SEC Charges Royal Bank of Scotland Subsidiary with Misleading Investors in Subprime RMBS Offering

The Securities and Exchange Commission recently charged RBS Securities Inc., a subsidiary of the Royal Bank of Scotland plc, with misleading investors in connection with its promotion of a $2.2 billion offering of a subprime residential mortgage-backed security (“RMBS”). The RMBS, called Soundview Home Loan Trust 2007-OPT1, was offered to the investing public by RBS in May 2007. RBS, formerly known as Greenwich Capital Markets, agreed to pay more than $150 million to settle the SEC charges, which will be used to compensate investors.

“RBS misled investors about the quality and safety of their investments by claiming that the subprime loans backing the multi-billion dollar offering were ‘generally’ in compliance with the lender’s underwriting guidelines,” said the SEC. In truth, “almost 30% of the loans backing the offering deviated so much from the lender’s underwriting guidelines that they should have been kicked out of the offering entirely,” said the SEC.

“In its rush to meet a deadline set by the seller of these loans, RBS cut corners and failed to complete adequate due diligence, with predictable results,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Today’s action punishes that misconduct and secures more than $150 million in relief for those harmed by this shoddy securitization.”

RBS told investors the loans backing the offering were “generally in accordance with” the lender’s underwriting guidelines, which compare the value of the home relative to the mortgage and the borrower’s ability to repay the loan. Due diligence prior to the offering, however, had revealed to RBS that almost 30% of the loans failed to meet the underwriting guidelines. Thus, RBS knew or should have known that its representation was false. As a result, even though investors knew they were taking a risk by investing in RMBS, RBS gave a misleading or false impression of the quality of the loans backing the offering and the likelihood of their repayment.

The SEC’s complaint charges Stamford-based RBS with violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. Without admitting or denying the SEC’s allegations, RBS agreed to a final judgment that orders it to disgorge $80.3 million, plus prejudgment interest of $25.2 million, and pay a civil penalty of $48.2 million.

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