Posted On: September 30, 2011

Standard & Poors Receives SEC Wells Notice Over CDO Rating

Standard & Poor's Ratings Services has received a Wells Notice from the Securities and Exchange Commission notifying the credit rating agency that it ma be subject to possible enforcement action over alleged violations of federal securities laws. The allegations involve S & P’s ratings for the Delphinus CDO 2007-1, a collateralized debt obligation.

The $1.6 billion hybrid CDO was downgraded just a few months after it received AAA ratings from both S & P and Moody’s Investor Services—the two biggest credit rating agencies in the country—by the end of 2008 its securities that were rated AAA had been downgraded to junk status. S & P’s parent company McGraw-Hill says that the credit rating agency is cooperating with the Commission’s examination into this matter. If the SEC were to file an enforcement action against S & P, it would be its first one against a credit rating agency for the rating of a mortgage-backed security.

Just today, the SEC staff expressed concern that despite changes that were implemented at credit rating agencies to better their operations, the Commission is still concerned about certain deficiencies. The SEC voiced its concerns in its first yearly report on Nationally Recognized Statistical Rating Organizations. Alleged deficiencies include:

• Not always following ratings procedures or methodologies.
• Failure to make accurate and timely disclosures.
• Improper management of conflict of interest.
• Lack of effective internal control structures for the rating process.


The new annual reports was mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection, which is seeking better oversight and regulation of credit rating agencies. 10 credit rating agencies registered as NRSROs were examined. The names of the NRSROs weren’t published.

It was just earlier this year that the Senate Permanent Subcommittee on Investigations issued its bipartisan report noting that the most “immediate cause” of the financial crisis three years ago was the “mass ratings downgrades” of securities in 2007 that were made by Moody’s and S & P. Per the report, credit rating agencies were aware that their ratings wouldn’t “hold” and held back on putting up more strict ratings criteria. When they did modify their risk models that noted there were high-risk mortgages being issued, the revised models were not applied to existing securities. All of this allowed investment banks to push out high-risk investments before the tougher criteria were implemented.


Credit ratings changes can impact not just a company’s bond prices but also its stock price. The market can also be impacted.

For the time ever, S & P downgraded the US credit rating a notch lower than AAA. The credit agency expressed concern about the federal government’s ability to take care of its finances. S & P noted that the bipartisan agreement to look for at least $2.1 trillion in budget savings was not enough to quell the nation’s debt in the long run. Now, the SEC is looking into whether news of S & P’s downgrade of the country’s debt was leaked and the info used for trading before it was officially made known.

S&P downgrades U.S. credit rating for first time, Washington Post, August 5, 2011

S.E.C. Faults Credit Raters, but Doesn’t Name Them, NY Times, September 30, 2011

SEC Staff Issues Summary Report of Commission Staff's Examinations of Each Nationally Recognized Statistical Rating Organization, SEC, September 30, 2011


More Blog Posts:

Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court, Institutional Investment Fraud Blog, December 30, 2010

Standard and Poor’s Ratings Lawsuit to Go Forward, Says Judge, Institutional Investment Fraud Blog, September 16, 2010

SEC’s Handling of Credit Rating Agencies Oversight and Failure to Detect Madoff and Stanford Ponzi Scams Questioned at Senate Appropriations Financial Services Subcommittee, Stockbroker Fraud Blog, May 8, 2010

Continue reading " Standard & Poors Receives SEC Wells Notice Over CDO Rating " »

Posted On: September 27, 2011

Class Action Securities Case Accusing SunTrust Banks of Faulty Financial Disclosures Can Proceed

A district court has ruled that Belmont Holdings Corp. v. SunTrust Banks Inc., a putative class securities action claiming that a 2008 SunTrust (STI) securities’ offerings documents contained faulty financial disclosures, can proceed. According to Judge William Duffey Jr. of the U.S. District Court for the Northern District of Georgia, investors’ claims made against SunTrust and affiliates, and a number of underwriters, and Sections 11 and 12(a)(2) of the 1933 Securities Act are enough for moving forward with the case. The statutory provisions place liability on specific participants in a securities offering where these documents have material omissions and misstatements.

Per the court, SunTrust put out securities that were pursuant to a registration statement. This was done as amended by a prospectus supplement, which incorporates by reference SunTrust's 2007 Form 10-K. In their initial securities lawsuit, the plaintiffs argued that when the offering was made three years ago, the US housing market was in chaos. To raise funds, SunTrust allegedly put out the securities and a prospectus supplement that included misleading and false information about is reserves, capital, and ability to manage risk.

As a result, investors were misled about the degree of risky loans that SunTrust was exposed to in the housing market. An amended complaint was submitted by the plaintiff pushing forward similar claims that were made in the first lawsuit. However, clarifying allegations supporting the claim that the prospectus supplement was misleading because it failed to adequately disclose SunTrust’s ALLL and because the financial firm’s loss reserves were not enough to cover its loan losses were also included with this lawsuit.

The plaintiff contends that SunTrust knew that it used flaw financial information that would lead to misleading information being added to its prospectus supplement. This flawed information was allegedly used to determine loan loss reserves, ALLL, and loan loss.

Because the court determined that there is sufficient grounds to allege that SunTrust defendants “did not truly believe” the Provision and ALLL that were disclosed, the plaintiff was able to sufficiently allege plausible claims. The court said that claims against the underwriter defendants can also proceed. Except for a few exceptions, claims against outsider auditor Ernst & Young can also move forward.

If you have been the victim of securities fraud, you may be able to recover your losses from the negligent party. The best way to do this is to work with an experienced securities fraud attorney. Your case may be able to be resolved in arbitration or in court.

Belmont Holdings Corp. v. SunTrust Banks Inc. , Docket (PDF)


More Blog Posts:
Investor May Proceed With Suit Alleging Faulty Financial Disclosures by SunTrust, Institutional Investor Securities Blog, August 6, 2011

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

8/31/11 is Deadline for Opting Out of $100M Oppenheimer Mutual Funds Class Action Settlement, Institutional Investor Securities Blog, August 17, 2011

Continue reading " Class Action Securities Case Accusing SunTrust Banks of Faulty Financial Disclosures Can Proceed " »

Posted On: September 24, 2011

Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed

The U.S. District Court for the Southern District of New York has thrown out some of the Securities and Exchange Commission charges against GSCP (NJ) managing director Edward Steffelin for his alleged involvement in a JP Morgan Securities LLC collateralized debt obligation deal. GSCP (NJ) was the collateral manager for the CDO transaction.

While JP Morgan Securities settled for $153.6 million the SEC’s allegations that it misled investors about the CDO deal by agreeing to pay $153.6 million, Steffelin opted to fight the charges. He claimed that there was no reason for him to think that the CDO offering documents were problematic. He argued that nothing had been left out and nobody was “defrauded.”

In district court, Judge Miriam Goldman Cedarbaum granted Steffelin’s motion to dismiss the SEC’s 1933 Securities Act Section 17(a)(3) claims against him. Per the Act, any person involved in the sale or offer of securities is prevented from taking part in any transaction or practice that would deceive or be an act of fraud against the buyer. Cedarbaum said it would be a “big stretch” to conclude that Steffelin owed the investors that bought the CDO a fiduciary duty. However, she decided not to throw out the SEC’s securities claims related to the 1940 Investment Advisers Act, which has sections that make it unlawful to sell or offer securities to get property or money as a result of an omission or material misstatement. The act also prevents investment advisers from taking part in a transaction or practice that performs a deception or fraud on a client.

The SEC’s charges revolved around a JPM-structured CDO called Squared CDO 2007-1. It mainly included credit default swaps that referred to other CDOs linked to the housing market. Per the Squared CDO’s marketing collaterals, GSCP was noted as the one choosing the portfolio’s deals. What wasn’t included in the disclosure was the fact that Magnetar Capital LLC, a hedge fund, played a key part in choosing the CDOs and had a short position in over 50% of the assets. This meant that Magneta Capital stood to gain financially if the CDO portfolio failed.

JP Morgan Securities is JP Morgan Chase affiliate. Under the terms of its $153.6 million settlement, the financial firm agreed to fully pay back all monies that investors lost. By agreeing to settle, JP Morgan Securities did not admit to or deny wrongdoing. Other large financial firms that have settled SEC securities fraud cases related to CDOs in the last 16 months include Citigroup, which recently reached a $250 million settlement and Goldman Sachs, which settled its case with the SEC last year for $550 million.

JPMorgan to pay $153.6M to settle fraud charges, Boston Herald, June 21, 2011

Court Tosses Some SEC Claims Against IA Exec Over Role in JPM CDO Deal, BNA Securities Law Daily, October 28, 2011


More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rackoff, Institutional Investor Securities Blog, November 9, 2011

Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court, Institutional Investor Securities Blog, October 27, 2011

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


***This post has been backdated.

Continue reading " Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed " »

Posted On: September 23, 2011

SEC Chairman Criticized For Allowing Ex-Commission Official that Benefited from the Bernard Madoff Ponzi Scam to Help Craft Policy Regarding Victims’ Compensation

Securities and Exchange Commission Chairman Mary Schapiro has been taking some heat because the agency allowed David Becker, a former SEC general counsel, to help develop policy regarding compensation for the victims of the Bernard Madoff Ponzi scam should be compensated even though Becker was someone who benefited from the scheme. SEC Inspector General H. David Kotz has asked the Justice Department to look into whether Becker violated any laws as a result and whether criminal charges should be filed.

At a House hearing this week, Becker testified that SEC ethics officials told him that there was no conflict of interest preventing him from taking on this task. Attendees at the hearing criticized Schapiro for letting Becker participate in establishing compensation policy even though he had inherited his own Madoff account. Schapiro has already admitted that she was wrong in allowing him to stay involved.

Some lawmakers believe that Becker’s participation in this type of policy planning is just one more incident that has caused the public to lose faith in the SEC, which didn’t even realize for almost 20 years that Madoff had been running a multibillion-dollar scam. They are now raising questions about leadership within the agency, the ability of SEC senior management to make decisions, and possible flaws in the Commissions procedures and policies as they apply to ethical matters.

On Tuesday, Kotz issued a report stating that Becker took part “personally and substantially” in matters in which he had a financial interest. Also per his report, Kotz said that the ex-General Counsel had recommended to commissioners that they put into place a policy that would value Madoff clients’ claims in a manner that would have restricted the court-appointed trustee’s power to sue Ponzi scheme beneficiaries to get back fictitious profits. Becker is one of those beneficiaries.

Earlier this year, the trustee, Irving Pickard, filed a lawsuit against Becker and his siblings contending that about $1.5 million of the money in their mom’s account was a bogus profit that should go tot the fund designated to pay back victims of Madoff’s Ponzi scam. Becker, who maintains that he never considered there to be a conflict of interest (he says that on two occasions, the ethics committee even advised him that this was correct) said that if he knew then that the trustee would sue him later he would have recused himself from working on the compensation policy.

According to Reuters, while some lawmakers don’t believe that Becker broke any laws, many are wondering why he didn’t decide on his own to not get involved in Madoff-related SEC matters.

Bernard L. Madoff Investment Securities LLC’s multibillion-dollar Ponzi Scam, which cost investors billions, wasn’t discovered until the end of 2008. Madoff has been sentenced to 150 years behind bars.

SEC head under fire as ex-official says he got OK, Chron.com, September 23, 2011

Some lawmakers doubt ex-SEC lawyer broke the law, Reuters, September 22, 2011


More Blog Posts:
Madoff Trustee Files Securities Lawsuit Against Safra National Bank of New York Seeking to Recover Almost $111.7M for Ponzi Scam Investors, Institutional Investor Securities Blog, May 12, 2011

Texas Congressmen Seek Answers from SEC Chairwoman Regarding Conflict of Interest Related to Madoff Debacle, Stockbroker Fraud Blog, March 8, 2011

Madoff Investors Who Were Victims of “Ponzi” Scam Contact Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP to Explore Recovery Options, Stockbroker Fraud Blog, December 17, 2008

Continue reading " SEC Chairman Criticized For Allowing Ex-Commission Official that Benefited from the Bernard Madoff Ponzi Scam to Help Craft Policy Regarding Victims’ Compensation " »

Posted On: September 20, 2011

SEC Proposes Restricting Financial Firms From Betting Against Financial Products Sold to Investors

The SEC has taken steps to prevent financial firms from betting against their packaged financial products that they sell to investors. Its proposal, introduced this week, also seeks to prevent the types of conflict witnessed in last year’s civil lawsuit against Goldman Sachs through a ban on third parties being able to set up an asset-backed pool allowing them to make money from losses sustained by investors.

The proposal comes following a report by US Senate investigators accusing Goldman of setting itself up to make money from investor losses sustained from complex securities that the financial firm packaged and sold. It would place into effect a provision from the Dodd-Frank Wall Reform Consumer and Protection Act, which requires that the commission ban for one year placement agents, underwriters, sponsors, and initial buyers of an asset-backed security from shorting the pool’s assets and establishing material conflict. Restrictions, however, wouldn’t apply when a firm is playing the role of market-maker or engaged in risk hedging. The SEC also wants the industry to examine how the proposal would work along with the “Volcker rule,” which would place restrictions on proprietary trading at banks and other affiliates.

SEC’s Securities Case Against Goldman
The SEC accused Goldman of creating and marketing the ABACUS 2007-AC1, a collateralized debt obligation, without letting clients know that Paulson & Co. helped pick the underlying securities that the latter then went on to bet against. Last year, Goldman settled the securities case with the SEC for $550 million.

In settlement papers, Goldman admitted that it did issue marketing materials that lacked full information for its ABACUS 2007-AC1. The financial firm said it made a mistake when it stated that ACA Management LLC “selected” the reference portfolio and did not note the role that Paulson & Co. played or that the latter’s “economic interests” were not in line with that of investors. The $550 million fine was the largest penalty that the SEC has ever imposed on a financial services firm. $250 million of the fine was designated to go to a Fair Fund distribution to pay back investors.

Volcker Rule
Named after former Federal Reserve Chairman Paul Volcker, the proposed rule is designed to limit the kinds of high-risk investments that helped contribute to the recent financial crisis. It would also restrict the financial firms’ use of their own money to trade. Bloomberg.com reports that overseas firms with businesses in the US may also be subject to these limits on proprietary trading. Per Dodd-Frank, October 18 is the deadline to establish rules to execute the provision.

Volcker Rule May Be Extended to Overseas Banks With Operations in the U.S., Bloomberg, September 16, 2011

SEC moves to limit firms' bets against clients, Reuters, September 19, 2011

Volcker Rule Delay Is Likely, Wall Street Journal, September 12, 2011


More Blog Posts:
Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claim, Institutional Investor Securities Blog, March 2, 2011

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG, Institutional Investor Securities Blog, October 27, 2010

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud Blog, November 12, 2010

Continue reading " SEC Proposes Restricting Financial Firms From Betting Against Financial Products Sold to Investors " »

Posted On: September 17, 2011

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions

The Financial Industry Regulatory Authority has fined Morgan Stanley Smith Barney LLC and Morgan Stanley & Co. Inc. $1 million for charging excessive markdowns and markups to corporate and municipal bond transactions clients. The SRO has also ordered that the financial firm pay $371,000 plus interest in restitution to these investors. By agreeing to settle, Morgan Stanley has not denied or admitted to the securities charges.

According to FINRA, the markdowns and markups that Morgan Stanley charged ranged from under 5% to 13.8%. Considering how much it costs to execute transactions, market conditions, and the services valued, these charge were too much.

The SRO also determined that the financial firm had an inadequate supervisory system for overseeing markups and markdowns of corporate and municipal bonds. Morgan Stanley must now modify its written supervisory procedures dealing with markups and markdowns involving fixed income transactions.

FINRA Market Regulation Executive Vice President Thomas Gira has said that Morgan Stanley violated fair pricing standards. He noted is important for financial firms that sell and purchase securities to make sure that clients are given reasonable and fair prices whether/not a markdown or markup exceeds or is lower than 5%.

A Markup is what is charged above market value. It is usually charged on principal transactions involving NASDAQ and other OTC equity securities. Markups on principal transactions usually factor in the type of security, its availability, price, order size, disclosure before the transaction is effected, the type of business involved, and the general markups pattern at a firm.

A markup on an equities security that is over 5% is seldom considered reasonable or fair. Regulators have rules in place for how much registered representatives can charge customers for services rendered. Not only do the charges have to be reasonable, but also they must be fair and not show particular preferences to any clients.

The 5% policy also applies to agency transactions. Commissions for such transactions also must be “fair and reasonable.” Commissions that go above that must be justified and are often closely examined by regulators.
While most securities professionals are committed to doing their jobs fairly and ethically, there are those determined to take advantage of the system to defraud investors. There are also honest mistakes that can occur that also can result in investor losses.

Financial firms and their representatives are responsible for protecting investors and their money from unnecessary losses resulting from securities fraud or other negligence.

Morgan Stanley Fined $1M Over Muni-Bond Markups, Bloomberg, November 10, 2011

FINRA Fines Morgan Stanley $1 Million and Orders Restitution of $371,000 for Excessive Markups and Markdowns, FINRA, November 10, 2011


More Blog Posts:
Whistleblower Claims SEC is Illegally Destroying Records of Closed Enforcement Cases, Institutional Investor Securities Blog, August 31, 2011

Ex-Bank of America Employee Pleads Guilty to Mortgage Fraud Scam Using Stolen Identities to Buy Homes Not For Sale, Institutional Investor Securities Blog, August 30, 2011

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


**This blog has been backdated.


Continue reading " Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions " »

Posted On: September 16, 2011

President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M

President Barack Obama says he supports Senate bill, S. 1544, which would let companies sell up to $50 million in securities in a public offering without having to register with the SEC. That’s a huge leap from the current $5 million threshold that is allowed under Regulation A of the 1933 Securities Act.

Called the Small Company Capital Formation Act, Senators Jon Tester (D-Mont.) and Pat Toomey (R-Pa.) introduced the bill earlier this month. If passed, Tester said it would relieve some regulatory burdens. S. 1544 is almost identical to H.R. 1070, which Rep. David Schweikert (R-Ariz.) introduced in the House earlier this year.

Senator Tester says that the new rule will help entrepreneurs create jobs and raise additional capital. Greater transparency of offers would also be enhanced, giving investors access to more information. On his Web site, Tester speaks about the need to do everything possible to push for “innovation, entrepreneurship, and job creation.” Tester says the bill streamlines new companies’ ability to be successful and have the capital they need for growth. With this capital, they can concentrate on succeeding rather than getting mired in “government paperwork.” Senator Pat Toomey has the Small Company Capital Formation Act will make it easier for small companies and start-ups to go public.

Meantime, Republican lawmakers have introduced a series of job bills that could also affect securities laws. The Entrepreneur Access to Capital Act, H.R. 2930, exempts crowdfunding from the 1933 Securities Act‘s registration requirements for business individuals who invest under $10,0000 or under 10% of their annual income and companies that raise under $5 million. In his jobs plan, President Obama has also said that he supports this proposed measure.

Other Republican Bills:
H.R. 2930: Introduced by Rep. Patrick McHenry (R-N.C.), this bill would exclude crowdfunding from the 500 shareholder cap of the 1934 Securities Exchange Act, while preempting state regulation. McHenry said that if passed the bill would give smaller investors a chance to get into startups, which they currently cannot do because of current SEC regulation.

S. 1538: Known as the Regulatory Time-Out Act, this bill would set up a one-year moratorium on key regulations with a $100 million or greater yearly effect on the economy.

Access to Capital for Job Creators Act: Introduced by GOP whip Rep. Kevin McCarthy (R-Calif.), the bill would get rid of the SEC’s current ban on general solicitation. Currently, the Commission’s Section 4(2) of the 1933 Act or its Rule 506 of Regulation D doesn’t let private placement issuers use general solicitation or advertising to get investors to put money in their offerings. McCarthy believes that this ban keeps small companies from being able to draw in capital that they need.

Our securities fraud attorneys are here to help investors that have been victims of financial fraud recoup their losses.


Republican Lawmakers Sponsor Slew Of Job Bills Impacting Securities Laws, BNA Securities Law Daily, September 16, 2011

American Jobs Act, White House, September 8, 2011

Tester, Toomey introduce bill to help businesses raise capital, cut red tape, and create jobs, Senate.gov, September 12, 2011


More Blog Posts:
Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities, Stockbroker Fraud Blog, August 31, 2011

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 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, Institutional Investor Securities Blog, August 29, 2011

Continue reading " President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M " »

Posted On: September 14, 2011

SEC Looking at Other Ways to Communicate with Whistleblowers

According to Sean McKessy, who is in charge of the Securities and Exchange Commission’s Office of the Whistleblower, the agency is exploring the best ways to communicate with whistleblowers and their lawyers. McKessy spoke as part of a TheCorporateCounsel.net—sponsored webcast panel on whistleblower issues.

Right now, the office is adhering to the communications policies of the SEC’s enforcement division. However, McKessy said that the Whistleblower Office is in the process of coming up with “communicating best practices,” documenting interactions, and developing internal policies and procedures. Proper documentation would hopefully ensure that the necessary information, and the extent that the whistleblower cooperated, are properly recorded so that this information can be presented in the event there is a claim.

The SEC’s whistleblower office is also working on its yearly report to Congress about the progress the program has made, as well as its the investor protection fund that provides whistleblowers who come forward with their financial reward with compensation.

David Becker, who is a former SEC general counsel and was also a co-panelist, spoke about companies considering whether to self-report internal problems. Becker noted that there is greater incentive to self-report when there is a possibility that an employee might go to the SEC first. However, he pointed out that companies considering self-reporting would have to take into consideration how revealing specific information could impact them, as there is certain information that he SEC “will not be able to walk away from.”

Meantime, many companies are now using certification forms. These request employees to notify a company about unethical or unlawful behavior that they observe. McKessey, however, cautioned that unless the forms are properly worded and constructed, they might affect the employee’s ability to come forward to the SEC. That said, he did push for companies to move towards developing systems that allow for the reporting of wrongdoing. As long as an employee fears reprisal and punishments for stepping forward there is a greater likelihood that they won't say anything.

The whistleblower bounty program is supposed to provide employees that come forward with certain protections. However, a worker can still be fired for company policy violations and poor performance as long an employer provides proper documents showing that the termination would have happened regardless of whether or not the employee was a whistleblower.

Whistleblower Complaints
A whistleblower that steps forward to voluntarily report possible violations of federal securities laws may be entitled to part of the damages collected by the government from the responsible parties. That percentage of the award is 10-30%.

To receive this money, the information provided by the whistleblower must be original and has to result in a successful SEC action ending in an order of monetary sanctions above $1 million.

Stockbroker Fraud
Our securities fraud lawyers are here to help our investor clients recoup their losses.

SEC Whistleblower Office Considering Ways To Communicate With Informants, Chief Says, BNA Securities Law Daily, September 14, 2011

Office of the Whistleblower, SEC


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

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, April 28, 2011

Whistleblower Claims SEC is Illegally Destroying Records of Closed Enforcement Cases, Institutional Investor Securities Blog, August 31, 2011

Continue reading " SEC Looking at Other Ways to Communicate with Whistleblowers " »

Posted On: September 10, 2011

SEC Spent $100K More Than Necessary By Failing to Follow Office of Personnel Management Guidelines In Director’s Hiring

According to the Office of the Inspector General, by failing to abide by its own practices when hiring Henry Hu as Division of Risk director, as well as the guidelines provided by the Office of Personnel Management, the Securities and Exchange Commission unnecessarily spent $100,000. Details of these findings were provided in a report released by the SEC late last month.

The “unprecedented arrangement” with Hu covered his living expenses in DC when he worked as an SEC division director between 9/09 through 1/11. He is now back at work as a professor at the University of Texas Law School.

Specifically faulted over this matter was ex-SEC Executive Director Diego Ruiz, who the Office of Personnel Management said was the person mainly responsible for the offer to cover Hu’s living costs while he worked for the Commission. Ruiz, who has resigned from the agency, was also allegedly involved in the SEC’s misuses of its independent leasing authority. Because Ruiz is no longer with the agency, no disciplinary action will be taken against him.

Hu was approached by the SEC after an op-ed piece that he’d written about Goldman Sachs was published. In his article, Hu talked about how the financial firm’s use of credit default swaps related to its loans to AIG had resulted in an distorted incentive because it let Goldman Sachs not have to deal with economic exposure to losses on the loans even as it retained its right to call the loans. SEC Chairman Mary Schapiro later offered him a position at the agency as head of a new unit that would colloquially be called the “Office of Smart People.”

The SEC paid back the University of Texas 314,198.26 for Hu’s benefits and salary. The agency also spent approximately $120,000 to cover Hu’s plane fare, living costs, and housing. The per diem that Hu was given was a first for the SEC and not in line with OPM guidelines.

The offer to Hu did not include a cap on how much the agency would pay for living expenses. Per the SEC report, and even as these costs mounted, the agency did not attempt to renegotiate the terms of the agreement when it was renewed with Hu.

Usually federal employees are given a $9,000 relocation allowance. However, SEC Chairman Mary Schaprio, reportedly told the OIG that she believed the agreement with Hu was similar to other hiring arrangements previously made with the SEC.

The OGI is recommending that the SEC’s COO establish guidelines for arramagnements made under the Intergovernmental Personnel Act, which was the statute used to hire Hu. Guidelines should include specifics regarding when a per diem arrangement like the one made with Hu can be offered and financial caps should be included.

Securities Fraud
Contact our securities fraud law firm. Shepherd Smith Edwards and Kantas represents institutional and individual investors throughout the US.

OIG: SEC Blew $100,000 by Not Following Guidance in Hire Arrangements for Director, BNA Securities Law Daily, September 30, 2011

Read the OIG Report (PDF)


More Blog Posts:

SEC’s Proxy Access Rule is Rejected by Appeals Court, Stockbroker Fraud Blog, August 5, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

Bill Funding SEC at $1.185B for Fiscal Year 2012 Approved by House Committee, Stockbroker Fraud Blog, June 24, 2011

Posted On: September 8, 2011

Nevada Attorney General Goes After Bank of America for Allegedly Violating Countrywide Fraud Settlement

Nevada Attorney General Catherine Cortez Masto is accusing Bank of America of violating its fraud settlement regarding Countrywide Financial Corp. She is asking the court to “terminate our consent judgment” because she says the violation is “such a material breach.”

Masto claims that instead of honoring the terms of their agreement, Bank of America has:

• Continued to take part in fraudulent activities that allow contracts to stay in place
• Gone back on its promise to lower interest rates when revising the loans of buyers in trouble and instead has raised them.
• Failed to give qualified homeowners the promised loan modifications
• Proceeded with foreclosures even though modification requests by borrowers were still pending
• Not met the 60-day requirement to grant new loan terms

Masto says that numerous complaints have been submitted to her office over modified mortgages that come with new contracts that are more expensive than what was originally stated. Ending Nevada’s participation in the settlement agreement would let the state file a securities lawsuit against the bank over its allegedly questionably practices.

Countrywide, which was acquire by Bank of America, settled lawsuits with a number of states, including Nevada over what they contend was predatory lending practices. To settle the complaints, the bank promised to designate $8.4 billion as direct loan relief, waive tens of millions of dollars in prepayment penalties and late fees, put aside money to help people in foreclosure, help 400,000 borrowers with financial relief, and suspend foreclosure on borrowers that were delinquent and had the most high risk loans.

Unfortunately, in Nevada, where 262,622 Countrywide loans were originated, foreclosure issues piled up, as did complaints about the bank’s loan service practices. Nevada’s new complaint also accuses Bank of America of:

• Telling credit report agencies that consumers who weren’t in default were in default.
• Deceiving borrowers about the reason their requests for loan modifications were turned down.
• Incorrectly claiming that borrowers that had made payments on trial loan modifications hadn’t paid.
• Falsely claiming that loan owners wouldn’t allow changes to mortgages.
• Misleading borrowers with loan modification offers that came with one set of terms but then returning with a different deal.
• Limiting the amount of time employees could help troubled borrowers with their loan-related issues and punishing those that violated these restrictions.
• Not providing the required loan documentation when it packaged mortgage securities and sold them to investors.
• Failing to endorse a mortgage note, per the typical pool and servicing agreements made between investors and Countrywide, and not delivering it to the trustee in charge of the pool.

Nevada says that Such paperwork failures should have prevented the bank from being able to foreclose on borrowers.

Masto’s request to get out of the Countrywide settlement could impact other negotiations by other state attorneys general related to allegedly improper foreclosure practices against Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo. These banks are being asked to put out approximately $20 billion toward loan modifications. Discussions here have been delayed because there is disagreement over whether a settlement would let state regulators sue the banks over questionable practices in the future.

Related Web Resources:
Nevada Says Bank Broke Mortgage Settlement, NY Times, August 30, 2011

Nevada's Attorney General pursues BofA, UPI, September 19, 2011

Nevada Goes to War Against Bank of America, Consumer Affairs, September 2011

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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

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Posted On: September 7, 2011

Jefferson County, Alabama Votes to Settle its $3.14B Bond Debt with JPMorgan and Other Creditors

Avoiding what would have been the largest municipal bankruptcy in our nation’s history, Jefferson County, Alabama has agreed to a settlement with creditors over the $3.14B in bond debt that it owes. This debt comes from the county borrowing too much to overhaul its local sewers.

Jefferson County went into financial crisis in 2008 after Wall Street’s own credit crisis cost the bond loss that should have been paid for with revenue from the county’s sewer system. The combination of debt and aggressive use of derivatives buoyed by the collapse of bond insurers also didn’t help.

The vote to settle was approved by 4 out of 5 county commissioners. Per the settlement, $1.1 billion of debt will be forgiven by creditors. JPMorgan, which arranged the debt deals and is the largest creditor, will taken on the majority of losses.

To make the agreement work, local sewer rates will go up 8.2% during the first three years and after that at no more than 3.25%. The State of Alabama will have to set up new legislation that would establish an entity to run the sewer system and sell bonds. About $2 billion of the debt that remains will have to refinance and the new bonds will have to be sold.

It was in December 1996 that Jefferson County said it would fix and reconstruct its sewer system to settle a complaint contending that federal Clean Water Act was being violated because untreated waste was getting into rivers. The following year, the county sold bonds to pay for the project, making $55 million in offerings that was led by underwriter Raymond James & Associates.

While the sewer system was expected to cost about $1.5 billion, the cost actually ended up being $2.2 billion, which resulted in the sewer system having debt of over $3 billion. Over the next decade, sewer rates went up significantly.

In 2008, the collapse of the housing market caused the credit ratings of XL Capital Assurance Inc. and Financial Guaranty Insurance Co. to be cut because of losses sustained on securities linked to home loans. Buyers weren’t able to hold the bonds and investors started getting rid of them in mass quantities. Banks also stopped buying auction-rate securities to build up their own cash reserves. When many auction failed, Jefferson County was left with numerous interest rates.

In August 2008, JPMorgan reached agreements with state regulators that it would buyback ARS sold to investors. JPMorgan had been the broker for $1.8 billion of Jefferson County’s ARS bonds. The following month, the Jefferson County's trustee said the county was in default under agreements involving $3.2 billion of sewer bonds because it didn’t make $46 million in sewer payments. The county's financial state wasn't helped by the number of corruption-related charges over the last few years resulting in guilty pleas and convictions related to financing and sewer construction.


Related Web Resources:

Jefferson County’s Path From Scandal to Settlement: Timeline, Bloomberg Businessweek, September 16, 2011

Ala. county votes to settle debt, avoid bankruptcy, Associated Press, AP/Google, September 16, 2011

Jefferson County, Alabama


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JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

Continue reading " Jefferson County, Alabama Votes to Settle its $3.14B Bond Debt with JPMorgan and Other Creditors " »

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