Articles Posted in Mortgage-Backed Securities

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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In a deal reached with the US Justice Department, Société Générale will pay $50M to settle civil charges accusing the bank of hiding that the residential mortgaged-backed securities (RMBS) that it promoted and sold were of poor quality. According to the government, the French bank made false representations involving the SG Mortgage Securities Trust 2006-OPT2, a $780M debt issue that it organized more than a decade ago. As part of the settlement, Société Générale admitted that it hid how many of the loans underlying the RMBS shouldn’t have been securitized or were not properly underwritten.

In a statement of facts, Société Générale took responsibility for its conduct. The bank admitted that it falsely represented that loans underlying the residential mortgage-backed security had been originated according to the underwriting guidelines of the loan originator. It also represented to investors that when the SG 2006-OPT2 was originated, no loans in the RMBS had a combined loan-to-value ratio or loan-to-value greater than 100%–this is a claim that Societe General is now admitting was false.

As a result of the bank’s actions, said the DOJ, investors lost “significant” amounts of money and they may lose more. Investors that were impacted include a number of financial institutions that are federally insured.

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The mortgage securities fraud deal arrived at between Deutsche Bank (DB) and the Department of Justice is now final. As part of the settlement, the German lender will pay a $3.1B civil penalty and $4.1B in relief to borrowers, homeowners, and others that were impacted because it purportedly misled investors about the mortgage securities it was selling before the housing market failed.

Although the agreement was announced last month, the details of the resolution have just been released to the public. This includes information that as far back as May 2006, a Deutsche Bank supervisor had cautioned one of the firm’s senior traders about one mortgage lender that had become too lax with its underwriting practices.

In a Statement of Facts that was part of the agreement, Deutsche Bank acknowledged that it was aware that it was not fully disclosing the risks involved with the loans that it was bundling and selling. Deutsche Bank CEO John Cryan issued a written statement apologizing “unreservedly” for the bank’s conduct. Cryan said that Deutsche Bank now has better standards in place.

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Jesse Litvak, a former Jefferies Group LLC (JEF) bond trader, is scheduled to go on trial again. It was just two years ago that a jury found him guilty of fraud when he misled customers about the price he paid for residential mortgage-backed bonds.

The criminal charges against him were originally brought by the US attorney’s office in Connecticut three years ago. Prosecutors accused him of bilking customers of $2M when he inflated the prices of what he’d actually paid for the bonds. Because of purported misstatements, professional investment managers and hedge funds overpaid for the residential-mortgage-backed bonds. Meantime, Litvak allegedly made $100K more for his firm for every transaction than was disclosed to his customers.

The jury, in 2014, found that Litvak violated securities laws and they found him guilty on 15 criminal counts, including multiple counts of securities fraud. Litvak had pleaded not guilty to all of the charges. He was then sentenced to two years in prison and ordered to pay a $1.75M.

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US District Court Judge William Pauley III has approved a $335M settlement in a securities fraud case against Bank of America (BAC). This one of the largest class action settlements involving securities buyer claims related to the 2008 financial crisis. Among the investors that will be able to avail of the settlement are the Pennsylvania Public School Employees’ Retirement System (PSERS), the Anchorage Fire and Police Retirement Fund, the Arkansas Teacher Retirement Fund, a number of asset managers, and two trade unions.

PSERS served as lead plaintiff for those that purchased the bank’s common stock or common equivalent securities on a US public exchanges and later sustained losses between 2/27/09 through 10/19/10. According to a PSERS Spokesperson, the Pennsylvania retirement plan lost approximately $8M of its holdings with Bank of America.

The mortgage-backed securities case accused Bank of America of misleading investors about the position it took in MBSs and of hiding debt. They also claim that the bank compelled them to purchase Bank of America stock that was sold to pay back $45B of federal bailout funds from TARP. The plaintiffs alleged that the bank was aware that it could not raise enough capital to avoid TARP restrictions on executive salaries if it were to disclose that it might have to buy back billions of dollars of securities that were backed by high-risk loans.

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The US government has arrived at multibillion-dollar settlements with Credit Suisse Group AG (CS) and Deutsche Bank AG (DB) to settle allegations involving toxic securities. It also has filed a separate lawsuit against Barclays (BARC) over its alleged sales of toxic mortgage-backed securities.

In the Deutsche Bank case, the US Justice Department had sought $14B to settle allegations that the bank sold investors toxic mortgage securities. Now, the German lender will have to pay $3.1B immediately. It has promised to pay $4.1B over five years to a US consumer relief fund. However, Deutsche Bank remains under investigation by US and UK regulator over suspect trades involving Russian stock, foreign exchange rate rigging, precious metal-related price violations, and alleged violations of US sanctions against number of countries, including Iran.

In the settlement with Credit Suisse, the bank will pay a $2.48B penalty and $2.8B in relief to communities and homeowners impacted by the drop in home prices during the financial crisis. The consumer relief will be paid over five years.

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Financial Advisor Admits to Stealing $1.6M From Family’s Trusts
Brian Keenan, an ex-financial advisor, has pleaded guilty to criminal charges accusing him to stealing over $1.6M from three trusts belonging to members of the same family. Keenan had been employed with Train Babcock Advisors from about 5/2007 to 8/2012. It was during this time that the former financial adviser stole over $1.6M from the beneficiaries of three trusts.

Not only did Keenan take their money, but he also spent the funds on his own expenses. He set up a joint checking account under his name and the name of one of the beneficiaries, and he issued over 40 checks from the trust accounts to the joint account. The beneficiary under whose name he co-opened the account did not have access to it.

Issuing a statement about the financial fraud case, Manhattan District Attorney Cyrus R. Vance reminded the public that a financial adviser’s main duty is to act in a client’s best interest. Vance said that rather than fulfilling that obligation, Keenan took advantage of his clients. Keenan pleaded guilty to Grand Larceny in the First Degree.

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According to the Appellate Division, First Department in New York, the state’s attorney general can move forward with his $11B investor fraud case against Credit Suisse (CS). The state appeals court decided that in this residential mortgage-backed securities lawsuit, a six-year statute of limitations and not a three-year one was applicable.

The civil case was brought in Manhattan Supreme Court four years ago. It accuses the several of the bank’s units of wrongly persuading investors to buy toxic residential mortgage-backed-securities in 2006 and 2007. The complaint states that 24% of Credit Suisse’s loans that were tied to RMBS from those two years were liquidated. Investors went on to sustain $11.2B in losses.

In a 3-2 ruling, the justice’s panel said that NY AG Eric Schneiderman’s fraud claims are ones that may have been brought prior to the writing of the statute. As a result, wrote the justices, the lengthier statute of limitations is to what this case is subject.

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Barbara Duka, the ex-head of Standard & Poor’s commercial mortgage-backed securities, is on trial before a Securities and Exchange Commission administrative law judge. Duka is accused of inflating the ratings of commercial mortgage-backed securities and not telling investors that she and her team had changed the way they formulated ratings for the securities in 2011.

The SEC contends that Duka implemented the change after the credit rating agency lost market shares for rating commercial-backed securities using “more conservative criteria” in the wake of the 2008 economic collapse. The regulator believes that Duka began to rate the securities in a way that favored the issuers so S & P could bring in more business.

Meantime, investors  continued to believe that the ratings were conservatively-based.  Now, the Commission wants to bar Duka from associating with ratings organizations. It also wants her to pay financial penalties.

The SEC brought its case against Duka last year around the time that the Commission and two state attorneys general announced that they had reached a $77M settlement with S &P. The regulator’s case was brought after Citigroup Inc.(C) and Goldman Sachs Group(GS) had to withdraw a $1.5B commercial mortgage-backed securities offering because S & P told them about an internal review of the securities ratings. Duka, meantime, sued the SEC, questioning whether it had the right to pursue cases in-house before its own judge instead of in court.  Although a district court judge ruled that the SEC could not move forward with its case against Duka, a federal appeals court decided otherwise.

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According to the U.S. Department of Justice, Ally Financial (ALLY) will pay $52M to resolve allegations accusing its subsidiary Residential Capital (ResCap) of purposely marketing mortgage bonds even though it knew that the mortgages backing the bonds were toxic. At issue are Residential Capital LLC mortgage-backed securities.

10 subprime residential mortgage-backed securities (RMBS) were issued in ’06 and ’07 with Ally Financial’s brokerage firm, Ally Securities, previously known as Residential Funding Securities, in the role of lead underwriter. The government contends that even though Ally Securities purportedly noticed that mortgage loan pools in RASC-EMX securities were deteriorating because of deficiencies in both the underwriting guidelines for the subprime mortgage loans and the diligence employed to the collateral before securitization, the firm took great pains to set up the RASC-EMX brand, secure investors for the RMBS offerings, and direct third-part due diligence to test if the loans were in compliance with disclosures made in public offering documents to investors.

The U.S. Attorney’s Office claims that the firm continued to market the securities to investors even though it knew that the toxic subprime mortgages were likely to become delinquent. The government is alleging that Ally Financial made misstatements about the RMBSs.

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