Financial Firms

Royal Bank of Scotland Settles Mortgage Fraud Case for $4.9B

Published on: May 17, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Once again, Royal Bank of Scotland (RBS) has arrived at yet another securities settlement related to its mortgage practices leading up to the 2008 housing crisis. This time, RBS is getting ready to pay almost $4.9B. The deal, reached with the US Justice Department, must still must be finalized. The DOJ had been investigating allegations that the British bank sold high risk loans between 2005 and 2007.

CNN reports that since the economic crisis, RBS has paid about $28.4B in fines and settlements, including $500M to the state of New York earlier this year to settle allegations of misrepresentations made and deceptive practices used on investors of residential mortgage-backed securities. The bank settled for $5.5B with US Federal Housing Finance Agency last year to resolve allegations that it bundled and sold more than $30B of risky loans to government-sponsored enterprises Freddie Mac and Fannie Mae.

RBS previously reached two settlements with the National Credit Union Administration. One, for $1.1BM in 2016, was over claims that it sold faulty mortgage-backed securities to credit unions. The other, for $129.6M, settled claims tied to alleged losses for corporate credit unions Southwest and Members United bought RMBSs. According to NCUA, RBS made misrepresentations when underwriting and selling the residential mortgage-backed securities.

LPL Financial Agrees to Pay $26M Over Unregistered Securities to State Securities Regulators

Published on: May 4, 2018 | by Shepherd Smith Edwards & Kantas, LLP

In an agreement reached with the North American State Securities Administrators Association, LPL Financial (LPLA) will pay $26M in fines to a number of US states and jurisdictions over unregistered securities sales going back more than a decade. NASAA reports that the settlement comes after a task force was set up last summer to probe LPL’s sales of unregistered, non-exempt securities to clients. Now, LPL will pay $499K to each state securities regulator. It also must buy back certain securities that it sold to investors going as far back as October 2006.

Details of the LPL Settlement for the Sale of Unregistered Securities

Per the settlement, LPL will offer to repurchase securities in the brokerage firm’s accounts that were found to have been unregistered, fixed-income or non-exempt equity securities. Every buyback offer will come with 3% simple interest annually. Requirements were also put in place for investors with “affected securities” that were moved or sold from an LPL account.

Sanctions Against Wedbush Securities in SEC and FINRA Rulings Are Upheld by the 9th Circuit

Published on: April 24, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The United States Court of Appeals for the 9th Circuit has refused to overturn the US Securities and Exchange Commission ruling that Wedbush Securities Inc. engaged in inadequate supervision of its own regulatory compliance. The appeals court also affirmed the suspension of the brokerage firm’s president and principal Edward W. Wedbush.

The SEC’s 2016 finding had sustained a 2014 ruling by the Financial Industry Regulatory Authority’s National Adjudicatory Council, which ordered Wedbush to pay a $350K fine for either not filing, or filing late, dozens of documents regarding complaints and judgments that had been brought against the investment firm and its financial representatives. Finra found that Wedbush Securities violated the bylaws and rules of the NASD, the NYSE, and the self-regulatory organization itself 158 times and was delinquent in submitting the documents at issue over a five-year period, from 1/2005 to 7/2010.

Wedbush and its president had tried to argue before the SEC that FINRA was wrong in finding that the broker-dealer failed to supervise reporting requirements. The brokerage firm also questioned whether the hearing it received before the SRO was a fair one since a FINRA rule did not specifically note suspension as a sanction.

Firm Executives Reportedly Were Aware of Domestic Violence Allegations Against High-Earning Morgan Stanley Broker for Years

Published on: April 11, 2018 | by Shepherd Smith Edwards & Kantas, LLP

According to the New York Times, even though Morgan Stanley (MS) executives have known for years about the domestic violence allegations against Douglas E. Greenberg, who was one of their leading brokers, the firm continued to allow him to stay employed in its wealth management division. However, after the NY Times tried to contact the firm about him, Greenberg was finally suspended, pending review. Now, the media is reporting that Greenberg has been fired. Still, a number of the former-Morgan Stanley broker’s exes have retained their own lawyers in light of the fact that he wasn’t let go until now.

Four women have come forward accusing him of domestic abuse. Court filings indicate that not only did Greenberg’s accusers go to the police seeking protection against the now former Morgan Stanley financial adviser, but also, according to one of the women’s attorneys, the firm was issued a federal subpoena notifying it about at least one of the allegations. Morgan Stanley was also aware that Greenberg was charged for allegedly violating a restraining order.

Still, no action was taken against Greenberg, who belonged Morgan Stanley’s exclusive Chairman’s Club as one of the firm’s highest earning brokers. Ironically, the members of this club are expected to maintain certain standards when it comes to “conduct and compliance.” Greenberg is considered one of the leading wealth managers in Oregon. Firmwide, he was among Morgan Stanley’s top 2% of brokers when it came to bringing in revenue.

Barclays Settles DOJ’s Mortgage-Backed Securities Fraud Case for $2B

Published on: April 1, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Barclays Capital Inc. (BARC) and a number of its affiliates will pay $2B to settle the United States government’s civil case alleging fraud involving the underwriting and issuance of residential mortgage-backed securities. The settlement comes after a three-year probe. The case is US v. Barclays Capital Inc.

The US accused Barclays of taking part in a fraud to sell three dozen residential mortgage-backed securities deals, causing investors to suffer billions of losses. More than $31B of Alt-A and subprime mortgage loans were securitized and over half of these went on to default. The RMBSs were sold leading up to the 2007 financial crisis.

The bank and its affiliates allegedly misled investors about the quality of the loans backing the RMBS deals, including purposely misrepresenting key features of the loans that involved. The British bank, meantime, maintains that it did not mislead investors about the quality of the loans. The government, however, contends that Barclays committed wire fraud, mail fraud, bank fraud, and violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

HSBC Settles Libor Rigging Lawsuit for $100M

Published on: March 31, 2018 | by Shepherd Smith Edwards & Kantas, LLP

To settle a private securities lawsuit in the US alleging Libor manipulation, HSBC Holdings Plc. (HSBC) has agreed to pay $100M. The bank is accused of conspiring to rig the London interbank offered rated (Libor) benchmark. The plaintiffs in the lawsuit are a number “over-the-counter” investors, including Yale University and the Maryland city of Baltimore, that dealt directly with banks belonging to the panel tasked with determining the key benchmark interest rate. Now, a court will have to approve the preliminary settlement.

The plaintiffs sued 16 banks for alleged Libor rigging in 2011. According to their case, HSBC and other banks conspired together to submit artificially low borrowing costs so that they could appear more financially robust and increase earnings. These lower borrowing costs led to a lower Libor, which had an adverse effect on institutions and persons that invested in pension funds, money market funds, mutual funds, the bond market, a number of derivative products, and bank loan funds.

Libor is the benchmark used to establish rates on hundreds of trillions of dollars of transactions, including those involving credit cards, student loans, and mortgages. It also allows the banks to figure out what it would cost them to borrow from one another.

Wedbush Securities Faces Failure to Supervise Charges Over Broker’s Pump-And-Dump Scam

Published on: March 28, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed civil charges against Wedbush Securities Inc. The regulator is accusing the brokerage firm of not supervising registered representative Timary Delorme, 59, and disregarding warning signs that she was involved in a pump-and-dump fraud that targeted retail investors. Delorme has settled the SEC’s charges against her.

According to the SEC, Delorme took part in certain trades to manipulate the stocks. She received benefits, which were paid to her spouse, for getting customers to invest in microcap stocks that were part of a pump-and-dump fraud run by Izak Zirk Engelbrecht, who also has been subject to civil, as well as criminal charges. Engelbrecht, previously called Izak Zirk de Maison before adopting his wife’s last name, is accused of running the scam that involved microcap company Gepco Ltd.

Also, Delorme and her husband are accused of selling shares for Engelbrecht and sending him the money for the sales while she was paid a commission. This purportedly allowed Engelbrecht to hide the sales.

Bank of America to Pay $42M to New York Over Fraudulent “Masking” Involving Electronic Trading

Published on: March 24, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Merrill Lynch (BAC) will pay a $42M penalty to New York State to settle allegations that it engaged in fraudulent practices involving electronic trading services.

According to a press release issued by New York Attorney General Eric Schneiderman, the bank admitted that over five years, it “systematically” hid from clients that it was “secretly routing” their equity securities orders to electronic liquidity providers, including Knight Capital, Citadel Securities, Two Sigma Securities, D.E. Shaw, and Madoff Securities, which then executed the transactions.

Bank of America Merrill Lynch, which is Bank of America’s corporate investment banking division, had “undisclosed” agreements with these providers. Its “masking” strategy was used in more than 16 million client orders that involved over 4 billion shares that were traded.

According to the probe by Schneiderman office, and Bank of America Merrill Lynch’s own admission, starting in 2008, the corporate investment banking division purposely took steps to hide that it was sending a number of equity securities orders made by clients to the electronic liquidity providers. Bank of America Merrill Lynch told investors that the orders were executed “in-house.”

Meantime, it committed fraud by modifying its electronic trading systems to “automatically doctor” the trade confirmation that clients received after these other firms executed the transactions. Internally, Bank of America Merrill Lynch called this action “masking,” which consisted of replacing the electronic liquidity provider’s identity with a code to make it appear as if a trade execution had taken place through the bank instead.

Goldman Sachs Gives LPL Financial Holdings Clients Access to Securities Lending

Published on: March 20, 2018 | by Shepherd Smith Edwards & Kantas, LLP

LPL Financial Holdings (LPLA) brokers and investment advisers will now be able to offer their clients securities lending services through Goldman Sachs (GS). Under the new arrangement, LPL clients can borrow anywhere from $75,000 to $25 million against the securities held in their accounts.

In a press release, Goldman Sachs spoke about how through its Goldman Sachs Private Bank Select, LPL clients would be able to borrow these funds for “life events,” including travel or education, without having to sell their investments. However, the money borrowed cannot be used to purchase more investments. Goldman noted that its “high-tech platform” would be able to reduce wait time for a non-purpose securities- based loan from weeks to days, with no fees charged.

Over 15,000 LPL financial advisors will now be able to offer clients access to Goldman’s securities lending capabilities. The independent investment advisory firm joins 40 other such firms and broker-dealers on Goldman’s GS Select platform.

Securities Lending Comes with Significant Risks

The ability to borrow against securities is often touted as a benefit to investors. However, securities lending may not be the best choice in the long run for many investors. While such loans allow clients to borrow against what is in their accounts, certain risks come with this advantage, including forced liquidation of accounts during bad market moves.

SEC Grants $83M in Whistleblower Awards in $415M Bank of America Settlement

Published on: March 19, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has awarded two whistleblowers almost $50M and another over $33M in the largest whistleblower awards that the regulator has issued to date. This ups the total of SEC whistleblower awards granted to $262M to 53 individuals in the last six years.

According to the SEC Office of the Whistleblower Chief Jane Norberg, these latest awards show that whistleblowers can offer information that is “incredibly significant,” making it possible for the regulator to go after serious violations that could have gone “unnoticed. “ Until these latest awards, the largest SEC whistleblower award granted was $30M in 2014.

Whistleblowers who provide quality, unique information involving securities law violations that lead to a successful enforcement action rendering over $1M in monetary sanctions may be eligible to receive an award that is 10-30% of the funds collected.