were issued from 2005 to 2007. Nomura was the securities' sponsor, and RBS underwrote four of the deals. 
 
 In her ruling, Cote said the securities sold to Fannie Mae and Freddie Mac "were supported by loans for which the underwriting process had failed," with deals comprised of 45 percent to 59 percent "materially defective" mortgages. 
 
 Nomura's lawyers countered that any losses incurred by Fannie and Freddie were not the banks' fault and were due to overall market conditions. 
 
 But Cote said the banks "have not quantified the loss that they say is due to macroeconomic factors." 
 
 Nor did the banks deny that "there is a link between the securitization frenzy associated with those shoddy practices and the very macroeconomic factors that they say caused the losses to the certificates," she wrote. 
 
 The case is Federal Housing Finance Agency v Nomura Holding America Inc, U.S. District Court, Southern District of New York, No. 11-06201. 
 
 (Reporting by Jonathan Stempel in New York; Editing by Chizu Nomiyama, Alan Crosby and Christian Plumb) ||||| “As its witnesses repeatedly described and as its documents illustrated, Nomura’s goal was to work with the sellers of loans and to do what it could to foster a good relationship with them,” the judge wrote. “Given this attitude, it is unsurprising that even when there were specific warnings about the risk of working with an originator, those warnings fell on deaf ears.” 
 
 During the trial, expert witnesses performed analyses of some of the loans backing the disputed bonds. The experts brought in by the housing finance agency said far more of the loans than the documents stated had characteristics that made them much more likely to default. 
 
 Lawyers for Nomura and R.B.S. argued that those experts’ analyses were seriously flawed. In his closing argument last month, David B. Tulchin, a lawyer for Sullivan & Cromwell, representing Nomura, called the experts’ methodologies “entirely artificial in the extreme.” 
 
 The banks’ lawyers could argue on appeal that even though Fannie Mae and Freddie Mac took steep paper losses on the bonds, their actual losses have been small. All payments on the roughly $2 billion in bonds have been made, except for about $25 million, according a member of Nomura’s legal team, who spoke on the condition of anonymity. 
 
 More broadly, Nomura, in its appeal, will most likely continue to argue that the government’s losses on mortgage bonds were caused by the wider housing crash, making it a legal stretch to tie the losses on those bonds to flaws in the underlying loans. 
 
 Judge Cote, however, said that the banks’ misconduct exacerbated the collapse in the mortgage market. 
 
 “The origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factor that defendants say caused the losses,” she wrote, “but once that collapse started, improperly underwritten loans were hit hardest and drove the collapse even further.”
– If you had to name two banks guilty of selling lousy mortgage packages during the financial meltdown of 2008, it's doubtful you'd tick off the names Nomura Holdings of Japan and the Royal Bank of Scotland. But as Reuters reports, a federal judge yesterday declared that both lied through their teeth when selling their deals to the government-owned entities of Fannie Mae and Freddie Mac. US District Judge Denise Cote of Manhattan, who decided the case on her own, framed it in straightforward terms in a line that Wall Street critics will love: “The magnitude of falsity, conservatively measured, is enormous.” Other banks such as Goldman Sachs and Bank of America opted to settle rather than go to trial, with Nomura and RBS the first two to do so. Legal experts tell the New York Times that they might have been less worried about their reputations taking a hit in the US because they were foreign banks. Nomura plans to appeal, with no word yet from RBS. The ruling puts the banks on the hook for about $500 million in penalties, though that's only about half of the original claim by the government, reports Bloomberg.