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


Washington D.C., Nov. 7, 2013 —

The Securities and Exchange Commission today charged RBS Securities Inc., a subsidiary of the Royal Bank of Scotland plc, with misleading investors in a 2007 subprime residential mortgage-backed security (RMBS) offering.  RBS agreed to settle the matter and pay more than $150 million, which the SEC will use to compensate investors for harm suffered as a result of RBS’s conduct. 

The SEC alleges that RBS said the loans backing the offering “generally” met the lender’s underwriting guidelines even though nearly 30 percent fell so short of the guidelines that RBS should have excluded them from the offering entirely.  Stamford, Connecticut-based RBS, then known as Greenwich Capital Markets, quickly reviewed a very small portion of the loans and was paid approximately $4.4 million for its work as the lead underwriter on the transaction, the SEC said in a complaint filed in federal court in Connecticut. 

“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 consider the value of the home relative to the mortgage and the borrower’s ability to repay the loan.  RBS knew or should have known that was false because due diligence before the offering showed that almost 30% of the loans underlying the offering did not meet the underwriting guidelines.  In its complaint, the SEC said RBS gave investors a misleading 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.  RBS, without admitting or denying the SEC’s allegations, has 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.

The SEC thanks the federal-state Residential Mortgage-Backed Securities Working Group for its assistance in this matter.  The SEC’s investigation was conducted by members of the SEC’s Complex Financial Instruments Unit and the Boston Regional Office – Kerry Dakin, Jim Goldman, Rua Kelly, and Kevin Kelcourse.


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