Articles Posted in Mortgage-Backed Securities

This week, Royal Bank of Scotland Group PLC (RBS) has agreed to pay the Federal Housing Finance Agency $5.5B to resolve the latter’s investigation into the UK government-controlled bank’s sale of toxic mortgage-backed securities to mortgage giants Freddie Mac and Fannie Mae leading up to the 2008 financial crisis. RBS has come under fire for the way it packaged and sold subprime mortgages. The violations allegedly involved private-label residential mortgage-backed securities (PLS) trusts that were purchased between 2005 and 2007.

RBS will pay Freddie Mac about $4.5B and approximately $975M to Fannie Mae to resolve this RMBS fraud case. However, the bank is eligible for a $754M reimbursement according to certain indemnification agreements.

RBS had previously reached, for $1.1B, separate settlements over similar MBS fraud claims that the US National Credit Union Administration had brought in Kansas and California. It remains under investigation by the US Department of Justice and several US agencies who are conducting their own mortgage-backed securities fraud probes.

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A jury has found Michael Gramins guilty of conspiracy to lie about mortgage bond prices. Gramins was one of three ex-Nomura (NMR) residential mortgage-backed securities traders charged with fraud and accused of defrauding clients of millions of dollars.

Aside from the guilty RMBS fraud verdict for conspiracy, Gramins was found not guilty of six fraud counts. The jury did not arrive at a verdict on two other charges against him.

Meantime, ex-Nomura trader Tyler Peters was acquitted on all of the criminal fraud charges against him. Although jurors cleared former Nomura trader Ross Shapiro of eight fraud counts, they were unable to arrive at a verdict regarding one conspiracy count against him. It wll be up to prosecutors to decide whether they want to retry Gramins and Shapiro on the counts that were not resolved.

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The US Securities and Exchange Commission is charging two-ex Nomura (NMR) head traders with fraud. Kee Chan and James Im ran Nomura Securities International Inc.’s commercial mortgage-backed securities desk. The regulator claims that they purposely lied to customers to inflate profits for themselves and the firm. As a result, said the SEC, the two of them made an additional over $750K in trading profits for the desk. They received healthy bonuses as a result.

Commercial Mortgage-Backed Securities
CMBSs are asset-backed securities that have commercial real estate loans as their underlying assets. These debt obligations are often called bonds. CMBSs are illiquid securities.

According to the Commission, while serving as trade intermediaries with customers seeking to sell and buy CMBSs on the secondary market, Im and Chan made it seem as if they were working out bond purchases with a third-party seller at more than what Nomura paid to obtain the bonds. Im even allegedly told a customer that he had sought to deceive on purpose. Meantime, Chan is accused of modifying a customer email to protect his lie regarding a bond’s bid price.

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According to Bloomberg, US prosecutors are conducting a criminal probe into whether hedge funds inflated the value of bonds to enhance the fees they were paid. Sources told the news media outlet that prosecutors want to know whether hedge funds solicited fake price quotes from brokers, which would have let the funds artificially raise the value of illiquid securities in their portfolios.

Just this week, a witness in the residential mortgage-backed securities fraud criminal trial against three ex-Nomura Holdings Inc. traders—they are accused of lying about RMBS prices to clients—stated under oath that he had given a Premium Point Investments LP trader fake quotes. The witness, ex-broker Frank DiNucci Jr., claims that two of the defendants, Michael Gramins and Ross Shapiro, are among the ones that trained him to lie to customers about bond prices. DiNucci, who pleaded guilty to fraud and conspiracy and making misrepresentations,previously worked at Nomura. He also worked at Auriga USA LLC and AOC Securities LLC.

Because certain securities are hard to price, hedge funds depend on brokers and third parties for estimates and quotes to determine how to value debt. Holding artificially inflated securities in the portfolios can allow a hedge fund to tout a better performance and get paid more for performance and management fees. It also allows them to conceal when some holdings do poorly.

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UBS Group AG (UBS) has paid the National Credit Union Administration $445M to settle claims brought on behalf of Western Corporate Federal Credit Union and U.S. Central Federal Credit Union, which both failed after they sustained losses from residential mortgage-backed securities they purchased through the broker-dealer.The two credit unions went into conservatorship several years ago and have since shut down.

UBS settled this latest case without denying or admitting to wrongdoing. The lender had previously paid NCUA $79.3M to resolve similar allegations involving two other credit unions that also failed. With that settlement, the bank also did not deny or admit wrongdoing.

To date, NCUA has recovered nearly $5B in settlements from big banks related to the faulty securities that they sold to corporate credit unions.

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The US Securities and Exchange Commission said that Barclays Capital (BARC) has agreed to pay over $16.5M as part of a settlement resolving allegations accusing the company of failing to properly supervise two of its ex-mortgage bond traders. The men are accused of lying to clients, as well as overcharging some of them. According to the regulator, Barclays did not put into place or execute the proper supervisory procedures that could have stopped or detected the alleged residential mortgage-backed securities fraud.

The two traders, David Wong and Yoon Seok Lee, are accused of making misleading or false statements to the firm’s customers about RMBS securities, how much Barclays makes for facilitating the trades, and other pertinent information. Lee and Wong also are accused of making excessive mark-ups on certain transactions without telling customers.

The SEC said that the ex-Barclays traders’ actions, which would have occurred between 6/2009 and 12/2012, caused Barclays to earn $15.5M in profits.

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Ex-Jefferies Trader Will Go to Prison for Mortgage-Backed Securities Fraud After All
Jesse Litvak, the ex-Jefferies (JEF) managing director, has once again been sentenced to two years in prison. Litvak was found guilty of mortgage-backed securities fraud in 2014 and sentenced to two years behind bars. The conviction at the time was for multiple securities fraud charges and for making false statements, as well as for defrauding TARP.

Claiming that expert witnesses hadn’t been able to testify for him, Litvak was able to get that sentence tossed. However, the US government continued to go after him and he was found guilty on one fraud count. Now, he has again been sentenced to two years in prions.

Litvak also must pay $2M because he lied about bond prices to a customer. (The earlier conviction had come with a $1.75M fine.) According to U.S. District Judge Janet C. Hall, Litvak’s victims only invested because he lied to them.

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In Manhattan, U.S. District Judge Katherine Polk Failla ruled that a few dozen funds may pursue their mortgage-backed securities fraud lawsuits against Wells Fargo & Co. (WFC) According to Reuters, five lawsuits are involved and plaintiffs include funds from Prudential Financial Inc.(PRU), BlackRock Inc. (BLK), TIAA-CREF, and Pacific Investment Management Co. (PIMICO) Judge Failla also said that the National Credit Union Administration (NCUA) could proceed with its MBS fraud claims against the San Francisco-based bank, which it filed on behalf of five credit unions that failed after they bought $2.4B in residential mortgage-backed securities.

The funds are seeking to hold Wells Fargo liable for breach of contract and conflict of interest involving over four dozen trusts, breach of due care, and breach of fiduciary duty. Failla, however, did not allow claims contending violation of a NY law related to mortgage trusts, as well as claims of general negligence, to proceed.

The investors contend that the bank took “virtually no action” to make sure that lenders either bought back the faulty securities or fixed the loans that were backing the securities once they knew that the loans were poorly underwritten or had defaulted. They accused Wells Fargo of failing to act despite being aware of these problems.

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$165M Class Action Settlement Reached in MBS Fraud Case Involving NovaStar Securities
Royal Bank of Scotland Group Plc (RBS), Wells Fargo & Co. (WFC), and Deutsche Bank AG (DB) have reached a $165M with investors in their class action mortgage-backed securities case involving underwriting for NovaStar Mortgage Inc., a former subprime lender. The lead plaintiff in the case is the New Jersey Carpenters Health Fund.

NovaStar, which filed for bankruptcy last year, had specialized in low quality residential mortgages. Many of these were bundled into risky securities that were issued prior to the 2008 financial crisis. The class action settlement resolves claims contending that the offering documents put together by the banks misled investors into thinking that the loans underlying about $7.55B of NovaStar MBSs were safe and had been underwritten properly.

A district court judge must still approve the settlement. Meantime, despite the resolution, the banks continue to deny wrongdoing.
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Another Jury Finds Ex-Jefferies Group Trader Guilty of RMBS Fraud
A federal jury has convicted Jesse Litvak of one count of securities fraud. The ex-Jefferies Group LLC (JEF) bond trader was tried again on allegations that he bilked customers of $2M when he inflated the prices that he claimed he paid for residential mortgage-backed securities. As a result of his claims, professional investment managers and hedge funds paid too much for bonds.

Another jury had found Litvak guilty of fraud two years ago. However, in 20015, a federal appellate court dismissed parts of the RMBS fraud case against him. The securities fraud charges were retried before a new jury.

During this trial, prosecutors claimed that Litvak’s customers had totally relied on him for bond pricing information. His legal team, however, argued that his customers were sophisticated investors and did what they wanted regardless of his advice.

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