Bear Stearns

Former RBS Bond Trader Pleads Guilty to Fraud

Published on: December 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Adam Siegel, an ex-Royal Bank of Scotland Group Plc (RBS) bond trader, has plead guilty to fraud over his involvement in a multi-million dollar scheme in which he lied to customers so that they would pay higher prices for bonds. Siegel, 37, served as the co-head of RBS’s U.S. Asset-Backed Securities, Mortgage-Backed Securities and Commercial Mortgage-Backed Securities Trading groups. He supervised and traded fixed income investment securities, including collateralized loan obligations (CLOs) and residential mortgage-backed securities (RMBS).

According to prosecutors, Siegel and others lied about the asking price of sellers to buyers, as well as the price that buyers were willing to pay to sellers, while pocketing the difference. He made misrepresentations so that customers would pay higher prices while those selling bonds would end up getting deflated prices, both of which benefitted RBS.

Sometimes, he and co-conspirators would make misrepresentations to buyers by telling them that a fake third-party was selling the bonds. This allowed the firm to charge an unwarranted commission.

JPMorgan to Pay $500M to Resolve Mortgage Settlement Involving Bear Stearns, Says Source

Published on: January 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Reuters and Bloomberg are reporting that according to person familiar with the case, JPMorgan Chase (JPM) has consented in principal to resolve a class action case related to Bear Stearns’ sale of $17.58B of faulty mortgage securities for $500 million. JPMorgan purchased Bear Stearns in 2008.

The agreement settles claims that Bear Stearns violated federal securities laws when, from May 2006 to April 2007. it sold certificates backed by over 47,000 primarily subprime and low documentation “Alt-A” mortgages in over a dozen offerings. Almost all certificates were eventually reduced to “junk” status even though 92% of them had been given “trip-A” ratings previously.

The plaintiffs, led by the New Jersey Carpenters Health Fund and, the Public Employees’ Retirement System of Mississippi, claim that offering documents included misleading and false statements about underwriting guidelines that Bear’s EMC Mortgage unit and other lenders used, as well as inaccuracies related to associated property appraisals. According to the lawsuit, because of the omissions and false statements, the class bought certificates that were a lot risker than what they were represented as and unequal in quality to other investments that received the same credit rating.

Morgan Stanley Fires Wealth Management Group Employee For Stealing Client Data

Published on: January 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) has let go of Galen Marsh, a 30-year-old financial adviser in its wealth management group, for stealing client information and allegedly making some of the data that he took available online. Some 350,000 of the brokerage firm’s 3.5 million wirehouse clients were affected. About 900 clients’ account names and numbers were briefly posted on the Internet.

Morgan Stanley discovered that Marsh had downloaded the client data, including account numbers, names, states of residence, and asset values. In a statement, the firm said that there is no proof of any financial loss sustained by the clients whose information was stolen. (Social security numbers and account passwords were not taken.)

The firm says it is notifying the clients who were affected. It has also reached out to regulators and law enforcement.

JPMorgan and the DOJ Finalize Their $13 Billion Settlement

Published on: November 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

After months of back-and-forth, the US Justice Department and JPMorgan Chase (JPM) have agreed to a $13 billion settlement. The historic deal concludes several of lawsuits and probes over failed mortgage bonds that were issued prior to the economic crisis. It also is the largest combination of damages and fines to be obtained by the federal government in a civil case with just one company. JPMorgan had initially wanted to pay just $3 billion.

The $13 billion deal is the largest crackdown this government had made against Wall Street over questionable mortgage practices. US Attorney General H. Eric Holder and other lead DOJ officials were involved in the settlement talks with JPMorgan CEO Jamie Dimon and other senior officials.

The settlement is over billions of dollars in residential mortgage backed securities involving not just the firm but also its Washington Mutual (WAMUQ) and Bear Stearns (BSC) outfits. The government claims that the RMBS were based on mortgages that were not as solid as what they were advertised to be.

Securities Case Over Insuring The $160M in Disgorgement Paid to the SEC Goes Back to Trial Court

Published on: July 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

New York’s highest court has revived a declaratory judgment action against D & Liability insurers after finding that the Securities and Exchange Commission order mandating that Bear Stearns (BSC) pay $160M in disgorgement failed to establish in a conclusive manner that payment could not be insured. The securities lawsuit is J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al.

Claiming that Bear Stearns engaged in market timing mutual fund trades and illegal late trading and for certain clients over a four-year period, the SEC wanted $720M in sanctions from the firm. The financial firm, however, argued that the activities only caused it to make $16.9M in revenues. A settlement was reached ordering Bear Stearns to pay $160M in disgorgement and $90M in penalties, with the firm not having to deny or admit to the Commission’s claims.

A declaratory action followed with a plaintiff in the New York Supreme Court seeking to have D & O insurers pay for $150M of the $160M disgorgement. Citing New York law, the insurers argued that the case should be dismissed, noting that under state law disgorgement is not insurable. A lower court turned down these contentions, denying the motion.

New York’s Attorney General Sues JP Morgan Chase & Co. Over Alleged MBS Financial Fraud by Its Bear Stearns Unit

Published on: October 4, 2012 | by Shepherd Smith Edwards & Kantas, LLP

NY Attorney General Eric Schneiderman is suing J.P. Morgan Chase & Co. (JPM) over MBS fraud that was allegedly committed by its Bear Stearns unit. This is the first securities lawsuit to be brought under the sponsorship of the Residential Mortgage-Backed Securities Working Group, which is made up of prosecutors and regulators and was formed by President Barack Obama. The action is seeking damages that were either a direct or an indirect result of “fraudulent and deceptive acts.”

The group is contending that investors sustained $22.5 billion in losses involving Bear Stearns Cos.-issued securities before the investment bank almost failed in 2008 and JP Morgan ended up taking it over. Mortgage securitizations involving subprime and Alt A mortgages from between 2005 and 2007 are at the center of the case.

According to the MBS fraud lawsuit, Bear Stearns committed financial fraud against investors when it packaged and sold mortgages that it knew (or should have known) had a good chance of defaulting. The lawsuit even quotes messages and emails supposedly sent internally at Bear Stearns showing that bank employees knew the investments they were selling were of poor quality. Schneiderman is alleging that the mortgage unit “systematically failed” when assessing loans, disregarded defects that were found, and failed to inform investors about review procedures or problems involving the loans.

Rather than focusing on a single transaction, the New York securities fraud lawsuit is claiming financial fraud across the firm. It also is applying New York State’s Martin Act, which doesn’t mandate that in order to win the case prosecutors must prove that a financial firm meant to commit the alleged fraud. The task force intends to use this case to bring other claims on a firm-wide basis. Schneiderman said that the group is “looking at tens of billions of dollars” in damages and not just by one financial firm.

Federal and state regulators have been working hard since 2008 to find out whether banks just made poor decisions or actually broke securities laws related to the mortgage securities that failed in the economic crisis. Recent victories against large firms include Bank of America Corp. (BAC) consenting to pay $2.43 billion to settle class action securities allegations accusing it of misleading investors about the Merrill Lynch & Co. (MER) acquisition. However, the bank settled without admitting or denying wrongdoing.

Regarding this New York MBS case against JP Morgan Chase, a spokesperson for the financial firm said it was “disappointed” with the civil action while making it clear that the alleged activities in question occurred before it bought Bear Stearns.

JP Morgan Sued on Mortgage Bonds, The Wall Street Journal, October 1, 2012

NY Attorney General Says More Suits Will Follow JPMorgan, Bloomberg, October 2, 2012

Residential Mortgage-Backed Securities Working Group Members Announce First Legal Action, Justice.gov, October 2, 2012

Residential Mortgage Backed Securities Fraud Working Group

Martin Act (PDF)

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

Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds, Stockbroker Fraud Blog, October 6, 2010
Class Action MBS Securities Lawsuit Against Goldman Sachs is Reinstated by 2nd Circuit, Institutional Investor Securities Blog, September 14, 2012 Continue Reading ›

Institutional Investment Roundup: FINRA Lets Ex-UBS Broker Keep $1M Signing Bonus, Court Approves Settlement Reached By Ex-Bear Stearns Hedge Fund Managers & SEC, Madoff Investors’ Securities Suit Against the Govt. is Dismissed

Published on: June 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Arbitration panel has decided that ex-UBS Financial Services broker Pericles Gregoriou can keep $1 million of the signing bonus he was given when he joined the financial firm even though he left the company earlier than what the terms of the hiring agreement stipulated. Gregoriou worked for the UBS AG (UBS) unit from ’07 to ’09.

This is an unusual victory for a broker. They usually find it very challenging to contest demands by a financial firm to give back unpaid bonus money. However, the FINRA panel said that Gregoriou was not liable for the $1 million damages. Also, the
panel denied Gregoriou’s counterclaim against UBS and a number of individuals. He had sought $3.24 million.

In a securities fraud case involving two former Bear Stearns employees against the SEC, “reluctantly,” the U.S. District Court for the Eastern District of New York approved a settlement deal involving Matthew Tannin and Ralph Cioffi. The defendants are accused of making alleged representations about two failing hedge funds.

The ex-Bear Stearns managers faced civil and criminal charges in 2008 for allegedly misleading bank counterparties and investors about the financial state of the funds, which ended up failing due to subprime mortgage-backed securities exposure in 2007. Cioffi and Tannin were acquitted of the criminal allegations in 2009.

Senior Judge Frederic Block approved the agreement wile noting that the SEC has limited powers when it comes to getting back the financial losses of investors. He asked Congress to think about whether the government should do more to help victims of “Wall Street predators.”

Per the terms of the securities settlement, Tannin will pay $200K in disgorgement and a $100K fine. Meantime, Cioffi will also pay a $100K fine and $700K in disgorgement. Although both are settling without denying or admitting to the allegations, they also have agreed to not commit 1933 Securities Act violations in the future and consented to temporary securities industry bars—Tannin for two years and Cioffi for three years.

In other securities law news, the U.S. District for the District of Columbia dismissed the lawsuit that investors in Bernard Madoff’s Ponzi scam had filed against the government. The reason for the dismissal was lack of subject matter jurisdiction.

The investors blame the SEC for allowing the multibillion dollar scheme to continue for years and they have pointed to the latter’s alleged gross negligence” in not investigating the matter. The plaintiffs contend that the Commission breached its duty to them. Judge Paul Friedman, however, sided with the government in its argument that the investors’ claims are not allowed due to the Federal Tort Claims Act’s “discretionary function exception,” which gives the SEC broad authority in terms of when to deciding when to conduct probes into alleged securities law violations.

While recognizing the plaintiffs’ “tragic” financial losses, the court found that investors failed to identify any “mandatory obligations” that were violated by SEC employees that executed discretionary tasks. The plaintiffs also did not adequately plead that the SEC’s activities lacked grounding in matters of public policy.

Meantime, the SEC has named ex-Morgan Stanley (MS) executive Thomas J. Butler the director of its new Office of Credit Ratings. The office is in charge of overseeing the nine nationally recognized statistical rating organizations that are registered, and it was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The office will conduct a yearly exam of each credit rating agency and put out a public report.

UBS loses case to recoup bonus from ex-broker, Reuters, February 6, 2012

Former Exec to Head Office of Credit Ratings, The Wall Street Journal, June 15, 2012

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

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey

Published on: March 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is seeking district court approval of its proposed securities fraud settlement with two ex-Bear Stearns & Co. portfolio managers. The SEC presented its second plea to the U.S. District Court for the Eastern District of New York earlier this month.

In a letter to the court, the SEC cited the Second Circuit Appeals Court’s decision earlier this month to stay a district court judge’s ruling turning down the Commission’s proposed $285M settlement with Citigroup Global Markets Inc. It said that the order in that matter “supports approval and entry” of this pending consent judgment.

If the settlement is approved, former Bear Stearns portfolio managers Matthew and Tannin and Ralph Cioffi would settle SEC charges accusing them of misleading bank counterparties and investors about the financial condition of two hedge funds that failed because of subprime mortgage-backed securities in 2007. Per the terms of the proposed settlement, Tannin would pay $200,000 in disgorgement plus a $50,000 fine and Cioffi would pay $700,000 in disgorgement and a $100,000 fine.

This is the second attempt by the SEC and the defendants to the court for settlement approval after District Court Judge Frederic Block cited concerns made by Judge Rakoff, who is the one who threw out the proposed $285M settlement in the SEC-Citigroup case and ordered both parties to trial. The Second Circuit has since stayed those proceedings. (In the securities case between the SEC and Citigroup, the regulator had accused the financial firm of misrepresenting its involvement in a $1 billion collateralized debt obligation that the latter and structured and marketed five years ago.)

In other SEC news, the Commission has honored its commitment to providing greater transparency when it comes to cooperation credit by notifying the public that it credited an ex-AXA Rosenberg senior executive for his substantial help in an enforcement action against the quantitative investment firm. AXA Rosenberg is accused of concealing a material error in the computer code of the model it used to manage client assets.

The SEC said it would not take action against the former executive not just because of the help he provided, but also because the alleged misconduct in question was one that mattered so much. Fortunately, the SEC was able to give clients back the $217 million they lost, as well is impose penalties of $27.5 million. This was the Commissions first case over mistakes in a quantitative investment model.

Meantime, the International Organization of Securities Commissions’ Technical Committee says it has updated the data categories for information it plans to collect in a global survey of hedge funds that will take place later this year. Modified reporting categories include general information about firms, funds, and advisors, geographical focus, market and product exposure for strategy assets, leverage and risk, trading and clearing.

According to IOSCO, responses to the survey will bring together an array of hedge fund information that regulators can look at to determine systemic risk. The committee believes that having securities regulators regularly monitor hedge funds for systemic risk indicators/measures will be beneficial and provide necessary insight into possible issues hedge funds might create for the global financial system. This will be IOSCO’s second survey on hedge funds.

SEC Credits Former Axa Rosenberg Executive for Substantial Cooperation during Investigation, SEC, March 19, 2012

More Blog Posts:
Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval

Published on: February 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants the U.S. District Court for the Eastern District of New York to approve the proposed securities settlements that it reached with Matthew Tannin and Ralph Cioffi, two former Bear Stearns & Co. portfolio managers. The SEC says the deals are “fair, adequate, and reasonable.”

The settlements are to resolve SEC allegations that the two men misled bank counterparts and investors about two hedge funds’ financial states. Subprime mortgage-backed securities exposure caused the funds to collapse in 2007 and investors lost about $1.8 billion. (Bear Stearns’ hedge funds were some of the first to fail when the housing bubble popped.)

According to federal prosecutors, Cioffi and Tannen promoted the prospects of the funds even though they knew that their portfolio and the housing market were in dire straights. In the process, they earned millions of dollars.

A jury acquitted both of them criminal charges in these matters in 2009. This was a criminal case filed separate from the SEC’s securities fraud complaint against them. The proposed securities fraud settlement with the Commission allows Tannin and Cioffi to not have to go through a second trial.

As part of the settlement, Tannin and Cioffi have agreed to pay $1 million-Cioffi’s portion would be $700,000 in disgorgement plus a fine of $100,000 and Tannin would pay $200,000 in disgorgement and a $50,000 fine. Also, Cioffi wouldn’t be allowed to associate with any municipal securities dealers, investment advisers, or other financial industry professionals for three years. The ban for Tannin would be two years. Both of them would not have to admit wrongdoing.

Federal Judge Frederic Block, who will decide whether or not to approve the securities fraud settlement, has referred to the money the two men have agreed to pay as “chump change.” He has, however, indicated that he will likely sign off on it.

That said, as our securities fraud lawyers have reported in recent blog posts, the SEC recently came under fire for allowing parties to settle securities fraud cases by paying fines that some don’t believe reflect the true damages sustained by investors and others. Critics have also taken issue with the SEC’s practice of letting financial firms, brokers, and investment advisers settle without having to admit to any wrongdoing.

In response to Block’s concerns, the SEC noted that although courts should just approve Commission settlements, they also shouldn’t replace their own judgments with what the parties involved have agreed upon. The regulatory agency says that as long as the settlements reached don’t ignore any state or federal laws that apply and fail to create a burden on judicial resources, there is no reason why a court shouldn’t approve these agreements. The SEC pointed out that the financial settlement reached with Cioffi and Tannen is in the range of what might have been arrived at had the case gone to court.

Bear Stearns Ex-Managers to Pay $1 Million to Settle Fraud Case, New York TImes, February 13, 2012

SEC Charges Two Former Bear Stearns Hedge Fund Portfolio Managers with Securities Fraud, SEC, June 19, 2008

More Blog Posts:
Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court, Stockbroker Fraud Blog, July 23, 2010
Bear Stearns Sold to JP Morgan – One Firm’s Trash Is Another Firm’s Treasure!, Stockbroker Fraud Blog, March 17, 2008
Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases, Stockbroker Fraud Blog, February 3, 2011 Continue Reading ›

Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases

Published on: February 3, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Ambac Assurance Corp., a mortgage insurance company, claims that not only did JP Morgan Chase & Co. resist repurchasing loans from Bear Stears-created bonds, but also, it demanded that a lender buy back the bad mortgages. Ambac made the claim in a proposed amended securities lawsuit against Bear Stear’s EMC Mortgage unit. JP Morgan now owns Bear Stearns.

Ambac filed its securities lawsuit in 2008, claiming that ex-Bear Stearns mortgage executives that currently head mortgage divisions at Bank of America, Goldman Sachs, and Ally Financial defrauded and cheated investors, while hiding their actions from the public. Its complaint lists more than $600 million in claims with $1.2 billion in damages from the bad mortgage securities that it insured against and invested in. The insurer is now adding the claim of fraud to its case.

According to the complaint, on March 11, 2008, Bear Stearns, who had bought loans and packaged them into bonds for investors to buy, sought to have a lender repurchase mortgages in bonds that Syncora Guarantee Inc. had insured because it claimed that they did not meet promised standards of quality. This, at the same time that Bear Stearns refused, per Syncora’s demands, that it buy back the loans over the same flaws.

Bear traders allegedly sold the toxic mortgage securities to investors and then resold the bad loans with early payment defaults to banks that originated them. Because investors were not notified that the time allowed for early default payments had been cut, this allowed the investment bank to swiftly securitize defective loans without giving investors time conduct due diligence.

Former EMC analysts have stepped forward admitting that they were ordered to falsify loan-level performance data and that the information was passed on to ratings agencies, who would then approve Bear’s billion-dollar deals. They also claim that senior traders were taking money that should have gone to the security holders that bought the bonds and loans from Bear. Due diligence standards were allegedly ignored. Executives allegedly made tens of millions of dollars in compensation.

Ambac claims that Bear knew that what traders were doing in its mortgage trading division yet chose to conceal the defective loans and ignore contractual obligations. The insurer is now holding JP Morgan accountable for the accounting fraud that began at Bear. Ambac also contends that JP Morgan has continued to ignore the vast off-balance sheet exposure linked to its contractual repurchase agreements.

Related Web Resources:
E-mails Suggest Bear Stearns Cheated Clients Out of Billions, The Atlantic, January 25, 2011

Ambac Says JPMorgan Refused Mortgage Repurchases It Also Sought, Bloomberg Businessweek, January 25, 2011

JP Morgan and Chase, Institutional Investors Securities Blog, February 3, 2011