Posted On: August 31, 2011

Whistleblower Claims SEC is Illegally Destroying Records of Closed Enforcement Cases

According to SEC employee Darcy Flynn, the Securities and Exchange Commission is continuing to get rid of records from closed enforcement cases. If this is true, then the SEC may be breaking the law. Darcy Flynn has brought a whistleblower case over his allegations.

Flynn has been an attorney with the SEC’s enforcement division. The Washington Post quotes him as claiming that “standing orders to direct the destruction of records” were given to him.

Flynn contends that the agency has been getting rid of certain records for the last 17 years even though this violates federal law. He is also accusing the SEC of misleading government officials about the alleged misconduct. Flynn’s lawyer says that with these records now destroyed it will be much more difficult to hold the SEC for any wrongdoing.

Per the “Records Retention Schedule” investigative case files have to be kept for 25 years. Other documents have to be kept until the National Archives say that they can be destroyed.

In 2010, after Flynn put at an alert over this possible issue, the National Archives and Records Administration asked the SEC to explain. The SEC responded that it would preserve the records until the issue was resolved. Flynn’s concerns at the time were focused on “matters under inquiry” documents. MUIs are preliminary investigative records.

Now, however, Flynn is alleging that it isn’t just MUIs that the SEC is wrongfully destroying. He is claiming that documents from formal investigations, including closed probes, are also being eliminated. Flynn believes that not only are these alleged actions impairing the regulator’s ability to resolve certain securities fraud cases, but they are also adversely affecting its ability to regulate any influence peddling by attorneys that have left the SEC to go work at hedge funds, banks, and other firms under its oversight.

In July 2011, Flynn’s attorney reported the allegations his client made to Sen. Charles E. Grassley (R-Iowa), who has since gone public with them. The lawyer also invoked whistleblower protection on his client’s behalf.

>Per the letter to Grassley, the SEC is accused of:

• Ordering the improper destruction documents related to “matters of inquiry” when the initial probe didn’t lead to an official investigation and files were then closed.

• Retaining an enforcement division policy that leads to 75% of documents obtained in formal investigations and generated by the staff getting tossed out when all but 5% of that should be kept on record.

• Giving staff permission to get rid of internal emails after investigations are concluded.

• Destroying the majority of most staff-generated case documents unless the paperwork falls under a category called ‘formal memoranda.”

Last month, the SEC wrote a letter to the National Archives and Records Administration saying staff had been ordered to keep “all MUI records” and acknowledged that this new protocol is a recent change in policy.

This isn’t the first time that Flynn has acted as a whistleblower. He received about $2.7 million over alleged Medicare fraud in 1993. At the time, Flynn was an insurance-claims auditor. In that whistleblower complaint, he claimed under the False Claims act that the insurer turned in false records related to audits of Medicare payments to hospitals and, as a result, cheated the Medicare program. Without admitting/denying wrongdoing, Medicare consented to pay the government $27.6 million to settle the claims.

SEC still destroying records illegally, whistleblower says, Washington Post, September 6, 2011

SEC lawyer blew whistle before, Street Journal, August 31, 2011

SEC suspends destruction of enforcement records, CNBC, September 8, 2011

More Blog Posts:

Whistleblowers to Be Awarded from $453 Million SEC Fund, Institutional Investors Securities Blog, July 28, 2011

New Bill Calls for Whistleblowers to Notify Financial Firms of Alleged Violations, Institutional Investors Securities Blog, July 23, 2011

Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008, Stockbroker Fraud Blog, May 5, 2011

Continue reading " Whistleblower Claims SEC is Illegally Destroying Records of Closed Enforcement Cases " »

Posted On: August 30, 2011

Ex-Bank of America Employee Pleads Guilty to Mortgage Fraud Scam Using Stolen Identities to Buy Homes Not For Sale

Venedie Roberto Valencia, a former Bank of America employee, is now sentenced to 15 months in federal prison for a mortgage scam he was involved in that used stolen identities to buy homes in Southern California that weren’t being sold. The sentence comes after Valencia, 27, pleaded guilty and admitted that he forged a document linked to bogus bank accounts. As part of his penalty, Valencia must pay $51,688 in restitution.

Valencia’s sentence comes two years after co-conspirator licensed real estate agent Felix Pichardo was sentenced to eight years over the same mortgage scam. Pichardo was asked to pay $770,000 in restitution. Per court documents, the latter used bogus identities on loan applications to buy mortgages on real estate properties that weren’t for sale.

After pleading guilty in 2009, Pichardo admitted that he used to people’s identities to gain access to mortgage loans for properties even though their owners weren’t selling.. Pichardo then cause separate loan applications for $360,000 and $417,000 to be sent to AmTrust bank. The applications were turned in without the consent of the property owner. Pichardo and another conspirator, Latrice Shaunte Borders pocketed the loan proceeds.

Borders also pleaded guilty to criminal charges (for bank fraud) in 2009. She too was ordered to pay $ restitution.

Mortgage Scams
Unfortunately, mortgage fraud occurs more often than we’d like to think. In the process, lenders and borrowers are being bilked of millions of dollars.

Last year, the owners of Premier One Lending Group were indicted for allegedly securing over $30 million in loans through the use of hundreds of loan applications that upped the actual assets and income of the borrowers. Bogus bank documents and income verification documents were also given to lenders. Also last year, more than a dozen people were arrested in connection with a mortgage scheme in Ventura County, California that resulted in the loss of millions of dollars when the homes foreclosed.

In a separate mortgage fraud case, prosecutors filed a civil lawsuit accusing a number of real estate professionals over their involvement in an alleged scam to get unqualified buyers mortgage loans that were insured by the government. Bank statements, pay stubs, government agency letters over benefits that didn’t exist, and other documents were allegedly fabricated.

Meantime, in an unrelated case, mortgage brokerage firm owner Mikhail Kosachevich and his loan processor Jeffrey Gerken were sentenced to 33 months and six months in prison, respectively, over a mortgage scam that cost lenders at least $7 million.

Recently, three mortgage professionals and a title agent were accused of scamming senior citizens. Using the 1st Continental Mortgage Company in Florida, in 2009 and 2010, they allegedly processed 14 reverse mortgages and secured $2.5 million in reverse mortgage loans that the Federal Housing Administration had insured. The money wasn’t used to pay for existing loans and about $1 million in illegal loan proceeds were said to have been pocketed.

Former Bank of America employee sentenced in mortgage fraud scheme, Los Angeles Times, August 29, 2011

Reverse mortgage scam targeted seniors, Miami Herald, July 6, 2011


O.C. mortgage firm busted in crackdown, OC Register, June 17, 2010

More Blog Posts:

Democrats Call for Shareholder Approval of Corporate and Political Spending, Institutional Investor Securities Blog, August 2, 2011

Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report, Institutional Investor Securities Blog, April 23, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investor Securities Blog, April 8, 2011

Continue reading " Ex-Bank of America Employee Pleads Guilty to Mortgage Fraud Scam Using Stolen Identities to Buy Homes Not For Sale " »

Posted On: August 29, 2011

$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm

Once again, Western and Southern Life Insurance Co. is suing Bank of America Corporation for the alleged misrepresentation of mortgage-backed securities that the financial firm sold to the insurer. This time, the plaintiff is seeking $63 million. Western and Southern Life’s first MBS lawsuit against BofA sought $225 million in losses over securities it bought through Countrywide Financial Corp. (Bank of America acquired Countrywide in 2008.)

In this latest ARS lawsuit, Western and Southern Life says that it purchased $134 million in MBS from Bank of America between 2006 and 2008. The company contends that the securities would go on to lose 47% of their value. Western and Southern Life claims that the financial firm disregarded its own underwriting procedures and that a lot of the loans, which had AAA-ratings when they were purchased, have since foreclosed or defaulted. The insurer is also accusing Bank of America of failing to properly examine documents pertaining to the loans, which it says were based on erroneous information (including inflated appraisals, overstated incomes, and false employment verifications).

It was just last month that Western and Southern Life filed two other MBS lawsuits. In its securities case against Morgan Stanley & Co., the insurer is seeking $68.1 million for losses it claims it sustained because the financial firm allegedly misrepresented the MBS. The insurer says that in 2006 and 2007 it bought $179 million in mortgage-backed securities from Morgan Stanley.

Also in July, Western and Southern Life sued Credit Suisse Securities over the alleged loss of $107 million in MBS that the financial firm underwrote and one of its units sold. As with its securities cases against Bank of America, Western and Southern Life claims that Credit Suisse and Morgan Stanley disregarded their standards when accepting the loans. The insurer says that between 2005 and 2008 it bought $276 million in MBS from Credit Suisse.

Although Bank of America’s agreement to settle mortgage-back securities claims by 22 private investors that purchased 530 MBS valued at $424 billion covers Countrywide loans, Western and Southern Life was not part of this arrangement. Among the institutional investors to benefit from the settlement are BlackRock, Inc., PIMCO, Metlife, Inc., the Federal Reserve Bank of New York, and Goldman Sachs.

Per that settlement, Bank of America will give $8.5 billion to Bank of New York Mellon, which, as bondholder trustee, will distribute the funds to investors. However, if the court approves this settlement, investors will still be at a disadvantage because only some 2 or 3 centers on the dollar would be represented for those that suffered financial losses.

BofA Again Sued Over MBS, Yahoo, August 25, 2011

Bank of America agrees to $8.5B Countrywide settlement, Biz Journals, June 29, 2011

Western & Southern sues over investments, Business Courier, July 29, 2011

More Blog Posts:

AIG Files $10 Billion Mortgage-Backed Securities Lawsuit Against Bank of America, Institutional Investors Securities Blog, August 13, 2011

Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards, Stockbroker Fraud Blog, September 29, 2010

Federal Home Loan Banks Say Countrywide Financial Corp Mortgage Bond Investors May Be Owed Way More than What $8.5B Securities Settlement with Bank of America Corp. is Offering, Institutional Investors Securities Blog, July 22, 2011

Continue reading " $63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm " »

Posted On: August 24, 2011

Goldman Sachs CEO Hires Prominent Defense Attorney in the Wake of Justice Department Probe into Mortgage-Backed Securities

Now that the Justice Department is investigating Goldman Sachs (GS), Lloyd C. Blankfein, the broker-dealer’s chief executive, has retained the services of a prominent defense attorney. This move comes following allegations by the Senate Permanent Subcommittee on Investigations accusing firm executives of misleading investors and Congress about mortgage-backed securities. News of Reid Weingarten’s hiring caused Goldman Sachs’ shares to drop almost 5%. On Tuesday, Goldman Sachs lost almost $2.7 billion in market value.

The Senate panel issued a report claiming that Goldman Sachs misled investors when it failed to disclose that it was betting against securities that they were buying from the financial firm. The report also accuses the financial firm’s CEO of lying under oath when making the claim that the financial firm did not have a massive short position against the housing market.

Weingarten is a leading criminal defense attorney at Steptoe & Johnson. He previously represented ex-Enron accounting officer Richard Causey, ex-WorldCom chief executive Bernard Ebbers, ex-Duane Reade chief executive Anthony Cuity, and ex-Tyco International general counsel Mark Belnick.

The senate panel’s report, which is 639 pages long, comes after a 2-year bipartisan investigation. The subcommittee found that traders and executives tried to eliminate their exposure to the subprime mortgage market while shorting the market to make a profit.

The panel accused Goldman of misleading clients when it didn’t tell them that it was betting or shorting against their investments. In 2007, Goldman’s mortgage department made a $1.2 billion profit.

Goldman Sachs’s latest quarterly filing with the SEC reveals that the financial is under scrutiny for a number of issues, including its role as a clearing broker and its compliance with the US Foreign Corrupt Practices Act. The investment bank is also be under investigation at the state, federal, and local levels and is the recipient of subpoenas. In 2010, Goldman Sachs agreed to settle for $550 million charges by the SEC that it misled clients about a synthetic collateralized debt obligation (CDO) when the housing market was collapsing.

Recently, Allstate (ALL) sued Goldman Sachs Group for the over $123 million in MBS that it says that the financial firm fraudulently sold it. Allstate claims that Goldman issued misstatements and made omissions about the mortgages. The National Credit Union Administration also just filed its securities fraud case seeking $491 million from Goldman for the purchase of more than $1.2 billion in MBS sales. NCUA blames Goldman and other financial firms, including JPMorgan and RBS Securities, for the failure of five wholesale credit unions. NCUA says that because of the way Goldman handled the mortgage-backed securities sales, the credit unions did not know they were taking on such huge risks when they made those investments.

Why Goldman Investors Are Overreacting, New York Times, August 23, 2011

Goldman confirms Blankfein and other execs hired outside lawyers, Efinancial News, August 23, 2011

More Blog Posts:

NCUA’s Sues Goldman Sachs for $491M Over $1.2B of Mortgage-Back Securities Sales That Caused Credit Unions’ Failure, Institutional Investor Securities Blog, August 23, 2011

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel, Institutional Investors Securities Blog, April 15, 2011

Continue reading " Goldman Sachs CEO Hires Prominent Defense Attorney in the Wake of Justice Department Probe into Mortgage-Backed Securities " »

Posted On: August 23, 2011

NCUA Sues Goldman Sachs for $491M Over $1.2B of Mortgage-Back Securities Sales That Caused Credit Unions’ Failure

In its fifth MBS lawsuit seeking what is now totaling to be nearly $2 billion in compensatory damages for wholesale credit union members, the National Credit Union Administration (NCUA) wants $491 million in compensatory damages from Goldman Sachs. NCUA is accusing the financial firm of misrepresenting the MBS that were sold to member credit unions that then sustained huge losses that led to their failure.

Goldman Sachs allegedly misrepresented material facts in prospectuses, marketing collaterals, and when selling the MBS. Because of this, NCUA says that the credit unions thought that the risk of loss for their investments was low.

NCUA filed its securities complaint against Goldman Sachs in California district court. NCUA is serving as the liquidating agent for the corporate credit unions that failed. It has filed other securities lawsuits seeking nearly $2 billion in compensatory damages. Two of the other defendants that NCUA is suing are RBS Securities and JPMorgan. Both, and others, are accused of underestimating the risks involved with the MBS.

The wholesale credit unions that failed are:
• Constitution Corporate Credit Union
• Southwest Corporate Credit Union
• Members United Corporate Credit Union
• U.S. Central Corporate Credit Union.
• Western Corporate Credit Union

Because these “corporate” credit unions failed after they invested in toxic MBS that was marketed by Wall Street firms, the credit unions industry has suffered. There are also smaller credit unions that have failed, which has resulted in costs of at least another $1.3 billion. Now, the industry must contend with billions of dollars that will have to be paid over the next several years.

While the NCUA did try to prevent having to shut down the failed corporate credit unions by taking over management of US Central and WesCorp in 2009, including guaranteeing all retail credit union deposits in the corporate credit unions and borrowing up to $20 billion from the Treasury to offer liquidity (this amount has since been paid back), the five credit unions mentioned above were closed in 2010.

NCUA says it is its statutory obligation to obtain recoveries from the parties responsible for the demise of the corporate credit unions and that this will minimize the failure costs to the industry and its insurance funds. It is pursuing those who issued, soled, and underwrote the faulty MBS. NCUA contends that the credit unions.

Our securities fraud law attorneys represents institutional and individual investors throughout the US. We are appalled at all the misconduct on Wall Street that contributed to the financial crisis of 2008. We continue to help our clients’ recoup their losses while holding the negligent parties responsible through arbitration and in court.

Regulator sues Goldman Sachs over risky mortgages, AP, August 9, 2011

Mortgage-backed securities losses costing nation's credit unions, Investigative Reporting Workshop, December 22, 2010

NCUA Sues Wall Street Over Corporate Debacle, Credit Union Journal, June 20, 2011

NCUA sues JPMorgan and RBS to recover losses from failed institutions, Housing Wire, June 20, 2011

More Blog Posts:
$629M Mortgage-Backed Securities Lawsuit Blames RBS Securities and Other Financial Firms For Bankruptcy of Western Corporate Federal Credit Union in 2009, Institutional Investor Securities Blog, July 26, 2011

Morgan Stanley Reports a Possible $1.7B in Mortgage-Backed Securities Losses, Institutional Investor Securities Blog, August 16, 2011

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Posted On: August 20, 2011

Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges

Joseph "Chip" Skowron III, an ex- FrontPoint Partners Hedge Fund manager, has pleaded guilty to criminal charges involving insider trading activities that saved his financial firm more than $30 million in losses. Charges include conspiracy to commit securities fraud and to obstruct a Securities and Exchange Commission probe.

Skowron, 42, admitted that he received confidential information from Yves Benhamou, a French doctor working on clinical trials for a biotechnology company’s hepatitis C drug. After Benhamou notified him that there were certain problems with the medication, in 2008 Skowron had the hedge fund get rid of millions of dollars of shares in the company (the funds’ holdings of Human Genome Sciences Inc. (HGSI)), which is why the more than $30 million loss was averted.

This week, Skowron admitted to directing trades in six FrontPoint health-care funds based on the insider tip. He also said that he lied to the SEC in 2009 about whether Benhamou had given him material, nonpublic information. As part of his plea deal, Skowron will forfeit $5 million. He also could be ordered to serve 5 years behind bars. His sentencing is scheduled for later this year.

A few months ago, FrontPoint paid $33 million to regulators over the related losses that Skowron prevented when he sold the shares. Of the $33 million, $29 million was in disgorgement of avoided losses. The remaining $4 million was for prejudgment interest.

Following the former hedge fund manager’s guilty plea, FrontPoint issued a statement saying that Skowron lied and misled the financial firm’s internal compliance team, the federal government, and the external counsel retained to independently probe his actions. FrontPoint also pointed out that it was never accused of any wrongdoing in this matter.

Over the last two years, 47 hedge fund managers are among those that have pleaded guilty to or been convicted of insider trading. These outcomes are in part because federal government has stepped up its efforts to investigate insider trading on Wall Street.

Earlier this year, Preet Bharara, the United States attorney in Manhattan who has charged dozens of people with insider trading, said the scope of so many allegations indicated that the problem was a “corrupt business model” rather than an “occasional corrupt individual.” He condemned the “prevalence of illegal trading” that has been taking place on Wall Street.

Insider Trading
While legal insider trading, which involves a corporate insider selling stock in the company and reporting these trades to the SEC, does exist and is an acceptable practice, illegal insider trading is against the law. This type of insider trading involves the selling or buying of securities in a manner that uses material, nonpublic information and breaches a fiduciary duty or other relationship of confidence and trust. The person being tipped the insider information, the one tipping the information, or the actual person with the tip making the trade are among those who can be charged with committing illegal insider trading.

Ex-Fund Manager Pleads Guilty to Using Inside Tips, The Wall Street Journal, August 16, 2011

Insider Inquiry Steps Up Its Focus on Hedge Funds, New York Times, February 8, 2011

Former Hedge Fund Portfolio Manager Joseph “Chip” Skowron Pleads Guilty in Manhattan Federal Court to Insider Trading Scheme Involving Clinical Drug Trial, FBI, August 15, 2011

More Blog Posts:

Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011

44% of Insider Traders Convicted of Insider Trading in New York Manage to Get Out of Jail Before Even Serving Time, Institutional Investor Securities Blog, January 25, 2011

Janney Montgomery Scott LLC to Pay $850K to Settle Securities Charges Over Alleged Failure to Prevent Inside Trading, Stockbroker Fraud Blog, July 21, 2011

Continue reading " Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges " »

Posted On: August 18, 2011

Allstate Files Securities Fraud Lawsuit Against Goldman Sachs Over More Than $123M of Mortgage-Backed Securities

According to Allstate Corp., Goldman Sachs Group Inc. committed securities fraud by fraudulently selling the insurer over $123 million of mortgage-backed securities prior to the collapse of the housing market. Allstate is also accusing Goldman of making “untrue statements” and leaving out “material facts” about the mortgages.

Allstate Insurance Corp, a subsidiary of Allstate Corp, filed the securities fraud complaint in New York State Supreme Court this week. The plaintiff is accusing the broker of violating state laws and negligent misrepresentation. Allstate believes that Goldman marketed the MBS as low-risk with strict underwriting criteria even though the latter knew the lenders had stopped abiding by the guidelines and that loans were being produced without the chance of payback.

Goldman has already settled for $550 million similar securities fraud charges filed by the SEC. This was the largest penalty a Wall Street financial firm has ever been ordered to pay. The Commission claimed that Goldman encouraged investors to buy into complex mortgage investments while failing to tell them that a client who was betting against the securities had crafted them. In April, a Senate Report said that in an attempt to move risk away from Goldman and to investors, the broker marketed four complex mortgage securities.

With this latest securities lawsuit against Goldman, Allstate has now filed nine MBS lawsuits since December. The defendants of the other complaints are Countrywide Financial, Bank of America Corp., Morgan Stanley , Merrill Lynch and Co, JPMorgan Chase & Co, Citigroup Inc., Deutsche Bank AG, and Credit Suisse Group:

• The securities lawsuit against Countrywide is over $700 million of toxic MBS that the insurer purchased. Bank of America is named in the complaint because it purchased Countrywide in 2008.

• The complaint against Morgan Stanley is over Allstate’s purchase of over $104 million in residential MBS in six offerings and the broker’s “central role” in creating and selling the securities. Allstate says that Morgan Stanley either knew or “recklessly disregarded” that the lenders involved were putting out risky loans that were not in compliance with underwriting standards.

• Allstate’s lawsuit against Merrill Lynch involves the allegedly fraudulent sale of approximately $167 million of residential mortgage-backed securities.

• The insurer is accusing JP Morgan Chase of misrpersenting the risks involved in over $757 million of mortgage securities that it purchased.

• Allstate bought over $200 million of MBS from the Citigroup defendants and approximately $185 million from the Deutche bank units. Misrepresentations and omissions related underwriting standards, loan-to-value ratios, and owner occupancy data are among the allegations.

• Allstate’s securities lawsuit against Credit Suisse is over $231 million of MBS. Allstate, which bought the securities from the financial firm, says that the latter did not disclose that the underlying loans were toxic. Allstate is alleging fraudulent inducement, fraud, and negligent misrepresentation.

Our securities fraud attorneys represent investors who have suffered financial losses from investing in mortgage-backed securities.

Allstate sues Goldman Sachs over toxic investments, AP, August 16, 2011

Allstate sues Goldman over sour mortgage-backed securities, USA Today, August 16, 2011

Allstate Sues Goldman Sachs Over Toxic Mortgage Securities, Insurance Journal, August 17, 2011

More Blog Posts:

Morgan Stanley Reports a Possible $1.7B in Mortgage-Backed Securities Losses, Institutional Investor Securities Blog, August 16, 2011

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Continue reading " Allstate Files Securities Fraud Lawsuit Against Goldman Sachs Over More Than $123M of Mortgage-Backed Securities " »

Posted On: August 16, 2011

Morgan Stanley Reports a Possible $1.7B in Mortgage-Backed Securities Losses

Morgan Stanley says it may sustain $1.7B in losses over a number of securities fraud cases related to subprime mortgage deals. Citigroup Inc.'s (C.N) Citibank is the plaintiff of the securities lawsuit over the Capmark VI CDO and STACK 2006-1 CDO deals, while there are 15 plaintiffs seeking punitive damages over Cheyne Finance, a structured investment vehicle. Morgan Stanley is also reporting losses over a mortgage-backed security deal involving MBIA Corp.

Our securities fraud attorneys would like you to contact us if you are someone who sustained financial losses in any of these MBS deals with Morgan Stanley. Here are more details about the cases:

• Morgan Stanley says the losses in the Citibank securities fraud lawsuit may be a minimum of $269M over a credit default swap on the Capmark VI CDO deal and another one on the credit default swap involving the STACK 2006-1 CDO deal.

• The financial firm is reporting that it may possibly incur $983 million in damages over the Cheyne deal.

• At least $223M may have been lost on an insurance contract with MBIA Corp. over a mortgage-backed security deal.

Morgan Stanley’s loss forecast doesn’t include interest, legal fees, costs, and other ancillary items. There are also other securities lawsuits involving Morgan Stanley, including:

• Allstate's complaint over investment losses related to residential mortgage-backed securities. The insurer, who purchased over $104 million in MBS from the financial firm and its affiliates, claims that financial firm misrepresented the quality of the mortgages while claiming it had performed due diligence on the loans and mortgage originators. Many of these originators have since closed office or filed for bankruptcy and they are the defendants in government investigations/securities lawsuits.

• MBIA is suing Morgan Stanley over claims that the financial firm made misrepresentations regarding the underwriting standards of bonds that it would go on to insure. The underwriting standards are for securities based on about 5,000 subordinate-lien residential mortgages. The bond insurer claims it has already paid out tens of millions of dollars in claims that were never reimbursed.

Mortgage-Backed Securities
These debt obligations represent claims to the cash flow from mortgage loan pools. Mortgage companies, banks, and other originators put together these pools by a private, governmental, or quasi-governmental entity, which then issues securities representing claims on principal and interest payments that borrowers made on the pool’s loans. This process is called securitization. Types of MBS include pass-through participation certificates, collateralized mortgage obligations, or mortgage derivatives.

If you are an investor who suffered financial losses from investing in mortgage-backed securities, you may have reason to file a securities case against the financial firm that handled your MBS. Our stockbroker fraud lawyers have helped thousands of clients recoup their losses.

M. Stanley may have to pay $1.7 billion in MBS cases, MSNBC, August 8, 2011

Bond Insurer Sues Morgan Stanley—What Are the Ramifications?, CNBC, December 9, 2010

Allstate Sues Morgan Stanley Over Mortgage-Backed Securities, Property Casualty 360, July 7, 2011

More Blog Posts:

AIG Files $10 Billion Mortgage-Backed Securities Lawsuit Against Bank of America, Institutional Investor Securities Blog, August 13, 2011

Investors in Oppenheimer Mutual Funds Considering Opting Out of $100M Class Action Settlement Have Until August 31, Institutional Investor Securities Blog, August 6, 2011

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Posted On: August 13, 2011

AIG Files $10 Billion Mortgage-Backed Securities Lawsuit Against Bank of America

American International Group (AIG) is seeking to recover over $10 billion in mortgage-backed securities-related losses from Bank of America (BAC). The losses were allegedly sustained on $28 billion in investments.

In what may be the largest MBS-related action filed by one investor, the complaint accuses Bank of America and its units Countrywide Financial and Merrill Lynch of misrepresenting the quality of the mortgages that were in the securities that investors bought. AIG also claims that Bank of America used false data to persuade the credit rating agencies to give the MBS high ratings.

Bank of America, which contends that the disclosures that were made were robust enough for sophisticated investors and that AIG is a “seasoned investor,” is denying AIG’s allegations against it. According to Bank of America spokesperson Lawrence Di Rita, the reason AIG suffered the financial losses at issue is because it was reckless in pursing profits and high yields in the “mortgage and structured finance markets.”

Bank of America’s 2008 acquisition of Countrywide for $4 billion has cost the financial firm much more in mortgage-related fines, losses, loan buybacks, and litigation expenses. Courthouse News Service database reports that Countrywide and Bank of America have been named as defendants in 1300 lawsuits in 2011 alone. Recently, Bank of America agreed to settle investor MBS claims for $8.5 billion. Parties to the settlement included the Bank of NY Mellon, BlackRock, the Federal reserve Bank of New York, and PIMCO. However, the New York Attorney General is now calling that settlement inadequate.

As for AIG, which is still largely owned by taxpayers following its 2008 government bailout, the New York Times says that the insurer is preparing similar securities fraud complaints against JPMorgan Chase, Goldman Sachs, and Deutsche Bank to try to recover some of the billions that it lost during the economic crisis.

Government Not Proving Helpful In Pursuing Investment Banks
Contrary to investors, who are seeking to hold big banks accountable in civil court, the Justice Department closed many of its investigations into Wall Street’s big banks without filing any criminal charges. Although it has brought cases against three employees at big financial banks, no executives have been charged. However, a spokesperson for the Justice Department says that the government has pursued the cases were appropriate and that it is much more difficult to prove that a crime has been committed beyond a reasonable doubt than to find a party liable in civil court.

The New York Times reports that a person familiar with the case says that the Justice Department has concluded its investigation into Countrywide’s actions heading into the financial crises and that there will be no charges filed. The government also recently closed its probe into Washington Mutual, with the finding that there was no evidence of criminal wrongdoing. The Washington bank almost failed because of high-risk mortgages.

Related Web Resources:

A.I.G. Sues Bank of America Over Mortgage Bonds, The New York Times, August 8, 2011

AIG sues Bank of America for $10 billion over mortgages, USA Today/AP, August 8, 2011

More Blog Posts:
Federal Home Loan Banks Say Countrywide Financial Corp Mortgage Bond Investors May Be Owed Way More than What $8.5B Securities Settlement with Bank of America Corp. is Offering, Institutional Investor Securities Blog, July 22, 2011

Bank of America Cop. (BAC)’s Merrill Lynch a Defendant of Class-Action Mortgage-Backed Securities Lawsuit Against at Least 1,800 Investors, Institutional Investor Securities Blog, July 22, 2011, June 25, 2011

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Continue reading " AIG Files $10 Billion Mortgage-Backed Securities Lawsuit Against Bank of America " »

Posted On: August 10, 2011

SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts

Three years after five Wisconsin school districts filed their securities fraud lawsuit against Stifel, Nicolaus & Company and the Royal Bank of Canada, the Securities and Exchange Commission has filed charges against the brokerage firm and former Stifel Senior Vice President David W. Noack over the same allegations. The charges stem from losses related to the sale of $200 million in high-risk synthetic collateralized debt obligations (CDOs) to the Wisconsin school districts of West Allis-West Milwaukee School District, the School District of Whitefish Bay, the Kimberly Area School District, the School District of Waukesha, and the Kenosha Unified School District No. 1.

The SEC says that not only were the CDOs inappropriate for the school districts that would not have been able to afford it if the investments failed, but also the brokerage firm did not disclose certain material facts or the risks involved. The school districts are pleased that the SEC has decided to file securities charges.

Robert Kantas, partner of Shepherd Smith Edwards & Kantas LTD LLP, is one of the attorneys representing the school districts in their civil case against Stifel and RBC. Attorneys for the school districts issued the following statement:

“It is our belief that the five Wisconsin school districts and the trusts established to make these investments were defrauded by Stifel, Royal Bank of Canada and the other defendants. Contrary to the way they were represented, the $200 million CDOs that were devised, solicited, and sold by the defendants to our clients in 2006 were volatile, complex, extremely high risk, and totally inappropriate for them. To protect residents and taxpayers, the districts later hired lawyers and others to investigate the investments and their fraud risk. Unfortunately, the failure of the investments did result in losses for the school districts, which in 2008 filed their Wisconsin securities fraud complaint in Milwaukee County Circuit Court. The school districts' goal was to obtain full recovery of the monies lost in this scheme, while protecting and maintaining the districts’ valuable credit ratings. The districts’ lawyers have already examined three million pages of documents regarding in this matter. Meantime, the districts have taken the proper steps to report to the SEC the nature and extent of the wrongdoing uncovered. In the past year, the districts have given the SEC volumes of documents and information for its investigation.”

The school districts had invested the $200 million ($162.7 million was borrowed) in notes that were tied to the performance of synthetic CDOs. This was supposed to help them fund retiree benefits. According the SEC, however, Stifel and Noack set up a proprietary program to facilitate all of this even though they knew that they were selling products that were inappropriate for the school districts and their investment needs.

Stifel and Noack allegedly told the school districts it would take “15 Enrons” for the investments to fail, while misrepresenting that 30 of the 105 companies in the portfolio would have to default and that 100 of the world’s leading 800 companies would have to fail for the school districts to lose their principal. The SEC claims that the synthetic CDOs and the heavy use of leverage actually exposed the school districts to a high risk of catastrophic loss.

By 2010, the school districts' second and third investments were totally lost and the lender took all of the trusts’ assets. In addition to losing everything they’d invested, the school districts experienced downgrades in their credit ratings because they didn’t put more money in the funds that they had set up. Meantime, despite the fact that the investments failed completely, Stifel and Noack still earned significant fees.

The SEC is alleging that Noack and Stifel violated the:
• The Securities Act of 1933 (Section 17(a))
• Securities Exchange Act of 1934 (Section (10b))
• The Securities Act of 1934 (Section 15(c)(1)(A))

The Commission wishes to seek disgorgement of ill-gotten gains along with prejudgment interest, permanent injunctions, and financial penalties.

Related Web Resources:
SEC Charges Stifel, Nicolaus & Co. and Executive with Fraud in Sale of Investments to Wisconsin School Districts,, August 10, 2011

SEC Sues Stifel Over Wisconsin School Losses Tied to $200 Million of CDOs, Bloomberg, August 10, 2011

Read the SEC Complaint

School Lawsuit Facts

More Blog Posts:

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

JP Morgan Settles for $153.6M SEC Charges Over Its Marketing of Synthetic Collateralized Debt Obligation, Institutional Investor Securities Blog, June 18, 2011

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2, Institutional Investor Securities Blog, April 7, 2011

Continue reading " SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts " »

Posted On: August 6, 2011

Investors in Oppenheimer Mutual Funds Considering Opting Out of $100M Class Action Settlement Have Until August 31

Recently, our stockbroker fraud law firm reported on the $100 million class action settlement that Massachusetts Mutual Life Insurance Co.’s OppenheimerFunds Inc. has agreed to pay to settle allegations that it did not properly manage its Oppenheimer Core Bond Fund (OPIGX) and Oppenheimer Champion Fund (OCHBX, OPCHX and OCHCX). The securities case was brought by investors who claimed that the offering documents and sales pitches misrepresented the risks involved in credit default swaps (CDS), mortgage-backed securities (MBS), and other complex securitized financial instruments. Instead, they contend that the funds were marketed and sold as high yielding, diversified, and conservative investments.

The Champion Fund would go on to lose about 80% of its value in 2008. (55% was lost just in November of that year.) The Core Bond Fund lost 33%. (Compare that to the rest of its peer group, which lost 5%.) As a result, Champion Fund investors sustained extremely significant financial losses and Core Bond investors also suffered.

The class action settlement distributes the $100 million between the two groups of mutual fund investors. While Core Bond investors will get $47.5 million, Champion investors are slated to receive $52.5 million. The Boards of Trustees for the funds have already given their approval. However, even in settling, OppenheimerFunds is not admitting to any wrongdoing. Its spokesperson has said that the proposed settlement is in the best interests of its Funds’ shareholders.

Opting Out of the Oppenheimer Funds Class Action
Our securities fraud lawyers would like to remind investors that in a class action case such as this one, the amount each investor will receive is likely substantially less than what could be recovered if one were to file his/her own FINRA arbitration claim or securities fraud lawsuit. Considering that thousands invested in the OppenheimerFunds, Champion Fund investors are expected to get about 3 cents on the dollar, while Core Bond Fund investors will get about 12 cents on the dollar.

If you are an investor who wants to file your own securities fraud case against OppenheimerFunds, you must opt out of the class before August 31, 2011. To do this you have to send a written exclusion to class counsel and this must be postmarked no later than the deadline. If you don’t opt out and the settlement goes into effect, you will get a check for your share and you will not be allowed to file a securities fraud lawsuit or an arbitration claim.

Our securities fraud lawyers know how scary it can be to go it alone, but it is the best way to increase your chances of recovering as much of your financial losses as possible. Our stockbroker fraud law firm would be happy to offer you a free case evaluation.

OppenheimerFunds Settles Mismanagement Case for $100 Million, Bloomberg Businessweek, July 26, 2011

OppenheimerFunds to pay $100 million to settle mismanagement case, Denver Post, July 27, 2011

More Blog Posts:
Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case, Stockbroker Fraud Blog, June 25, 2011

Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010

Wells Fargo Settles Mortgage-Backed Securities Class Action Case for $125M, Institutional Investor Securities Blog, July 19, 2011

Posted On: August 2, 2011

Democrats Call for Shareholder Approval of Corporate and Political Spending

Senate and House Democrats have brought forward a revised proposal that would mandate that shareholders are notified of and approve any spending of corporate money towards political spending. The Shareholder Protection Act of 2011, which was introduced by Rep. Mike Capuano (D-Mass.) and Sen. Robert Menendez (D-N.J.), will hopefully curb unaccountable political spending by company executives, while giving shareholders a say in whether a company should get involved in electoral politics.

Prior to 2010, corporations weren’t allowed to spend on federal campaigns—that is, until the US Supreme Court ruled last year that they could give money to non-profit groups with issue-based advertising. The decision, in Citizens United v. Federal Election Commission, worried many Democrats because that kind of spending is protected from public disclosure laws dealing with campaign contributions. (Prior to that there was the legislature known as the DISCLOSE ACT, which Congress blocked in 2010. The DISCLOSE ACT mandated that there be more disclosure regarding union and corporate money that is given to outside organizations for political purposes.

Per this new measure, companies that want to put money into campaigns would have to get shareholders to approve a budget for this. A corporation’s board of directors would have to approve expenditures greater than $50,000 and these would have to be publicly disclosed. Payments to outside organizations for political purposes would also have to be disclosed.

The bill also covers spending for:
• “Electioneering communications” involving a federal candidate.
• Messages directly calling for a vote for or against a candidate.

Melendez, who served as Democratic Senatorial Campaign Committee chairman, said that he considers it “fundamentally wrong” for corporations to influence elections and be able to make decisions about our nation’s policies. He said that during his time as chair, he saw corporate funding of about $70 million to combat candidates that he supported.

It does not appear likely that Republicans and campaign finance regulation opponents will back this new proposal. Center for Competitive Politics President Sean Parnell has said that with its “regulations on their political speech,” the Shareholder Protection Act is a “thinly disguised effort to silence the business community.” He called the bill an attack on the First Amendment and wants Congress to reject it.

Citizens United v. Federal Election Commission
In a 5-4 decision, the Supreme Court ruled that the government is not allowed to ban corporations from engaging in political spending in candidate elections and that to do so is a regulation of political speech and free speech. President Barack Obama said the Supreme Court’s decision was a victory for Wall Street firms, oil companies, health insurance companies and other powerful interests.

Citizens United v. Federal Election Commission overruled two precedents. McConnell v. Federal Election Commission upheld the portion of the Bipartisan Campaign Reform Act of 2002 (it limits union and corporate campaign spending) and Austin v. Michigan Chamber of Commerce upheld limits on corporate spending directed at either opposing or supporting a political candidate.

Our institutional investment fraud lawyers work hard to help our clients, who have suffered financial losses because of misconduct by Wall Street firms and/or their their employees get their money back. Unfortunately, it is the investors who end up suffering because of broker misconduct.

Related Web Resources:
Senator wants shareholders to have a say, NorthJersey, July 14, 2011

Justices, 5-4, Reject Corporate Spending Limit, NY Times, January 21, 2010

Citizens United v. Federal Election Commission (PDF)

H.R. 2517: Shareholder Protection Act of 2011
, GovTrack

More Blog Posts:

Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report, Institutional Investor Securities Blog, April 23, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investor Securities Blog, April 8, 2011

Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro, Stockbroker Fraud Blog, March 24, 2011

Continue reading " Democrats Call for Shareholder Approval of Corporate and Political Spending " »

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