August 1, 2016

Financial Firm News: Deutsche Bank Ordered to Face Part of Subprime Mortgage Fraud Lawsuit & Morgan Stanley & Bank of America Must Contend with MBS Case

A U. S. district court judge said that Deutsche Bank AG (DB) must face part of a mortgage fraud case accusing the German bank of bilking investors who purchased over $5.4M of preferred securities. The plaintiffs, led by two individuals and Belmont Holdings Corp., claim that Deutsche Bank hid its exposure to the subprime mortgage market.

Judge Doborah Batts turned down the bank’s bid to throw out claims related to about $2.55B of securities sold in 11/07 and 2/08. She did, however, dismiss claims involving $2.9B of securities sold in 5/07, 7/07, and 5/08. Investors claim that Deutsche Bank should have notified them in offering documents that it had significant exposure to subprime markets via collateralized debt obligations and residential mortgage-backed securities. They believe that early notification could have prevented them from purchasing the preferred securities before their values dropped, resulting in billions of dollars of losses.

Continue reading "Financial Firm News: Deutsche Bank Ordered to Face Part of Subprime Mortgage Fraud Lawsuit & Morgan Stanley & Bank of America Must Contend with MBS Case " »

November 15, 2014

$13B JPMorgan Chase Mortgage Settlement Was Not Sufficient, Says Whistleblower

According to Alayne Fleischmann, the whistleblower who gave the evidence which helped resident in a $13 billion mortgage settlement from JPMorgan Chase(JPM) to the U.S. Department of Justice last year, that amount was not enough. Fleischmann, a lawyer, joined the financial firm as a deal manager in 2006.

She says that not long after she started working there she noticed that about half of the loans in a multimillion-loan pool included overstated incomes. Such loans, she said, were likely at risk for default—a precarious position for both the investors and the securities. Fleischmann said that she notified management about how the bank was re-selling subprime mortgages to customers without letting them know about the risks. She also spoke about how one bank manager wanted to put in place a non-email policy so there would be no paper trail to show that the firm was aware that such activities were happening.

It was the sale of toxic sub-prime loans by JPMorgan and other US banks that incited the US housing market crisis, which eventually spurred the global financial meltdown of 2008. Repackaged loans were sold to pension funds and other institutional investors, with many buyers unaware of the high default risks involved.

Fleischman was let go from JPMorgan in early 2008. The U.S. Securities and Exchange Commission reached out to her later that year. Even though she had signed a non-disclosure agreement when leaving the firm, this did not preclude her from talking about criminal wrongdoing, including the selling of toxic sub-prime mortgage products.

Prosecutors used the information to negotiate a $9 billion mortgage fraud settlement with JPMorgan, in addition to $4 billion relief for homeowners that included mortgage modifications for homeowners at risk of foreclosure. Yet no criminal charges have been brought in this matter.

After signing an approximately 10-page “statements of fact, JPMorgan Chase CFO Marianne Lake spoke out, noting that despite the settlement, the firm was not admitting to having violated any laws. The settlement did not even have to pass court approval. The firm also was able to take some $7 billion of the settlement and use it as a tax write-off.

Fleischmann, who recently outed herself as the whistleblower in a Rolling Stone article, believes that individuals who took part in the infringements that lead to the housing crisis should be held responsible for their crimes. According to journalist Matt Taibbi who wrote the article, she said that a number of other historical settlements with the DOJ, including those made with Bank of America (BAC) and Citigroup (C) were actually deals in which “cash for secrecy,” was the trade.

Institutional investors were the ones that suffered when they were sold toxic sub-prime mortgages instruments. Our mortgage-backed securities fraud lawyers have been working hard over the last six years to help investors recoup their losses. Contact the SSEK Partners Group today.

The $9 Billion Witness: Meet JPMorgan Chase's Worst Nightmare, Rolling Stone, November 6, 2014

‘Occupy made it possible’: JPMorgan whistleblower Fleischmann to Max Keiser,, November 13, 2014

JPMorgan settlement not enough, says whistleblower, CNBC, November 12, 2014

JPMorgan agrees to $13 billion mortgage settlement, CNN, November 19, 2013

More Blog Posts:
SEC Sanctions UBS, Charles Swab, Oppenheimer, & 10 Other Firms For Improper Sales of Puerto Rico Junk Bonds, Stockbroker Fraud Blog, November 3, 2014

SEC News: Regulator Grants $30M Whistleblower Award and Charges Washington Investment Advisory Firm $600K for Undisclosed Principal Transaction, False Advertising, Stockbroker Fraud Blog, September 23, 2014

T.J. Malone’s Lincolnshire Management Settles with SEC for $2.3M Over Purportedly Improper Allocations That Cost Its Funds, Institutional Investor Securities Blog, September 23, 2014

August 28, 2013

JPMorgan Found Liable in Billionaire’s Subprime Mortgage Lawsuit for Over $50M in Damages

In the State Supreme Court in Manhattan, Justice Melvin Schweitzer found JPMorgan Chase (JPM) liable for breach of contract when it put high-risk subprime mortgages in an account held by investor Leonard Blavatnik. Now, the financial firm must pay the Russsian-American billionaire more than $50 million in damages--$42.5 million for the breach and 5% interest from beginning May 2008. However, JPMorgan was not found liable for negligence.

Blavatnik, who Forbes magazine says is the 44th wealthiest person in the world, filed his securities fraud case against JPMorgan in 2009. He contended that the investment bank lost over $100 million on about a $1 billion investment made by CMMF L.L.C., which is a fund that Access Industries, his company, created. He says JPMorgan promised him that the money would be invested conservatively but instead breached a 20% mortgage-backed securities limit when it misclassified securities that were backed by a subprime loans pool—ABS home-equity loans—as asset-backed instead of as MBSs.

Access, Blavatnik’s company, claims that the bank kept holding the securities even though it knew that they were not right for the portfolio. In May 2008, CMMF shut down the account.

Judge Schweitzer found the bank liable for going beyond the cap limit while rejecting the firm’s claim that it was a practice in the industry to separately classify mortgages securities and home equity loans because they don’t a carry the same risk. Regarding the negligence claim, he said that the mortgage securities were generally safe when they were purchased and that the financial firm behaved reasonably when it suggested CMMF wait instead of selling at such low prices.

Meantime, JPMorgan also is contenting with other investigations and lawsuits over the way it dealt with its mortgage business during the economic crisis of 2008.

Our MBS fraud lawyers represent investors throughout the US.

Judge Rules Against JPMorgan in Suit Over Billionaire’s Losses, The New York Times/Reuters, August 26, 2013

Billionaire Blavatnik Wins $42.5 Million JPMorgan Award, Bloomberg, August 26, 2013

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

Former Jeffries Director Charged with Securities Fraud Crimes and Sued By SEC Over Alleged Residential Mortgage-Backed Securities, Stockbroker Fraud Blog, February 11, 2013

UBS Fails in Bid to Block $125M ARS Arbitration Case by Allina Health System, Institutional Investor Securities Blog, February 14, 2013

December 3, 2012

SEC's Antifraud Claim Against Goldman Sachs Executive Fabrice Tourre Won’t Be Reinstated, Says District Court

The U.S. District Court for the Southern District of New York has refused the Securities and Exchange Commission’s request to reinstate its antifraud claim against Goldman Sachs & Co. (GS) executive Fabrice Tourre for alleged misstatements related to a collateralized debt obligation connected to subprime mortgages. Judge Katherine Forrest said that the facts did not offer enough domestic nexus to support applying 1934 Securities Exchange Act Section 10(b). To do so otherwise would allow a 10(b) claim to be made whenever a foreign fraudulent transaction had even the smallest link to a legal securities transaction based in the US, she said, and that this is “not the law.” The case is SEC v. Tourre.

The SEC had sued the Goldman and its VP, Tourre, over alleged omissions and misstatements connected with the ABACUS 2007-AC1’s sale and structuring. This 2007 CDO was linked to subprime residential mortgage-backed securities and their performance. The Commission claimed Goldman had misrepresented the part that Paulson & Co., a hedge fund, had played in choosing the RMBS that went into the portfolio underlying the CDO and that Tourre was primarily responsible for the CDO deal’s marketing and structuring.

In 2010, Goldman settled the SEC’s claims by consenting to pay $550M, which left Tourre as the sole defendant of this case. Last year, the court dismissed one of the Section 10(B) claims predicated on $150 million note purchases made by IKB, a German bank, because of Morrison v. National Australia Bank Ltd. In that case, the US Supreme Court had found that this section is applicable only to transactions in securities found on US exchanges or securities transactions that happen in this country. The court, however, did let the regulator move forward under Section 10(b) in regards to other ABACUS transactions, and also the 1933 Securities Act’s Section 17(a).

However, following Absolute Activist Value Master Fund Ltd. v. Facet in which the U.S. Court of Appeals for the Second Circuit earlier this year found that ““irrevocable liability is incurred or title passes” within the US securities transaction may be considered domestic even if trading did not occur on a US exchange, the SEC requested that the court revive the Section 10(b) claim. Although IKB was the one that had recommended the CDO to clients, including Loreley Financing, it was Goldman that obtained the title to $150 million of the notes through the Depository Trust Co. in New York. Goldman then sent the notes to the CDO trustee in Chicago before the notes were moved from the DTC to Goldman's Euroclear account to Loreley's account. The Commission said that, therefore, transaction that the claim was based on had closed here.

Noting in its holding that Section 10(b) places liability on any person that employs deception or manipulation related to the selling or buying of a security, the court said that the Commission was trying to premise the domestic move of the notes’ title from the CDO trustee to Goldman at the closing in New York as a “hook” to show liability under this section. The court pointed out that while the title of the transfer that took place in New York was legal and it wasn’t until later that the alleged fraud happened. The “fraud was perpetuated upon IKB/Loreley, not Goldman” so “no fraudulent US-based” title transfer related to the note purchase is “sufficient to sustain a Section 10(b) and rule 10b-5 claim against Tourre” for the transaction.

SEC v. Tourre (PDF)

Morrison v. National Australia Bank Ltd. (PDF)

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

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, November 12, 2010

Class Action MBS Securities Lawsuit Against Goldman Sachs is Reinstated by 2nd Circuit, Institutional Investor Securities Blog, September 14, 2012

Continue reading "SEC's Antifraud Claim Against Goldman Sachs Executive Fabrice Tourre Won’t Be Reinstated, Says District Court " »

October 29, 2012

Institutional Investor Securities Blog: Putnam Advisory Accused of Massachusetts Securities Fraud in $3B CDO Offerings, SEC Claims Yorkville Advisors Fixed Books To Attract Investors, and FINRA Seeks Comments on Revised Proposal Over Bond Market Research

The Massachusetts Securities Division is claiming that Putnam Advisory Co. deceived investors about its actual involvement in Pyxis 2006 and Pyxis 2007, two $1.5 billion collateralized debt obligations comprised of midprime and subprime mortgage-backed securities. In its administrative complaint, the state contends that Putnam represented to investors that it would act as an independent advisor when to the Pyxis CDOs when, in fact, Magnetar Capital, a hedge fund, was also involved creating in and structuring key aspects of both and even recommended that certain collateral to be included in them while then proceeding to take a substantial short position on that collateral. Putnam denies the allegations.

The state says that Magnetar proceeded to benefit from the downgrades of subprime assets in the two CDOs while making a net gain of about $67 million on aggressive positions and equity investments linked to the two of them. Meantime, Putnam earned $8.81 million in collateral management fees for the Pyxis CDOs. Massachusetts Secretary of Commonwealth William F. Galvin says that his office will continue to look at how banks misled the buyers of subprime mortgage-backed securitized debt instruments.

In other securities news, the SEC is accusing Yorkville Advisors LLC, its president and founder Mark Angelo, and CFO Edward Schinik of revising certain books to appeal to potential investors and succeeded in getting pension funds and funds of funds to invest $280 million into two Yorkville hedge funds. This allegedly let Yorkville charge at least $10 million in excessive fees. All three three defendants are denying the allegations.

Per the SEC, Yorkville, Angelo, and Schinik allegedly misrepresented the assets’ liquidity and safety of the funds’ assets and charged excessive fees to investors by fraudulently inflating the investments’ value. This included “falsely” presenting Yorkville as a firm that “employed a robust valuation procedure” and was in charge of an investment portfolio that was highly collateralized.

The Commission’s allegations stem from its Aberrational Performance Inquiry, which employs analytic data to determine risk and look for hedge funds with returns that are “suspicious.” The SEC claims that the defendants did not abide by Yorkville’s valuation practices, disregarded negative data about specific investments, failed to disclose adverse information from an auditor, and misled investors about the funds’ liquidity and the role played by a third-party valuation firm.

Meantime, the Financial Industry Regulatory Authority wants comments on a revised proposal that tackles conflicts of interest stemming from bond market research. While current FINRA rules are imposed on research analysts and research reports for equities research, the modifications, which the SEC must approve, would impose requirements on research analysts and research reports that examine debt securities.

Per the proposed revisions, brokerage firms would set up, maintain, and put into effect procedures and policies that would identify and deal with conflicts of interest having to do with debt research analysts’ public appearances, the preparation and distribution of debt research reports, and interactions between the analysts and others. Also, a “higher tier” of institutional investors that would be able to get institutional debt research without having to affirmatively elect to do so in writing would be set up. Institutional investors would qualify for this tier by satisfying the “qualified institutional buyer” definition and other requirements. Also, firms that have limited principal debt trading activity would, for the first time, obtain an exemption.

The revised proposal was developed following comments criticizing the original one as being too “burdensome.” As with the first proposal, this one continues to “treat retail investors and institutional investors as customers and counterparties, respectively,” said FINRA chairman and CEO Richard Ketchum, while retail debt research and equity research will get equal protections and institutional debt research becomes exempt from a lot of structural provisions.

In the matter of Putnam Advisory Co., LLC, Sec.State.Ma.US (PDF)

SEC v. Yorkville Advisors, Mark Angelo, and Edward Schinik (PDF)

Text of Proposed New Finra Rule: Debt Research Analysts and Debt Research Reports, FINRA

More Blog Posts:

FINRA Securities Fraud Roundup: Guggenheim Securities Fined $800K For Failure to Supervise CDO Traders, Brokerage Firm Managing TIC Securities Doesn’t Have to Arbitrate Investor Claims, & Investor Award in Morgan Keegan Funds is Upheld, Institutional Investor Securities Blog, October 12, 2012

Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt, Institutional Investor Securities Blog, August 30, 2012

FINRA Arbitration Panel Tells Merrill Lynch to Pay $1.34M to Florida Couple Over Allegedly Misrepresenting Fannie Mae Preferred Shares' Risks, Stockbroker Fraud Blog, October 17, 2012

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 25, 2012

Ex-Fannie Mae Executives Have to Defend Against SEC Lawsuit Over Their Alleged Involvement in Understating Mortgage Company’s Exposure Risk

The U.S. District Court for the Southern District of New York has decided that ex-Federal National Mortgage Association executives do have to contend with a Securities Exchange Commission enforcement lawsuit over their alleged role in underplaying just how exposed the company was to high risk loans. Ex-Fannie Mae (FNM) CEO Daniel Mudd, former single family mortgage business EVP Thomas Lund, and ex-chief risk officer Enrico Dallavecchia had sought to have the lawsuit dismissed because they said that the Commission failed to make its case against them. Judge Paul Crotty has denied their motion.

The SEC claims that former Fannie Mae executives misled investors about the actual degree to which the company was exposed to “Alt-A” loans and subprime loans when they failed to reveal this information in the mortgage firm’s public disclosures. As a result, Fannie Mae understated its mortgage exposure risk by hundreds of billions of dollars.

The defendants had countered that because Fannie Mae is an independent establishment of this country, per the 1934 Securities Exchange Act’s Section 3(c), government agencies are protected from liability. Crotty, however, did not agree Fannie Mae did not fall under the “independent establishment” category seeing that it is a private corporation, run by a board, did not get federal funding, and traded stock in public.

The court also disagreed with the defendants’ contention that the SEC did not succeed in alleging that an “actionable” omission or representation occurred, instead finding that the Commission did an adequate job of pleading that Fannie Mae's “quantitative subprime and Alt-A disclosures” failed to include all the loans that fell under these two loan categories. The court also found that the Commission did a sufficient job of alleging that Fannie Mae did not make sure the subprime loans it obtained via certain loans it acquired from Countrywide Home Loans were factored into its calculations. As for the Alt-A loans, the court said that the SEC also did an adequate job of pleading that Fannie Mae did not disclose that it had “instructed certain lenders” to not label some specific low-documentation loans as Alt-A loans, while leaving these loans out when figuring out its exposure calculations.

The judge dismissed the defendants’ contention that the alleged omissions the SEC accuses them of making/helping to make were immaterial. Crotty said that not factoring in certain loans when making its calculations caused its exposure to subprime loans to be understated by over $100 billion and its exposure to Alt-A loans to be understated by $341 billion. Considering that the secured-transaction and housing market were so volatile, Crotty said that it had been important for investors to know the true exposure risk involved.

“The public should note that the SEC and prosecutors will not pursue case against MF Global CEO John Corzine after over a billion dollars of his clients’ money disappeared, and financial firm heavyweights such as Goldman Sachs (GS), Deutsch Bank (DB), and Merrill Lynch (MER) are getting off unscathed,” said securities lawyer William Shepherd. “Meanwhile, salaried employees at Fannie Mae and Freddy Mac (FMCC) will apparently be sued for doing what their boss, Congress, told them to do.”

Read the Complaint (PDF)

Ex-Fannie Mae CEO Mudd Must Defend SEC Suit, Judge Rules, Bloomberg, August 10, 2012

Former Fannie Executives Must Face SEC Suit Over Disclosures, Court Rules, Bloomberg/BNA, August 15, 2012

More Blog Posts:

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange, Stockbroker Fraud Blog, June 25, 2010

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

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

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,, 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

December 23, 2011

Barclays Capital Ordered by FINRA to Pay $3M Fine For Alleged Subprime Mortgage Securitization-Related Misrepresentations

FINRA says that Barclays Capital Inc. will pay $3 million over charges of inadequate supervision related to the residential subprime mortgage securitizations and the misrepresentation of delinquency data. The SRO claims that between 3/07 and 10/10, Barclays misrepresented three RMBS’s historical delinquency rates.

Per industry rules, financial firms have to give investors certain performance information for securities that they issue. FINRA says that Barclay’s Capital misrepresented the historical delinquency rates for the RMBS between March 2007 and December 2010. This inaccurate data was published on the company’s website, which impacted how investors were able to evaluate other securitizations.

Historical delinquency rates, which provide historical performance information for previous securitizations with mortgage loans, are key in helping an investor determine and RMBS’s value and whether mortgage holders’ inability to make loan payments could disrupt future returns. The inaccurate information that was posted on the Barclay’s Capital website was referred to as historical delinquency rates in five subsequent residential subprime mortgage securitizations and had errors that were key enough to impact investors.

According to FINRA Enforcement Chief Brad Bennett, Barclay lacked a system that could ensure that delinquency data that was published was accurate.

Barclays has settled the case. However, the financial firm is not denying or admitting to the charges.

It was just earlier this year that FINRA fined Merrill Lynch $3 Million and Credit Suisse Securities $4.5 Million over misrepresentations involving RMBS. Both financial firms settled the allegations without denying or admitting to the charges.

According to the SRO, in 2006, 21 RMBS’s historical delinquency rates were misrepresented by Credit Suisse. The financial firm allegedly knew that this information was not accurate yet failed to adequately look into the mistakes, tell clients about the errors, or correct the information, which was published on its we site. The delinquency errors for six of the 21 securitizations were enough to impact the way investors were able to evaluate subsequent securitizations. Credit Suisse also allegedly did not define or name the methodology that was applied in determining the mortgage delinquencies in five other subprime securitizations. (Disclosing which method was issued is required because there are different standards for determining delinquencies.)

Regarding the charges against Merrill Lynch, the SRO claims 61 of the financial firm’s subprime RMBS had historical delinquency rates that were misrepresented. However, upon discovering the mistakes, Merrill Lynch published the correct data online. In eight cases, the delinquencies impacted investors’ ability to assess subsequent securitizations.

FINRA Fines Barclays Capital $3 Million for Misrepresentations Related to Subprime Securitizations, FINRA, December 22, 2011

Finra Fines Credit Suisse, Bank of America Over RMBS Errors, Bloomberg, May 26, 2011

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

Investors Want JP Morgan Chase & Co. To Explain Over $95B of Mortgage-Backed Securities, Institutional Investor Securities Blog, December 17, 2011

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

Continue reading "Barclays Capital Ordered by FINRA to Pay $3M Fine For Alleged Subprime Mortgage Securitization-Related Misrepresentations" »

December 21, 2011

Bank of America to Pay $335M to Countrywide Financial Corp. Borrowers Over Allegedly Discriminating Lending Practices

Bank of America Corp. has agreed to a record $335 million settlement to pay back Countrywide Financial Corp. borrowers who were billed more for loans because of their nationality and race, while creditworthiness and other objective criteria took a back seat. All borrowers that were discriminated against qualified to receive mortgage loans under Countrywide’s own underwriting standards.

The settlement is larger than any past fair-lending settlements (totaling $30M) that the US Justice Department has been able to obtain to date. Countrywide was acquired by Bank of America in 2008.

According to the Justice Department, Countrywide charged higher fees and interest rates to over 200,000 Hispanic and black borrowers while directing minorities to more costly subprime mortgages despite the fact that they qualified for prime loans. Meantime, the latter were given to non-Hispanic white borrowers who had similar credit profiles.

Under federal civil rights laws, a lending practice is illegal if it has a negative effect on borrowers that are minorities. The US Justice Department’s complain contends that “steering,” which involves using discrimination to place borrowers in subprime loans, was able to occur because it was Countrywide’s practice to let employees and mortgage brokers place a loan applicant in a subprime loan even when that party qualified for a prime loan. Also, mortgage brokers were allowed to use discretion when asking for exceptions to the underlying guidelines.

Subprime loans usually come with higher-cost conditions, such as exploding adjustable interest rates that can suddenly go up after a couple of years, as well as prepayment penalties. All of this can place a borrower at higher risk of foreclosure and render payments unaffordable.

Per the settlement, Countrywide will have to put in place practices and policies to bar discrimination if it decides to go back to the lending business in the next four years. Also resolved are the Justice Department’s claims that the Bank of America subsidiary violated the Equal Credit Opportunity Act.

Countrywide is accused of using marital status to discriminate against non-applicant spouses of borrowers by trying to get them to sign away their rights to home ownership through quitclaim deeds and other documents that ended up giving the borrowing spouse the interest and legal rights in property held by both of them.

A judge still has to approve the settlement. If it goes through, impacted lenders will get between several hundred to several thousand dollars.

Our securities fraud attorneys represent investors that lost money during the subprime mortgage crisis. If you believe that negligence on the part of a financial professional caused your losses, do not hesitate to contact Shepherd Smith Edwards and Kantas, LTD LLP today.

BofA Agrees Record $335M Fair-Lending Deal, Bloomberg, December 21, 2011

Countrywide Will Settle a Bias Suit, New York Times, December 21, 2011

More Blog Posts:

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

California Investigating Whether Bank of America & Countrywide Financial Used False Pretenses to Sell Mortgage-Backed Securities to Investors, Institutional Investors Securities Blog, October 21, 2011

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

December 16, 2011

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges

The Securities and Exchange Commission has charged six ex-executives of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) with securities fraud. The Commission claims that they not only knew that misleading statements were being made claiming that both companies had minimal holdings of higher-risk mortgage loans but also they approved these messages.

The six people charged are former Freddie Mac CEO and Chairman of the Board Richard F. Syron, ex-Chief Business Officer and Executive Vice President Patricia L. Cook, and former ex-Single Family Guarantee Executive Vice President Donald J. Bisenius. The three ex-Fannie Mae executives that the SEC has charged are former CEO Daniel H Mudd, ex-Fannie Mae's Single Family Mortgage Executive Vice President Thomas A. Lund, and ex- Chief Risk Officer Enrico Dallavecchia.

In separate securities fraud lawsuits, the SEC accuses the ex-executives of causing Freddie Mac and Fannie Mae to issue materially misleading statements about their subprime mortgage loans in public statements, SEC filings, and media interviews and investor calls. SEC enforcement director Robert Khuzami says that the former executives “substantially” downplayed what their actual subprime exposure “really was.”

The SEC contends that in 2009, Fannie told investors that its books had about $4.8 billion of subprime loans, which was about .2% of its portfolio, when, in fact, the mortgage company had about $43.5 billion of these products, which is about 11% of its holdings. Meantime, in 2006 Freddie allegedly told investors that its subprime loans was somewhere between $2 to 6 billion when, according to the SEC, its holdings were nearer to $141 billion (10% of its portfolio). By 2008, Freddie had $244 billion in subprime loans, which was 14% of its portfolio.

Yet despite these facts, the ex-executives allegedly continued to maintain otherwise. For example, the SEC says that in 2007, Freddie CEO Syron said the mortgage firm had virtually “no subprime exposure.”

It was in 2008 that the government had to bail out both Fannie and Freddie. It continues to control both companies. The rescue has already cost taxpayers approximately $150 billion, and the Federal Housing Finance Administration, which acts as its governmental regulator, says that this figure could rise up to $259 billion.

Today, Freddie Mac and Fannie Mae both entered into agreements with the government that admitted their responsibility for their behavior without denying or admitting to the charges. They also consented to work with the SEC in their cases against the ex-executives.

The Commission is seeking disgorgement of ill-gotten gains plus interest, financial penalties, officer and director bars, and permanent and injunctive relief.

Ex-Fannie Mae, Freddie Mac execs charged with fraud, USA Today/AP, December 16, 2011

SEC Charges Former Fannie Mae and Freddie Mac Executives with Securities Fraud, SEC, December 16, 2011

More Blog Posts:

Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance, Institutional Investor Securities Blog, November 30, 2011

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

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange, Stockbroker Fraud Blog, June 25, 2010

Continue reading "Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges " »

January 22, 2011

Bank of America Settles for $4.25M New York Securities Fraud Allegations that Merrill Lynch & Co. Inc. Hid Subprime Mortgage Risks from Investors

Bank of America Corp. (BAC) and the New York State Common Retirement Fund have settled the latter’s securities fraud lawsuit accusing Merrill Lynch & Co. Inc. of concealing the risks involved in investing in the subprime mortgage market. Under the terms of the settlement, Bank of America, which owns Merrill Lynch, will pay $4.25 million.

The comptroller’s office is keeping the terms of the securities settlement confidential. State Comptroller Thomas P. DiNapoli did announce last July that the New York pension fund wanted to recover losses sustained by investors from Merrill’s alleged “fraud and deception” that “artificially inflated” the value of Merrill stock, which rapidly declined when the extent of exposure was revealed.

By opting out of a similar class action complaint involving other funds, the state pension fund has a chance of recovering more from the investment bank. Another securities lawsuit that has yet to be resolved seeks to recover losses related to Bank of America’s proxy disclosure when acquiring Merrill.

The demise of the subprime mortgage market a few years ago contributed to the crisis in the housing market and the economic collapse that has affected millions in the US and the rest of the world. Investors have since stepped forward and filed securities claims and lawsuits against investment banks, brokers, and others in the financial industry for misrepresenting the risks involved with subprime mortgages that have resulted in losses in the billions.

DiNapoli, BOA/Merrill Lynch settle for $4.25 million, Capitol Confidential, January 13, 2011

The Subprime Mortgage Market Collapse: A Primer on the Causes and Possible Solutions, The Heritage Foundation

NY comptroller settles Merrill Lynch fraud suit, BusinessWeek, January 13, 2011

New York State Common Retirement Fund

Subprime Mortgage, Institutional Investors Securities Blog

Continue reading "Bank of America Settles for $4.25M New York Securities Fraud Allegations that Merrill Lynch & Co. Inc. Hid Subprime Mortgage Risks from Investors" »

December 30, 2010

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

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

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

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

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

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

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

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

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


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

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

Credit Ratings Agencies, Stockbroker Fraud Blog

California Anti-SLAPP Project

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

November 29, 2010

Financial Firms File Securities Fraud Lawsuits Against Each Other Over 2008 Credit and Subprime Crisis

In what one investment banking official is calling a “second wave” of securities litigation stemming from the credit and subprime crisis of 2008, financial firms are now suing other financial institutions for damages. While speaking on a Practising Law Institute panel, Morgan Stanley managing director D. Scott Tucker noted that this “second wave” is the “exact opposite of the first wave,” which was primarily brought by smaller pension funds or states claiming violations of the 1933 Securities Act and the 1934 Securities Exchange Act.

Tucker said that with this new wave, most of the plaintiffs are financial institutions, including investment managers and hedge funds, that are asserting common law fraud and making other state law claims. Also, these latest lawsuits are primarily individual cases, rather than class actions. The securities at the center of this latest wave of litigation are complex structured products, such as credit default swaps, collateralized debt obligations, and mortgage-backed securities, as well as complaints involving private placements and derivatives or securities that don’t trade on liquid markets.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP represent institutional investors who suffered financial losses because of their dealings with investment companies. Unlike other law firms, our stockbroker fraud lawyers will never represent brokerage firms.

Over the years, we have represented thousands of investors and recovered millions of dollars for them. We are dedicated to protecting our clients' right to financial recovery.

Related Web Resources:
Panel: 2008 Credit Crisis Now Spawning New Wave of Suits Between Financial Firms, BNA, November 16, 2010

Can’t Grasp Credit Crisis? Join the Club, New York Times, March 19, 2008

Stockbroker Fraud Blog

October 7, 2010

Goldman Sachs International Fined $27M by UK’s FSA for Not Reporting SEC Investigation into Abacus 2007-AC1 Synthetic Collateralized Debt Obligation

Goldman Sachs International has been ordered by the United Kingdom’s Financial Services Authority to pay $27 million. The FSA says that Goldman failed to notify it about the US Securities and Exchange Commission’s probe into the investment bank’s marketing of the Abacus 2007-AC1 synthetic collateralized debt obligation, a derivative product tied to subprime mortgages.

Goldman Sachs and Co. has settled the SEC’s case for a record $550 million dollars. However, even though Goldman knew for months in advance that SEC charges were likely, the investment bank did not notify regulators, shareholders, or clients.

FSA’s Enforcement and Financial Crime Managing Director Margaret Cole says that while GSI didn’t intentionally hide the information, it became obvious that the investment firm’s reporting systems and controls were defective and that this was why its ability to communicate with FSA was well below the level of communication expected. Cole says that large institutions need to remember that their reporting obligations to the FSA must stay a priority.

FSA contends that Goldman was in breach of FSA Principle 2, which says that a firm has to “conduct its business with due skill, care, and diligence,” FSA Principle 3, which talks about a firm’s responsibility to “organize and control its affairs responsibly and effectively, with adequate risk management systems,” and FSA Principle 11, which stresses a firm’s responsibility to disclose to the FSA that “of which it would reasonably expect notice.”

For example, Fabrice Tourre, a Goldman vice president that worked on the Abacus team and who became an FSA-approved person after he was transferred to GSI in London, was later slapped with SEC civil charges. Along with Goldman, the SEC accused Tourre of alleged misrepresentations and material omissions in the way the derivatives product was marketed and structured.

Cole notes that FSA was disappointed that even though senior members of GSI in London were aware that Tourre had received a Wells Notice that SEC charges were likely, they did not take into account the regulatory implications that this could have for the investment firm. Because of the failure to notify, Tourre ended up staying in the UK and continued to perform at a “controlled function for several months without further enquiry or challenge.”

Because FSA did not find that GSI purposely withheld information, the investment bank received a discount on the fine, reducing it from $38.5 million to the current amount.

Securities fraud lawsuits and investigations have followed in the wake of the SEC’s case against Goldman.

Related Web Resources:
FSA fines Goldman Sachs £17.5 million, Reuters, September 9, 2010

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

Continue reading "Goldman Sachs International Fined $27M by UK’s FSA for Not Reporting SEC Investigation into Abacus 2007-AC1 Synthetic Collateralized Debt Obligation" »

October 4, 2010

In Securities Fraud Case Against Morgan Stanley Pension Fund Doesn’t Have Standing to Bring Certain Claims, Says Court

A US district court judge has issued a ruling in the securities fraud lawsuit against Morgan Stanley and several affiliates. The case, which was brought by West Virginia Investment Management Board (WVIMB), involves mortgage-backed securities.

WVIMB, which bought securities from Morgan Stanley Mortgage Loan Trust 2007-11AR, had filed class claims against securities bought under the trust claiming that the defendants had violated federal securities laws when making mortgage-backed securities sales. However, WVIMB wanted to expand the claims to include 30 other loan trusts even though it hadn’t bought securities from them.

Morgan Stanley and its affiliates contended that WVIMB did not have the legal standing to pursue claims on certificates it didn’t buy. They also said that the plaintiff waited too long to file its claims on Trust 2007-11AR. The court agreed.

According to Judge Laura Taylor Swain’s decision, pension funds do not have standing to bring certain claims, and, at least in court, there will be a distinction made between loan trusts that have separate prospectus supplements even if they have the same shelf registration statement. The court also noted that the pension fund had enough information that it could and should have filed its securities lawsuit sooner. Swain’s decision narrowed the pension fund’s claims that the defendants affiliates violated federal securities laws when making mortgage-backed securities sales.

Mortgage-Backed Securities
Many securities fraud lawsuits that have been filed over the alleged wrongdoings related to the marketing, packaging, and sale of mortgage-backed securities. Retirement funds, pension funds, and other investors are among those that have sued investment firms and banks for misleading them about these securities and failing to reveal the true degree of risk involved in investing in them.

Related Web Resources:
West Virginia Investment Management Board

Morgan Stanley Mortgage Pass-Through Certificates Litigation,, August 17, 2010

Continue reading "In Securities Fraud Case Against Morgan Stanley Pension Fund Doesn’t Have Standing to Bring Certain Claims, Says Court " »

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,, 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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