July 14, 2014

Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion

Citigroup (C) has reached a $7 billion settlement with the U.S. Department of Justice over allegations it misled investors about mortgage-backed securities in the time leading up to the 2008 financial meltdown. The settlement includes a $4 billion penalty to be paid to DOJ, $2.5 billion in consumer relief, and $500 million to a number of states and the Federal Deposit Insurance Group.

According to the U.S. government, Citigroup knew it was selling mortgage-backed securities with loans that had “material defects” and hid this information from investors. Attorney General Holder called this misconduct “egregious.” He said the bank played a role in spurring the economic crisis.

The government released a statement of fact to which Citibank consented. In it are details about how the bank ignored its own warning signs that certain mortgages were subpar and made misrepresentations about the loans that were securitized. One U.S. attorney told The Wall Street Journal that the DOJ discovered 45 mortgage-backed security deals between 2006 and 2007 where inaccuracies about underlying loans’ and their quality were made.

More than once bank employees discovered a significant junk of mortgage loans were defective yet Citigroup packaged the loans into residential-mortgage backed securities and sold them. The bank even told due diligence firms to modify loan grades so that they went from rejected to accepted

While the settlement releases Citibank from liability for collateralized debt obligations and residential mortgage-backed securities that it issued between 2003 and 2008, criminal charges could still come from the government against both the bank and individuals who were involved. The bank also is under investigation over whether its Banamex USA did what it should have to bar suspected money laundering in transactions that occurred near the border of U.S. and Mexico.

While the Justice Department had sought $12 billion from Citigroup, the bank had wanted to pay just $363 million in cash, in addition to “consumer relief. Citigroup said it wasn’t a huge player in the mortgage-securities industry and didn’t think its penalty should be so high. The DOJ, however, believes that Citigroup's egregious behavior warranted a substantial penalty. As for the $2.5 billion in consumer relief, this includes financing for building and preserving multifamily rentals that are affordable, forbearance and principal reduction for residential mortgages, and other direct consumer benefits.

Citigroup is the second big US bank to settle with the government over mortgage securities. J.P. Morgan (JPM) settled MBS fraud charges last year for $13 billion. The government is also engaged in mortgage-backed securities settlement talks with Bank of America.

In other recent MBS fraud news, an ex-Credit Suisse (CS) banker was told to forfeit $900,000 and sentenced to time served. David Higgs pleaded guilty in February 2012 to conspiring to falsify Credit Suisse’s records. This lead the bank to take a $265 billion write-down for 2007.

The case is related to a plan to conceal over $100 million in losses in an MBS trading book at the Swiss bank. At issues were subprime residential mortgaged-backed securities and commercial mortgage-backed securities. Co-conspirators, including Higg, were charged with artificially rising bond prices to give the impression of profitability.

The SSEK Partners Group is a mortgage-backed securities fraud law firm. We represent institutional investors and high net-worth individuals.

Ex-Credit Suisse Banker Gets Time Served in Mortgage-Backed Securities Scheme, The Wall Street Journal, June 24, 2014

Citigroup Settles Mortgage Inquiry for $7 Billion, The NY Times, July 14, 2014


More Blog Posts:
Second Circuit Overturns Judge's Decision to Block Citigroup's $285M Settlement With the SEC, Stockbroker Fraud Blog, June 4, 2014

SEC Prepares Money-Fund Rules, Will Review Alternative Mutual Funds, Institutional Investor Securities Blog, July 10, 2014

SignalPoint Asset Management to PAY SEC Fine for Breach of Fiduciary Duty, Stockbroker Fraud Blog, July 7, 2014

July 3, 2014

Deutsche Bank, Wells Fargo, Citigroup Sued by Pimco and Blackrock Over Trustee Roles Involving Mortgage Bonds

Pacific Investment Management Co. and BlackRock Inc. (BLK) are leading a group of investors, including Charles Schwab Co. (SCHW), Prudential Financial Inc. (PRU), DZ Bank AG, and Aegon in suing trust banks for losses they sustained related to over 2,000 mortgage bonds that were issued between 2004 and 2008. Defendants include units of US Bancorp (USB), Deutsche Bank AG (DBK), Wells Fargo (WFC), HSBC Holdings (HSBA.LN), Citigroup (C), and Bank of New York Mellon Corp (BK).

The investors are accusing the banks of breaching their duty as trustee when they did not force bond issuers and lenders to buy back loans that did not meet the standards that buyers were told the bonds possessed. It is a trustee’s job to make sure that principal payments and interest go to bond investors. They also need to make sure that mortgage servicing firms are abiding by the rules that oversee defective loans or homeowner defaults.

Trustees, however, have said that their duties are restricted to tasks like supervising the way payments are made to investors and giving regular reports about bond servicing. They disagree about having a wider oversight duty to fulfill.

Blackrock and Pimco contend that the trustees knew the bonds had defective loans but that they had a conflict because the issues who appointed them had stakes in the firms servicing the loans. Loans in the bonds that were issued by the defendants included subprime lenders Morgan Stanley (MS), Countrywide Financial Corp, First Franklin Financial Corp, New Century Financial Corp., Royal Bank of Scotland Group (RBS), Goldman Sachs Group (GS), and PLC's Greenwich Capital.

Investors have already won settlements from JPMorgan Chase Co. (JPM) and Bank of America Corp. (BAC) for the banks’ part in originating and selling mortgage securities. The trustee lawsuit deals with bonds that were not part of this settlement. The plaintiffs want damages for bond losses that exceeded $250 billion.

BlackRock, Pimco Sue Deutsche Bank, U.S. Bank Over Trustee Roles, The Wall Street Journal, June 18, 2014

BlackRock, Pimco Sue Banks for Mortgage-Bond Trustee Role, Bloomberg, June 18, 2014


More Blog Posts:

PNC Bank Sues Morgan Stanley & Ex-Trust Adviser For “Surreptitious Conspiracy”, Institutional Investor Securities Blog, April 3, 2014

US Supreme Court Will Hear Appeal Over Libor Antitrust Claims, Institutional Investor Securities Blog, July 2, 2014

FINRA Official Says Variable Annuity Sales Top Investor Complaint List, Stockbroker Fraud Blog, July 3, 2014

July 2, 2014

US Supreme Court Will Hear Appeal Over Libor Antitrust Claims

The United States Supreme Court has agreed to hear an appeal in Ellen Gelboim et al v. Bank of America Corp. The lawsuit was filed by bond investors who lost money in securities tied to the London Interbank Offered Rate and the manipulation of the global benchmark interest rate. Now, the nation’s highest court is granting their request to let their claims go forward and will hold oral arguments on the lawsuit during its next term.

For the last three years, different kinds of investors have filed numerous securities fraud cases against the largest banks in the world claiming that they manipulated Libor. Last year, a district court judge allowed investors to pursue certain claims but threw out their antitrust claims.

Judge Naomi Reice Buchwald said that the settling of Libor was not competitive but, rather, cooperative; it involved banks providing data to a trade group that established the rate. Plaintiffs therefore could not prove that anticompetitive behavior harmed them.

However, a group of bond investors whose claims only had to do with antitrust violations filed an appeal to Buchwald’s ruling with the 2nd U.S. Circuit Court of Appeals. That court threw out the appeal over lack of appellate jurisdiction. The reason for this, said the 2nd circuit, was that the district court did not dismiss all related consolidated complaints.

The investors then went to the Supreme Court. They noted that appeals courts are split over if and when dismissing a consolidated action is an “appealable final order.” The investors believed that their Libor lawsuit was the “ideal” one for resolving this divide.

Also last month, Judge Buchwald ruled that Eurodollar futures traders could accuse Rabobank Group and Barclays Plc (BARC) of using Libor to obtain trading advantages. Buchwald granted the traders request to include these claims in their securities lawsuit.

The plaintiffs are investments funds. They claim that banks, including Citigroup Inc. (C), Credit Suisse Group AG (CSGN), and Bank of America (BAC), artificially suppressed the rate to conceal the risie in borrowing costs. Buchwald said that the funds could argue that they either didn’t earn enough for selling Eurodollar futures contracts on certain dates or they paid too much for them. Their lawsuit is one of a multitude of lawsuits that interrelated and claim that banks acted to depress Libor.

Buchwald however, dismissed Societe Generale SA (GLE) as a defendant. She said that the allegations against the bank were submitted too late. She noted that the plaintiffs must still contend with numerous obstacles, including showing that actual damages resulted because of the banks’ “improper conduct.”

Please contact our securities fraud lawyers today so we can help you determine whether you have reason to pursue a claim. The assessment is free.

Eurodollar Traders Can Revise Libor Manipulation Claims, Bloomberg, June 24, 2014

U.S. Supreme Court to hear Libor antitrust appeal, Reuters, June 30, 2014


More Blog Posts:
R.P. Martin To Pay $2.2M in Libor Rigging, Institutional Investor Securities Blog, May 22, 2014

Barclays Settles Two Libor-Related Securities Cases, Institutional Investor Securities Blog, April 16, 2014

Deutsche Bank, Royal Bank of Scotland Settle & Others for More than $2.3B with European Union Over Interbank Offered Rates, Institutional Investor Securities Blog, December 24, 2013

March 26, 2014

Citigroup and Royal Bank of Scotland Fail Federal Stress Test

A capital plan to reward investors with stock buybacks and dividends by Citigroup Inc. (C) was one of five to fail Federal Reserve stress test. The others that did not succeed were those involving the US units of Royal Bank of Scotland Group Plc. (RBS), HSBC Holdings Plc. (HSBA), Zions Bancorporation (ZIONS) and Banco Santander SA (SAN). The central bank, however, did approve plans for 25 banks, including those from Bank of America (BAC) and Goldman Sachs (GS) after both lowered their dividend and buyback requests.

Regulators have been trying to prevent another financial crisis like the one in 2008 by conducting yearly tests on the way the biggest banks would do in a similar crisis. According to analysts, banks had intended to pay out about $75 billion in excess capital to raise returns and reward shareholders. This is the second year in a row that the Fed has taken issue with certain plans.

While Citigroup requested the least capital return among the five biggest banks in the country last year after its plan was turned down in 2012, this year it could have passed on just quantitative grounds. However, the central bank found numerous deficiencies in Citigroup’s planning practices, including whether it could project revenues and losses while under stress, as well as be able to properly measure exposures.

Now, Citigroup and the other institutions that weren’t approved must turn in revised capital plans and suspend increased dividend payments until they get formal approval by the Fed. The foreign banks will not be allowed to pay greater dividends to their parent firm. And while the Fed approved the shareholder-reward plans of Goldman and Bank of America, they had to resubmit them after the strategies initially fell under minimum capital levels in the ‘severely adverse’ stress testing conditions.

Banks usually announce buybacks and dividend raises soon after the stress test results are issued. Collectively this year, banks got approval to pay out about 60% of estimated net income for the upcoming four quarters.

Last week, the Fed disclosed the way banks are projected to perform in a hypothetical recession with unemployment in this country at 11.3%, stock prices dropping nearly 50%, and the costs of homes dropping 25%. Projected losses for the 30 banks was at $377 billion over 9 nine quarters.

At The SSEK Partners Group, our securities lawyers are continuing to work with investors who suffered losses from the last economic crisis because of the negligent investment advice and inadequate broker services they received. We handle securities fraud cases involving mortgage-backed securities, residential mortgage-backed securities, auction rate securities, real estate investment trusts, non-traded real estate investment trusts, collateralized debt obligations, alternative investments, collateralized mortgage obligations, derivative securities, credit default swaps, and other investments that failed. Our securities attorneys represent clients in arbitration and in the courts.

Fed Kills Citi Plan to Pay Investors, The Wall Street Journal, March 26, 2014

Federal Reserve Board announces approval of capital plans of 25 bank holding companies participating in the Comprehensive Capital Analysis and Review, Board of Governors of the Federal Reserve, March 26, 2014

Dodd-Frank Act Stress Tests, Board of Governors of the Federal Reserve, March 24, 2014


More Blog Posts:
Madoff Ponzi Scam: Five Ex-Aides Convicted of Securities Fraud, Victims to Recover $349 Million, Stockbroker Fraud Blog March 26, 2014

LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments, Stockbroker Fraud Blog March 25, 2014

Securities Class Action Lawsuits Don’t Help Investors Recover, Says New Study, Institutional Investor Securities Blog, March 24, 2014

December 14, 2013

Fannie Mae Sues UBS, Bank of America, Credit Suisse, JPMorgan Chase, Citigroup, & Deutsche Bank, & Others for $800M Over Libor

Fannie Mae is suing nine banks over their alleged collusion in manipulating interest rates involving the London Interbank Offered Rate. The defendants are Bank of America (BAC), JPMorgan Chase (JPM), Credit Suisse, UBS (UBS), Deutsche Bank (DB), Citigroup (C), Royal Bank of Scotland, Barclays, & Rabobank. The US government controlled-mortgage company wants over $800M in damages.

Regulators here and in Europe have been looking into claims that a lot of banks manipulated Libor and other rate benchmarks to up their profits or seem more financially fit than they actually were. In its securities fraud lawsuit, Fannie Mae contends that the defendants made representations and promises regarding Libor’s legitimacy that were “false” and that this caused the mortgage company to suffer losses in mortgages, swaps, mortgage securities, and other transactions. Fannie May believes that its losses in interest-rate swaps alone were about $332 million.

UBS, Barclays, Rabobank, and Royal Bank of Scotland have already paid over $3.6 billion in fines to settle with regulators and the US Department of Justice to settle similar allegations. The banks admitted that they lowballed their Libor quotes during the 2008 economic crisis so they would come off as more creditworthy and healthier. Individual traders and brokers have also been charged.

Libor
Libor is used to establish interest rates on student loans, derivatives, mortgages, credit card, car loans, and other matters and underpins hundreds of trillions of dollars in transactions. The rates are determined through a process involving banks being polled on borrowing costs in different currencies over different timeframes. Responses are then averaged to determine the rates that become the benchmark for financial products.

Also a defendant in Fannie Mae’s securities case is the British Bankers’ Association, which oversees the process of Libor rate creation.

Earlier this year, government-backed Freddie Mac (FMCC) sued over a dozen large banks and the British Bankers’ Association also for allegedly manipulating interest rates and causing it to lose money on interest-rates swaps. Defendants named by the government-backed home loan mortgage corporation included Bank of America, JP Morgan Chase, Citigroup, Credit Suisse, and UBS.

Freddie Mac Sues Big Banks, The Wall Street Journal, March 19, 2013

Fannie Mae Sues Banks for $800 Million Over Libor Rigging, Bloomberg, November 1, 2013


More Blog Posts:
Sonoma County Files Securities Lawsuit Over Libor Banking Debacle, Institutional Investor Securities Blog, July 2, 2013

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012

August 15, 2013

Bank of America, JPMorgan Chase Among Banks Sued by Danish Pension Funds in Credit Default Swaps Lawsuit

In U.S. District Court for the Northern District of Illinois, Danish pension funds (and their investment manager) Unipension Fondsmaeglerselskab, MP Pension-Pensionskassen for Magistre & Psykologer, Arkitekternes Pensionskasse, and Pensionskassen for Jordbrugsakademikere & Dyrlaeger are suing 12 banks accusing them of conspiring to take charge of access and pricing in the credit derivatives markets. They are claiming antitrust violations while contending that the defendants acted unreasonably to hold back competitors in the credit default swaps market.

The funds believe that the harm suffered by investors as a result was “tens of billions of dollars” worth. They want monetary damages and injunctive relief.

According to the Danish pension funds' credit default swaps case, the defendants inflated profits by taking control of intellectual property rights in the CDS market, blocking would-be exchanges’ entry, and limiting client access to credit-default-swaps prices, and

This securities case comes four years after the US Justice Department acknowledged that it had begun an investigation into possible anticompetitive activities involving credit derivatives clearing, and trading (a probe that is ongoing) and just a few months after the Sheet Metal Workers Local No. 33 Cleveland District Pension Plan sued the banks, Markit, and ISDA also for allegedly taking control of the CDS market, which it says resulted in customers being overcharged some $7 billion annually. The plaintiff contends that there may be billions of dollars in damages and it wants treble damages. Last month, it was the European Commission's turn to claim that 13 banks, ISDA, and Markit worked together to stop CDSs from being able to trade on open exchanges.

If you think you may have been the victim of securities fraud involving credit default swaps, you should speak with one of our experienced CDS fraud lawyers today.

There are over a dozen defendants in the Danish pension funds' CDS fraud case including:

J.P. Morgan Chase & Co. (JPM)
Citigroup Inc. (C)
Morgan Stanley (MS)
Bank of America Corp. (BAC)
• Credit Suisse Group AG (CS)
Deutsche Bank AG (DB)
UBS AG (UBS)
• Royal Bank of Scotland Group PLC (RBS)
• Goldman Sachs Group Inc. (GS)
• Markit Group Ltd, a financial data provider
• International Swaps and Derivatives Association (ISDA)

Pensions Sue Banks Over Credit-Default Swaps, Wall Street Journal, July 12, 2013

Danish funds sue banks in U.S. for blocking CDS exchange-trading, Reuters/Yahoo, July 12, 2013


More Blog Posts:
US Will Likely Arrest Two Ex-JPMorgan Chase Employees Over Trading Losses Related to the London Whale Debacle, Institutional Investor Securities Blog, August 10, 2013

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

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

August 7, 2013

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel

A FINRA arbitration panel has decided that Citigroup (C) and Edward J. Mulcahy, one of the firm’s ex-branch managers, has to pay $11 million to investor John Fiorilla. Fiorilla is a legal adviser to the Holy See who went to Citigroup because he wanted to de-risk a $16 million stock position in Royal Bank of Scotland (RBS).

According to the claimant, he asked Citigroup to employ derivatives to assist in hedging his position against losses but the firm did not fulfill the request. When the market failed in 2008 his account suffered over $15 million in losses.

Fiorilla is claiming breach of contract, failure to control and supervise, breach of fiduciary duty, gross negligence, negligence, and other violations. His claim against Mulcahy is over an alleged failure to supervise.

The FINRA arbitration panel says Citigroup has to pay $10,750,000 and 9% interest from 5/1/09 until full payment of the award is reached. Mulcahy, who retired from Citigroup recently, must pay $250,000 and interest.

Citigroup denies the securities fraud allegations and is disappointed with the arbitration ruling.

Arbitration
Arbitration is one venue through which securities disputes between parties are resolved. To be eligible to be heard before a FINRA panel, cases must involve a FINRA-registered individual or entity and an investor (including broker v. investor, broker-dealer v. investor, brokerage firm and stockbrokers v. investors) or multiple FINRA-registered entities and/or individuals (such as broker v. broker, broker v. brokerage firm). Claims need to be submitted within six years that the events leading to the dispute happened.

Investors have to arbitrate before FINRA if this is mandated in their written agreement together, the dispute is with a FINRA member, and involves that member’s securities business. Industry members must arbitrate their disputes with each other before FINRA if a brokerage firm/broker’s securities business activities are involved. Brokerage firms and brokers have to enter into FINRA arbitration if the investor requests it.

The best way to increase the chances your FINRA securities case will come out in your favor is to hire an experienced FINRA arbitration lawyer.

Citigroup Ordered to Pay Investor $11 Million, On Wall Street, August 10, 2013

Arbitration Overview, FINRA


More Blog Posts:
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

Sonoma County Files Securities Lawsuit Over Libor Banking Debacle, Institutional Investor Securities Blog, July 2, 2013

July 2, 2013

Sonoma County Files Securities Lawsuit Over Libor Banking Debacle

Sonoma County, CA is suing Citigroup (C), JPMorgan (JPM), Bank of America (BAC), UBS (UBS), Barclays (BCS), and a number of other former and current LIBOR members over the infamous international-rate fixing scandal that it claims caused it to suffer substantial financial losses. The County’s securities lawsuit contends that the defendants made billions of dollars when they understated and overstated borrowing costs and artificially established interest rates.

Sonoma County is one of the latest municipalities in California to sue over what it claims was rate manipulation that led to lower interest payments on investments linked to the London Interbank Offered Rate. Also seeking financial recovery over the LIBOR banking scandal are the Regents of the University of California, San Mateo County, San Diego Association of Governments, East Bay Municipal Utility District, City of Richmond, City of Riverside, San Diego County, and others.

The County of Sonoma is alleging several causes of action, including unjust enrichment, fraud, and antitrust law violations involving transactions that occurred between 2007 and 2010, a timeframe during which Barclays already admitted to engaging in interest manipulation. The county invested $96 million in Libor-type investments in 2007 and $61 million in 2008. Jonathan Kadlec, the Assistant Treasurer at Sonoma County, says that an investigation is ongoing to determine how much of a financial hit was sustained. Kadlec supervises an investment pool that is valued at about $1.5 billion for the county. He said that LIBOR-type investments, which involve floating securities with interests that are index-based, make up a small portion of the pool.

Already, three LIBOR members have paid over $2.5 billion in penalties over the LIBOR rate-fixing debacle. Earlier this year, Royal Bank of Scotland (RBS) consented to pay $610 million, and last year, UBS consented to pay over $1.5 million while Barclays said it would pay $450 million.

LIBOR
The London Interbank Offered Rate is the global benchmark interest rate for establishing short-term interest rates on financial instruments ranging from sophisticated municipal derivative investments to car loans. The British Banker’s Association sets LIBOR daily. The benchmark interest rate is determined according to the average of the interest rate that each LIBOR member bank says it can borrow from the other bank members. Until the manipulation among LIBOR members was discovered, a member bank’s interbank borrowing rate was considered a mirror of its credit worthiness.

In 2011, regulators from the US, UK, Japan, and Switzerland said they would investigate LIBOR rate manipulation influencing financial markets globally. Banks that were members of LIBOR were accused of manipulating LIBOR to up their profits and report borrowing rates that were suppressed to make them appear to be in greater financial health.

Please contact our LIBOR Fraud lawyers at SSEK Partners Group today.

Sonoma County joins suit over LIBOR rate setting, North Bay Business Journal, June 28, 2013

The County of Sonoma, California Files Lawsuit Against Major Banks for Libor Interest Rate Manipulation, County of Sonoma, June 28, 2013


More Blog Posts:
CBOE Will Pay $6M Penalty Over SEC Charges Alleging Failure to Enforce Trading Rules, Institutional Investor Securities Blog, June 12, 2013

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement, Institutional Investor Securities Blog, June 5, 2013

FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013

June 8, 2013

Financial Firm Roundup: Citigroup Settles $3.5B MBS Lawsuit with FHFA, JPMorgan Unit Fined $4.64M, Court Won’t Dismiss USB Whistleblower’s Action, & Ex-Goldman Sachs Executive to Pay $100K Over Pay-To-Play Scam

Citigroup (C) Settle $3.5B securities lawsuit Over MBS Sold to Freddie Mac, Fannie Mae
Citigroup has settled the $3.5 billion mortgage-backed securities filed with the Federal Housing Finance Agency. The MBS were sold to Freddie Mac and Fannie Mae and both sustained resulting losses. This is the second of 18 securities fraud cases involving FHFA suing banks last year over more than $200B in MBS losses by Fannie and Freddie. The lawsuit is FHFA v. Citigroup.

J.P. Morgan International Bank Ltd. Slapped with $4.64M Fine by UK Regulator
The UK Financial Conduct Authority says that JPMorgan unit (JPM) J.P. Morgan International Bank Ltd. must pay a $4.64 million fine for controls failures and systems involving its retail investment advice and portfolio investment services. Per the agency, financial firms that don’t maintain the proper records not only put their clients at risk of getting involved inappropriate investments, but also they don’t have a way to determine whether the proper advice was given. Fortunately, investors were not harmed despite the risk exposure.

The UK regulator says the problems went on for two years. Among the problems identified: outdated files, insufficient key client data, inadequate record system, inadequate suitability reports, and insufficient communication with clients about suitability. FCA says that it wasn’t until after it identified the problems and notified the JP Morgan unit about them that the necessary modifications were made.

Whistleblower’s Retaliation Action Against UBS Securities Can Go Ahead, Says Court
A district court judge made the decision not to dismiss ex-UBS Securities LLC (UBS) senior strategist Trevor Murray’s retaliatory action against his former employer. Murray was allegedly fired after he told his managers about possible securities law violations.

He contends that he was let go because he refused to write reports about UBS’s commercial MBS that were “more favorable to the financial firm.” Murray sued, arguing that the action violated the Dodd-Frank Act’s whistleblower protection provisions. UBS then tried arguing that Murray wasn’t a whistleblower because he didn’t tell the SEC about the alleged violation, but the judge said that a whistleblower is allowed to report alleged violations to governmental authorities and persons other than the regulator.


Former Goldman Sachs VP Consents to Pay $100K Payment SEC Pay-to-Play Action
Neil M. M. Morrison, an ex-Goldman Sachs & Co. (GS) vice president, will pay $100,000 to resolve an SEC action accusing him of taking part in an alleged pay-to-play scheme involving former Massachusetts state Treasurer Timothy Cahill’s gubernatorial campaign. The Commission said that he solicited the state’s underwriting business while “engaged” in Cahill’s campaign and that his use of the financial firm’s resources and work time are considered campaign contributions. By settling, Morrison is not admitting or denying the allegations.

Meantime, Goldman will pay approximately $12 million to settle the related proceedings against it, as well as $4.5 million to Massachusetts Attorney General Martha Coakley. Even though the firm wasn’t allowed to take part in municipal underwriting business for two years after Morrison’s alleged violations, the SEC says that Goldman still took part in 30 underwriting contracts with issuers in the state and made about $7.5 million in fees.

Citi settles U.S. suit over $3.5 billion in mortgage securities, Reuters, May 28, 2013

U.K. Regulator Fines JPMorgan Unit $4.64M For Failures in Investment Systems, Controls, Bloomberg/BNA, May 28, 2013

Internal Whistleblowing Deserves Protection, Judge Tells UBS, Law360, May 22, 2013

SEC Charges Goldman Sachs and Former Vice President in Pay-to-Play Probe Involving Contributions to Former Massachusetts State Treasurer, SEC, September 27, 2012


More Blog Posts:
FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement, Institutional Investor Securities Blog, June 5, 2013

Two Oppenheimer Investment Advisers Settle for Over $2.8M SEC Fraud Charges Over Private Equity Fund, Institutional Investor Securities Blog, March 14, 2013

March 20, 2013

Citigroup Will Pay $730M in Bond Lawsuit Alleging It Misled Debt Investors

Pending court approval, Citigroup Inc. (C) will $730 million to resolve claims that it misled debt investors regarding its financial state during the economic crisis. The plaintiffs had purchased Citi preferred stock and bonds from 5/06 through 11/8. They are accusing Citigroup of misleading the buyers of 48 issues of its corporate bonds. Included among the plaintiffs of this bond lawsuit are the City of Philadelphia Board of Pensions and Retirement, the Louisiana Sheriffs’ Pension and Relief Fund, and the Minneapolis Firefighters’ Relief Association.

The bonds’ declined as the US mortgage market collapsed and the losses grew. According to Bloomberg.com, at one point, Citigroup’s $4 billion of 10-year notes declined to 79.7 cents on the dollar. It went on to lose over $29 billion in ‘08 and ’09.

Struggling from losses involving subprime mortgages, Citigroup ended up having to take a $45 million bailout in 2008, which it has since repaid. However, it is one of the Wall Street firms still coping with the aftermath of the financial crisis. Just last year, Citi consented to pay $590 million over a securities case filed by investors of stock contending that they too had been misled.

In ‘10, a district court judge rejected part of Citigroup’s motion to have this bond lawsuit tossed out. Claims that were dismissed involved the allegedly inadequate disclosure about auction-rate securities and part of the investors’ case involving structured investment vehicles.

Despite settling, the investment bank maintains that the allegations in this bond lawsuit are untrue. Citigroup contends that is only resolved the securities lawsuit to avoid the uncertainty and expense of having to go to court.

If you suspect that your investment losses were a result of securities fraud, contact our institutional investor fraud law firm today.

Citigroup to Pay $730 Million in Bond-Lawsuit Settlement, Bloomberg Businessweek, March 19, 2013

Citi To Pay $590 Million To Burned Shareholders In Toxic Asset Case, Forbes, August 29, 2012


More Blog Posts:
Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012

UBS & Citi Do Have to Arbitrate Auction-Rate Securities Case Filed by Health Care Nonprofit Carilion Clinic, Institutional Investor Securities Blog, January 31, 2013

January 31, 2013

UBS & Citi Do Have to Arbitrate Auction-Rate Securities Case Filed by Health Care Nonprofit Carilion Clinic

According to the U.S. Court of Appeals for the Fourth Circuit, a district court was right when it decided not to stop Carilion Clinic’s arbitration proceeding against Citigroup Global Markets (C) and UBS Financial Services (UBS) for an ARS issuance that proved unsuccessful. The financial firms had served the healthcare nonprofit in a number of capacities, including providing underwriting services.

Carilion had retained UBS and Citi in 2005 to raise over $308M so that it could redo its medical facilities. They are accused of recommending that Carilion put out over $72M of bonds in the form of variable demand rate obligations and $234 million in ARS.

When the auction-rate securities market took a huge dive in February 2008, Citi and UBS ended their policy of supporting the market and the auctions started to fail. As a result, result, Carilion allegedly was forced to refinance what it owed to avoid higher interest rates and it sustained losses in the millions of dollars. The nonprofit later began auction-rate securities arbitration proceedings with FINRA against both firms.

Although arbitration wasn’t provided for in the written agreements, Carilion contended that as the firms’ customer, it was entitled to turn in the dispute to the SRO. The district court concurred, finding that seeing as Citi and UBS provided Carilion with a number of financial services for payment, the nonprofit meets the meaning of the term of having been a ‘customer’ of both Citi and UBS for FINRA arbitration code purposes. The court disagreed that Carilion gave up being able to arbitrate when it consented to the mandatory forum selection clause that lets the court litigate such disputes.

Now, the appeals court is affirming the district court’s findings about both the term “customer” and the forum selection clause.

If you believe that your company has been the victim of institutional investment fraud, you should consult with an experienced securities law firm right away. Your case evaluation should be free.

UBS Financial Services V. Clinic (PDF)

Citi, UBS Must Arbitrate Dispute With Nonprofit, 4th Circuit Affirms, Alacra Store, January 24, 2013


More Blog Posts:
Despite Her Involvement in Dozens of Securities Cases, Brokerage Firms Continue to Clear Trades of Newport Coast Securities Broker Bambi I. Holzer, Stockbroker Fraud Blog, January 10, 2013

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

US Supreme Court to Hear Appeals of Petitioners Over Stanford Ponzi Lawsuits, Stockbroker Fraud Blog, January 5, 2013

January 21, 2013

Large Financial Firms Roundup: Securities Fraud Suit Against Citigroup is Dismissed by 2nd Circuit, AIG Wants to File MBS-Related Cases Against Banks, & District Court Reconsiders Partial Dismiss of Class Action Against Morgan Stanley in Pension Fund Case

Second Circuit Dismisses Securities Fraud Lawsuit Against Citigroup
The U.S. Court of Appeals for the Second Circuit has affirmed the district court’s decision to throw out the securities fraud lawsuit filed by a real estate developer against Citigroup (C) and its former CEO Vikram Pandit. Sheldon H. Solow had accused both of them of allegedly making omissions and misstatements that highlighted the bank’s liquidity and capitalization while downplaying financial problems. Because of this, he contends, the financial firm’s stock price became artificially inflated and then fell when the truth about the firm’s financial health became known.

The appeals court held that while Solow, in his securities lawsuit, did an adequate job of pleading alleged misstatements and omissions about Citigroup’s liquidity, he did not succeed in showing that the statements caused his financial losses. It also dismissed his control-person claim against Pandit, saying that there was a failure to plead a primary violation by the bank.

AIG Wants to File MBS-Related Cases Against Banks
American International Group (AIG) wants to be able to assert tort and fraud claims against financial institutions that marketed and securitized mortgage-backed securities that AIG bought between 2005 and 2007. The insurance corporation wants the New York Supreme Court to declare that it owns billions of dollars in these claims. The case is American International Group v. Maiden Lane II.

Per the 23-page complaint, the Federal Reserve Bank of New York had created Maiden Lane II to give the broader financial markets and AIG stability in 2008. Maiden Lane II is the possessor of contract claims related to these securities and the New York Fed believes AIG moved the tort and fraud claims to Maiden Lane II in the asset purchase agreement that was made. AIG, however, remains adamant that it owns the claims.


District Court Reconsiders Partial Dismiss of Class Action Against Morgan Stanley in Pension Fund Case
A district court in New York says it will reconsider its partial dismissal of class action allegations accusing Morgan Stanley (MS) and a number of its affiliates of violating federal securities laws involving mortgage-backed securities sales. According to Judge Laura Taylor Swain, because the 2nd Circuit’s ruling in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. constituted an “intervening change of controlling law,” so warrants another look of the district court’s own earlier opinion.

According to the institutional investor plaintiffs, Morgan Stanley and affiliates sold them securities backed by home mortgage loans that had almost no value or were flawed. Investor Public Employees' Retirement System of Mississippi filed a securities complaint over its certificates purchase through one of 14 offerings by Morgan Stanley.
While the district court had partially dismissed the case in 2010 noting that MissPERS did not have standing to make claims on the other offerings from which it hadn’t bought certificates, in the wake of the Goldman ruling, plaintiffs of this case can now file an now file an amended complaint. The appeals court’s decision found that a putative lead plaintiff has class standing if having “plausibly alleged” that it experienced suffering from some actual injury because of conduct by the defendant that was “putatively illegal” and implicates the same concerns as the conduct (by the same defendants) that allegedly caused injury to the other class members.


Related Web Resources:
AIG Sues The New York Fed, Reuters/Business Insider, January 12, 2013

Federal appeals court dismisses Sheldon Solow’s lawsuit against Citigroup, The Real Deal, january 15, 2013

Intervening Change' in Law Leads Court To Reconsider Standing Question in MBS Suit, BNA/Bloomberg, January 15, 2013


More Blog Posts:
Credit Suisse Must Face ARS Lawsuit Over Subsidiary Brokerage’s Alleged Misconduct, Says District Court, Stockbroker Fraud Blog, January 11, 2013

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds, Institutional Investor Securities Blog, December 17, 2012

Principals of Global Arena Capital Corp. and Berthel, Fisher & Company Financial Services, Inc. Settle FINRA Securities Allegations, Stockbroker Fraud Blog, April 6, 2012

December 11, 2012

LIBOR Investigation Leads to Three Arrests

Anti-fraud and police in Britain have made three arrests related to the global interest rate rigging scandal involving the London Interbank Offered Rate (LIBOR). The three men are Thomas Hayes, an ex-Citigroup Inc. (C) and UBS AG (UBSN.VX) trader, and James Gilmour and Terry Farr, who both worked at RP Martin, an interdealer broker. All of them are British nationals.

The Canadian Competition Bureau regulator claims that Hayes and others tried to manipulate yen Libor, which is the average interbank interest rates that banks are willing to lend in unsecured funds that are in Japanese yen denominations to each other. The regulator is also accusing Hayes of reaching out to traders at other banks in London and trying to persuade them to manipulate yen rates.

Regulators and prosecutors in Europe, Canada, the US, and Japan have been probing how traders have been able to rig interbank lending rates, including LIBOR, and whether banks may have changed submissions that are supposed to set benchmarks so they could make money off interest-rate derivatives-related bets or make lenders appear more financially healthy.

Dozens of people are under investigation related to the scandal, which broke out this summer after Barclays (BARC.LN) admitted that some of its traders had attempted to manipulate both LIBOR and Euribor, which is its Euro counterpart, between 2005 and 2009 and how during the economic problems of 2007 and 2008 the bank had low-balled rates. (Barclays settled with regulators both here and in the UK for $450 million.)

Now, over a dozen other banks are being examined for possible involvement in rate rigging. This has raised a number of questions, such as whether banks have been honest about the actual costs tied to borrowing and if regulators either allowed the manipulation or failed to stop it.

Settlements are also expected to be reached with Royal Bank of Scotland Group (RBS.LN) and UBS. Royal Bank of Scotland Group, which the UK government has 81% ownership stake in, has had to contend with claims that it had manipulated not just LIBOR rates but also other rates. While the bank is willing to settle, the terms of any such agreements are taking awhile because the US CFTC, UK’s FSA, the US Department of Justice, and authorities in Asia and Europe are all involved.

As for UBS, Bloomberg is reporting that according to a source that knows about the settlement talks, the bank is close to reaching deals with regulators here and in the UK and it will likely pay $466 million in fines over allegations that it attempted to manipulate global interest rates. Regulators have been looking into whether UBS traders were in collusion with other banks to manipulate rates for profits. The bank has obtained conditional community from certain antitrust authorities, such as the Swiss Competition Commission, and the Canadian Competition Bureau, and well as the US Justice Department, for being among the first to self-report wrongdoing.

Three British men arrested in UK Libor probe, Yahoo, December 11, 2012

RBS Seeks Pact on Libor, The Wall Street Journal, November 2, 2012


UBS nears deal with United States, UK over Libor, Reuters, December 3, 2012


More Blog Posts:

LIBOR Oversight-Related Changes Announced by FSA Chief, Institutional Investor Securities Blog, October 2, 2012

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

October 16, 2012

Citigroup Inc. CEO Vikram Pandit Resigns

After months of tensions with Citigroup’s (C) board of directors, Chief Executive Officer Vikram Pandit has turned in his resignation. Taking his place as CEO will be Michael Corbat.

According to several sources, Pandit’s decision to leave comes after months of tension with Chairman Michael O’Neill over numerous issues, including the role of Chief Operating Officer John Havens and regarding compensation. Havens stepped down on the same day as Pandit. (Reuters reports that one person familiar with the investment bank says that this means that O’Neill is now in full control.) During a conference call with analysts and investors, O’Neill offered reassurances while noting that outside candidates had been considered before Corbat’s appointment.

With Pandit’s departure, Citigroup shares rose up to 2%, with some investors expressing relief that he is gone. Pandit was at the helm when the financial firm took a loss when it had to sell the stake it had left in its retail brokerage business to Morgan Stanley (MS). He also opposed breaking up the bank in any way, which some believed could have raised shareholder value. Proposals for these changes could come back onto the table now that he is gone.

Pandit’s relationship with the board wasn’t helped after shareholders recently turned down the CEO pay package. While he was awarded over $15 million in compensation last year, 55% of shareholders did not approve it.

According to Reuters, Pandit, who says he is leaving of his own accord, believes he has accomplished his aims since becoming Citigroup CEO in December 2007 and that putting his successor in place now makes sense because plans are in development for 2013 when a new strategy will be executed.

Meantime, Havens’ departure also isn’t a surprise to many, as he and Pandit have close career ties. They worked together at Morgan Stanley and Old Lane Partners LP. Some inside Citigroup considered their relationship to be an obstacle. Pandit moved to Citigroup after Old Lane Partners, which was his private equity firm and hedge fund, was acquired by the bank for $800 million.

Since the mortgage crisis, banks are under pressure regarding their profits, which haven’t been helped by unimpressive investment returns and unspectacular capital market activities. The Wall Street Journal reports that according to private equity firm JC Flowers & Co., the return on equity among financials should “normalize to historic levels” even though the economic crisis has resulted in a “major long-term evolution.”

In the firm’s mid-year report to investors, Chairman J. Christopher Flowers said this normalization would occur because financial service companies are needed if the economy is to work properly. He stressed that with economic growth, financial service companies will periodically need more capital to stimulate this, and, as a result, they won't be able to attract new capital unless ROEs and valuations adjust accordingly. Flowers said that this would occur via price changes and business mix shifts. Also per the WSJ, his view is in contrast to that of KKR & Co. global macro and asset allocation head Henry McVey, who recently reported that while the financial services industry is experiencing changes, more intense regulation will likely cause the firms’ performance and returns to keep lagging.

Citi's CEO Pandit exits abruptly after board clash, Reuters, October 16, 2012

Pandit Is Forced Out at Citi, The Wall Street Journal, October 17, 2012


More Blog Posts:
Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme, Institutional Investor Securities Blog, August 31, 2012

Continue reading "Citigroup Inc. CEO Vikram Pandit Resigns" »

August 30, 2012

Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt

Citigroup (C) has agreed to pay $590 million settle a shareholder class action collateralized debt obligation lawsuit filed by plaintiffs claiming it misled them about the bank’s subprime mortgage debt exposure right before the 2008 economic collapse By settling, Citigroup is not admitting to denying any wrongdoing. A federal judge has approved the proposed agreement.

Plaintiffs of this CDO lawsuit include pension funds in Illinois, Ohio, and Colorado led by ex-employees and directors of Automated Trading Desk. They obtained Citigroup shares when the bank bought the electronic trading firm in July 2007. The shareholders are accusing bank and some of its former senior executives of not disclosing that Citigroup’s CDOs were linked to mortgage securities until the bank took a million dollar write down on them that year. Citigroup would later go on to write down the CDOs by another tens of billions of dollars.

The plaintiffs claim that Citigroup used improper accounting practices so no one would find out that its holdings were losing their value, and instead, used “unsupportable marks” that were inflated so its “scheme” could continue. They say that the bank told them it had sold billions of dollars in collateralized debt obligations but did not tell them it guaranteed the securities against losses. The shareholders claim that to conceal the risks, Citi placed the guarantees in separate accounts.

Prior to the economic collapse of 2008, Citi had underwritten about $70 billion in CDOs. It, along with other Wall Street firms, had been busy participating in the profitable, growing business of packaging loans into complex securities. When the financial crisis happened, the US government had to bail Citigroup out with $45 billion, which the financial firm has since paid back.

This is not the first case Citigroup has settled related to subprime mortgages and the financial crisis. In 2010, Citi paid $75 million to settle SEC charges that it had issued misleading statements to the public about the extent of its subprime exposure, even acknowledging that it had misrepresented the exposure to be at $13 billion or under between July and the middle of October 2007 when it was actually over $50 billion. Citigroup also consented to pay the SEC $285 million to settle allegations that it misled investors when it didn’t reveal that it was assisting in choosing the mortgage securities underpinning a CDO while betting against it.

This week, Citi agreed to pay a different group of investors a $25 million MBS settlement to a securities lawsuit accusing it of underplaying the risks and telling lies about appraisal and underwriting standards on residential loans of two MBS trusts. The plaintiffs, Greater Kansas City Laborers Pension Fund and the ‪City of Ann Arbor Employees' Retirement System,‬ had sued Citi’s Institutional Clients Group. ‬

This $590 million settlement of Citigroup’s is the largest one reached over CDOs to date and one of the largest related to the economic crisis. According to The Wall Street Journal, the two that outsize this was the $627 million that Wachovia Corp. (WB) agreed to pay over allegations that investors were misled about its mortgage loan portfolio’s quality and the $624 million by Countrywide Financial (CFC) in 2010 to settle claims that it misled investors about its high risk mortgage practices.

Citigroup in $590 million settlement of subprime lawsuit, The New York Times, August 29, 2012

Citi's $590 million settlement: Where it ranks, August 29, 2012

Citigroup to Pay $25 Million to Settle MBS Lawsuit, American Banker, August 31, 2012

Citigroup Said To Pay $75 Million To Settle SEC Subprime Case, Bloomberg, July 29, 2010


More Blog Posts:
Amerigroup Shareholders Claim Goldman Sachs Advisers’ Had Conflicts of Interest That Influenced $4.5B Sale of Company to WellPoint, Institutional Investor Securities Blog, August 21, 2012

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

Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs, Institutional Investor Securities Blog, August 14, 2012


Continue reading "Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt " »

August 6, 2012

UBS, Citigroup FINRA Arbitration with Nonprofit Over ARS Cannot Be Halted, Said District Court

The U.S. District Court for the Eastern District of Virginia said that Citigroup (C) and UBS (UBS)cannot preliminarily enjoin Financial Industry Regulatory Authority arbitration over an auction-rate securities offering that did not succeed. The case is UBS Financial Services Inc. v. Carilion Clinic. Carilion is a nonprofit health care and the two financial services firms had provided it with services, including underwriting, for an issuance of auction rate securities that ended up failing.

Per Judge John Gibney, Jr., in 2005, the nonprofit had looked to Citigroup and UBS for help in raising raise $308.465 million to renovate and grow its medical facilities. The two financial firms allegedly recommended that Carilion issue $72.24 million of bonds as variable demand rate obligations. The nonprofit then issued the rest of the funds—$234 million—as ARS, which are at the center of the case.

After the ARS market failed in 2008, the interest rates on Carillion’s ARS went up, forcing the nonprofit to refinance its debt so it wouldn’t have to contend with even higher rates. The auctions then started failing.

Carilion contends that it didn’t know that UBS and Citigroup had been helping to hold up the ARS market prior to its collapse (which they then stopped doing) and said it wouldn’t have issued the securities if they had known that this was the case. The nonprofit filed FINRA arbitration proceedings against the two financial firms and said it could submit the dispute as a “customer” of both even though arbitration isn’t a provision of their written agreements.

Citigroup and UBS sought to bar the arbitration with their motion for a preliminary injunction. The district court, however, rejected their contention that the nonprofit is not a customer of theirs (if this had been determined to be true, then Carilion would not be able to arbitrate against them in front of FINRA). It said that the nonprofit was a “customer,” to both UBS and Citigroup, seeing as both firms provided it with numerous financial services and were paid accordingly.

The court also turned down the financial firms’ argument that Carilion had waived its right to arbitration when it consented to a mandatory forum selection clause that requires for disputes to go through the litigation in front of the U.S. District Court for the Southern District of New York. It pointed out that the “forum selection clause” could only be found in the agreements with one of the parties and that language used, as it relates to arbitration, is ambiguous and would not be interpreted as a waiver of Carillion’s arbitration rights.

Carilion can therefore go ahead and have FINRA preside over its arbitration dispute.

UBS Financial Services Inc. v. Carilion Clinic, Reuters, July 30, 2012


More Blog Posts:
Texas Securities Fraud: BNY Mellon Capital Markets LLC Settles Allegations of Rigged Bond Bidding for $1.3M, Stockbroker Fraud Blog, January 24, 2012

Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 20, 2012

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



Continue reading "UBS, Citigroup FINRA Arbitration with Nonprofit Over ARS Cannot Be Halted, Said District Court" »

July 16, 2012

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope

The London Inter-Bank Offer Rate (LIBOR) manipulation scandal involving Barclays Bank (BCS-P) has now opened up a global probe, as investigators from the United States, Europe, Canada, and Asia try to figure out exactly what happened. While Barclays may have the settled the allegations for $450 million with the UK’s Financial Services Authority, the US Department of Justice, and the Commodity Futures Trading Commission, now a number of other financial firms are under investigation including UBS AG (UBS), JPMorgan Chase (JPM), Deutsche Bank AG, Credit Suisse Group (CS), Citigroup Inc., Bank of Tokyo-Mitsubishi UFJ, HSBC Holdings PLC (HBC-PA), Lloyds Banking Group PLC (LYG), Rabobank Groep NV, Mizuho Financial Group Inc. (MFG), Societe Generale SA, RP Martin Holdings Ltd., Sumitomo Mitsui Banking Corp., and Royal Bank of Scotland PLC (RBS).

In the last few weeks, the accuracy of LIBOR, which is the average borrowing cost when banks in Britain loan money to each other, has come into question in the wake of allegations that Barclays and other big banks have been rigging it by submitting artificially low borrowing estimates. Considering that LIBOR is a benchmark interest rates that affects hundreds of trillions of dollars in financial contracts, including floating-rate mortgages, interest-rate swaps, and corporate loans globally, the fact that this type of financial fudging may be happening on a wide scale basis is disturbing.

“It’s my understanding the total financial paper effected by LIBOR is close to $500 trillion dollars. This is a half-quadrillion dollars if you are wondering about the next step up,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Institutional Investment Fraud Attorney William Shepherd.

Barclays contends that its manipulation of borrowing estimates could not alone have dramatically influenced the final labor rate. The bank claims that it submitted low borrowing costs that were artificial because it suspected that this is what other banks were doing and it didn’t want to look like it was in financial trouble by comparison.

“In the US, these allegations could fall under the Sherman Anti-trust and/or the Clayton Unfair Trade Practices Acts, said Securities Lawyer Shepherd. “The recovery possible under such legislation could reach triple damages, plus legal fees and costs.”

A slew of securities lawsuits, including class actions and regulator complaints, against some of these banks under investigation, are likely. CNN reports that already, attorneys general in Massachusetts, Florida, New York, and Connecticut are investigating the LIBOR rate-setting scandal. There may be a variety of plaintiff types, including municipal governments and investment firms.

“Institutions are usually the subject of such actions, which are also federal crime statutes, but individuals can also be held liable,” said Stockbroker Fraud Attorney Shepherd. “The allegations cover more than just price-fixing or predatory pricing and involve multiple acts of price manipulation among institutions (legally an “enterprise”), such that racketeering (RICO) laws could also apply.”

Banks belonging to the LIBOR panels will likely become defendants of criminal complaints, regulator complaints, and huge class actions. For now, they in turn, have been blaming the central banks and regulators.

States weighing Libor scandal suit, CNN, July 16, 2012

Who Else Is Under Investigation for Libor Manipulation?, The Wall Street Journal, July 9, 2012

The Worst Banking Scandal Yet?, Bloomberg, July 12, 2012


More Blog Posts:
$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit, Institutional Investor Securities Blog, July 14, 2012

June 16, 2012

Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest

Broker Bruce Parish Hutson has turned in a Letter of Acceptance, Waver, and Consent to settle allegations of Financial Industry Regulatory Authority rule violations involving his alleged failure to advise Morgan Stanley Smith Barney (MS) of his arrest for retail theft at a store in Wisconsin. FINRA has accepted the AWC, which Hutson submitted without denying or admitting to the findings and without adjudicating any issue.

The Ex-Morgan Stanley Smith Barney broker (and before that he worked for predecessor company Citigroup Global Markets Inc. ((ASBXL)), had entered a “no contest” plea to the misdemeanor charge in February 2010. He received a jail sentence of nine months, which was reduced to 12 months probation. On August 16, 2010, Hutson, turned in a Form UT (Uniform Termination Notice for Securities Industry Registration) stating that he was voluntarily let go from Morgan Stanley Smith Barney because the financial firm accused him of not properly reporting the arrest.

Also, although Form U4 (Uniform Application for Securities Industry Registration or Transfer) doesn’t mandate the disclosure of a mere arrest but does contemplate a criminal charge (at least), many industry members obligate employees to disclose any arrests. Yet when it was time to update this form by March 18, 2010, FINRA says that Hutson did not report the misdemeanor theft plea. Then, when he filled out Morgan Stanley Smith Barney’s yearly compliance questionnaire on May 19, 2010, he again denied having been arrested or charged with a crime in the past year or that he was statutorily disqualified.

FINRA contends that Hutson willfully violated its Article V, Section 2 (C) by-laws by not disclosing the criminal charge. The SRO also says that his later “no contest” plea to the misdemeanor theft violated FINRA Rule 2010 (when he made the false statement that he hadn’t been charged with any crime in the 12 months leading up to his completion of the compliance questionnaire) and he again violated this same rule when it was time to fill out the questionnaire. Per the AWC terms, Hutson is suspended from associating with any FINRA member for five months and he must pay a $5,000 fine.

“A broker can have a dozen complaints by investors and lose a half-dozen claims of wrongdoing, in which arbitrators reimburse these investors only part of their millions in collective losses, yet the broker is neither fined nor suspended,” said Shepherd Smith Edwards and Kantas, LTD, LLP founder and Securities Attorney William Shepherd. “A shoplifting charge in one’s past - very bad. Repeated misrepresentations to investors – so what. Perhaps FINRA should get its priorities straight.”

Broker Bruce Parish Hutson, Forbes, June 27, 2012

More Blog Posts:
Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval, Stockbroker Fraud Blog, February 28, 2012

Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M, Stockbroker Fraud, August 3, 2011

Continue reading "Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest" »

May 29, 2012

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

The CFTC says that before an option was about to expire, Whitney would make orders to sell front-month out-of-the-money options. By doing this, he was “implicitly” representing that the accounts were open and had enough margin to cover trades (In truth, the accounts had no margin and were closed). When the clearing firms would turn the trades down because the accounts were closed, they would give back the trades to the executing floor brokers’ clearing firms. The following day, Whitney would give account numbers that were valid to clear the trades. The CFTC says that this process allowed him to avoid the margin posting. Also, when Whitney traded, he would allegedly collect the options premium. By settling, he is not denying or admitting to the CFTC allegations.

Meantime, Senate Agriculture Committee Chairman Debbie Stabenow (D-Mich.) has written a letter to the heads of the Securities and Exchange Commission, the CFTC, the US Treasury Department, the Federal Reserve Board, the Comptroller of the Currency, and Federal Deposit Insurance Corporation urging them to go ahead and complete its implementation of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Right now, regulators are a year behind on the deadline for most of the law’s rules.

Stabenow cited JPMorgan Chase's (JPM) recent over $2 billion trading loss and MF Global Inc.’s (MFGLQ) bankruptcy last fall as clear examples of the need to pass Dodd-Frank. She worried that there hasn't been sufficient rulemaking to enforce the act’s new derivatives laws. She said that now is the time to finish writing the rules and “fully” implementing the law.

Our institutional investment lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represents investors throughout the US. We also have clients that are located abroad.

FINRA fines Citigroup Global Markets $3.5 million, Reuters, May 22, 2012

Federal Court in New York Orders Chicago Resident and Former Floor Broker, Kent R.E. Whitney, to Pay $600,000 for Margin Call Avoidance Scheme, CFTC, May 23, 2012

Chairwoman Stabenow: It Is Time To Fully Implement Wall Street Reform, AG.Senate.gov, May 18, 2012


More Blog Posts:

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats, Institutional Investor Securities Blog, May 26, 2012

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012

SEC Charges New York-Based Fund Manager and His Two Financial Firms Over Alleged $11M Ponzi Scheme, Stockbroker Fraud Blog, May 28, 2012

May 26, 2012

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats

At a House Financial Services Committee hearing on May 17, a number of Democratic lawmakers spoke out against the Securities and Exchange Commission's practice of settling securities enforcement actions without making defendants deny or admit to the allegations. There is concern that companies might see this solution as a mere business expense.

The hearing was spurred by U.S. District Court for the Southern District of New York Judge Jed Rakoff’s rejection of the SEC’s $285 million securities settlement with Citigroup (C) over its alleged misrepresentation of its role in a collateralized debt obligation that it marketed and structured in 2007. Citigroup had agreed to settle without denying or admitting to the allegations.

Rakoff, however, refused to approve the deal. In addition to calling for more facts before the court could accurately judge whether or not to approve the agreement, he spoke out against the SEC’s policy of letting defendants off the hook in terms of not having to deny or admit to allegations when settling. The U.S. Court of Appeals for the Second Circuit later went on to stay Rakoff’s ruling that SEC v. Citigroup Global Markets, Inc. go to trial.

At this Congressional hearing, a number of the lawmakers were “sympathetic” to Rakoff’s reasoning, said Rep. Carolyn Maloney (D-N.Y.). Rep. Al Green (D-Texas) stressed the importance of holding businesses accountable for alleged wrongdoings. The Democrats, however, were clearly mindful of the fact that SEC did not have the resources to take on additional, lengthy lawsuits, as well as of the delays that a change in the SEC’s current settlement policy would cause for investors seeking financial recovery, and they did not call for any actual policy change.

Meantime, SEC Enforcement Director Robert Khuzami, who was also at the hearing, talked about how not only would securities cases take longer to resolve if defendants were made to deny or admit wrongdoing when settling, but also, there would be a lot less settlements.

His views were backed by a number of attending Republican lawmakers who support the SEC’s settlement policy. Committee Chairman Spencer Bachus (R-Ala.) said he felt that agencies should have the primary discretion when it comes to deciding whether to settle or try a case, while Vice Chairman Jeb Hensarling (R-Texas) also said that eliminating the SEC’s policy would result in a huge increase in the number of securities lawsuits.

Earlier this month, at the Alan B. Levenson Symposium in Washington, current and former judges spoke for federal judges’ right to turn down settlement agreements if they didn’t think they had been given enough facts or considered the deals to be fundamentally unfair. They spoke about the importance of judicial independence and how judges shouldn’t be forced to merely rubber stamp settlement deals. For example, U.S. District Court for the District of Columbia Judge Beryl Howell said that regardless of whether parties had agreed to a settlement, a court still must be given sufficient facts to be able to determine whether a deal is reasonable.

Contact our SEC securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.

Examining the Settlement Practices of U.S. Financial Regulators, House.gov, May 17, 2012

Courts Must Reject Settlement Pacts Where Necessary, Former, Current Judges Say, Bloomberg BNA, May 15, 2012

SEC v. Citigroup Global Markets, Inc., Justia (the Opinion and Summary)


More Blog Posts:
SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected, Institutional Investor Securities Blog, March 15, 2012

Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2012

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

March 27, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns

FINRA says that Citigroup Inc. subsidiary Citi International Financial Services LLC must pay over $1.2M in restitution, fines, and interest over alleged excessive markdowns and markups on agency and corporate bond transactions and supervisory violations. The financial firm must also pay $648,000 in restitution and interest to over 3,600 clients for the alleged violations. By settling, Citi International is not denying or admitting to the allegations.

According to FINRA, considering the state of the markets at the time, the expense of making the transactions happen, and the value of services that were provided, from July ’07 through September ’10 Citi International made clients pay too much (up to over 10%) on agency/corporate bond markups and markdowns. (Brokerages usually make clients that buy a bond pay a premium above the price that they themselves paid to obtain the bond. This is called a “markup.”) Also, from April ’09 until June ’10, the SRO contends that Citi International did not put into practice reasonable due diligence in the sale or purchase of corporate bonds so that customers could pay the most favorable price possible.

The SRO says that during the time periods noted, the financial firm’s supervisory system for fixed income transactions had certain deficiencies related to a number of factors, including the evaluation of markups/markdowns under 5% and a pricing grid formulated on the bonds’ par value rather than their actual value. Citi International will now also have to modify its supervisory procedures over these matters.

In the wake of its order against Citi International, FINRA Market Regulation Executive Vice-President Thomas Gira noted that the SRO is determined to make sure that clients who sell and buy securities are given fair prices. He said that the prices that Citi International charged were not within the standards that were appropriate for fair pricing in debt transactions.

If you believe that you were the victim of securities misconduct or fraud, please contact our stockbroker fraud law firm right away. We represent both institutional and individual investors that have sustained losses because of inadequate supervision, misrepresentations and omissions, overconcentration, unsuitability, failure to execute trades, churning, breach of contract, breach of promise, negligence, breach of fiduciary duty, margin account abuse, unauthorized trading, registration violations and other types of adviser/broker misconduct.

Before deciding to work with a brokerage firm that is registered with FINRA, you can always check to see if they have a disciplinary record by using FINRA’s BrokerCheck. Last year, 14.2 million reviews of the records of financial firms and brokers were conducted on BrokerCheck.

Read the Letter of Acceptance, Waiver, and Consent

Citigroup Fined for Bond Markup, The Wall Street Journal, March 19, 2012

FINRA BrokerCheck®


More Blog Posts:

Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 30, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011

Continue reading "Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns" »

March 15, 2012

SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected

In a primarily procedural decision, the U.S. Court of Appeals for the Second Circuit has ruled that the Securities and Exchange Commission’s case against Citigroup, which resulted in a proposed $285M securities fred settlement, be stayed pending a joint appeal of U.S. Senior District Judge Jed Rakoff’s ruling that the civil lawsuit proceed to trial. Rakoff had rejected the settlement on the grounds that he didn’t believe that it was “adequate.” He also questioned the Commission’s practice of letting parties settle securities causes without having to admit or deny wrongdoing. The trial in SEC v. Citigroup Global Markets, Inc. had been scheduled for July 2012.

In December, the SEC filed a Notice of Appeal to the 2nd Circuit contending that the district court judge made a legal mistake in declaring an unprecedented standard that the Commission believes hurts investors by not allowing them to avail of “benefits that were immediate, substantial, and definite.” The notice also stated that it considered it incorrect for the district court to require an admission of facts or a trial as terms of condition for approving a proposed consent judgment—especially because the SEC provided Rakoff with information demonstrating the “reasoned basis” for its findings.

The 2nd circuit’s ruling deals a blow to Rakoff’s decision, which other federal judges have cited when asking if the public’s interest is being served when federal agencies propose settlements. The three-judge panel’s appellate ruling, which was a per curiam (unsigned) decision, found that the SEC and Citi would likely win their contention that Rakoff was in error when he turned down the securities settlement. The appeals court justices said that they had to defer to an executive agency’s evaluation of what is best for the public and that there was no grounds to question the SEC’s claim that the $285M securities settlement with Citigroup is in that interest.

The 2nd circuit said that Rakoff “misinterpreted” precedent related to his discretion to determine public interest and went beyond his judicial authority. Also, per the appellate panel, while district court judges should not merely rubber stamp on behalf of federal agencies it is not their job to define the latter’s policies.

It is important to note, however, that the 2nd circuit’s ruling only tackles the preliminary issue of whether the securities case should be stayed pending the completion of the appeal. The panel said it would be up to the justices that hear the appeal to resolve all matters and that this ruling should not have any “preclusive” impact. Counsel would also be appointed to argue Rakoff’s side during the appeal.

Ruling Gives Edge to U.S. in Its Appeal of Citi Case, NY Times, March 15, 2012

Second Circuit: Rakoff, Mind, Wall Street Journal, March 15, 2012


More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional investor Securities Blog, November 9, 2011

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

Continue reading "SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected" »

January 28, 2012

Citigroup Woes Continue With FINRA Order to Pay Financial Adviser Team $24M Over Inadequate Compensation

A Financial Industry Regulatory Authority panel wants Citigroup to pay financial advisor siblings Robert Vincent Minchello and James Bryan Minchello, as well as administrator Martha Jane Sullivan, $24 million. The claimants, who were formerly employed by the financial firm, contend that they did not receive fair compensation for transactions involving an institutional investor client.

Prior to working for Citigroup they were with Banc of America Securities. When they landed at Citi, they brought a number of institutional investors with them. Transactions that the brothers conducted with one the clients, a technology incubator that at the time they already had a 10-year working relationship with, is at the center of the dispute with Citigroup.

The Claimants contend that Citi only partially paid them on a few of the initial transactions and then removed them from relationship with the client while refusing to compensate them for subsequent transactions. After leaving the financial firm in 2009 they submitted an arbitration claim with Citigroup. They had wanted $156.1 million in punitive damages and interest, as well as $78 million in compensatory damages ( and attorneys’ fees and other costs).

The FINRA panel awarded the team about $24 million for compensatory damages and 6% yearly interest for the period of December 15, 2004 through January 13, 2012. Citi must also pay the advisors $1M in sanctions. The Claimants’ securities fraud attorney says the award seem to be a “rebuke” of the practice that some investment banks engage in of not paying advisors that connect them with lucrative transactions or clients. The brothers and Sullivan are now with JP Morgan Securities LLC.

As you can read about in some of our recent blog posts, Citigroup has come under fire a lot recently over alleged violations. FINRA just fined Citigroup Global Markets $725,000 for allegedly failing to disclose certain conflicts of interest in its research reports and during research analyst public appearances. In December 2011, a judge turned down Citigroup’s request to have a $54.1M arbitration award against it overturned. That FINRA award was over Citigroup’s alleged failure to disclose to investors the risks involved in putting their money in municipal bonds.

Of course, there is also the $285 million settlement reached between Citigroup and the Securities and Exchange Commission that US District Judge Jed S. Rakoff has refused to approve. Instead, he ordered both parties to court to resolve this matter. The SEC as the housing market was collapsing in 2007, Citigroup sold Class V Funding III and then betting against the $1B mortgage-linked CDO. Clients were not told about this conflict and investors eventually lost almost $700 million. Meantime, the financial firm made approximately $160 million.

Boston financial advisors and assistant win $24 million in arbitration, Boston, January 23, 2012

Citigroup Ordered To Pay Advisor Team $24M in Arbitration Dispute, OnWallStreet, January 24, 2012


More Blog Posts:
Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011

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

Unsealed Documents in $54.4M FINRA Arbitration Case Reveal that Citigroup Did Not Disclose Municipal Bond Risks to Investors, Stockbroker Fraud Blog, January 21, 2012


Continue reading "Citigroup Woes Continue With FINRA Order to Pay Financial Adviser Team $24M Over Inadequate Compensation " »

December 27, 2011

Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge

A US judge has denied Citigroup’s request that the $54.1M Financial Industry Regulatory Authority arbitration award issued to investors that sustained losses in municipal bond funds be overturned. This is one of the largest securities arbitration awards that a broker-dealer has been ordered to pay individual investors. Brush Creek Capital, retired lawyer Gerald D. Hosier, and investor Jerry Murdock Jr. are the award’s recipients. However, these Claimants are not the only investors to come forward contending that they were told the funds were suitable for investors that wanted to preserve their capital.

The investor losses were related to several leveraged municipal bond arbitrage funds that saw their value significantly drop between 2007 and 2008. Citigroup Global Markets had sold the municipal bond funds through MAT Finance LLC. Proceeds were invested in longer-term muni bunds while borrowing took place at low, short-term rates. The strategy proved to be unsuccessful, resulting in investors losing up to 80% of their money.

According to The Wall Street Journal, when it issued its ruling the arbitration panel appeared to reject three defenses that financial firms usually make:

• The financial crisis, and not the financial firm, is to blame for the losses.
• Sophisticated, rich investors should have known what risks were involved.
• The prospectus had warned in advance that investors could lose everything.

The Claimants alleged fraud, failure to supervise, and unsuitability. They had sought no less than $48 million in compensatory damages, fees, lost-opportunity costs, commission, lawyers’ fees, and interest.

The FINRA arbitration panel awarded $21.6 million in compensatory damages, plus 8% per annum, to Hosier, $3.9 million in compensatory damages, plus 8% per annum, to Murdock, Jr, and $8.4 million in compensatory damages, plus 8% per annum, to Brush Creek Capital LLC.

All Claimants were also awarded $3 million in lawyers’ fees, $17 million in punitive damages, $33,500 in expert witness fees, $13,168 in court reporter expenses, and $600 for the Claimant’s filing fee.

Following the FINRA ruling, Citigroup contended that the arbitration panel had ignored the law when arriving at the award. The brokerage firm also claimed that investors could not have depended on verbal statements that the financial firm had expressed about purchases because the clients had acknowledged through signed agreements that they could lose everything they invested. By denying Citigroup’s request to throw out the arbitration award, Judge Christine Arguello, however, said that the court found Citigroup’s “argument wholly unpersuasive.”

A Crack in Wall Street’s Defenses, New York Times, April 24, 2011

Citigroup Slammed With $54 Million Award by FINRA Arbitrators in MAT / ASTA Case, Municipal Bond, April 12, 2011

Citigroup loses suit to overturn $54-million ruling, Reuters, December 22, 2011


More Blog Posts:

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

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

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

Continue reading "Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge" »

November 9, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff

In Federal District Court today, Judge Jed S. Rakoff expressed concerns about the $285M securities settlement that Citigroup had reached with the Securities Exchange Commission. The financial firm was accused selling $1B in high-risk mortgage-linked collateralized debt obligation that it allegedly knew were at risk of failing. A federal judge must approve the settlement.

Rakoff is the same judge that wouldn’t approve Bank of America’s $33M securities settlement with the SEC for allegedly misleading investors. He later approved a revised settlement of $150 million.

At today’s hearing over the Citigroup deal, Rakoff said the settlement raises issues of concerns about the SEC’s enforcement practices. Approving the agreement would close the case on regulators’ claims that the financial firm.

While Rakoff has not yet made a decision about whether he will approve the settlement, he did question whether the SEC had any genuine desire to find out exactly what happened rather than just settling up. The SEC allows parties to settle without denying or admitting to any wrongdoing. Rakoff also raised concerns about the banks often break the promise they make when settling that they won’t violate securities laws in the future. This is the fifth time that Citigroup has settled securities claims with the SEC over alleged civil fraud. Rakoff also raised questions about why the bank’s settlement involves just a $95 million penalty when investors’ are estimated to have lost $700 million on the CDO.

Even though Citigroup didn’t jump into subprime mortgage loan packaging, it got involved in the housing boom just as that was reaching its heights As the market collapsed, Citigroup sustained over $30 billion in losses, and the government had to bail the bank out twice.

Last year, the financial firm consented to pay $75 million over allegations that it intentionally didn’t notify investors that their investment in the subprime mortgage market were declining in value when the financial crisis hit. Citigroup has since reorganized its risk management function

Citigroup’s $285M Settlement
The SEC claims Citigroup misled clients over a $1 billion derivatives deal involving Class V Funding III, which is a collateralized debt obligation. Not only did the financial firm select the portfolio but it also bet against it. Investors were not told of Citigroup’s conflicting allegiances and they sustained huge losses. Meantime, Citigroup made $126 million from taking a short position against the CDO’s assets, as well as another $34 million in fees.

Judge in Citigroup Mortgage Settlement Criticizes S.E.C.’s Enforcement, NY Times, November 9, 2011

Judge Dredd may scotch $285M Citi settlement: Attorney, Investment News, November 8, 2011


More Blog Posts:
Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal, Institutional Investor Securities Blog, October 20, 2011

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

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

Continue reading "Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff " »

October 20, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal

Citigroup has consented to pay $285 million to settle a Securities and Exchange Commission complaint accusing the bank of misleading investors in a $1 billion derivatives deal—a collateralized debt obligation called Class V Funding III. It was Citigroup that chose the assets for the portfolio that it then bet against. Investors were not told that Citigroup’s interests were contrary to theirs. The $285 million will go to the deal’s investors.

According to the SEC, Citigroup had significant influence over the $500 million of portfolio assets that were selected. It then took a short position against the assets, standing to profit if they dropped in value. All 15 investors were not made aware of any of this and practically all of their investments (in the hundreds of millions of dollars) were lost when the CDO defaulted in under 9 months after it closed on February 28, 2007. Credit ratings agencies had downgraded over 80% of the portfolio.

Financial instrument insurer Ambac, which was the deal’s biggest investor and had taken on the role of assuming the credit risk, was forced to pay those who bet against the bonds. In 2009, Ambac sought bankruptcy protection.

Meantime, Citigroup made about $126 million in profits from the short position and earned about $34 million in fees. S.E.C.’s division of enforcement director Robert Khuzami says that under the law, Citigroup was required to give these CDO investors “more care and candor.”

Per the SEC’s civil action, Citigroup employee Brian Stoker is the one that mainly put the deal together, while Credit Suisse portfolio manager Samir H. Bhatt was primarily in charge of the transaction. Credit Suisse was the CDO transaction’s collateral manager.

Stoker is fighting the SEC’s case against him. Meantime, Bhatt has settled the SEC’s charges by agreeing to pay $50,000. He has also been suspended from associating with any investment adviser for six months. Credit Suisse Group AG settled for $2.5 million.

As part of this settlement, Citigroup will pay a $95 million fine. It was just last year that the financial firm agreed to pay $75 million over federal claims that it purposely didn’t let investor know that their subprime mortgage investments were losing value during the financial crisis. Citigroup has said that since then, it has revamped its risk management function and gone back to banking basics.

Last year, Goldman Sachs Group Inc. agreed to settle for $550 million allegations that it did tell investors that the hedge fund that helped choose a CDO’s assets also was betting against it. JPMorgan Chase & Co. settled similar allegations earlier this year for $153.6 million.

Citigroup to Pay $285 Million to Settle SEC Claims on Mortgage-Linked CDO, Bloomberg, October 19, 2011

Citigroup to Pay Millions to Close Fraud Complaint, NY Times, October 19, 2011


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

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

Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund, Institutional Investors Securities Blog, November 11, 2010

Continue reading "Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal " »

August 16, 2011

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

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

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

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

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

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

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

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

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

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

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

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

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

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


More Blog Posts:

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

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

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

November 30, 2010

Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling

According to a district court ruling, investors can proceed with certain securities fraud charges against Citigroup and a number of its directors over the alleged misrepresenting of the risks involved in mortgage-related investments (including auction-rate securities, collateralized debt obligations, Alt-A residential mortgage-backed securities, and structured investment vehicles). However, the majority of claims involving pleading inadequacies have been dismissed. The securities lawsuit seeks to represent persons that bought Citigroup common stock between January 2004 and January 15, 2009.

Current and ex-Citigroup shareholders have said that as a result of the securities fraud, which involved the misrepresentation of the risks involved via exposure to collateralized debt obligations, they ended up paying an inflated stock price. The plaintiffs are accusing several of the defendants of selling significant amounts of Citigroup stock during the class period. They also say that seven of the individual defendants certified the accuracy of certain Securities and Exchange Commission filings that were allegedly fraudulent. They plaintiffs are claiming that there were SEC filings that violated accounting rules because of the failure to report CDO exposure and value such holdings with accuracy.

The plaintiffs claim that the defendants intentionally hid the fact that billions of dollars in CDOs hadn’t been bought. They also said that defendants made misleading statements that did not properly make clear the subprime risks linked to the Citigroup CDO portfolio.

The defendants submitted a dismissal motion, which the court granted for the most part. Although the court is letting certain CDO-related claims to move forward, it agrees with the defense that because the plaintiffs failed to raise an inference of scienter before February 2007 (when the investment bank started buying insurance for its most high risk CDO holdings), the claims for that period cannot be maintained. The court also held that the plaintiffs failed to plead that seven of the individual defendants had been aware of Citigroup’s CDO operations. As a result, the court determined that there can be no finding of scienter in regards to the individuals.

The court, however, did that the plaintiffs adequately pleaded securities fraud claims against Citigroup, Gary Crittenden, Charles Prince, Thomas Maheras, Robert Druskin, David C. Bushnell, Michael Stuart Klein, and Robert Rubin for misstatements made about the bank’s CDO exposure between February and November 3, 2007. The plaintiffs also adequately pleaded securities fraud claims against Citigroup and Crittenden for Nov. 4, 2007, to April 2008 period.

Related Web Resource:
Citigroup Inc. Securities Litigation (PDF)

Continue reading "Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling " »

November 11, 2010

Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund

A federal bankruptcy judge has approved a settlement involving Citigroup Global Markets Inc. agreeing to repay $95.5 million to clients who sustained auction-rate securities related-losses. The ARS were told by Citigroup to LandAmerica 1031 Exchange Services Inc. before the latter folded in 2008. The ARS had been valued at about $120 million. The repurchase rate that clients are getting is reportedly better than what the ARS can be sold for now.

Under the approved securities settlement, these creditors should recover a little over 50% of their financial losses. The distribution of the money should begin taking place in December.

LandAmerica 1031 Exchange Services Inc. and parent company LandAmerica Financial Group Inc. filed for Chapter 11 bankruptcy in November 2008. Over 250 clients had placed proceeds from investment property sales in the exchange. Their intention was to defer capital gains taxes while searching for other properties to purchase.

Unfortunately, because the exchange company invested some of the funds in ARS, when the market froze and LandAmerica filed for bankruptcy, the investors became unable to access their money. At the time of the bankruptcy, Landmark held $201.7 million in ARS. $30 million of the securities had sold.

Meantime, the US Securities and Exchange Commission has received complaints claiming that Citigroup engaged in misrepresentation and securities fraud related to the credit worthiness and liquidity of the securities.

Related Web Resources:

LandAmerica settlement for $95.5 million is proposed, WSLS, October 29, 2010

LandAmerica exchange fund settlement approved, Richmond Times-Dispatch, November 10, 2010

Stockbroker Fraud Blog

Continue reading "Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund " »

September 29, 2010

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors

Judge Ellen Segal Huvelle says she will approve the $75 securities settlement between Citigroup and the SEC once the agreement includes changes that the bank has already made to its disclosure policy in the agreement. The federal judge says she wants the changes added to the settlement terms so that executives can’t revise them. She also wants the $75 million used to compensate shareholders who lost money because of Citigroup’s misstatements.

Last month, Huvelle had refused to approve the settlement over Citibank’s alleged failure to fully disclosure its exposure to subprime assets by almost $40 billion. The SEC accused the investment bank of misleading investors and telling them that its exposure was only $13 billion. When questioning the agreement, Huvelle asked why Citigroup shareholders should have to pay for the bank executives’ alleged misconducts. She also wanted to know why only two individuals were pursued.

The SEC had also filed cases against former CFO Gary Crittenden and ex-investor relations head Arthur Tildesley Jr. Both men have settled the cases against them without denying or admitting wrongdoing.

Despite giving conditional approval of the settlement, Huvelle noted that she didn’t think the $75 million would “deter anyone” unless Citibank abided by the changes to the disclosure policy. She also noted that the bank was “doing a disservice to the public” because other Citigroup executives were not held accountable for their alleged involvement.

The Wall Street Journal reports that lawmakers and others have becoming extremely frustrated at the considerably small number of senior executives that have been charged in connection with the financial debacle that has impacted Wall Street. The SEC has said that it can only file charges when there is sufficient evidence. Meantime, defense attorneys have argued that the multibillion dollar losses by investment firms were a result of bad business calls and not intentional fraud.


Related Web Resources:
Citigroup's $75 Million Settlement With SEC Gets Green Light -- Almost, Law.com, September 28, 2010

US court approves SEC settlement with Citi, Financial Times, September 24, 2010

Judge Won't Approve Citi-SEC Pact, Wall Street Journal, August 17, 2010

Continue reading "Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors" »

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