Woodmen of the World, an Omaha, Nebraska-based insurer has sued U.S. Bancorp (USB) for $47 million losses incurred following the misrepresentation of insurer’s investments in mortgage-backed securities.
The insurer has filed a lawsuit against U.S. Bancorp in Delaware Chancery Court, alleging the bank for inappropriately making its investments in asset-backed commercial paper and mortgage-backed securities, which plunged in value during 2008 economic crisis.
Woodmen of the World officials’ claims that U.S. Bancorp failed to inform it about the decreasing value of his investments in commercial paper backed by subprime and Alt-A mortgage-backed securities. If U.S. Bancorp had informed the insurer on time, then it could have been able to minimize his losses by liquidating his investment portfolio.
U.S. Bancorp and the trustees, who are also named as defendants in the suit, concealed the information from Woodmen until mid-2008, and at present he is stuck in an illiquid, unredeemable trust, which is not expected to end for as many as 30 years.
The insurer has urged Delaware judge to charge U.S. Bancorp and the trust officials for violating legal duties owed to investors and should be answerable for damages. The bank is facing similar claims by the Woodmen of the World in federal court in Omaha.
On the flip side, U.S. Bancorp believes firmly that the portfolio management of the insurer was proper and it performed its services diligently abide by prescribed rules.
Banks and investment firms, such as Morgan Stanley (MS) and Bank of America Corp. (BAC), are facing a series of lawsuits over mortgage-backed securities following the decline of the U.S. housing market. Investors alleged that securities worth hundreds of millions of dollars were bought as they were marketed as conservative, low-risk investments.
U.S. Bancorp has weathered the economic downturn relatively well and is expected to be one of the first few banks to increase dividend in the first half of 2011. However, regulatory issues and mortgage-related lawsuits will continue to pose as headwinds.
U.S. Bancorp currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.
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