The two unions, U.S. Central Federal Credit Union and Western Corporate Federal Credit Union (WesCorp), paid more than $1.1 billion for the securities in 2006 and 2007, according to a complaint filed by the regulator, National Credit Union Administration (NCUA).

In the lawsuit filed in a Kansas court, NCUA said that at the time of purchase, U.S. Central and WesCorp "were not aware of the untrue statements or omissions of material facts" in the offering documents of the residential mortgage-backed securities (RMBS).

The misrepresentations in the offering documents had caused US Central and WesCorp to believe the risk of loss was minimal, when in fact the risk was substantial, NCUA said.

"The RMBS's substantial loss of market value has injured U.S. Central, WesCorp and the NCUA Board," the regulator said in the court papers. The agency has also asked the court for a jury trial in the case.

UBS spokeswoman Karina Byrne declined to comment to Reuters on the NCUA lawsuit.

NCUA has previously filed similar lawsuits against JP Morgan Chase, Royal Bank of Scotland Group, Goldman Sachs, and Wachovia, now a unit of Wells Fargo.

NCUA has settled claims worth more than $170 million with Citigroup, Deutsche Bank, and HSBC.

Corporate, or wholesale, credit unions provide services to retail credit unions including lending, as well as check and payment clearance services.

Wholesale credit unions have experienced more troubles than their retail counterparts because they did not face the same restrictions on permitted investments, leading to big losses during the financial crisis.

The NCUA seized three large corporate credit unions in 2010 after seizing two in 2009. NCUA had said money recovered from legal actions would further reduce the total losses resulting from the failure of the five corporate credit unions.

The Case is National Credit Union Administration Board VS UBS, Case No. 12-cv-02591, U.S. District Court, District of Kansas.

(Reporting by Sakthi Prasad; Editing by Muralikumar Anantharaman)

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