August 26, 2014

FINRA Claims Wedbush Securities Engaged in Supervisory and Anti-Money Laundering Violations

The Financial Industry Regulatory Authority has filed a disciplinary complaint against Wedbush Securities Inc. that accuses the firm of violations related to anti-money laundering and systemic supervision. The self-regulatory organization says that from January 2008 through August 2013, Wedbush did not put enough of its resources towards a supervisory systems, risk-management controls, and procedures. At the time, the firm was one of the largest market access providers, making millions of dollars from the business.

Because of purported violations, contends FINRA, market-access customers, including non-registered participants, were able to permeate U.S. exchanges and make thousands of trades that could have been manipulative and may have even involved spoofing and manipulative layering. The agency says that even though it was Wedbush’s duty to look out for suspect and possibility manipulative trades, the firm depended mostly on its market access customers to self-report such trading, as well as self-monitor.

FINRA contends hat even though Wedbush received notice about the risks involved in its market access business, the firm ‘s supervisory procedures and risk management controls were not reasonably designed to deal with these factors. Wedbush even established incentives for compensation to be based on the value of market customer access trading. FINRA says that Wedbush should have set up, kept up, and enforced satisfactory AML policies and procedures, and it purportedly failed to report suspect transactions.

The disciplinary complaint is the start of FIRNA's formal proceeding against Wedbush. However, the findings with regards to the allegations made have not been made yet. Now, Wedbush can respond to the complaint. To date, the firm remains adamant that its supervisory procedures and market-access risk procedures were designed to reasonably achieve compliance with regulatory requirements.

In June, the Securities and Exchange Commission filed similar charges against Wedbush, Jeffrey Bell, who is ex-EVP in charge of market access, and Christina Fillhart, a market access division Sr. VP. The Commission’s claims are over alleged violations that would have taken place between 7/11 and 1/13. Wedbush says the trading activities under examination in the SEC’s case didn’t lead to any losses. The firm is challenging the claims.

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

Wedbush Securities Defends Market-Access Risk Management Practices, The Wall Street Journal, August 19, 2014

FINRA Charges Wedbush Securities for Systemic Market Access Violations, Anti-Money Laundering and Supervisory Deficiencies, FINRA, August 18, 2014


More Blog Posts:
SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations, Institutional Investor Securities Blog, June 6, 2014

Goldman to Buy Back $3.15B in RMBS to Resolve FHFA Claims
, Stockbroker Fraud Blog, August 26, 2014

Bank of America to Pay $16.65 Billion to Settle DOJ Mortgage Probe, Institutional Investor Securities Blog, August 23, 2014

August 23, 2014

Bank of America to Pay $16.65 Billion to Settle DOJ Mortgage Probe

Bank of America (BAC) and the U.S. Department of Justice have arrived at a $16.65 billion mortgage settlement. Under the agreement, the lender will pay $9.65 billion to the DOJ, the SEC, other government agencies, and six states. The remaining $7 billion will be paid in the form of aid to struggling consumers. This is the largest settlement between the U.S. and just one company. It resolves claims not just against Bank of America, but also against its current and past subsidiaries, including Merrill Lynch and Countrywide Financial Corporation.

The numerous probes now resolved involve the packaging, sale, marketing, structuring, and issuance of collateralized debt obligations and residential mortgage-backed securities, as well as mortgage loan origination and underwriting practices. As part of the settlement, the bank issued a statement of facts acknowledging that it did not disclose key information to investors about the quality of billions of dollars of RMBS that it sold to them. When the securities failed, investors, including financial institutions that were federally insured, lost billions of dollars. Bank of America acknowledges that it originated mortgage loans that were high-risk and made misrepresentations about the loans to the Federal Housing Administration, Freddie Mac, and Fannie Mae.

Merrill Lynch and Countrywide made a lot of the loans at issue before Bank of America purchased both entities in 2008. However, the government also had a problem with Bank of America’s own mortgage securities, as well as the latter's attempts to circumvent internal underwriting standards by revising the financial data of applicants.

The bank is just one of several lenders accused of knowingly giving credit to borrowers who couldn’t afford the loans and then selling the mortgages to investors. When borrowers defaulted on the loans, they went into foreclosure. This cost investors big time.

As part of the settlement, the bank will pay $5 billion to settle the DOJ claims under the Financial Institutions Reform, Recovery and Enforcement Act. The deal also settles securities claims by the Federal Deposit Insurance Corporation, the states of Illinois, California, Kentucky, Delaware, Maryland, New York, and the U.S. Attorney’s Office for the Western District of North Carolina. The relief to consumers will include principal reduction loan modifications, new loans to credit worthy borrowers, money to help communities still recouping from the financial crisis, and the financing of affordable rental housing.

Meantime, prosecutors in Los Angeles, California are getting ready to file civil charges against former countrywide CEO Angelo Mozilo and other ex-Countrywide executives. The DOJ dropped its criminal probe of Mozilo three years ago. Still, others have sought to hold him responsible for his involvement in the way the mortgages were handled. In 2010 the SEC ordered Mozilo to pay $67.5 million to settle allegations that he misled Countrywide investors. The deal allowed him to avoid going to trial on civil fraud and insider trading charges. Now, also invoking FIRREA, the U.S. attorney’s office in LA is getting ready to sue Mozilo and others.

Bank of America settles mortgage probes for $16.65 billion, Reuters, August 21, 2014

Deal Done: Bank of America, Justice sign $16.7 billion deal over bad mortgages, BizJournals, August 21, 2014

Countrywide CEO Mozilo settles with SEC for $67.5M, The Christian Science Monitor, The Christian Science Monitor/AP, October 15, 2010

Countrywide’s Mozilo Said to Face U.S. Suit Over Loans, Bloomberg, August 20, 2014


More Blog Posts:

Bank of America, Its Ex-CEO To Pay $25M to Settle Securities Case with NY Over Merrill Lynch Deal, Stockbroker Fraud Blog, March 31, 2014

Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B
, Institutional Investor Securities Blog, March 29, 2014

Bank of America’s $8.5B Mortgage Bond Settlement Gets Court Approval, Institutional Investor Securities Blog, January 31, 2014

August 21, 2014

Lehman Brothers' Unsecured Creditors to Get $4.6B Payout

Pension funds, former employees, investment firms, and banks with unsecured claims against Lehman Brothers Holdings are finally getting an initial payout of $4.6 billion. That’s about 71% of the unsecured claims against the broker-dealer to be recovered. These creditors of the firm have waited years to get their money back, ever since investment bank went into bankruptcy in 2008 with $613 billion in liabilities.

Lehman’s collapse helped instigate the global financial crisis and it was Barclays (BARC) that bought the brokerage business. It’s trustee, James W. Giddens has already paid back brokerage customers the over $10 billion they were owed.

In total, the Lehman parent company and its units have paid $57.1 billion to unsecured creditors. The majority of creditors are expected to get back up to 35 cents on the dollar.

Giddens says that additional payments for the brokerage’s unsecured creditors are likely. While $20.4 billion claims have been allowed against the firm, about $6.8 billion remain unresolved.

Meantime, the Lehman estate continues to wind down. Remaining holdings will continue to be sold off over the next several years. The brokerage firm is being unwound separately under the Securities Investor Protection Act.

Recently, Lehman’s brokerage unit asked the Second U.S. Circuit Court of Appeals to reconsider its decision affirming that Barclays is entitled to billions of dollars in assets under dispute. They want the court to set up a new hearing.

Giddens noted that the ruling increases Barclay’s gain from when it purchased the brokerage during the bankruptcy court sale. He said this change would reduce how much creditors would get back.

When U.S. Bankruptcy Judge James Peck approved the sale in 2008, he said that “no cash” would go to Barclays from the brokerage firm, including exchange-traded derivatives and the money linked to them. In 2009, Lehman sued Barclays, accusing the British bank of working out a secret discount when it purchased the brokerage. Peck, however, ruled that Barclays did not get an improper “windfall.” He said that the brokerage was entitled to the approximately $4 billion that was held to secure exchange-traded derivatives, while Barclays should get $1.9 billion in clearance box assets.

The two sides appealed. The district court ruled in Barclays favor, saying it had the right to both assets groups. Giddens appealed to the Second Circuit, which affirmed the ruling from the district court. Now, Giddens wants a rehearing.

Lehman continues to face litigation from derivative counterparties and former affiliates.

If you are an institutional investor that has suffered losses because of the negligence of a brokerage firm or another entity, you will want to speak with our securities lawyers right away. Contact The SSEK Partners Group today. Your initial case consultation is free.

Lehman Brokerage Creditors to Get $4.6 Billion, The Wall Street Journal, August 15, 2014

Lehman Bros Creditors Are About To Get $4.6 Billion, Business Insider/Reuters, August 15, 2014

In re: Lehman Brothers Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-01420, Justia


More Blog Posts:
Lehman Makes Deal with SAP Founder, Frees Up Another $1.8B for Creditors, Institutional Investor Securities Blog, February 27, 2014

Detroit Becomes Largest US City to File Bankruptcy Protection, Institutional Investor Securities Blog, July 18, 2013

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LL, Stockbroker Fraud Blog, September 30, 2008

August 19, 2014

Securities Lawsuit Against BlackRock Accuses Firm of Charging Excessive Sub-Advisor Fees

BlackRock Inc. (BLK) wants a judge to dismiss a securities lawsuit accusing the money manager of charging exorbitant fees and breaching its fiduciary duties. Lawyers for the firm argued that the claims have no merit in the U.S. District Court in Trenton, New Jersey.

The investor plaintiffs, including a Florida investment adviser who won the lottery, contend that BlackRock’s subsidiaries collected excessive fees for services provided to Equity Dividend Fund (MDDVX), worth almost $30 billion, and their Global Allocation Fund, (MDLOX), worth close to $59 billion. They say that they lost millions of dollars because of excessive fees.

However, reports InvestmentNews, according to one of the lawyers representing BlackRock, the complaint does not properly acknowledge the fund’s size or allege facts adequate enough to plausibly demonstrate that the fees are unreasonable, especially considering the services that were provided.

The investors blame the board of directors of the funds for failing to behave “conscientiously” when approving “markups” and fees. They say that this violates U.S. the Investment Company Act of 1940 as it pertains to duty breaches.

This securities case is one of several that are pending against different firms over sub-advisor fees. Defendants in the other cases include J.P. Morgan Investment Management Inc. (JPM), SEI Investments, and AXA Equitable Life Insurance Co.

The lawsuits claim that subsidiaries of the fund companies get to keep too much of the revenue made by their funds. To date, the courts have yet to dismiss any of these cases.

BlackRock fights lawsuit claiming 'excessive fees', Investment News, August 14, 2014

Investment Company Act of 1940 (PDF)

Securities Lawsuits Accuse BlackRock Of Charging Exorbitant Investment Advisor Fees, Institutional Investor Securities Blog, May 8, 2014


More Blog Posts:
Fidelity Investment, BlackRock, Other Asset Managers Take Issue with Plans to Expand Too Big to Fail Rules, Institutional Investor Securities Blog, April 28, 2014

Investment Fraud Lawsuit Against BlackRock Over Exchange-Traded Funds Could Shed More Light on Securities Lending, Institutional Investor Securities Blog, February 18, 2013

August 18, 2014

SEC Charges Linkbrokers Derivatives in $18M Securities Fraud

The U.S. Securities and Exchange Commission is charging Linkbrokers Derivatives LLC with involvement in an $18 million fraud scam . The New York-based firm, which is no longer a broker-dealer, is settling the charges by paying $14 million.

According to the regulator, brokers at Linkbrokers secretly manipulated the costs of securities trades that it processed. They promised low commission fees and then charged fees that were 1,000% more than what they misrepresented they would be.

Over 36,000 transactions were involved in the securities fraud, which took place between 2005 and 2009. The SEC has already charged a number of brokers at Linkbrokers’ cash equities desk over this matter.

The brokers are accused of secretly raising or lowering trade prices while hiding the actual prices. The alleged manipulations usually took place during times when the market was more volatile and when prices were expected to fluctuate. Although illicit profits in some instances were minimal, they eventually added up. Three of the brokers settled the SEC fraud charges against them for around $4 million. Criminal charges also were filed.

The securities fraud settlement strips the firm of what assets it had left. The money will go to customers that were harmed.

By settling, Linkbrokers is not denying or admitting to the securities charges. Also, it is going to withdraw its broker-dealer registration.

Linkbrokers executed high-volume trades for institutional customers. However, certain institutional clients, such as pension funds and mutual funds, invested the money of smaller investors, meaning that these customers too were affected.

Contact our institutional investor fraud lawyers today.

SEC Charges N.Y.-Based Brokerage Firm With Overcharging Customers in $18 Million Scheme, SEC, August 14, 2014

The SEC Order (PDF)


More Blog Posts:
$18.7M Securities Fraud Case Involving Former Linkbrokers Derivatives Brokers is A Prime Example of How Trade Markups Involving Pennies Can Eventually Cost Investors Millions, Stockbroker Fraud Blog, October 10, 2012

UBS Wealth, OppenheimerFunds Take Financial Hit From Puerto Rico Muni Bonds, Stockbroker Fraud Blog, August 15, 2014

Christ Church Cathedral Sues JPMorgan Chase Over Proprietary Product Sales, Institutional Investor Securities Blog, August 13, 2014

August 15, 2014

FINRA Panel Orders Morgan Stanley Unit to Pay Banamex Unit $4.5M Over Alleged Unauthorized Third Party Loans

According to a Financial Industry Regulatory Authority arbitration panel, Morgan Stanley & Co. (MS) must pay Banco Nacional de Mexico SA unit $4.5 million for allegedly letting funds from a family’s trust account be utilized for paying back third-party loans without authorization. The Mexican bank, also known as Banamex, was trustee to the account. It filed its securities arbitration case in 2012.

The trust was established in 2007 with proceeds from a property that members of a family had inherited and decided to sell. Banamex and the beneficiaries of the trust worked with a Morgan Stanley (MS) broker, who ran their accounts. The trust accounts were at a Morgan Stanley banking unit. They were set up in such a way that the assets were not supposed to be used as guarantees to pay third-party loans that another family member’s account had taken.

Morgan Stanley is accused of compelling the trust accounts to guarantee payment of a third-party loan without getting Banamex’s consent. According to the plaintiffs, the brokerage firm improperly guaranteed or recorded the trust assets for the relative, who did not belong to the trust.

The securities arbitration panel said that Morgan Stanley was negligent and engaged in negligent supervision. The damages are compensatory.

A spokesperson for Morgan Stanley said the broker-dealer was disappointed in the hearing's outcome. The firm maintains that the evidence demonstrates that the head of the family pledged the trust accounts as collateral for loans. Banamex is a Citigroup Inc. (C) subsidiary.

In other FINRA arbitration news, the self-regulatory organization has extended the deadline for how long the SEC has to vote on its proposed measure that would restrict who qualifies as a public arbitrator to resolve investor disputes. The SEC had 45 days from when FINRA published the proposed rule in the Federal Register. Now, the deadline has been moved to October 1. The postponement provides the Commission with additional time to go over comment letters that were sent about the proposal.

The rule is supposed to deal with the perceived perception that bias may be a factor in arbitration panels that adjudicate claims between broker-dealers and investors. If approved, no one from the securities industry would be allowed to serve as a public arbitrator. Instead, these individuals could only serve on the panel in the role of nonpublic arbitrator. Anyone that has worked in the industry for at least 15 years would be permanently barred from serving.

At The SSEK Partners Group, our FINRA arbitration lawyers represent high net worth individuals and institutional investors to recouping their losses. Your best chances of getting back your investment fraud losses is to work with a securities law firm that knows how to help you.


Morgan Stanley must pay $4.5 million to Banamex: panel, Reuters, August 15, 2014

Finra delays decision on public arbitrators, Investment News, August 5, 2014


More Blog Posts:

Former MIT Professor and His Son Plead Guilty to $140M Hedge Fund Fraud, Stockbroker Fraud Blog, August 14, 2014

LPL Financial to Pay Illinois $2 Million Fine Related to Variable Annuity Exchanges, Stockbroker Fraud Blog, August 13, 2014

Christ Church Cathedral Sues JPMorgan Chase Over Proprietary Product Sales, Institutional Investor Securities Blog, August 13, 2014

August 13, 2014

Christ Church Cathedral Sues JPMorgan Chase Over Proprietary Product Sales

Christ Church Cathedral in Indiana is suing JPMorgan Chase & Co. (JPM) According to church leaders, the bank made inappropriate recommendations, causing $13 million in losses. They’re accusing JPMorgan of advising that the church invest in proprietary funds that were underperforming.

The church filed its securities fraud lawsuit in the U.S. District Court in Indianapolis. According to the complaint, the firm inappropriately guided the church into 177 investment products that gave the firm high revenues. InvestmentNews reports that the church said the proprietary products made up at least 68% of its investment portfolio.

The plaintiff contends that the private equity and hedge funds, cash sweep accounts, managed accounts, and mutual funds it invested in between 2004 and 2013 were bound to perform poorly, especially with all the associated fees and expenses. The church said that last year, its assets declined from $31.6 million to $19.2 million, while JPMorgan made millions from cross-selling investment products.

The Episcopalian institution is accusing the bank of breaching its fiduciary duty. It wants compensatory and punitive damages.

The U.S. Securities and Exchange Commission recently started looking into possible conflicts of interest involving JPMorgan and the firm’s sale of certain investments to individual clients. This inquiry is reportedly not public. The Wall Street Journal reported that the Office of the Comptroller of the Currency had been conducting a similar probe of the firm. The newspaper says that this investigation was one of the reasons the bank modified the way it discloses to investors the difference between outside offerings and its products. JPMorgan also now notifies them regarding how much of their monies are in each.

In May, the bank said in a disclosure to clients that it prefers its own funds unless they believe that third-party managers can provide portfolio construction benefits that are “substantially differentiated.” The document was reviewed by The WSJ. The firm admitted that the bank gets “more overall fees” when internal strategies are used. Private bank employees are notified about “investment priorities” that the firm would like to sell.

Banks can take in more of the fees if clients invest in their own products. Sometimes, offering their own investment vehicles allows them to provide performance that is better than average. Doing so can also be less costly for customers.

Amid SEC probe, church sues J.P. Morgan over asset mismanagement, Fortune.com, August 13, 2014

J.P. Morgan Faces More Questions on Conflicts of Interest, The Wall Street Journal, August 8, 2014

JPMorgan's fund choices for its clients said to be under regulatory review, InvestmentNews, August 11, 2014


More Blog Posts:

JPMorgan Will Pay $614M to US Government Over Mortgage Fraud Lawsuit, Stockbroker Fraud Blog, February 8, 2014

JP Morgan VP Barred from Securities Industry By FINRA for Insider Trading Scam, Stockbroker Fraud Blog, January 25, 2014

JPMorgan to Pay $920M to Settle London Whale Debacle & $80M Over Credit-Card Practice Allegations, Institutional Investor Securities Blog, September 19, 2013

August 11, 2014

Kansas Settles SEC Charges Over Allegations it Misled Investors about Risks in Muni Bond Offerings Totaling $273 Million

The U.S. State of Kansas has agreed to settle U.S. Securities and Exchange Commission fraud charges accusing it of failing to disclose in offering documents that the Kansas Public Employees Retirement System (KPERS), its pension system, was very underfunded. The regulator says that this established a repayment risk for bond investors. At issue were eight bond offerings valued collectively at $273 million.

According to the regulator’s order, the bond offers were issued via the Kansas Development Finance Authority (KDFA). Not only did the bond offering documents purportedly fail to disclose KPERS’ unfunded liability but also the paperwork did not describe what effect this could have on payments. The SEC said these poor disclosures stemmed from inadequate communications and procedures between KDFA and the state’s Department of Administration, which let the former know what data should have gone into the offering materials.

As a result, said the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit chief LeeAnn Ghazil Gaunt, Kansas gave investors were given an “incomplete” picture of the state's finances and its potential ability to pay back the bonds (because of other stresses on its budget). The state has since put into place new procedures and policies to make sure that the appropriate disclosures about pension liabilities are disclosed in offering documents.

Kansas settled the SEC charges without denying or admitting to the findings. The state also agreed to cease and desist from future violations of certain sections of the Securities Act of 1933. No fine was involved.

The SEC has been assessing muni bond disclosures nationwide. Previously, it sanctioned New Jersey for not disclosing to investors that two of its biggest pension plans were underfunded. Last year, the regulator charged Illinois for misleading pension disclosures.

Our municipal bond fraud lawyers represent institutional clients and high net worth individual investors. Contact The SSEK Partners Group today.

SEC Charges Kansas for Understating Municipal Bond Exposure to Unfunded Pension Liability, SEC.gov, August 11, 2014

Read the SEC Order (PDF)


More Blog Posts:
Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC, Institutional Investor Securities Blog, August 5, 2014

SEC Wants Texas’ Wyly Brothers to Pay $750M For Securities Fraud, Stockbroker Fraud Blog, August 7, 2014

FBI Probes Possible High-Speed Trading, Insider Trading Link, Institutional Investor Securities Blog, April 1, 2014

August 9, 2014

Regulators Tell Deutsche Bank to Enhance Its Risk Controls and Reporting Systems

The Federal Reserve Bank of New York and the state’s Department of Financial Services want Deutsche Bank AG (DB) to improve its technology and compliance procedures and get rid of risk-management deficiencies. The U.S. regulators made the demand to the financial institution via a private memorandum.

The Wall Street Journal says the confidential pact went into effect two years ago. While it doesn’t appear that regulators plan to take other action against Deutsche Bank over this matter, the New York Fed did give the financial institutional a deadline of the middle of 2015 to remedy a number of priority issues. Sources tell The WSJ that there is worry that reporting or trading mistakes by the bank could result in bigger, unplanned losses for the financial institution and even impact the market.

The Wall Street Journal recently reported that the New York Fed discovered that Deutsche Bank’s U.S. operations has known that it had serious financial reporting problems for years but did nothing to remedy the matter. Last year, New York Fed senior vice president Daniel Muccia sent a letter to the bank's executives saying that the firm's reports were not accurate and of poor quality. The extent of their errors was such that “wide-ranking remedial action” is needed. Muccia called the deficiencies a “systemic breakdown." He said that the regulator has been worried about Deutsche Bank’s US outfit for years.

New York’s Department of Financial Services wants to place government monitors in Deutsche Bank. The initiative is part of the regulator’s growing examination of the foreign-exchange market to determine whether manipulation is occurring. Barclays (BARC) has also been singled out for extra observation.

Meantime, the U.S. Commodity Futures Trading Commission wants Deutsche Bank to modify its systems, including make fixes to transaction reporting problems that could be place the firm, and possibly its trading partners, at greater risk. Bank officials said that they’ve been working to tackle compliance and technology problems and enhance systems and controls, including those involved with daily transaction reports and real-time trade confirmations.

Meantime, the bank also faces scrutiny abroad. BaFin, the financial regulator in Germany, is looking into possible interest-rate manipulation involving Deutsche Bank. Ernst & Young LLP is trying to determine when Anshu Jain, the bank’s co-CEO, first found out about the potential manipulation. In 2013, Deutsche Bank agreed to pay a fine of 725 million euros from manipulating Libor-linked interest rates.

Our institutional investor fraud lawyers are here to help our clients recoup their losses. The SSEK Partners Group represents high net worth individuals and different types of institutional investors.

Deutsche Bank Ordered by U.S. Regulators to Improve Reporting Systems, Risk Controls, The Wall Street Journal, August 7, 2014

Deutsche Bank to RBS Fined by EU for Rate Rigging, Bloomberg, December 4, 2013


More Blog Posts:

Former Merrill Lynch, Oppenheimer, Deutsche Bank Broker is Ordered by FINRA To Pay Investor $11M Over Alleged Securities Fraud, Stockbroker Fraud Blog, April 19, 2013

Deutsche Bank, UBS Being Probed Over Dark Pools & High-Frequency Trading, While An Investor Sue Barclays, Institutional Investor Securities Blog, July 30, 2014

Barclays and Deutsche Bank Under Scrutiny Over Barrier Options Transactions, Institutional Investor Securities Blog, July 17, 2014

August 5, 2014

Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC

Two months after the Second U.S. Circuit of Appeals ruled that he had made a mistake in blocking the $285 million mortgage securities fraud settlement between Citigroup (C) and the SEC, U.S. District Judge Jed Rakoff has approved the deal. Rakoff had originally refused to allow the agreement to go through in 2011, chastising the regulator for letting the firm settle without having to admit wrongdoing.

Following his decision, other judges followed his lead and began questioning certain SEC settlements. The regulator went on to modify a longstanding, albeit unofficial, policy of letting companies settle without having to deny or admit wrongdoing.

Even though Rakoff is approving the deal now, he was clear to articulate his reluctance. In his latest opinion he wrote that he worries that because of the Second Circuit’s ruling, settlements with governmental regulatory bodies, and enforced by the contempt powers of the judiciary, will not have to contend with any meaningful oversight. However, Rakoff said that if he were to ignore the Court of Appeals’ dictates this would be a “dereliction of duty.” Nonetheless, he noted that approving this settlement has left his court with “sour grapes.”

After Rakoff’s refusal to approve the deal a few years ago, the SEC and Citigroup joined forces to appeal his ruling. The Second Circuit found that Rakoff “abused” his discretion and applied the “incorrect legal standard” to the securities case. It remanded the lawsuit back to his court.

The mortgage securities settlement resolves the SEC’s claims that Citigroup misled investors in a $1 billion collateralized debt obligation involving risky mortgages that ended up costing investors $600 million.

Citigroup Judge Approves Accord, Warning of No Oversight, Bloomberg Businessweek, August, 2014

After Long Fight, Judge Rakoff Reluctantly Approves Citigroup Deal, NY Times, August 5, 2014

Approval of SEC-Citigroup Deal Leaves Rakoff With a Case of ‘Sour Grapes’, The Wall Street Journal, August 5, 2014


More Blog Posts:
Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion, Institutional Investor Securities Blog, July 14, 2014

Deutsche Bank, Wells Fargo, Citigroup Sued by Pimco and Blackrock Over Trustee Roles Involving Mortgage Bonds, Institutional Investor Securities Blog, July 3, 2014

Citigroup’s LavaFlow to Pay $5M to SEC For Not Protecting Subscriber Data in ATS
, Stockbroker Fraud Blog, July 28, 2014

August 4, 2014

Argentina Defaults, Misses Interest Payment Deadline on $13B of Restructured Bonds

Argentina has gone into default after not getting a $539 million payment to bondholders. A default has been likely since a number of New York hedge funds, demanding that the South American nation pay them back in full for government bonds that defaulted in 2001, won their claims in court.

A federal district court judge in Manhattan ruled in 2012 that Argentina could not keep regularly paying its main class of bondholders, without paying the hedge funds. They refused to accept new exchange bonds as a trade for the defaulted securities. The older bonds have far greater value.

Among those “holdouts” were individual investors and hedge funds, such as Aurelius Capital Management and Elliot Management’s NML Capital. Billionaire Paul Singer owns Elliot Management. Argentina owes the hedge funds over a billion dollars.

Argentina’s financial woes goes back to its formal default in 2001, which it declared after several years of recession and its inability to pay foreign creditors for loans made. Since then, there have been two restructurings. The Argentina government made a deal with most of its bondholders, now known as exchange bondholders, who traded their bonds in for bonds that had less value. The hedge funds, however, refused to take part.

The bonds that Argentina defaulted on 13 years ago were issued under New York law.
Judge Thomas Griesa, who issued the 2012 ruling, said that any financial firm that paid exchange bondholders without the hedge funds getting their payments would be in contempt. As a result, the $539 million that Argentina placed with the Bank of New York Mellon (BK) to pay bondholders was not transferred out. Last month, the U.S. Supreme Court turned down an appeal made by Argentina.

Payment to main class bondholders, who consented to a lesser payment than what is owed to them, was scheduled for last Wednesday. However, even after a court appointed mediator met with Argentina and hedge fund representatives for several hours, a resolution could not be reached. Argentine Economy Minister Axel Kicillof said his country couldn’t pay the hedge funds because this would trigger clauses that would mandate that the nation give other bondholders similar terms.

Griesa, however, insists that the talks must go on.

The SSEK Partners Group represents institutional investors and high net worth individuals. Our securities fraud lawyers would like to offer you a free consultation.

S.&P. Says Argentina Has Defaulted, New York Times, July 30, 2014

Everything you need to know about Argentina’s weird default, Washington Post, August 3, 2014


More Blog Posts:
SEC Charges Ex-UBS Broker With $730K Elder Financial Fraud Ponzi Scam, Stockbroker Fraud Blog, August 4, 2014

Bank of America’s Countrywide Must Pay $1.3B for Faulty Mortgage Loans, Institutional Investor Securities Blog, July 31, 2014

SEC Gets Nearly $70M Judgment Against Richmond, VA Firms, CEO Find Liable for Securities Fraud, Stockbroker Fraud Blog, August 5, 2014

July 31, 2014

Bank of America’s Countrywide Must Pay $1.3B for Faulty Mortgage Loans

U.S. District Judge Jed Rakoff in Manhattan is ordering Countrywide, a Bank of America (BAC) unit, to pay $1.3 billion in penalties for faulty mortgage loans that it sold to Freddie Mac (FMCC) and Fannie Mae (FNMA) leading up to the 2008 financial meltdown. This was the first mortgage fraud lawsuit that the federal government brought to go to trial.

The penalty is much less than the $2.1 billion maximum that the government had asked for. The government’s mortgage lawsuit against Countrywide originated from a whistleblower case brought against Bank of America by Edward O’Donnell, an ex-Countrywide executive.

Rakoff determined that Freddie and Fannie paid close to $3 billion for High Speed Swim Lane loans. This, after a jury determined last year Countrywide and Rebecca Mairone, one of its ex-executives, were liable for selling thousands of defective loans to the government-sponsored enterprises. Mairone’s penalty is $1 million.

During the trial, the government argued that Countrywide misrepresented risky loans it processed through the HSSL program, also known as “Hustle,” as being investment quality when in fact they bad loans were issued. The misrepresentations took place in 2007 and 2008. Loans were purportedly handled swiftly, and quality was not a priority.

The HSSL program tied bonuses to how rapidly bankers could originate the loans. Federal prosecutors said that this caused Countrywide to bring in loan processors who lacked the proper qualifications and experience and break down internal controls that should have weeded out high risk borrowers.

Rakoff called the fraud by the defendants “brazen," driven by “profits,” and having no regard for the harm inflicted that was inflicted on others. He wrote that even though there were reports internally at Countrywide indicating that the quality of the loans were deteriorating, and employees were vocal about concerns, the lender proceeded to put even more pressure on loan specialties to disregard their worries.

Rakoff said he decided on the bank’s penalty according to how much Freddie and Fannie paid for the mortgages that were proven defective—about 42% of over 17,600 loans. Bank of America has until September 2 to pay. It had argued that it shouldn’t have to pay the penalties, or at least no more than $1.1 million under the Financial Institutions Reform, Recovery and Enforcement Act. Meantime, Mairone will pay her penalty in installments.

Meantime, the impasse between the bank and the U.S. Justice Department over the latter’s mortgage securities investigation remains. The two parties are at odds over whether Bank of America should pay a penalty for alleged wrongdoing by Merrill Lynch & Co. Inc. and Countrywide before the bank owned both. The amount Bank of America is expected to pay to resolve the probe is at least $13 billion. The monies are expected to consist of cash and consumer relief.

Bank of America’s Countrywide Ordered to Pay $1.3 Billion, Bloomberg, July 30, 2014

Judge Orders Bank of America to Pay $1.27 Billion in 'Hustle' Case, The Wall Street Journal, July 30, 2014


More Blog Posts:
SEC Gets Nearly $70M Judgment Against Richmond, VA Firms, CEO Find Liable for Securities Fraud, Stockbroker Fraud Blog, August 5, 2014

Investors Pursue UBS's Puerto Rico Brokerage Over Closed-End Bond Funds, Stockbroker Fraud Blog, July 23, 2014

Deutsche Bank, UBS Being Probed Over Dark Pools & High-Frequency Trading, While An Investor Sue Barclays, Institutional Investor Securities Blog, July 30, 2014

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