February 18, 2015

US Probing Whether Morgan Stanley Data Breach Was Linked to Fired Financial Adviser

A U.S investigation into the way Morgan Stanley (MS) information became available for sale online is looking at whether hackers targeted financial adviser Galen Marsh after he took information from the bank. Marsh was fired for taking data on up to 350,000 wealth management clients. His lawyer, however, maintains that Marsh did not try to use, sell, or publish the information for personal gain.

Now, federal investigators want to know whether there was a breach to Marsh's computer after he took the information from Morgan Stanley, especially as there is no evidence that the firm’s own computers were hacked.

It was in December that the broker-dealer discovered that information about some 900 of its customers were published on Pastebin, which is a website. Potential buyers were asked if they would pay for more information and use a virtual currency. Morgan Stanley had the information removed from public view immediately and notified the authorities.

Since Marsh’s firing, more client data has shown up online. Marsh has admitted that he shouldn’t have obtained the data to begin with and he is reportedly cooperating with the firm to protect its clients. Morgan Stanley changed the account numbers of clients whose data Marsh took. No related fraud has been reported. Data that was breached included account numbers, client names, and investment details.

It was The Wall Street Journal that reported that federal authorities are looking into whether hackers were involved. They also want to know why Marsh took the information to begin with. He claims that he accessed the information, storing it on his computer, to figure out how successful advisers build portfolios for customers. Marsh says that he acted alone.

The hacking of financial firms is a real problem. JP Morgan Chase & Co. (JPM), Citigroup (C), HSBC Holdings (HSBA), are just some of the firms whose cybersecurity systems have been breached by hackers. At JP Morgan, data belonging to over 80 million account holders were affected—although, according to the firm, key account information was not accessed.

A report released a few weeks ago by the Financial Industry Regulatory Authority found that in its study about 20 broker-dealers, the threat of hacking by a state (not unlike the one by North Korea against Sony) was more of a worry for big investment banks, even if it wasn’t the number one fear. Instead, more firms were concerned about a cyber attack by an angry employee or a loose hacker group.

This month, the Securities and Exchange Commission started its own probe, looking at how well Wall Street investment banks and broker-dealers are equipped to fight off hackers. Based on an examination of over 100 registered firms, it appears that most of these companies have been targeted in cyber-linked incidents. The two most common ways of infiltration were fraudulent emails to get brokers to improperly move a client’s money and malware presented into a firm’s network.

Elsewhere, a hacking ring has reportedly stolen up to $1 billion from banks located in different parts of the world, penetrating over 100 banks in 30 nations. Hackers lift some $10 million from a bank and then focus their attention on the next bank. These attacks have sought to target the banks instead of customers and their accounts.

Morgan Stanley Probe Said to Examine If Adviser Hacked, Bloomberg, February 18, 2015

Brokerage Firms Worry About Breaches by Hackers, Not Terrorists, NY Times, February 3, 2015

Most Brokerages and Advisory Firms Targeted by Cybercriminals, The Wall Street Journal, February 3, 2015

Banking hack heist yields up to $1 billion, USA Today, February 15, 2015


More Blog Posts:

Morgan Stanley to Pay a $280,000 Fine to CFTC for Records and Supervision Failures Involving SureInvestment and $35M Ponzi Scam, Stockbroker Fraud Blog, September 16, 2014

Morgan Stanley Must Pay Connecticut Regulators $5M for Supervisory Violations, Stockbroker Fraud Blog, June 18, 2014

Morgan Stanley Fires Wealth Management Group Employee For Stealing Client Data, Institutional Investor Securities Blog, January 5, 2015

February 17, 2015

EU Fines ICAP $17M for Helping Traders Manipulate Yen Libor

The European Commission says that ICAP Plc has been ordered to pay a $17.2 million fine for helping traders manipulate benchmark interest rates linked to the Japanese yen. The word’s largest broker of transactions between banks is accused of spreading misleading data to lenders that set the yen Libor’s interbank lending rate, as well as helping traders communicate so they could collude with one another.

According to the Commission, the information was disguised as “predictions or expectations” but was actually geared toward influencing panel banks that were not involved in the infringements to turn in rates aligned with intended manipulations. The EU said ICAP facilitated six yen Libor cartels between ’07-’10 and attempted to get lenders to send rates that were similar to the panel. The broker also allegedly used other contacts to facilitate communication between an RBS trader and one from Citigroup (C). ICAP said it would appeal the fine and claims that the EU has shown no evidence that the broker engaged in violations of laws related to competition.

Authorities are looking into how bankers and derivatives traders worked together to make sure benchmarks were to their benefit, which could have affected over $300 trillion of financial products, loans, and contracts tied to the rate. While RP Martin Holdings Ltd., JPMorgan Chase & Co. (JPM), Deutsche Bank (DB), UBS AG (UBS), Royal Bank of Scotland Group Plc (RBS), and Citigroup already paid penalties to settle the EU’s case against them, ICAP refused. It has, however, paid $88 million of fines to United Kingdom and United States regulators to settle charges related to its contacts with traders at UBS.

ICAP Fined $17 Million by EU for Aiding Yen Libor Cartels, Bloomberg, February 4, 2015

ICAP fined 14.9 mln euros by EU regulators over yen cartels, Reuters, February 4, 2015


More Blog Posts:
Libor Manipulation Cases Get the Green Light from U.S. Courts, Institutional Investor Securities Blog, January 30, 2015

DOJ Charges Another Two Ex-Rabobank Traders Over Libor Manipulation, Institutional Investor Securities Blog, October 16, 2014

PFS Investments, Ex-Broker Under Investigation for Securities Fraud that Bilked At Least Twenty Customers, Stockbroker Fraud Blog, January 30, 2015

February 16, 2015

New Details Accusing HSBC of Aiding Tax Evaders Emerge

New information regarding HSBC Holdings PLC’s (HSBC) history of aiding tax evaders has been released by ex-employee Hervé Falciani to a number of media outlet, as well as the International Consortium of Investigative Journalists. The data alleges that the bank kept secret accounts for a number of wealthy, celebrity, and/or unsavory individuals, including “dictators and arms dealers,” as well as clients that are on U.S. sanctions lists. HSBC also purportedly would advise clients on how to get around paying taxes in their home countries.

Falciani, an HSBC computer analyst who calls himself a whistleblower, has provided what the BBC is calling the largest data leak in the history of banking. He started sending information out in 2008, copying files onto personal storage devices. The information was sent to French Finance Minister Christine Lagarde, who now runs the International Monetary Fund. She notified other governments.

Falciani claims that in 2006,he notified his superiors at HSBC that there were flaws in data storage that could hurt client confidentiality. He said that no one paid attention. Bank officials, however, counter that Falciani issued no such warnings.

While critics claim that he stole the HSBC data while working at the bank, as well as originally tried to sell the information first, Falciani denies those allegations. Now, he is warning that more revelations will be coming. Meantime, HSBC issued a statement last week noting that since 2008 the bank has worked hard to stop its services from being used for money laundering and tax evasion.

In 2011, the bank agreed to pay $1.92 billion to Ustpstoc.S. authorities to resolve money laundering claims—That’s $655 million in civil penalties and $1.25 billion in forfeiture.

HSBC is one of about a dozen Swiss lenders that the DOJ is looking into for allegedly helping Americans avoid paying taxes through undeclared accounts. In 2014, Credit Suisse Group (CS) paid $2.6 billion and pleaded guilty to a criminal charge of conspiring to aid tax evasion. In 2009, UBS AG (UBS) managed to avoid prosecution by consenting to pay $780M and giving the names of U.S. account holders to the American government.

HSBC Hit by Fresh Details of Tax Evasion Claims, The Wall Street Journal, February 9, 2015

HSBC to pay $1.92 billion in US money laundering case, France24, December 11, 2012


More Blog Posts:

HSBC to Pay $12.5M Settlement to SEC Over Charges That It Violated Securities Laws, Institutional Investor Securities Blog, November 25, 2014

HSBC Securities to Pay $375K to Settle FINRA Allegations that It Recommended Unsuitable Collateralized Mortgage Obligations to Retail Clients, Stockbroker Fraud Blog, August 25, 2010

UBS Under Scrutiny in New Tax Evasion Probe, Institutional Investor Securities Blog, February 4, 2015

February 12, 2015

SEC Commissioners Oppose Regulator’s Leniency Toward Oppenheimer, Despite Violations

SEC Commissioners Luis Aguilar and Kara Stein, both Democrats, say that they were among those that voted to grant Oppenheimer & Co. (OPY) special benefits even after the brokerage firm committed rules violations. It was just last month that the broker-dealer consented to pay a $20 million penalty while admitting to failures and resolving charges related to its failure to detect money laundering.

In that case, also settle with the Financial Crimes Enforcement Network, the firm did not properly identify and report suspicious penny stock trades, even though numerous Oppenheimer customers reportedly were involved in such activities. The broker-dealer admitted that it failed to establish a suitable anti-money laundering program and did not perform proper due diligence on a foreign correspondent account.

Yet, the regulator overturned the automatic disqualification that should have come with the violation. That happened when SEC Chairman Mary Jo White and the other two members (both Republicans) outvoted the Democratic member. Now, Oppenheimer is allowed to continue selling hedge funds to rich individuals. As part of the condition for the leniency, the broker-dealer will retain a law firm and consultant to make sure that its procedures and policies fall in compliance.

Aguilar and Stein said they were in opposition because they believe that Oppenheimer’s compliance culture is a ‘failed” one and that such a waiver was not deserved. They said that the SEC was disregarding the brokerage firm’s repeated securities law violations that have occurred over the years and exhibited too much leniency. They pointed out that even with the hiring of consultants in the past to report on remediation efforts, not much progress appears to have been made.

Typically, the Commission will grant waivers allowing firms to keep doing normal business, if this is considered in the best interests at the public. The Wall Street Journal points out that had the firm been deemed a “bad actor” this would have limited its ability to sell private fund investments for five years. Sans waiver, firms that violate specific securities laws are instantly restricted from taking part in private offerings.

Oppenheimer, however, pleaded its case. According to Law360, the broker-dealer sent a letter to the SEC’s Division of Corporation Finance, arguing that a bad actor ban was not warranted. The firm argued that the latest enforcement actions are unrelated to its previous securities transactions and a bar would hurt the brokerage firm and clients. Following Stein and Aguilar's published dissent, the brokerage firm promised that to retain a law firm that was “fully independent” to perform the Rule 506 compliance checks.

An Oppenheimer spokesperson said that moving forward, the firm is committed to put into place a robust compliance infrastructure.

Please contact our securities lawyers if you suspect that you were the victim of securities fraud.

SEC Commissioners Blast Decision Not To DQ Oppenheimer, Law 360, February 4, 2015

SEC Turned ‘Blind Eye’ to Oppenheimer’s Failures, Democrats Say, The Wall Street Journal, February 4, 2015


More Blog Posts:
Oppenheimer to Pay $20M Settlement to the SEC and FinCEN Over Penny Stock Violations, Stockbroker Fraud Blog, January 28, 2015

SEC Sanctions UBS, Charles Swab, Oppenheimer, & 10 Other Firms For Improper Sales of Puerto Rico Junk Bonds, Stockbroker Fraud Blog, November 3, 2014

Ex-Oppenheimer Fund Manager to Pay $100K To Settle Private Equity Fund Fraud Charges, Institutional Investor Securities Blog, January 25, 2014

February 11, 2015

Bank of America Used Subsidiary to Finance Trades, Helped Hedge Funds, Others, Avoid Taxes

According to The Wall Street Journal, internal documents show that Bank of America Corp. (BAC) used its Bank of America National Association, a subsidiary backed by the U.S. government, to finance controversial trades that allowed certain clients to get around paying taxes. A bank spokesperson said that the practice, which involved transactions by its investment banking arm in Europe, was phased out last year.

However, as far back as at least 2011 senior Bank of America investment bank officials in England purportedly began pressing at staff to avail of the lower funding costs of the U.S. unit, which doesn’t pay as much as business units for borrowing money. The purpose was to bring in more hedge fund clients, including those involved in dividend arbitrage tax trades. With that strategy, sophisticated investors are able to avoid or lower their withholding taxes on stock dividends.

There have been questions as to whether using an entity that holds federally insured deposits to pay for high-risk investment banking trades is appropriate. One employee even filed a whistleblower submission to the SEC about the banking subsidiary’s involvement.

Also, trades linked to U.S. Stock dividends were banned following government probes, as well changes to tax rules. In 2011, Bank of America settled for $63 million over previous U.S. dividend arbitrage trading.

The issue of whether certain banks are placing federally insured funds in peril has been a matter of interest ever since J.P. Morgan Chase & Co. (JPM) lost over $6 billion on bad trades involving a trader dubbed the “London Whale.” The firm paid $1 billion for violating securities laws.

Bank of America’s U.S. Deposit-Taking Unit Financed Tax Trades, The Wall Street Journal, February 11, 2015

Bank of America Reportedly Helped Fund Avoid Taxes, Investors.com, February 11, 2015


More Blog Posts:
John Carris Investments Expelled by FINRA, Stockbroker Fraud Blog, February 9, 2015

U.S. Department of Justice Wants Citigroup, Barclays, JPMorgan Chase, and Royal Bank of Scotland to Plead Guilty to Criminal Charges In Currency Antitrust Investigation, Institutional Investor Securities Blog, February 10, 2015

UBS Under Scrutiny in New Tax Evasion Probe, Institutional Investor Securities Blog, February 4, 2015

February 10, 2015

U.S. Department of Justice Wants Citigroup, Barclays, JPMorgan Chase, and Royal Bank of Scotland to Plead Guilty to Criminal Charges In Currency Antitrust Investigation

According to The Wall Street Journal, the Justice Department is going to try to make four big banks plead guilty to criminal anti-trust charges related to its traders’ alleged collusion in foreign-currency markets. The financial institutions are Citigroup Inc. (C), Barclays PLC (BARC), Royal Bank of Scotland (RBS), and J.P. Morgan Chase & CO. (JPM). Meantime, separate criminal fraud cases are being pursued against the individuals whose involvements are suspected.

The DOJ’s probe is examining whether bank employees manipulated foreign-currency exchange rates to their benefit, and in certain cases, hurting customers. In a separate investigation, New York’s Department of Financial Services is looking at whether some of the biggest banks used computer programs to manipulate foreign exchange rates. The department installed monitors at Deutsche Bank AG (DB) and Barclays in 2014 and has sent subpoenas to Goldman Sachs (GS), Société Générale, and BNP Paribas about the way they use these types of programs. The subpoenas were sent not because there was necessarily evidence of wrongdoing but because the banks are actively involved in these markets.

As we mentioned in a recent blog post, JPMorgan has just agreed to pay $99.5 million to settle its portion of a currency rigging case. In that litigation, institutional investors are accusing 12 banks of rigging prices in the foreign exchange market. By settling the financial instruction is not denying or admitting to wrongdoing.

JPMorgan to pay $99.5 million to resolve currency rigging lawsuit, Reuters, January 31, 2015

U.S. Seeks Guilty Pleas From 4 Banks in Currency Antitrust Probe, The Wall Street Journal, February 10, 2015


More Blog Posts:
SEC Headlines: Regulator Probes Oppenheimer Executive, Prepares Insider Trading Case Against Policy Research Firm, & Wants to Suspend Standard & Poor’s From Rating CMBSs, Stockbroker Fraud Blog, December 10, 2014

UBS Under Scrutiny in New Tax Evasion Probe, Institutional Investor Securities Blog, February 4, 2015

SEC Claims Investment Adviser Paid for Fraud Settlement With Client Monies, Stockbroker Fraud Blog, February 5, 2015

February 7, 2015

J.P. Morgan Under Scrutiny Over China Hirings

According to The Wall Street Journal, U.S. prosecutors and regulators are probing the Asian hiring practices of J.P. Morgan (JPM) and a number of other banks. The probe focuses on the Foreign Corrupt Practices Act, which is a U.S. law that prohibits giving anything of value to foreign government officials in order to gain a business edge.

Hiring employees in order to garner something in return is one area of scrutiny. The WSJ cited the hiring of the son of Chinese commerce minister Gao Hucheng even though he didn’t do well on job interviews, accidentally sent a sexually explicit email to a human resources employee, and exhibited other traits that purportedly made him a liability. Yet, during job cuts, the bank didn’t let him go and would have given him another position. Hucheng reportedly said that he would “go extra miles” for J.P. Morgan if his son wasn’t laid off.

Although China’s commerce ministry isn’t a client of the firm it has influence over business and is entitled to rule on mergers among multinationals that engage in business in that country. However, both father and son have not been accused of wrongdoing.

Sources told the WSJ that the financial firm is expected to settle with both the Securities and Exchange Commission and the Department of Justice over allegations related to the U.S.’s antibribery law. A fine and a mandated overhaul of hiring practices would be likely.

Meantime, the Chinese affiliates of PricewaterhouseCoopers, KPMG, Deloite Touch Tohmatsu, and Ernst & Young have each agreed to pay $500,000 to settle with the SEC because of their reluctance to hand over documents about Chinese companies that the regulator is investigating. The deal gives the firms an opportunity to avoid temporary suspension of their right to audit firms that are U.S.-traded. All four consented to abide by procedures that would make sure that the Commission could get audited documents from them in the future.

It was last year that a judge ruled that the accounting firms violated federal law when they wouldn’t give the audit-work papers regarding certain Chinese clients to the agency. The companies contended that although the clients’ securities traded in this country the accounting firms were barred from sharing the documents because of Chinese laws that treated these papers as if they were state secrets.

The work papers were eventually handed over to the Commission through regulators in China. The SEC believes it is important than they be given access to audit documents to protect investors from fraud. Already the SEC has filed over two-dozen enforcement cases against Chinese firms and their executives.

As pat of the settlement, the accounting firms must follow specific procedures that will allow them to hand over the audit documents to the SEC through the China Securities Regulatory Commission. However, they are not denying or admitting to wrongdoing.

J.P. Morgan Emails Illuminate Hiring of China Official’s Son, The Wall Street Journal, February 6, 2015


More Blog Posts:
SEC Sanctions UBS, Charles Swab, Oppenheimer, & 10 Other Firms For Improper Sales of Puerto Rico Junk Bonds, Stockbroker Fraud Blog, November 3, 2015

JPMorgan Suspends Forex Trader for Alleged Disclosures Involving Royal Bank of Scotland-Related Activities, Institutional Investor Securities Blog, January 14, 2015

U.S. Department of Labor’s Fiduciary Rule for Retirement Advisers Hits Another Snag, Stockbroker Fraud Blog, February 6, 2015

February 6, 2015

JPMorgan Sued by Indiana Church

The Christ Church Cathedral of Indianapolis is suing JPMorgan (JPM) for securities fraud. The church contends that the financial firm purposely mismanaged its money over the last ten years, causing $13 million in losses. Eli Lilly, the founder of pharmaceutical giant of the same name, gifted a large trust fund to the Episcopal congregation. Mr. Lilly appointed three local banks as trustees but JPMorgan became involved after it acquired two of the banks in 2004.

Court filings claim that once JPMorgan came on board the church’s portfolio of stocks and bonds were replaced by the firm’s own funds, including alternative investments, which involve higher fees paid to the firm. Over eight years the firm’s management fees went up from $35K to $177K, while it reaped in additional fees for selling proprietary products. By the close of 2009, the church was invested in over 50 investment funds— 75% of those were in the firm’s own products.

In 2004, when the firm took over the church’s trust fund, the congregation had $34.6 million. By the end of 2013 it had $31.6 million. Because of this, the congregation has been unable to do all of its charitable works. The church believes that its investment strategy should have let it take money from its endowment to fund its aid work without losing any money. The Christ Church Cathedral of Indianapolis wants JPMorgan to pay back the $13 million losses, which includes lost profits.

The Christ Church Cathedral does not appear to be an isolated situation of alleged church endowment mismanagement at JP Morgan. For example, last year the Episcopal Diocese of West Virginia and Sandscrest Foundation sued J.P. Morgan Chase, the Helen T. Sands Testamentary Trust, and its trustee. The church claimed breach of duty of prudence, breach of duty of loyalty, and breach of the duty to give information to beneficiaries.

According to filings in that case, following the final wills and testaments of Helen and Harry Sands, about 250 acres of land in Ohio were moved to Sandscrest Foundation Inc. While J.P. Morgan Chase used the net income for different charitable organizations, as the will instructed, it purportedly did not provide enough funding to the foundation to maintain the original property.

Just like individual investors, Institutions may also fall victim to securities fraud and mismanagement by financial professionals. If you believe you were the victim of institutional investor fraud, contact The SSEK Partners Group today.

Indiana church sues JPMorgan for millions, CNN, January 24, 2015

Groups say bank mismanagement trust funds, The West Virginia Record, April 16, 2014


More Blog Posts:
SEC Sanctions UBS, Charles Swab, Oppenheimer, & 10 Other Firms For Improper Sales of Puerto Rico Junk Bonds, Stockbroker Fraud Blog, November 3, 2014

U.S. Department of Justice Wants Citigroup, Barclays, JPMorgan Chase, and Royal Bank of Scotland to Plead Guilty to Criminal Charges In Currency Antitrust Investigation, Institutional Investor Securities Blog, February 10, 2015

JP Morgan Sued by Dexia in $1.7B MBS Lawsuit, Institutional Investor Securities Blog, February 11, 2013

February 4, 2015

UBS Under Scrutiny in New Tax Evasion Probe

U.S. prosecutors have opened a new investigation into whether UBS AG (UBS) helped Americans avoid paying taxes via investments that were banned in the country. The government is looking at whether the Swiss bank used bearer securities, which may be used as if they were cash. These securities were phased out of the financial system in the U.S. more than thirty years ago because they can be used in money laundering and tax evasion.

According to the Wall Street Journal, not only are prosecutors in the U.S. attorney’s office in Brooklyn looking at evidence of whether bank employees played a role in allowing securities fraud and tax evasion to happen, but also they are seeking proof that there may have been a criminal cover up internally. A whistleblower is involved in this latest probe.

In 2009, UBS paid $780 million to resolve a tax evasion investigation by the Department of Justice. The Swiss bank admitted that it encouraged this type of conduct. As part of the settlement it disclosed the identities of 250 American banking clients. It settled another U.S. lawsuit in which it revealed the names of 4,450 U.S clients with UBS accounts.

Providing Swiss accounts to American clients has proven profitable for UBS and other internationally-based banks. At one point this part of the business made UBS up to $200 million yearly.

Last year, Credit Suisse (S) paid $2.6 billion to the Justice Department, the Federal Reserve, and the New York State Department of Financial Services to settle allegations over its role in helping Americans evade paying taxes. It also pleaded guilty to criminal charges. The Swiss bank settled related claims by the Securities and Exchange Commission for $196 million.

UBS Said to Be Under New Tax-Evasion Probe in U.S., Bloomberg, February 4, 2015

Credit Suisse pleads guilty in tax evasion case, CNN, May 19, 2014


More Blog Posts:
UBS Settles SEC Dark Pool Case for $14M, Stockbroker Fraud Blog, January 16, 2015

Beneficiaries of Puerto Rico Trust File Securities Fraud Lawsuit Seeking Over $4.5M From UBS Financial Services, Stockbroker Fraud Blog, January 5, 2015

European Commission Takes Action Against JPMorgan, UBS, RBS & Credit Swiss for Cartel Conduct
, Institutional Investor Securities Blog, October 27, 2014

February 3, 2015

Standard & Poor’s Settles Inflated Ratings Case for $1.5 Billion

Credit rating agency Standard & Poor’s will pay $1.5 billion to settle a number of lawsuits accusing the company of inflating the ratings of mortgage securities in the lead up to the 2008 economic crisis. As part of the deal, S & P’s parent company McGraw Hill will pay $687.5 million to the U.S. Justice Department and $687.5 million to the District Columbia and 19 states over their inflated ratings cases.

The U.S. sued the credit rater in 2013, asking for $5 billion and claiming that S & P had bilked investors. The company fought the claims, arguing that the First Amendment protected its ratings and contending that the mortgage ratings case was the government’s way of retaliating after S & P downgraded the United States’ own credit rating. As part of the settlement, the credit rating agency said it found no evidence that retaliation was a factor.

S & P is not admitting to violating any law. It noted that its mission is to give the marketplace information that is independent and objective and employees are not allowed to influence analyst opinions because of commercial relationships.

The credit rating agency did, however, admit that certain relevant individuals within the company knew as far back as 2007 that a lot of loans in residential mortgage-backed securities transactions were delinquent and would likely to lead to losses. Still, S & P representatives kept putting out positive ratings without making adjustments to reflect the expected negative outcomes.

In 2008 a congressional report said that both S & P and credit rating agency Moody’s Corp (MCO.N) had put out ratings that made the high-risk mortgage backed securities appear safer than what was actual. These MBS’s ended up playing a big part in the financial collapse. The report blamed the firms for activating the worst economic crisis in decades when they ended up having to downgrade the ratings that were inflated.

In 2014, The U.S. Securities and Exchange Commission put into place new rules for the ratings industry. However, ratings agencies are still allowed to receive payments by banks giving ratings to securities, which are put out by these financial firms. This issuer-payer model was seen as an incentive for why credit raters artificially inflated the ratings on mortgage backed securities several years ago.

Also, in a separate deal, the credit rater reached a $125 million settlement with the California Public Employee’s Retirement System. The public pension fund said that S & P’s inaccurate ratings caused hundreds of millions of dollars in losses. Calpers also named Moody’s and Fitch Ratings in its lawsuit. Fitch has already settled, while the claims against Moody’s are still pending.

In January, S & P settled another mortgage ratings case with the U.S. Securities and Exchange Commission and New York and Massachusetts state attorneys general for $80 million that resolved allegations accusing the company of misleading the public about the way it rated a number of commercial mortgage investments.

Justice Department and State Partners Secure $1.375 Billion Settlement with S&P for Defrauding Investors in the Lead Up to the Financial Crisis, US Department of Justice, February 3, 2015

S.&.P. Announces $1.37 Billion Settlement With Prosecutors, NY Times, Feb 3, 2015

S&P, Calpers settle suit over mortgage deals for $125 mln, WSJ/Reuters, February 2, 2015


More Blog Posts:
SEC Subjects Credit Rating Agencies, Asset-Backed Securities Issuers to Tighter Rules, Stockbroker Fraud Blog, August 28, 2014

DOJ Gets Ready to Wrap Mortgage Bond Case Against Standard & Poor’s, Probes Moody’s, Institutional Investor Securities Blog, January 31, 2015

Moody’s Reduces American Realty Capital Properties Credit Rating to Junk Status, REIT’s Founder Nicholas Schorsch Steps Down, Institutional Investor Securities Blog, December 16, 2014

January 31, 2015

DOJ Gets Ready to Wrap Mortgage Bond Case Against Standard & Poor’s, Probes Moody’s

According to the Wall Street Journal, the U.S. Department of Justice has been meeting with ex-Moody’s Investor Service (MCO) executives to talk about the way the credit ratings agency rated complex securities prior to the 2008 financial crisis. Sources say that the probe is still in its early stages and it is not certain at the moment whether the government will end up filing a bond case against the credit rater.

DOJ officials are trying to find out whether the company compromised its standards in order to garner business. The government’s focus is on residential mortgage deals that took place between 2004 and 2007.

Moody’s and credit rating agency Standard and Poor’s gave triple A ratings to the deals so that even conservative investors were buying the subprime loan-backed securities. The investments later proved high risk. When the housing market failed, the bond losses cost investors billions of dollars.

The attorneys general from Mississippi and Connecticut have already filed mortgage fraud lawsuits against Moody’s but they decided to put the case on hold while resolving similar lawsuits against S & P.

The DOJ, which filed its case against S & P in 2013, accused the credit rating agency of falsely claiming that it had issued independent and objective ratings that were not impacted by conflicts of interest even though it allegedly inflated mortgage securities ratings, including collateralized debt obligations and mortgage-backed securities, to get on the good side of Wall Street banks. The banks paid the credit rater to rate the deals, which the DOJ said placed improper influence on the ratings of the securities. S & P disagreed with the government’s contentions and fought the claims.

Now, the DOJ is expected to announce a mortgage bond settlement of over $1.37 billion with Standard and Poor’s. The resolution did not come easily. For awhile the credit rating agency called the case a retaliatory act because S & P had reduced the United States’ own credit rating in 2011. Sources say that now, as part of the deal, S & P will admit that it has not found evidence of retaliation by the government. The deal will also likely resolve cases made by over a dozen states.

Meantime, the U.S. Securities and Exchange Commission is expected to file a case against Barbara Duka, who is S & P’s ex-head of commercial mortgage ratings. Also, the New York Times says that the DOJ is now looking at Morgan Stanley (MS) over allegations that it duped investors into purchasing troubled mortgage investments.

Unfortunately, many investors sustained losses in mortgage-backed securities during the financial crisis because of unsuitable investment recommendations made by firms and their representatives. The unreliable credit ratings issued for securities that were not, in fact, low risk has been a huge issue of contention.

Our mortgage-backed securities fraud lawyers represent investors with losses that they wish to recover. Contact the SSEK Partners Group today.

Justice Department Investigating Moody’s Investors Service, The Wall Street Journal, February 1, 2015

DOJ targeting Morgan Stanley's relationship with subprime lender: NYT
, Reuters, December 30, 2014


More Blog Posts:
OppenheimerFunds Increases Its Exposure to Puerto Rico Debt Despite Downgrade by Moody’s, S & P, and Fitch to Junk Status, Stockbroker Fraud Blog, February 14, 2014

Moody’s Reduces American Realty Capital Properties Credit Rating to Junk Status, REIT’s Founder Nicholas Schorsch Steps Down, Institutional Investor Securities Blog, December 16, 2014

Liquidators of Bear Stearns Hedge Funds Sue S & P, Moody’s and Fitch for $1.12B, Institutional Investor Securities Blog, August 6, 2013

January 30, 2015

Libor Manipulation Cases Get the Green Light from U.S. Courts

The U.S. Supreme Court says that bond buyers cannot be made to wait to appeal a decision tossing out their antitrust claims over alleged Libor interest manipulation. The nation’s highest court overturned a ruling that favored Bank of America Corp. (BAC), Barclays PLC (BARC ), Royal Bank of Scotland Group PLC (RBS), and other banks.

The decision involves antitrust litigation claiming that the biggest banks in the world conspired to manipulate the Libor benchmark interest rate. It was then up to the Supreme Court to decide when a party can appeal a ruling that impacts only certain claims in litigation that has been consolidated.

The plaintiffs, Linda Zacher and Ellen Gelboim, bought bonds with Libor-linked interest rates. They sued the banks, accusing them of antitrust violations. Their case was consolidated with over five-dozen Libor cases. The consolidated litigation accuses the banks of trying to manipulate the benchmark rate.

In 2013, a district judge kept certain claims intact in the consolidated lawsuit but threw out the allegations involving federal antitrust law violations. The two women tried to appeal and that is when the U.S. Court of Appeals for the Second Circuit said that it did not have jurisdiction because other claims in the consolidated case had yet to be resolved.

The Supreme Court turned down the banks’ contention that district courts should have that discretion. Instead, said the court, the plaintiffs right to appeal became correct when the district court dismissed their case. Their lawsuit is now allowed to proceed.

In the wake of that ruling, other Libor plaintiffs are responding. In some instances they are asking that dismissals of their antitrust claims be reconsidered under appeal.

In another Libor case, U.S. District Judge Lorna Schofield in Manhattan said that U.S. investors could pursue a national antitrust case accusing a dozen banks of manipulating prices in the $5.3 trillion-a-day foreign exchange market. Defendants include:

• Barclays
Bank of America
Deutsche Bank AG (DB)
Citigroup Inc. (C)
• Royal Bank of Scotland
• BNP Paribas SA
• Goldman Sachs Group Inc. (GS)
• HSBC Holdings Plc. (ADR)
UBS AG (UBS)
Morgan Stanley (MS)
Credit Suisse Group (CS)
JPMorgan Chase & Co.


Judge Schofield rejected the defendants’ contentions that the lawsuit should be thrown out because of insufficient evidence.

The investors, which include hedge funds, the city of Philadelphia, Pennsylvania, and public pension funds claim that since 2003 the banks conspired to rig currency rates. They contend that traders convened in chat rooms, via email, and through instant messages to manipulate the rates.

JPMorgan settled its part of the lawsuit for around $100 million. Already, six of the defendants have agreed to pay over $4.3 billion in civil fines from regulators in Europe and the US related to the probes into banks accused of manipulating currency rates to make money.

Investor Groups Ask to Join Libor Antitrust Appeal, Litigation Daily, January 28, 2015


UPDATE 2-Big banks fail to dismiss U.S. currency rigging lawsuit, Reuters, January 28, 2015


More Blog Posts:
PFS Investments, Ex-Broker Under Investigation for Securities Fraud that Bilked At Least Twenty Customers, Stockbroker Fraud Blog, January 30, 2015

Oppenheimer to Pay $20M Settlement to the SEC and FinCEN Over Penny Stock Violations, Stockbroker Fraud Blog, January 28, 2015

John Carris Investments Expelled by FINRA, Institutional Investor Securities Blog, January 27, 2015

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