(CN) - MoneyGram is seeking to recover more than $260 million in losses from a group of investment banks that allegedly sold fraudulent collateralized debt obligations and residential mortgage backed securities between 2005 and 2007.
     MoneyGram claims Deutsche Bank, Goldman Sachs, The Royal Bank of Scotland, and UBS AG along with their affiliates knowingly sold the faulty securities to the Minnesota-based global money transfer company which "boosted each bank's stock price and resulted in record compensation and bonuses on Wall Street."
     According to the complaint, the investments banks marketed the CDOs as "investment grade" backed by secure residential mortgage-related assets and the RMBS loans were screened through an underwriting process to ensure borrowers could pay back the money. But MoneyGram claims the "junk" securities were backed by "defective" assets that became evident when the financial crisis hit.
     The complaint points the finger at Magnetar, a hedge fund used by the Wall Street investment banks to put up equity to launch $40 billion worth of CDOs, but the fund intentionally picked bad backing assets that were "designed to fail."
     "Magnetar's influence on each CDO it 'sponsored' actually sabotaged those CDOs, allowing Magnetar to 'earn' hundreds of millions of dollars on its 'short' side bets on the CDOs when all of the CDOs collapsed," the complaint states.
     Documents from mortgage loan data-verification company Clayton Holdings reveal that reports were sent to each investment bank informing them that between 18 to 35 per cent of the RMBS and CDOs were faulty, but the banks continued to sell MoneyGram between 29 and 53 per cent of the most defective loans, the suit contends, and used inadequate structures and ratings to set up the CDOs and RMBS from "toxic" originators along with false investment grade ratings.
     A Goldman Sach's executive was caught sending an email to another exec in 2007 where he referred to a CDO sold to MoneyGram as a "shitty deal," and in a complaint filed by the Federal Home Loan Bank of Chicago in 2010 an RBS associate is alleged to have said, "I knew we were destroying the economy... But if you're making $40 million a year, do you care? No."
     MoneyGram says it used due diligence in researching the securities before purchase and had every reason to believe it was buying safe investments. It adds that it has taken years of government investigations and subpoenas to uncover the truth but the damage had already been done. "When the underlying mortgages defaulted at rates that reflected their actual risk levels, the cash flows could not support the RMBS's or CDOs' structure or the tranches that MoneyGram purchased. In turn, the value of MoneyGram's CDOs and RMBS collapsed," the suit states.
     MoneyGram is represented by Carolyn G. Anderson and Brian C. Gudmundson of Zimmerman Reed, P.L.L.P. in Minneapolis, Spencer A. Burkholz, Douglas R. Britton, X. Jay Alvarez, and Lucas F. Olts of Robbins Geller Rudman & Dowd LLP in San Diego, Jason C. Davis of Robbins Geller Rudman & Dowd LLP in San Francisco, and Samuel H. Rudman and Robert M. Rothman of Robbins Geller Rudman & Dowd LLP in Melville, Ny.