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.
Duka’s defense team is maintaining that she never purposely sought to defraud investors even though certain mistakes happened. Duka’s lawyer said that her S & P group gave the mortgage bonds “fair and accurate” ratings.
In other mortgage-backed securities news, Royal Bank of Scotland Group Plc. (RBS) and Nomura Holdings Inc. (NMR) are asking a US appeals court to overturn a ruling ordering them to pay $839M for purportedly making false statements when selling MBSs to Fannie Mae. That decision was the outcome of the Federal Housing Finance Agency’s mortgage bond lawsuit against them.
According to Reuters, an attorney for Nomura contends that the lower court judge had no grounds for finding that the allegedly false statements made were material. The defendants also argued that the district court left out evidence showing how any reasonable investor might have known about the underwriting practices during the relevant time.
However, the three-judge panel at the 2nd U.S. Circuit Court of Appeals now wants to know how that would have exempted the banks from the representations they made about the quality of the loans backing the mortgage bonds. These alleged misrepresentations were that Fannie and Freddie Mac depended upon when making their decision about whether to buy the securities.
FHFA has pursued 18 lawsuits against banks that sold about $200M in MBS to Freddie Mac and Fannie Mae, and it arrived at $17.9M in settlements with a number of the banks, including Deutsche Bank AG (DB), JPMorgan Chase & Co. (JPM), and Bank of America (BAC). The MBS fraud case against RBS and Nomura is the only one to go to trial.
S & P’s former commercial chief sues SEC, The Wall Street Journal, January 6, 2015
Nomura, RBS appeal US Judge’s $838M mortgage bond award, Money Control, November 19, 2016