May 13, 2016

Securities News: $5.95B RMBS Lawsuit Against Moody’s is Reinstated, Barclays Traders Remain on Trial, And Former Bank CEO Enters Guilty Plea to Fraud Charges

1st Circuit Reinstates Lawsuit Against Moody’s
The First Circuit Court of Appeals has reinstated the $5.9 billion residential mortgage-backed securities fraud case brought by the Federal Home Loan Bank of Boston against Moody’s Investor’s Service, Inc. and Moody’s Corp. The bank claims that the credit rating agency knowingly issued false ratings on certain RMBSs that it had purchased.

A district court judge in Massachusetts had dismissed the lawsuit citing lack of personal jurisdiction. The judge also held that the court could not move the lawsuit to a different court where jurisdiction would be proper because cases dismissed for lack of jurisdiction could only be transferred if the dismissal was for lack of subject matter jurisdiction, not personal jurisdiction.

Now the First Circuit has vacated that ruling and found that transferring a case that has dismissed for lack of personal jurisdiction is also allowed. It is moving the RMBS case to the district court, which will decide whether to move the case to New York.

Former Barclays Trader Pleaded Guilty to Libor Rigging
According to prosecutors in the U.K., ex-Barclays Plc. (BARC) trader Peter Johnson pleaded guilty to conspiracy to manipulate the London interbank offered rated in 2014. The government announced the guilty plea this week after lifting a court order that had prevented the plea from being reported until now. The disclosure comes as the criminal trial against five of Johnson’s former Barclays co-workers into related allegations is underway.

The defendants on trial are Jay Merchant, Stylianos Contogoulas, Alex Pabon, Ryan Reich, and Jonathan Matthew. They have pleaded not guilty to the charge of conspiracy to commit fraud. The U.K.’s serious fraud office claims that the men acted dishonestly when they turned in or asked others to submit rates for Libor.

Continue reading "Securities News: $5.95B RMBS Lawsuit Against Moody’s is Reinstated, Barclays Traders Remain on Trial, And Former Bank CEO Enters Guilty Plea to Fraud Charges " »

March 31, 2016

California Sues Morgan Stanley for Purportedly Selling Bad Investments

The State of California is suing Morgan Stanley (MS) for allegedly selling bad residential mortgaged backed securities. According to lawmakers, the firm sold residential mortgage-backed securities as risky loans to subprime lenders while downplaying or hiding the risks and at times encouraging credit raters to bestow the securities with high ratings that were not warranted. Because of these RMBS sales, contends the state, the California Public Employees' Retirement System (CALPERS) and California State Teachers Retirement System (CalSTRS) sustained devastating losses.

California claims that the firm violated the state’s False Claims Act and securities laws. A significant part of the case challenges Morgan Stanley’s behavior when marketing the Cheyne SIV, which was a structured investment vehicle that failed nine years ago. State Attorney General Kamala Harris is seeking $700M from the firm, as well as over $600M in damages.

Meantime, Morgan Stanley has argued that the case is meritless. It contends that the RMBSs were sold and marketed to institutional investors who were sophisticated enough to understand the investments. They claim that the RBMBs performed in a manner that was in line with the sector to which it belonged.

It was just recently that Moody’s Corp. reached an agreement with CalPERS to pay the California pension fund $130M to resolve allegations that the credit rating agency may have acted negligently by giving high ratings to toxic investments. CalPERS contended that its purchase of the investments cost it hundreds of millions of dollars.

Continue reading "California Sues Morgan Stanley for Purportedly Selling Bad Investments" »

February 26, 2016

Securities News: UBS To Pay $33M to NCUA For Mortgage-Backed Securities, CFTC, FCA May File More Civil Charges Against Banks for Libor Rigging, Moody’s Waits for end of DOJ’s Subprime Mortgage Probe

UBS to Pay $33M to NCUA Related to MBS Sold to Credit Unions
UBS AG (UBS) will pay $33 million to resolve a lawsuit filed by the National Credit Union Administration accusing the bank of selling toxic mortgage-backed securities to credit unions. The case revolves around MBS that were underwritten and sold by UBS. The securities were purchased by Members United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union for almost $432.4M from ’06 to ’07.

NCUA alleged that offering documents for the securities sold included untrue statements claiming that the loans were originated in a manner that abided by underwriting guidelines when, in fact, the loans’ originators had “systematically abandoned” said guidelines. The false statements made the securities riskier than what was represented to the credit unions. Eventually, the MBS failed, resulting in substantial losses.

To date, NUCA has recovered almost $2.46B from banks over MBS sales that occurred prior to the 2008 financial crisis.

US, UK Regulators May Pursue More Banks Over Libor
According to the The Wall Street Journal, the US Commodity Futures Trading Commission and the UK Financial Conduct Authority are working on pressing the last civil charges against a number of banks for alleged rigging of the London interbank offered rate. LIBOR is the benchmark that underpins interest rates on trillions of dollars of financial contracts around the globe.

Sources tell WSJ that the firms under scrutiny include Citigroup (C), J.P. Morgan Chase & Co (JPM)., and HSBC Holdings (HSBC)—although the FCA has already dismissed its probe into J.P. Morgan.

Continue reading "Securities News: UBS To Pay $33M to NCUA For Mortgage-Backed Securities, CFTC, FCA May File More Civil Charges Against Banks for Libor Rigging, Moody’s Waits for end of DOJ’s Subprime Mortgage Probe" »

October 25, 2015

Securities Enforcement: DBSR to Pay Almost $6M to Settle SEC Related to Ratings Methodology for RMBSs and Re-REMICs, FINRA Censures NFP Advisor Services for Inadequate Supervision of Private Securities Transactions

Credit Rater Accused of Misrepresenting Surveillance Approach for Complex Securities
Credit rating agency DBSR Inc. will pay nearly $6 million to settle Securities and Exchange Commission charges. The regulator is accusing the credit rater of misrepresenting the surveillance method it used for rating certain kinds of complex financial instruments over a three-year period.

In its yearly examination of DBSR, The agency’s Office of Credit Ratings found that the credit rating agency misrepresented that it would each month monitor its current ratings of re-securitized real estate mortgage investment conduits and residential mortgage-backed securities. DBSR said it did this via a three-step quantitative analysis and a surveillance committee review of each rating.

However, said the SEC, the firm failed to perform this monthly scrutiny and did not have its committee look at each rating every month. Instead, when the committee would get together it would only examine a limited subset of outstanding Re-REMIC and RMBS ratings. The credit rater lacked the sufficient technological resources and staffing for performing surveillance for all outstanding Re-REMIC ratings and RMBS each month. The SEC also said that DBRS failed to disclose modifications to specific surveillance assumptions even though its methodology said that is what it would do.

As part of the settlement, DBRS consented to disgorge over $2.7M in rating surveillance fees that it received from ’09 to ’11 in addition to prejudgment interest. It consented to paying a $2.925M penalty and will hire an independent consultant to look at its internal controls, make recommendations for how to improve them, and other matters.

NFP Advisor Services to Pay $500K to FINRA Over Inadequate Supervision
The Financial Industry Regulatory Authority has censured NFP Advisor Services for failing to properly supervise its registered representatives when they conducted private securities transactions. These representatives were registered not just with the firm but also with a registered investment advisor.

Continue reading "Securities Enforcement: DBSR to Pay Almost $6M to Settle SEC Related to Ratings Methodology for RMBSs and Re-REMICs, FINRA Censures NFP Advisor Services for Inadequate Supervision of Private Securities Transactions" »

October 4, 2015

SEC Regulation News: Commission Proposes Mutual Fund, ETF Liquidity Management Rules, Requests Regulation S-X Comments, and Takes Out Credit Ratings References in Money Market Fund Form and Rule

SEC to Propose Reforms to Improve Liquidity Management for Open-End Funds
The Securities and Exchange Commission voted to propose a package of rule reforms to improve effective liquidity risk management for open-end funds, including exchange-traded funds and mutual funds. If approved, both would have to put into place liquidity risk management programs and improve disclosure about liquidity and redemption practices. The hope is that investors will be more able to redeem shares and get assets back in a timely fashion.

The liquidity risk management program of a fund would have to include a number of elements, including classification of the fund portfolio assets liquidity according to how much time an asset could be converted to cash without affecting the market, the review, management, and evaluation of the liquidity risk of a fund, the set up of a fund’s liquidity asset minimum over three days, as well as board review and approval. The proposal also seeks to codify the 15% limit on illiquid assets that are found in SEC guidelines.

Commission Looks for Comment on Regulation S-X
The SEC announced last month that it is looking for public comment regarding the financial disclosure requirements in Regulation S-X and their effectiveness. The comments are to focus on form requirements and the content contained in financial disclosure that companies have to submit to the regulator about affiliated entities, businesses acquired, and issuers and guarantors of guaranteed securities.

Continue reading "SEC Regulation News: Commission Proposes Mutual Fund, ETF Liquidity Management Rules, Requests Regulation S-X Comments, and Takes Out Credit Ratings References in Money Market Fund Form and Rule" »

May 12, 2015

Moody’s Investors Group Drops City of Chicago’s Credit Rating to Junk

Credit rating agency Moody’s Investor Service has downgraded the credit rating for the city of Chicago, Illinois to junk, reducing the rating of its $8.1 billion of general obligation by two to Ba1, along with a negative outlook. That’s right under investment grade.

The reduction lets banks demand that the Illinois city pay back the debt it owes them early. It also makes Chicago vulnerable to fees to terminate swap contracts.

Aside from the Michigan city of Detroit, Chicago is the lowest-rated of any large city in the U.S. Moody’s downgrade comes after the Illinois Supreme Court decision over retirement benefits last week. The court unanimously decided that a state pension law to reduce government worker benefits, which would get rid of $105 billion in retirement system debt, was unconstitutional. Now, there is skepticism over whether Chicago can keep its $20 billion pension fund short fall under control.

The city’s retirement funds are in financial trouble because for years money was not put aside to take care of the promised benefits. Chicago has four pension funds with collectively over $20 billion in unfunded liabilities. The city claims it currently has only about half of the assets needed to pay for retirement benefits. In 2016, the yearly payment into worker pensions is expected to go up by $600 million.

The state law, which went into effect in 2013, stopped automatic, compounded annual cost-of-living increases for people that were retired while extending the retirement ages for state workers that are still on the job. It also restricted how much of a worker’s salary could be used to figure out pension benefits.

Workers’ unions sued, contending that according to the Illinois constitution, pension benefits are a contractual agreement, which cannot be “diminished or impaired” once they’ve been granted. A circuit court judge agreed with the plaintiffs, but the state government appealed on the grounds that economic necessity compelled its actions.

The Illinois State Supreme Court justices, however, disagreed, finding that the law violated the state constitution’s pension protection clause. The court said that state worker retirement benefits that are promised on the first day of employment could only be increased, not reduced. Meantime, lawsuits submitted by some 60,000 employees—the complaints had been on hold pending the outcome of this case—will have to be dealt with. The ruling impacts not just the state government but also taxpayers of Illinois municipalities that are trying to deal with increasing pension debts.

Standard & Poor’s, Fitch Ratings, and Kroll Bond Rating still have Chicago rated as investment-grade.

The SSEK Partners Group is a securities fraud law firm.

Chicago Faces $2.2 Billion Bank Payout After Rating Cut to Junk, Bloomberg, May 12, 2015

Moody's downgrades Chicago, IL to Ba1, affecting $8.9B of GO, sales, and motor fuel tax debt; outlook negative, Moody's, May 12, 2015

More Blog Posts:

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

OppenheimerFunds Increases Its Exposure to Puerto Rico Debt Despite Downgrade by Moody’s, S & P, and Fitch to Junk Status, Stockbroker Fraud Blog, February 14, 2015

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2015

February 3, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

January 31, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

January 21, 2015

Standard & Poor’s to Pay Almost $80 Million to Resolve SEC Charges Over Ratings Fraud Involving CMBSs

Standard & Poor’s has agreed to settle U.S. Securities and Exchange Commission charges accusing the credit rating agency of fraudulent misconduct when rating certain commercial mortgage-backed securities. As part of the settlement, S & P will pay close to $80 million—$58 million to resolve the regulator’s case, plus $12 million to settle a parallel case by the New York Attorney General’s Office, and $7 million to resolve the Massachusetts Attorney General’s case.

The SEC put out three orders to institute resolved administrative proceedings against the credit rater. One order dealt with S & P’s practices involving conduit fusion SMBS ratings methodology. The Commission said that the credit rating agency’s public disclosures misrepresented that it was employing one approach when a different one was applied to rate several conduit fusion CMBS transactions, as well for putting out preliminary ratings on two transactions. To resolve these claims S & P will not rate conduit fusion CMBSs for a year.

The SEC’s second order said that after S & P was frozen out of the market for its conduit fusion ratings in 2011, the credit rating agency published a misleading and false article claiming to show that it’s overhauled credit ratings criteria enhancement levels could handle economic stress equal to “Great Depression-era levels.” The Commission said that S & P’s research was flawed, were made based on inappropriate assumptions, and the data used was decades off from the Depression’s serious losses. Without denying or admitting to the findings, S & P has consented to publicly retract the misleading and false data about the Depression era-related study and rectify inaccurate descriptions that were published about its criteria.

In the third order, the regulator addressed the internal control failures in the credit rating agency’s surveillance of ratings of residential mortgage-backed securities. According to the SEC, S & P let there be breakdowns in the way it performed ratings surveillance of RMBS that were previously rated from 10/12 to 6/14. S & P modified a key assumption so that its ratings were less conservative and they were not consistent with the assumptions in its published criteria about its ratings methodology. The credit rater is accused of disregarding internal policies for modifying surveillance criteria and, instead, using ad hoc workarounds of which investors were not fully apprised.

S & P has consented to extensive undertakings to improve its internal controls environment. However, it is not denying or agreeing to the findings in the order.

Regarding NY’s CMBS ratings case, Attorney General’s Eric T. Schneiderman said that for several months in 2011, S & P “loosened” its criteria when rating eight CMBS, did not tell investors about this, and misled market participants into thinking that investments’ ratings were determined by more conservative assumptions than what was applied. He said that his actions, as well as those of the Massachusetts Attorney General’s office and the SEC, are part of their efforts to hold S & P accountable so that credit rating agencies know that they have to give investors “rigorous and honest” ratings. Speaking about her office’s settlement, Massachusetts Attorney General Maura Healey said that there would be no tolerance shown toward credit rating agencies that “compromise” their ratings’ “integrity” for “financial gain.”

The settlement was a joint federal-state collaboration between the SEC and the two AG offices.

Our commercial mortgage-backed securities lawyers represent investors in recouping their fraud losses.

Standard and Poor's to Pay $7 Million to Massachusetts for Making False Statement Regarding Its Ratings Methodology,, January 21, 2015

A.G. Schneiderman Settles With Standard And Poor’s Over CMBS Credit Ratings, NY AG, January 21, 2015

SEC Announces Charges Against Standard & Poor’s for Fraudulent Ratings Misconduct, SEC, January 21, 2015

More Blog Posts:
Standard & Poor’s on the Verge of Civil Settlement Over Real-Estate Bond Ratings, Reports WSJ, Institutional Investor Securities Blog, December 29, 2014

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

December 29, 2014

Standard & Poor’s on the Verge of Civil Settlement Over Real-Estate Bond Ratings, Reports WSJ

According to The Wall Street Journal, Standard & Poor’s Ratings Services is close to arriving at a securities settlement with regulators over the way they graded real-estate bonds. The agreement would resolve claims by the U.S. Securities and Exchange Commission, Massachusetts Attorney General Martha Coakley, and New York Attorney General Eric Schneiderman.

The proposed deal is over six commercial real estate bond ratings issued by the credit rater in 2011. In July of that year, S & P withdrew a preliminary rating on a $1.5 billion security comprised of commercial real-estate loans. The decision made debt issuers and investors very angry. (The deal was later partially overhauled and eventually went to market.)

S & P discovered discrepancies in the way its ratings methodology applied for commercial real estate deals. However, it said the incongruence was not outside what is considered an acceptable range. Still, investigators were compelled to look at the withdrawn rating and other deals from that period.

Any settlement reached may result in a suspension for S & P from certain ratings deals—conduit deals, in particular. The credit rater may also be ordered to pay a fine of at least $60 million, which is what its parent company McGraw Hill Financial Inc. took as an accounting charge for third quarter earnings in the wake of these ongoing discussions with regulators.

Lawmakers and others have accused credit rating agencies of playing a big part in causing the 2008 economic crisis. They say that to win business, these companies put out positive ratings for mortgage bonds that eventually failed. Aside from this case, S & P is also dealing with cases brought by pension funds and states. It is also the defendant in a $5 billion lawsuit filed by the U.S. Department of Justice.

Our bond fraud lawyers represent investors seeking to recoup their investment losses.

S&P Nears Settlement on Real-Estate Bond Ratings, The Wall Street Journal, December 25, 2014

U.S. Confident Its $5 Billion S&P Lawsuit Was Not Retaliation, Business Insider, August 25, 2014

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

Attorney Generals Want Securities Cases Against Standard Poor’s To Go Back to State Courts, Institutional Investor Securities Blog, August 21, 2013

US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

December 16, 2014

Moody’s Reduces American Realty Capital Properties Credit Rating to Junk Status, REIT’s Founder Nicholas Schorsch Steps Down

American Realty Capital Properties’ (ARCP) credit rating was just downgraded to junk status by Moody’s Investors Service (MCO). The credit rater is now rating the real estate investment trust with a Ba1, which is just under investment grade. Moody’s has also given ARCP a negative outlook. The downgrade comes following this week’s management shakeup at the REIT and its disclosure several weeks ago of massive accounting irregularities that were covered up.

This week, American Reality Capital Properties’ chairman and founder Nicholas Schorsch stepped down, as did COO Lisa Beeson and chief executive David Kay. In October, ARCP’s chief accounting officer and CFO also resigned after an $23 million accounting mistake was announced.

The change in management comes weeks after the REIT disclosed that it misstated financial results in 2014’s first quarter and purposely concealed the error by misrepresenting second quarter results. After the REIT revealed the $23 million accounting error, a number of firms suspended trading in nontraded real estate investment trusts that were run and backed by companies under Schorsch. The firms included Fidelity, Charles Schwab (SCHW), Pershing, LPL Financial (LPLA), AIG Advisor Group, National Planning Holding, Securities America, and even Schorsch’s Cetera Financial Group broker-dealer network.

In other recent ARCP news, RCS Capital Corp., a company also founded by Schorsch, has consented to pay the REIT $60 million to resolve a lawsuit over the canceled sale of Cole Capital Partners LLC, which would have been a $700 million transaction. As part of the deal, RCS Capital will pay a $42.7 million break up fee plus a $15.3 million two-year promissory note.

ARCP sued RCS Capital Corp. after the latter withdrew from its deal to acquire Cole Capital Advisors Inc. and Cole Capital Partners. ARCP accused RCS of breaching the purchase agreement. RCS wanted to distance itself from ARCP in the wake of the accounting scandal.

Exiting American Realty Capital Properties, Schorsch to give up $100 million in pay, Investment News, December 16, 2014

Moody’s Cuts American Realty Capital Properties to Junk, The Wall Street Journal, December 16, 2014

Schorsch’s RCS Capital Jumps After Settling ARCP Lawsuit, Bloomberg, December 4, 2014

More Blog Posts:
Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm, Stockbroker fraud Blog, October 30, 2014

Fidelity, Schwab, and Pershing Suspend Trading of Schorsch Nontraded Real Estate Investment Trusts, Institutional Investor Securities Blog, November 13, 2014

SEC Claims Fraud Involving a REIT and Bogus Senior Resident Occupants
, Institutional Investor Securities Blog, December 3, 2014

August 21, 2013

Attorney Generals Want Securities Cases Against Standard Poor’s To Go Back to State Courts

The attorneys general of Washington, Arizona, South Carolina, Arkansas, Pennsylvania, Colorado, North Carolina, Delaware, Missouri, Idaho, Maine, Mississippi, Indiana, Tennessee, and Iowa want their securities cases against Standard & Poor’s Rating Services and its parent company The McGraw-Hill Companies Inc. sent back to their state courts. They contend that the cases don’t have federal jurisdiction.

The AGs submitted their consolidated brief in the U.S. District Court for the Southern District of New York. They say that the states’ respective complaints are exclusively state law action causes and the credit rating agency can’t use affirmative defenses to put together federal jurisdiction.

It was the U.S. Judicial Panel on Multidistrict Litigation that moved the 15 state securities lawsuits against Standard & Poor’s to New York’s federal court. Panel chairman Judge Kathryn Vratil, who presides over the U.S. District Court for the District of Kansas, said that they had determined that the “actions involve common question of fact” and centralizing them would be more convenient and expedient for everyone involved. One common “question of fact” was over whether the credit rater “intentionally misrepresented” that its structured finance securities analysis was unbiased, autonomous, and not impacted by its business ties with securities issuers.

The states, however, believe that transferring the cases to NY, where S & P is located, would be an inconvenience to them, and considering that there has been “cooperation” among AGs, this was not necessary. The AGs believe that comity principals are in favor of the federal court turning down jurisdiction and remanding the securities cases to the state courts.

The majority of the lawsuits were filed on the same day that the US Justice Department filed its own complaint against S & P. The government claims that the credit rating giant inflated the ratings of mortgage investments to “defraud” investors and this contributed to the securities’ failing. The DOJ is accusing S & P of making misrepresentations about the objectivity and independence of these ratings.

Last month, a judge declined to throw out the DOJ’s securities fraud case accusing S & P of submitting a defense that was “puffery.” The company had argued that issuers, investors, legislators, and regulators should not have depended on public statements it made about procedures for offering unbiased credit ratings that were supposedly based on data and free from conflicts of interest.

S & P and other credit raters, such as Moody, have been contending with a number of credit rating fraud lawsuits related to the ratings they issued going back to the financial crisis. Claiming that the agencies concealed risks involved and inflated the ratings, investors want the losses they sustained back. Questions continue to be raised over whether the credit raters put their business interests over investors’ best interests.

AGs urge federal judge to return cases against Standard & Poor’s to state courts, Legal News Online, August 19, 2013

Lawsuits Against S.& P. Sent to One Court, The New York Times, June 6, 2013

More Blog Posts:
US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

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

Mandatory Securities Arbitration vs. Court? The Debate Rages Past the Quarter-Century Mark, Stockbroker Fraud Blog, July 4, 2013

August 6, 2013

Liquidators of Bear Stearns Hedge Funds Sue S & P, Moody’s and Fitch for $1.12B

Liquidators are suing Moody’s Investors Service (MCO), Standard & Poor’s, and Fitch Ratings over their issuing of allegedly fraudulent and inflated ratings for the securities belonging to two offshore Bear Stearns (BSC) hedge funds. The plaintiffs are seeking $1.12 billion.

The credit raters are accused of misrepresenting their autonomy, the timeliness of their residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) ratings, and the quality of their models. Because of the purportedly tainted ratings for securities that were supposedly “high-grade,” the funds lost $1.12B.

The funds, which were operated by Matthew Tannin and Ralph Cioffi, failed in 2007. The US government later pursued the two men for securities fraud, but they were acquitted. They did, however, settle an SEC securities case over related allegations last year.

Just recently, a US district judge decided that the US Justice Department’s $5 billion securities fraud lawsuit against S & P could proceed. The government is accusing the credit rating agency of misrepresenting its ratings process as independent and free from influence when actually the impetus to make banks and its other clients happy got in the way of its objectivity. This supposedly caused S & P to put out AAA ratings for poor quality mortgage packages between ’04 and ’07, causing federally issued banks and credit unions to sustain huge losses.

If you think that you suffered investment losses because credit rating agencies misrepresented certain securities by giving them higher ratings than they merited, you may have reason to file a CDO lawsuit or an RMBS securities complaint. The SSEK Partners Group represents institutional investors that sustained losses because others in the securities industry were negligent or careless or committed financial fraud.

The funds involved in the liquidators' lawsuit:

• Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd.
• Bear Stearns High-Grade Structured Credit Strategies (Overseas)

Liquidators of failed Bear Stearns funds sue rating agencies, Reuters, July 10, 2013

Bear Stearns Fund Liquidators Sue Credit-Rating Firms, Wall Street Journal, July 10, 2013

More Blog Posts:

DOJ’s $5B Securities Lawsuit Against Standard & Poor’s Can Proceed, Says Judge, Institutional Investor Securities Blog, July 22, 2013
Texas Money Manager Sued by SEC and CFTC Over Alleged Forex Trading Scam, Stockbroker Fraud Blog, August 6, 2013

GAO Wants SEC to Look At Other Criteria for Who Qualifies As An Accredited Investor, Institutional Investor Securities Blog, July 31, 2013

July 22, 2013

DOJ’s $5B Securities Lawsuit Against Standard & Poor’s Can Proceed, Says Judge

U.S. District Judge David O. Carter for the Central District of California has turned down Standard & Poor’s bid to have the Justice Department’s $5 billion securities lawsuit against it dismissed. This affirms Carter’s recent tentative ruling earlier on the matter.

S & P is the largest credit rating agency in the world. It is a McGraw Hill Financial Inc. unit.

According to the US government, the credit rater fraudulently misrepresented its ratings process as objective and independent when it was, in fact, stymied from issuing ratings because of its desire to please banks and other clients. Instead, between 2004 and 2007, S & P purportedly issued AAA ratings to certain poor quality mortgage packages, including residential mortgage-backed securities, collateralized debt obligations, and subprime mortgage-backed securities. Now, prosecutors want to recover the losses that credit unions and federally insured banks allegedly suffered because of these inaccurate ratings that it contends upped investor demand for the instruments until the prices soared and the market collapsed, contributing to the global economic meltdown that followed.

S & P contends that it did not cause the financial crisis. It claims that just like the Federal Reserve, the US Treasury, and other market participants, the credit rater could not have foreseen the market events that went on to happen in 2008.

Seeking to have the securities case dismissed, S & P argued that its public statements about its objectivity and autonomy that prosecutors identified as purportedly fraudulent misrepresentations, including official policy statements about rating deals and employee conduct codes, are in actuality “puffery” statements that investors were not supposed to take at face value. S & P lawyers said that because of this, the government couldn’t use these statements as grounds for its securities fraud case.

Now, Judge Carter is saying that he finds S & P’s “puffery” defense “deeply… troubling,” especially in light of the implications. He observed that with this defense, S & P is implying that investors, legislators, and regulators shouldn’t have taken seriously any of the public statements the credit rater made about either supposed data-based, unbiased credit ratings or its agency procedures.

As in his earlier, tentative ruling, Carter said that contrary to defendants’ protestations, his court cannot see how all the “must nots” and “shalls” used by S & P in its statements was merely the company’s way to aspire about vague objectives. Rather, he sees these statements as “specific assertions” about polices and they contrast conduct the government is accusing S & P of committing.

Meantime, S & P is battling more than a dozen CDO lawsuits filed by state prosecutors who are accusing the credit rating agency of the same alleged fraud.

Please contact our CDO lawyers at Shepherd Smith Edwards and Kantas, LLP if you believe your losses are due to securities fraud. Your initial case consultation with The SSEK Partners Group is free.

U.S. Federal Judge Calls S&P Defense Troubling, NASDAQ, July 17, 2013

Judge lets U.S. pursue $5-billion fraud lawsuit against S&P, Reuters, July 17, 2013

More Blog Posts:
District Judge Not Inclined to Toss $5B Securities Fraud Case Against Standard & Poor’s, Institutional Investor Securities Blog, July 4, 2013

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis, Institutional Investor Securities Blog, May 9, 2013

US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

July 4, 2013

District Judge Not Inclined to Toss $5B Securities Fraud Case Against Standard & Poor’s

A U.S. district judge in California has put out a tentative decision in the $5B fraud lawsuit against Standard & Poor’s indicating that he will likely reject a motion to dismiss the civil case against the credit rating agency. Judge David Carter said he needs more time to come up with his final ruling, which is expected on July 15, but for now, he is turning down S & P’s request to toss out the case outright.

Federal prosecutors sued S & P contending that the credit rater chose not to alert investors that the housing market was failing in ‘06 and inflated high-risk mortgage investments’ ratings. The Obama Administration said the ratings agency did not act fast enough to put downgrade a large number of subprime-backed securities despite realizing that home prices were dropping and borrowers were finding it hard to pay back loans. Instead, collateralized debt obligations and mortgage-backed securities continued to receive elevated ratings from the top credit rating agencies, allowing banks to sell trillions of these investments.

Contending that the credit rater committed fraud by making false claims that its ratings were objective, the US Department of Justice wants S & P to pay $5 billion in penalties, The government believes that between 9/04 and 10/07, S & P delayed updating both its ratings criteria and analytical models, which means the requirements were weaker than what analysts say should have been necessary to ensure their accuracy. During this time, S & P credit rated about $1.2 trillion in structured products related to $2.8 trillion worth of mortgage securities and charged up to $750 per rated deal. The government says that this means that S & P saw the investment banks that put out the securities as its primary customers.

Now, S & P wants the MBS case thrown out, contending that the lawsuit is too broad and doesn’t offer enough specific examples of the alleged fraud. The credit rating agency maintains that the statements federal prosecutors say are the allegedly fraudulent misrepresentations are ones that investors were not supposed to take at face value and, therefore, they cannot be grounds for the securities fraud case.

Also, S & P’s legal defense says that just like other market participants, including the US Treasury, the credit rating agency did not have the ability to predict how severe the ensuing “catastrophic meltdown” would be and, if anything, this showed a “lack of prescience” rather than fraud.

However, Judge Carter in his tentative ruling, did say that S & P’s statements in employee conduct codes and official policy statements about its standards and processes for ratings deals aren’t just “mere aspirational musings,” but instead are “specific assertions of policies… in stark contrast” to conduct that the government is alleging occurred.

Please contact The SSEK Partners Group and ask for your free, no obligation case assessment with one of our experienced securities lawyers today.

Ruling Undermines S&P's Defense in U.S. Lawsuit, The Wall Street Journal, July 9, 2013

Judge unlikely to dismiss suit against S&P, The Tribune, July 8, 2013

U.S. government slams S&P with $5 billion fraud lawsuit, Reuters, February 5, 2013

More Blog Posts:

US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis, Institutional Investor Securities Blog, May 9, 2013

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

May 9, 2013

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis

In the U.S. District Court for the Central District of California, Standard & Poor's Financial Services LLC is asking for the dismissal of a US Department of Justice securities fraud lawsuit accusing the ratings firm of knowing that it was issuing faulty ratings to collateralized debt obligations and residential mortgage-backed securities during the financial crisis. S & P is contending that the claims are against judicial precedent and don’t establish wrongdoing.

The government sued the credit rating giant and its parent company McGraw-Hill Companies Inc. (MHP) earlier this year. It claims that S & P took part in a scheme to bilk investors by wrongly representing that its ratings for collateralized debt obligations and residential mortgage backed securities were independent and objective, purposely giving artificially high ratings to specific securities, and ignoring the risks involved. Submitted under the 1989 Financial Institutions Reform, Recovery, and Enforcement Act, this is the first federal legal action filed against a rating agency related to the economic crisis.

Now, however, S & P is arguing that the DOJ’s RMBS lawsuit does not succeed in alleging fraud. The credit rater says that it shouldn’t be blamed for not having been able to foresee the financial crisis of 2008.

S & P believes that the statements prosecutors rely upon in their case are not actionable, seeing as other courts have struck down similar challenges in past federal cases. The credit rating agency cited the example of Boca Raton Firefighters and Police Pension Fund v. Bahas, in which U.S. Court of Appeals for the Second Circuit’s decision affirmed the tossing out of a pension fund’s securities case against S & P after finding that statements about the “credibility and objectivity” of the agency’s ratings were the type of “puffery” that previously was not considered actionable.

Also, S & P claims the allegations it misled investors about its ratings’ objectivity and accuracy don’t succeed in this CDO lawsuit. Rather, they demonstrate that during what proved to be the start of an economic meltdown, there was debate within the agency about how complex financial instruments might fare moving forward.

Read the Complaint (PDF)

Boca Raton Firefighters and Police Pension Fund v. Bahash

More Blog Posts:
US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

April 24, 2013

Standard Poors Wants DOJ’s Mortgage Debt Lawsuit Against It Tossed

Standard Poors is asking a judge to dismiss the US Justice Department’s securities lawsuit against it. The government claims that the largest ratings agency defrauded investors when it put out excellent ratings for some poor quality complex mortgage packages, including collateralized debt obligations, residential mortgage-backed securities, and subprime mortgage-backed securities, between 2004 and 2007. The ratings agency, however, claims that the DOJ has no case.

Per the government’s securities complaint, financial institutions lost over $5 billion on 33 CDOs because they trusted S & P’s ratings and invested in the complex debt instruments. The DOJ believes that the credit rater issued its inaccurate ratings on purpose, raising investor demand and prices until the latter crashed, triggering the global economic crisis. It argues that certain ratings were inflated based on conflicts of interest that involved making the banks that packaged the mortgage securities happy as opposed to issuing independent, objective ratings that investors could rely on.

Now, S & P is claiming that the government’s lawsuit overreaches in targeting it and fails to show that the credit rater knew what the more accurate ratings should have been, which it contends would be necessary for there to be grounds for this CDO lawsuit. In a brief submitted to the United States District Court for the Central District of California, in Los Angeles, S & P’s lawyers argue that there is no way that their client, the Treasury, the Federal Reserve, or other market participants could have predicted how severe the financial meltdown would be.

S & P is also fighting over a dozen other CDO lawsuits filed by state attorneys general that make similar securities fraud allegations. The states are generally invoking their consumer-protection statutes, which carry a lower burden of proof, and the credit rating agency is seeking to have their securities lawsuits moved to federal court.

S.&P. Seeks Dismissal of U.S. Civil Suit Over Rating of Mortgage Debt, NY Times, April 22, 2013

U.S. Sues S&P Over Ratings, The Wall Street Journal, February 5, 2013

More Blog Posts:

US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

November 8, 2012

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court

A ruling by the Australian Federal Court against Standard & Poor’s could give 13 NSW councils about A$30M in compensation for their about A$16M in synthetic derivative losses. According to the court, the ratings firm misled investors by giving its highest ratings to complex investment instruments that ended up failing during the worldwide economic crisis. The councils can now claim compensation from S & P and co-defendants Royal Bank of Scotland (RBS)- owned ABN Amro Bank and the Local Government Financial Services, Ltd. The three had sold the councils constant proportion debt obligation notes, promoted as Rembrandt notes, six years ago.

Specifically to this case, Australian Federal Court Justice Jayne Jagot said that Standard & Poor’s took part in conduct that was “deceptive” when it gave AAA ratings to constant proportion debt obligations that were created by ABN Amro Bank NV. The Australian townships were among those that invested what amounted to trillions of dollars in the CPDOs, as well as in collateralized debt obligations.

The projected A$30M in compensation includes not just councils’ losses, but also interest and costs. The councils are also entitled to receive compensation for breach of fiduciary duty from LGFS, which succeeded in its own claim against Standard and Poor’s and ABN Amro for Rembrandt notes that it sold to its parent company after the notes were downgraded from their triple-A rating to triple-B+.

This ruling, issued on Monday, is considered a landmark one in that it is the first judgment to be issued against a ratings firm since the worldwide financial crisis over the way it rated complex securities. The decline of synthetic derivatives during the economic collapse played a huge role in the collapse of Lehman Brothers. The decision could be an opening for similar cases elsewhere around the globe.

Yesterday, back in the United States, Illinois Attorney General Lisa Madigan won a ruling in circuit court allowing her to move forward with litigation against Standard & Poor’s Ratings Services. She is also accusing the rating firm of misleading investors while the economic meltdown was happening. Madigan claims that S & P sought to favor banker clients and up profits through the assignation to MBS of its highest ratings. The securities later failed. Madigan said that this ruling was key in that it was the first obstacle to pursuing the case and it has now been overcome. She said that this is a statement that S & P isn’t going to be able to use legal measures to escape the “fact that they committed fraud.”

For years, rating firms have overcome lawsuits in the US by claiming that the ratings they issue are opinions and have First Amendment protection. This Illinois lawsuit, however, appears to get around this by concentrating not on the actual ratings but on public statements S & P made about how its ratings process is autonomous and objective. Circuit Court Judge Mary Anne Mason said that First Amendment protections aren’t applicable to this case, because constitutions, both state and federal, don’t protect practices that are “false, misleading, or deceptive.”

A Casino Strategy, Rated AAA, The New York Times, November 8, 2012

Illinois Clears Legal Hurdle in Suit Against S&P, The Wall Street Journal, November 7, 2012

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 Investor Securities Blog, December 30, 2010

Standard & Poors Receives SEC Wells Notice Over CDO Rating, Institutional Investor Securities Blog, September 30, 2011

Make Credit Rating Agencies Collectively Liable for Inaccuracies, Proposes Lawmaker, Stockbroker Fraud Blog, October 7, 2009

August 23, 2012

2nd Circuit Affirms Dismissal of $18.5M Auction-Rate Securities Lawsuit Against Merrill Lynch Filed by Anschutz Corp.

The U.S. Court of Appeals for the Second Circuit has affirmed a lower court’s ruling to dismiss the ARS lawsuit filed against Merrill Lynch (MER), Merrill Lynch, Pierce, Fenner, and Smith Inc. ( MLPF&S), Moody’s Investor Services (MCO), and the McGraw-Hill Companies, Inc. (MHP). Pursuant to state and federal law, plaintiff Anschutz Corp., which was left with $18.95 million of illiquid auction-rate securities when the market failed, had brought claims alleging market manipulation, negligent misrepresentation, and control person liability. The case is Anschutz Corp. v. Merrill Lynch & Co. Inc.

According to the court, Merrill Lynch underwrote a number of the Anchorage Finance ARS and Dutch Harbor ARS offerings in which Anschutz Corp. invested. To keep auction failures from happening, Merrill was also involved as a seller and buyer in the ARS auctions and had its own account. Placing these support bids in both ARS auctions allowed Merrill to make sure that they would clear regardless of the orders placed by others. The financial firm is said to have been aware that the ARS demand was not enough to “feed the auctions” unless it too made bids and that its clients did not know of the full extent of these practices.

Per its securities complaint, Anschutz contends that the description of Merrill’s ARS practices, which were published on the financial firm’s website beginning in 2006, were misleading, untrue, and “inadequate.” The plaintiff accused the credit rating agency defendants of giving the ARS offerings ratings that also were misleading and false and should have been lowered (at the latest) in early 2007 when Merrill knew or should have known that the ratings they did receive were unwarranted.

Last year, the United States District Court for the Southern District of New York dismissed the ARS lawsuit, concluding that Merrill’s disclosures on its Web site had been “sufficient” to make Anschutz aware of Merrill’s ARS “support bidding practices.” In regards to the claims against the credit rating agency, the court found that the plaintiff did not succeed in alleging that there was any actionable misstatement under California or New York law because the challenged ratings were only “statements of opinion.”

Now, in affirming the district court’s decision to dismiss the ARS lawsuit, the appeals court has found that the “generalized and conclusory allegations” made by the plaintiff are not enough to plead that a violation of securities law occurred. The 2nd Circuit also affirmed the district court’s decision to dismiss the California statutory claims against Merrill on the basis that Anschutz did not allege that the harm it suffered occurred in that state or that the financial firm committed any behavior there that was relevant.

As for the claims against the credit ratings agency, the appeals court held that the plaintiff did not have any alleged contact or relationship with the defendants that would “remotely” meet the standard under New York law, which mandates that to make a negligent misrepresentation claim a plaintiff has to allege that because of “a special relationship” it was the defendant’s duty to provide the correct information.

If your losses are a result of a failed ARS and you believe that misconduct or negligence on the part of a financial firm or one of its advisers was a factor, please contact one of our auction-rate securities lawyers today.

Anschutz Corp. v. Merrill Lynch & Co. Inc.

More Blog Posts:

Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court, Institutional Investor Securities Blog, January 17, 2011

July 12, 2012

Institutional Investor Roundup: Evergreen Ultra Short Investor Lawsuit Settled for $25M, FINRA Launches Pilot Program for Huge Claims, Ex-AmeriFirst Funding Manager’s Conviction Appeal is Rejected, & EU Regulator Examines Credit Raters’ Bank Downgrade

Evergreen Investment Management Co. LLC and related entities have consented to pay $25 million to settle a class action securities settlement involving plaintiff investors who contend that the Evergreen Ultra Short Opportunities Fund was improperly marketed and sold to them. The plaintiffs, which include five institutional investors, claim that between 2005 and 2008 the defendants presented the fund as “stable” and providing income in line with “preservation of capital and low principal fluctuation” when actually it was invested in highly risky, volatile, and speculative securities, including mortgage-backed securities. Evergreen is Wachovia’s investment management business and part of Wells Fargo (WFC).

The plaintiffs claim that even after the MBS market started to fail, the Ultra Short Fund continued to invest in these securities, while hiding the portfolio’s decreasing value by artificially inflating the individual securities’ asset value in its portfolio. They say that they sustained significant losses when Evergreen liquidated the Ultra Short Fund four years ago after the defendants’ alleged scam collapsed. By settling, however, no one is agreeing to or denying any wrongdoing.

Meantime, seeking to generally move investors’ claims forward faster, the Financial Industry Regulatory Authority has launched a pilot arbitration program that will specifically deal with securities cases of $10 million and greater. The program was created because of the growing number of very big cases.

Under the voluntary program, parties would be able to “customize” the arbitration process. The SRO says it wants parties to have a “formal” approach that gives them greater control and flexibility over their claims, including “additional control” over choosing arbitrators and “expanded” discovery.

In other securities news, the U.S. Court of Appeals for the Fifth Circuit has turned down ex-AmeriFirst Funding Inc. manager Jeffrey Bruteyn’s appeal to his criminal conviction. Bruteyn was convicted of 9 counts of securities fraud in 2010 for running a scam that used the sale of secured debt obligations to defraud investors of millions of dollars.

The SDO’s were sold to raise capital for AmeriFirst Funding, which financed used car buys. Bruteyn is accused of making the sales by generating promotional materials that overstated insurance coverage while understating investor risk and falsely telling investors that that his family, which owned Hess Corp. (HES) would cover any losses sustained. Bruteyn was ordered to pay $7.3M in restitution and sentenced to 25 years in prison and three years of supervised release.

In Europe, regulators are examining the recent decisions made by credit rating agencies Moody’s (MCO), Fitch, and Standard & Poor's to downgrade banks affected by the eurozone sovereign debt crisis and the economic contraction. The European Securities and Markets Authority says it wants make sure that “transparent” and “rigorous” analyses were part of the credit raters’ decision-making process. ESMA is especially interested in a “block” rating that Moody’s issued to a number of Spanish banks last month.

ESMA is allowed to fine credit rating agencies for not following correct methodology or applying proper resources. It can also force a credit rater’s “de-registration.”

Throughout the US, our institutional investment fraud lawyers are committed to helping our clients recoup their losses from securities fraud.

$25 Million Settlement Submitted In Re Evergreen Ultra Short Opportunities Fund Securities Class Action, Yahoo Finance, July 2, 2012

FINRA Announces Pilot Program for Large Cases, FINRA, July 2, 2012

US v. Bruteyn

EU market regulator is suspicious of rating agencies, RT, July 2, 2012

More Blog Posts:

CFTC Accuses Peregrine Financial Group of Securities Fraud Related to $200M Customer Funds Shortfall, Institutional Investor Securities Blog, July 10, 2012

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?, Institutional Investor Securities Blog, July 6, 2012

SEC to Push for Money Market Mutual Fund Reform Provisions Despite Opposition, Stockbroker Fraud Blog, July 6, 2012

June 7, 2012

Institutional Investor Securities Roundup: SEC Sues Investment Adviser Over $60M Ponzi Scam, Michigan Investment Club Manager Gets Prison Term for Defrauding Over 900 Investors, & IOSCO Seeks Comments on Report About Credit Raters’ Conflicts & Controls

The SEC is suing investment adviser John Geringer for allegedly running a $60M investment fund that was actually a Ponzi scheme. Most of Geringer’s fraud victims are from the Santa Cruz, California area.

According to the Commission, Geringer used information in his marketing materials for GLR Growth Fund (including the promise of yearly returns in the double digits) that was allegedly “false and misleading” to draw in investors. He also implied that the fund had SEC approval.

While investors thought the fund was making these supposed returns by placing 75% of its assets in investments connected to major stock indices, per the SEC claims, Geringer’s trading actually resulted in regular losses and he eventually ceased to trade. To hide the fraud, Geringer allegedly paid investors “returns” in the millions of dollars that actually came from the money of new investors. Also, after he stopped trading in 2009, he is accused of having invested in two illiquid private startups and three entities under his control. The SEC is seeking disgorgement of ill-gotten gains, financial penalties, preliminary and permanent injunctions, and other relief.

In an unrelated securities case, this one resulting in criminal charges, Michigan investment club manager Alan James Watson has been sentenced to 12 years behind bars for fraudulently soliciting and accepting $40 million from over 900 investors. Watson, who pleaded guilty to the criminal charges, must also forfeit over $36 million.

Watson ran and funded Cash Flow Financial LLC. According to the US Justice Department, he lost all of the money on risky investments—even as he told investors that their money was going to work through an equity-trading system that would give them a 10% return every month. In truth, Watson only put $6 million in the system, while secretly investing the rest in the undisclosed investments. He would go on to also lose the $6 million when he moved this money into risky investments, too.

Watson ran the club as a Ponzi scam so investors wouldn’t know what he was doing. He is still facing related charges in a securities case brought by the Commodity Futures Trading Commission.

In other institutional investments securities news, the International Organization of Securities Commissions' technical committee is asking for comments about a new consultation report describing credit rating agencies’ the internal controls over the rating process and the practices they employ to minimize conflicts of interest. The deadline for submitting comments is July 9.

The report was created following the financial crisis due to concerns about the rating process’s integrity. 9 credit rating agencies were surveyed about their internal controls, while 10 agencies were surveyed on how they managed conflict.

IOSCO’s CRA code guides credit raters on how to handle conflict and make sure that employees consistently use their methodologies. Two of the report’s primary goals were to find out how get a “comprehensive and practical understanding” of how these agencies deal with conflict when deciding ratings and find out whether credit ratings agencies have implemented IOSCO’s code and guiding principals.

Read the SEC's complaint against Geringer (PDF)

Investment Club Manager Sentenced To 12 Years In Prison For $40 Million Fraud,, May 24, 2012

Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest, IOSCO (PDF)

More Blog Posts:
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

Leave The 2nd Circuit Ruling Upholding Madoff Trustee’s “Net Equity” Method for Investor Recovery Alone, Urges SEC to the US Supreme Court, Stockbroker Fraud Blog, June 5, 2012

Continue reading "Institutional Investor Securities Roundup: SEC Sues Investment Adviser Over $60M Ponzi Scam, Michigan Investment Club Manager Gets Prison Term for Defrauding Over 900 Investors, & IOSCO Seeks Comments on Report About Credit Raters’ Conflicts & Controls" »

March 24, 2012

Institutional Investor Fraud Roundup: Decline in Securities Class Action Settlements, ESMA Recognizes US Credit Rating Agency Framework, and Court Dismisses Securities Lawsuit Against Mecox Lane

According to a report published by Cornerstone Research, there has been a decline not just in the number of securities class action settlements that the courts have approved, but also in the value of the settlements. There were 65 approved class action settlements for $1.4 billion in 2011, which, per the report, is the lowest number of settlements (and corresponding dollars) reached. That’s 25% less than in 2010 and over 35% under the average for the 10 years prior. The report analyzed agreed-upon settlement amounts, as well as disclosed the values of noncash components. (Attorneys’ fees, additional related derivative payments, SEC/other regulatory settlements, and contingency settlements were not part of this examination.)

The average reported settlement went down from $36.3 million in 2010 to $21 million last year. The declines are being attributed to a decrease in “mega” settlements of $100 million or greater. There was also a reported 40% drop in media “estimated damages,” which is the leading factor in figuring out settlement amounts. Also, according to the report, over 20% of the cases that were settled last year did not involve claims made under the 1934 Securities Exchange Act Rule 10b-5, which tends to settle for higher figures than securities claims made under Sections 11 or 12(a)(2).

Our securities fraud law firm represents institutional investors with individual claims against broker-dealers, investment advisors, and others. Filing your own securities arbitration claim/lawsuit and working with an experienced stockbroker fraud lawyer gives you, the claimant, a better chance of recovering more than if you had filed with a class.

In other securities fraud news:
The U.S. District Court for the Southern District of New York tossed out the securities lawsuit related to an IPO offering of common stock in Chinese internet company Mecox Lane Ltd. (MCOX). Per the court, the plaintiffs, who sued Mecox, its leading officials, and underwriters Credit Suisse Securities (USA) LLC and UBS AG (UBS), failed to adequately allege any materially false or misleading statements in the registration statement or prospectus for the 2010 IPO. (The plaintiffs, who bought the common stock after the IPO, claimed that the offering materials did not provide full disclosure regarding Mecox Lane’s financial state. When this information was disclosed in fourth quarter data, share prices dropped.)

Earlier this month, the European Securities and Markets Authority (ESMA) decided to recognize the U.S. regulatory framework on credit rating agency supervision. This will let financial firms in the EU keep using credit ratings that were issued in this country.

ESMA’s moves follows intense dialogue with the SEC and the Department of Treasury. If ESMA had chosen otherwise, companies throughout the EU would have had to obtain other ratings.

ESMA also gave mutual recognition to the regulatory frameworks for CRAs of Hong Kong, Canada, and Singapore because their respective models are equal in stringency to the EU. It will also decide whether to do the same for the regulatory frameworks of Brazil, Argentina, and Mexico.

Settlement Values, Estimated Damages, and the Number of Cases Settled in 2011 Experience Historic Declines, Cornerstone Research

Court Tosses 1933 Act Suit Over Chinese Firm's IPO, Bloomberg/BNA, March 16, 2012

EU watchdog allows U.S. ratings use in Europe, 4-Traders, March 15, 2012

More Blog Posts:
SEC Chairman Schapiro Says Jumpstart Our Business Startups Act Needs Better Investor Protections, Institutional Investor Securities Blog, March 21, 2012

As the US House Passes Package of Bills to Open Capital Market Flow to Small Businesses, the Senate Prepares Similar Legislation, Institutional Investor Securities Blog, March 13, 2012

US Army Staff Sergeant Held in Afghan Civilian Massacre Was Once Accused of Securities Fraud, Stockbroker Fraud Blog, March 20, 2012

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" »

December 30, 2010

Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court

According to California Superior Court Judge Richard Kramer Fitch Inc., Standard and Poor’s parent (MHP) McGraw-Hill Companies Inc., Fitch, Inc., and Moody's Corp. (MCO), were merely exercising their First Amendment right to free speech when they gave their highest rating to three structured investment vehicles (SIVs) that collapsed when the mortgage market failed in 2008 and 2007. The ruling, in California Public Employees' Retirement System v. Moody's Corp. now leaves the plaintiffs with a steep burden of proof. The plaintiff, the largest pension fund in the US, is seeking more than $1 billion in securities fraud damages stemming from the inaccurate subprime ratings.

Per the securities complaint, CAlPERS is accusing the defendants of publishing ratings that were “unreasonably high” and “wildly inaccurate” and applying “seriously flawed” methods in an “incompetent” manner. The plaintiff contends that the high ratings that were given to the SIVs contributed to their collapse during the economic crisis.

BNA was able to get court transcripts that indicate that the ruling came on a motion under California’s anti- Strategic Lawsuit Against Public Participation (SLAPP) statute, which offers a special procedure to strike a complaint involving the rights of free speech and petition. If a defendant persuades the court that the cause of action came from a protected activity, the plaintiff must prove that the claims deserve additional consideration. Now CalPERS must show a “probability of prevailing.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, there is no longer any protection from private litigation for ratings agency misstatements. Now, an investor only has to prove gross negligence to win the case. However, per Wayne State University Law School Peter Henning, in BNA Securities Daily, Dodd-Frank’s provision may not carry much weight if a ratings agency’s First Amendment rights are widely interpreted.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker fraud lawyer William Shepherd had this to say: “There have long been many restrictions on 'speech,' including life threats, trademarks, defamation, conspiracy, treason and threats of blackmail. But the age-old standard restriction is 'you can’t shout fire in a crowded theater.' The reason is that strangers might rely on the words and be injured by your 'speech.' How is this different than shouting 'AAA- rated,' knowing that strangers will rely on the words and be harmed by this 'speech?' The difference is that Wall Street can say anything it wants, while the rest of us have to just sit down and shut up."

CalPERS has until March 18, 2011 to respond to the court.

Related Web Resources:
Ratings by Moody’s, Fitch, S&P Ruled to Be Protected Speech, BusinessWeek, December 11, 2010

Calpers Sues Rating Companies Over $1 Billion Loss, Bloomberg, July 15, 2010


California Public Employees' Retirement System v. Moody's Corp., Justia Dockets

Calif. Court Concludes Credit Ratings Entitled to First Amendment Protection, BNA Securities Law Daily, December 10, 2010

Credit Ratings Agencies, Stockbroker Fraud Blog

California Anti-SLAPP Project

Continue reading "Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court " »

September 16, 2010

Standard and Poor’s Ratings Lawsuit to Go Forward, Says Judge

A superior court judge has turned down Standard & Poor's motion to dismiss Connecticut Attorney General Richard Blumenthal’s lawsuit against it. Blumenthal, who filed companion complaints against Moody’s Corp, and Fitch Inc., is accusing the credit rating agency of issuing artificially low ratings to municipalities. He claims that this ended up costing taxpayers millions of dollars in unnecessary bond insurance and high interest rates.

S & P’s parent company McGraw-Hills Cos. had moved to dismiss for improper venue by claiming that a mandatory exclusive forum provision in the S&P Terms and Conditions barred the case from being filed in Connecticut. McGraw-Hills argued that the internal laws of the State of New York are supposed to govern the agreement and that the courts there are to serve as the exclusive forums for any disputes stemming from the agreement.

Superior Court Judge Robert Shapiro, however, denied the motion to dismiss. He said that under the Connecticut Unfair Trade Practices Act, the state has a number of sovereign powers and that one of them lets the commission of consumer protection request that the state’s attorney general enforce CUTPA in state superior court.

Blumenthal called Shapiro’s decision a victory, while saying that credit rating agencies will likely continue to avoid being held accountable for misconduct. Meantime, a spokesperson for S & P told BNA last month that the lawsuit against the credit ratings agency has no factual merit.

The ratings lawsuits against Moody’s, S & P, and Fitch will now go forward in state court.

Related Web Resources:
Ratings case against S&P to proceed, MarketWatch, August 21, 2010

Richard Blumenthal, CT AG, Sues Moody's, S&P, Says They Knowingly Falsified Debt Ratings, Huffington Post, March 10, 2010

Continue reading " Standard and Poor’s Ratings Lawsuit to Go Forward, Says Judge" »

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