Articles Posted in Miscellaneous

The deferred prosecution deal between a HSBC Holdings PLC (HSBC) unit and the US government is now at risk as prosecutors consider whether to file a criminal charge against the bank. It was in 2012 that the HSBC said it would pay $1.92B to resolve a money laundering investigation involving its top executives and lax oversight that allowed drug cartels and terrorists entry into the U.S. financial system. HSBC admitted that it did business with sanctioned countries, such as Iran, and helped Mexican drug cartels launder funds.

As part of the deal to avoid prosecution, the bank agreed to retain an independent monitor to make sure that it complied with anti-money laundering requirements. HSBC is still on probation.

Now, however, the Justice Department is looking into whether the bank has broken any U.S. laws since the deferred prosecution deal was put in place. That deal includes a section stating that HSBC could still be held responsible for its conducted related to the money laundering charges.

Two more 401(K) lawsuits alleging self-dealing have been brought against asset management firms. In Cryer V. Franklin Resources, Inc. et al, the employees of Franklin Resources Inc. are suing their employer. Franklin Resources (BEN) operates under the name Franklin Templeton Investments.

According to the plaintiffs, the asset management firm engaged in self-dealing in its 401(k) plan. They believe that individuals overseeing the retirement plan were in breach of duty under ERISA when they chose costly, proprietary funds that performed poorly instead of selecting less expensive funds that performed better. The plaintiffs are also accusing their employer of charging excessive fees for administrative services.

In the lawsuit, they noted that the 401K had invested in hundreds of millions of dollars in mutual funds that Franklin Templeton and its subsidiaries managed even though there were many other choices available. These entities manage all of the mutual funds in the Franklin Templeton 401(K) retirement plan. The plaintiffs said that Franklin Templeton chose these funds so that it could receive fees and make money.

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Another two asset management firms are the subject of separate (401)K lawsuits filed by their employees . The plaintiffs claim that American Century and New York Life, respectively, charged excessive fees in their retirement savings plans.

In Andrus et al v. New York Life Insurance Company et al , a class action lawsuit, plan participants in the the Employee Progress-Sharing Plan and the Agents Progress-Sharing Plan contend that New York Life and affiliated fiduciaries engaged in self-dealing when they kept a MainStay-branded S&P 500 index mutual fund i both retirement plans. New York Life and the subsidiaries own the MainStay brand fund.

The plaintiffs believe that they improperly benefited from “excessive fees and expenses.” They argued that because the defendants have a financial interest in the mutual fund, they neglected to look for lower-cost funds between ’10 and now. Instead, they kept the MainStay fund, which cost 35 basis points, in the two 401(k) plans. They say that this cost participants more than $3M. The plaintiffs are alleging breach of loyalty and prudence under ERISA.

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Mutual fund company T-Rowe Price Group Inc. (TROW) will pay $194M to clients because of a proxy-voting mistake it made in 2013 during the management buyout of Dell Inc. The payments will be made to a number of institutional client accounts, two trusts, four U.S. mutual funds, and one fund located overseas.

Among the funds to benefit the most are the:

· T. Rowe Price Equity Income Fund (PRFDX)

· T. Rowe Price Science & Technology Fund (PRSCX), which is expected to be affected the most because it has a greater number of Dell shares as a percentage of all its assets.

· T. Rowe Price Institutional Large-Cap Value Fund (TILCX)

Shareholders will not get cash as part of this payout. Instead, they will see the results in the performance bump of the impacted portfolios.

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M & T Bank (MTB) will pay the U.S. government $64M to resolve a lawsuit about housing loans. The case stems from a whistleblower case filed by an ex-M & T underwriter accusing the bank of underwriting fraud. Following its investigation, the Department of Justice said that M & T had awarded loans that failed to meet certain Federal Housing Administration (FHA) requirements.

As part of the deal reached, M & T Bank admitted that between 1/07 and 12/11, it certified mortgage loans that were insured by the FHA even though they did not satisfy the Department of Housing and Urban Development’s (HUD) underwriting requirements and failed to adhere to the federal government’s quality control requirements. M & T Bank also admitted that before 2010, it did not preview every Early Payment Default loan, which are loan that become 60 days past due during the first six months of repayment, nor did it review an adequate FHA loan sample between ’06 and ’11 even though this was an HUD requirement.

M & T also established a quality control process that let it generate preliminary major errors that were much lower than what that rate would have been if the preliminary major error rate were determined more appropriately. The bank did not abide by HUD’s self-reporting requirements even after identifying that a number of FHA insured loans had these “major errors.” It wasn’t until 2008 that it began to self-report loans with errors.

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VimpelCom Resolves FCPA Violations for $795M
The U.S. Securities and Exchange Commission, the U.S. Department of Justice, and regulators in the Netherlands have arrived at a global settlement with VimpelCom Ltd. to resolve Foreign Corrupt Practices Act violations. The telecommunications provider purportedly committed the offenses in order win business in Uzbekistan.

According to the regulator, the company offered bribes to an Uzbek government official who was the relative of Uzbekistan’s President, just as VimpelCom entered that nation’s telecommunications market. VimpelCom needed government-issued licenses, channels, frequencies, and mobile blocks. At least $114M in bribes were funneled through an entity with ties to the official who was bribed, while about $500K was hidden under the guise of “charitable donations” that were also affiliated to the same official.

As a result of the alleged FCPA violations, said the SEC, the telecommunications company earned massive revenues in Uzbekistan. As part of the settlement, VimpelCom will pay $167.5M to the SEC, $130.1M to the DOJ, and $397.5M to Dutch regulators.

PTC Inc. is Accused of Bribing Chinese Officials to Win Business
PTC Inc. and its two Chinese subsidiaries (PTC-China) have consented to collectively pay $28M to resolve civil and criminal actions accusing them of violating the Foreign Corrupt Practices Act. According to the regulator, the two subsidiaries provided improper payments and non-business related travel to Chinese government officials to garner business. The SEC order, which institutes a settled administrative proceeding against the Massachusetts-based technology company, states that the two subsidiaries spent almost $1.5M on improper travel, entertainment, and gifts for the Chinese government officials who worked for state-owned entities that were customers of PTC. This purportedly made the company about $11.8M in profits from sales contracts with these entities.

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In a second round of layoffs, Aequitas Capital Management announced that it is letting of even more workers in the wake of financial problems. A week after disclosing that it would lay off about a third of its workers, the investment firm told employees that almost everyone else would have to go. Workers were given 60 days notice. A spokesperson for Aequitas explained that the Oregon-based investment firm was modifying its strategy and changing its business model.

Aequitas, which manages investments for rich individual investors, appears to be having serious cash flow issues. This is a definite about face for a company that once held $500 million in assets under management. Not only was it a challenge for Aequitas to make payroll during the first month of this year, but also the firm angered investor clients last year when it told them that it couldn’t meet scheduled payouts because of liquidity issues. Aequitas claimed that the delays were unexpected because of “incoming investments” and “timing mismatches involving cash flow.”

Over the last few years, the investment firm has become more focused on subprime credit to purchase consumer healthcare debt, student debt, and motorcycle loans. In total, investors have bet close to $600M on Aequitas’ subprime lending strategies.

Aequitas was also connected Corinthian Colleges Inc., which has been accused by federal regulators of using deceptive and predatory tactics to get students to enroll and borrow money for tuition. According to The Oregonian, an Aequitas affiliate purchased over $500M in Corinthian student loans at a reduced rate and charged the college chains millions of dollars in fees for its assistance. Aequitas had set up the Campus Student Funding LLC to purchase the debt from Corinthian.

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Participants in Anthem Inc.’s 401(K) plan are accusing the plan’s fiduciaries of breaching their fiduciary duties under the Employee Retirement Income Security Act of 1974. They claim that the fiduciaries churned excessive administrative and investment management fees in Vanguard mutual funds. Vanguard Group is the fund’s record-keeper.

According to plaintiffs, the plan fiduciaries chose mutual fund share classes that were “high-priced” instead of equivalent ones that didn’t cost as much and were also available to the plan. As of 12/14, Anthem’s 401(k) plan offered 11 Vanguard mutual funds, including Institutional and Admiral share classes: Vanguard target-date collective investment trust funds, a fund offered by Touchstone Investments, funds by Artisan Partners, and an Anthem common stock fund. The lawsuit claims that each fund in the plan charged fees excessive to what Anthem could have gotten elsewhere with funds that were comparable.

The Anthem 401(k) fund participants also contend that Vanguard was paid excessive fees for record-keeping related services from ’10-’13, which was when the plan paid about $80-$94/participant for record keeping through revenue-sharing and hard-dollar fees. It wasn’t until 9/13 that the cost was reduced to a flat yearly fee of $42/participant.

The plaintiffs argued that a reasonable fee’s “outside limit” for this particular plan should have been no higher than $30. The class-action securities case also claims that instead of including a stable value fund in the plan, there was a money market fund that generated returns that were “microscopic.”

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In the wake of criticism regarding its proposed rule to enhance the investment advice standards that brokers must abide by when working with retirement accounts, the U.S. Department of Labor official reportedly will make modifications. Under the current proposal, brokers would have to act in their clients’ best interests in individual retirement accounts and 401(k) accounts.

The Labor Department introduced the fiduciary rule proposal earlier this year with the backing of the White House. Public comments were sought.

Members of the financial industry have been critical of the proposal’s provision over best interest contract exemption. By signing a legally binding duty with a client to be in a fiduciary relationship with him/her, a broker is entitled to collect compensation in numerous ways, including commissions, as long as he/she acts in that client’s best interests. Some have expressed concern that such an agreement at the start of talks between a potential client and a broker could be problematic. Others are worried that certain costly changes would have to take place for brokers and their firms abide by the rule, and clients may end up having to foot the extra fees.

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According to, U.S. prosecutors are thinking about revoking settlements in currency manipulation settlements that were agreed upon years ago and going after banks for manipulating interest rates. The Department of Justice is looking at whether banks violated the earlier deals that resolved those investigations, which stipulated that they would not break the law. If the government finds that banks did in fact commit crimes after the earlier settlements were reached it would be able to revoke those deals.

It has been a common practice for the DOJ to offer deferred prosecution and non-prosecution settlements in probes involving a number of matters, including market manipulation and violations of sanctions. Banks admit responsibility while cooperating with the investigation.

To rescind such a deal would be unprecedented. Among the banks that have settled probes over London interbank offered rate, also known as Libor, are Royal Bank of Scotland Group Plc (RBS), Barclays Plc (BARC), and UBS Group AG (UBS).