Financial Firms

Swaps Interest Rate Cases: FHLBNY Settles With Lehman Brothers for $70M & Banco Santander and Portugal Come to An Agreement

Published on: April 13, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Home Loan Bank of New York will pay Lehman Brothers and its Special Financing unit a $70M settlement in an interest-rate swaps case. The plaintiffs sued FHLBNY two years ago seeking over $150M that they claim they were owed related to their position on more than 350 swaps and options transactions.

Lehman filed for Chapter 11 bankruptcy protection in 2008. The move froze the markets while spurring the end of millions of derivative transactions in which it was involved. A few days later, when FHlBNY ended its swaps with Lehman, it did so with a $16.5B notional amount.

According to Lehman, due to interest rate fluctuations after its bankruptcy filing, FHLBNY returned and “cherry picked” other end dates. As a result, claims the plaintiff, the latter “massively understate” how much it owed Lehman.

Puerto Rico Debt: Creditor Sues Bank of New York Mellon Over COFINA’s Revenue and Pension Participants File Lawsuit to Stop Island’s Proposed Fiscal Plan

Published on: April 12, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Hedge fund Whitebox Advisors has filed a lawsuit against Bank of New York Mellon (BNY Mellon) over revenues from Puerto Rico’s sales tax bonds, which are commonly called COFINAs, that support $17 Billion of the island’s debt. Currently, the US territory is continuing to struggle to pay back the $70 Billion of debt it owes to creditors and BNY Mellon is a trustee for the island. (A number of hedge funds aside from the plaintiff, hold about $2.5 Billion in senior COFINA bonds, but they are not part of this case.)

In its lawsuit, brought in state court in New York, Whitebox Advisors accused BNY Mellon of breaching its duties to senior COFINA bondholders by continuing to make payments to junior creditors even after the US territory indicated that it wants to make concessions related to different kinds of debts. The hedge fund wants a court order stopping further payments to junior creditors, as well as a statement declaring that BNY Mellon has a conflict of interest. The plaintiff is also seeking monetary damages.

This week, the island is set to begin confidential talks with COFINA creditors as well as holders of competing general obligation debt. Creditors have until May 1 to arrive at mutually agreed upon settlements. The deadline was put into place, temporarily halting creditor lawsuits, to give the federally appointed oversight board a chance to work out a debt restructuring deal outside of court. At this moment, an extension to the freeze is unlikely. After that, the board is allowed to try to place Puerto Rico into quasi-bankruptcy proceedings.

Morgan Stanley to Pay Massachusetts $1M to Settle Charges Alleging Unethical Sales Contests Involving Brokerage Customers

Published on: April 12, 2017 | by Shepherd Smith Edwards & Kantas, LLP

To settle charges over a high-pressure sales contest involving its financial advisers and brokerage clients, Morgan Stanley (MS) will pay $1 million to Massachusetts Secretary of the Commonwealth William Galvin. By settling, the firm did not deny or admit to the charges. It must, however, reassess its sales contest policies and notify the state of what is included in them, as well as what changes it might make in the wake of this review.

It was last year that Galvin charged the broker-dealer for cross selling and encouraging wealthy clients to borrow against their brokerage accounts. He also accused senior Morgan Stanley staff of knowing about the contest, determining that it violated the firm’s own internal policies (in addition to Massachusetts securities rules), but yet allowing the contest to continue for a few more months. It was only then that the firm’s Compliance and Risk decided that the contest was “impermissible.”

The program, which also involved a similar contest in Rhode Island, ran between ’14 and ’15. 30 financial advisers at five Morgan Stanley offices participated. The financial representatives are accused of persuading investors to set up new lending accounts. The broker-dealer purportedly rewarded them with bigger “business development allowances” when their efforts were successful. Advisers were given $1K for every 10 loan accounts that were opened, $3K for every 20 accounts, and $5K for every 30 accounts.

Securities Cases: SEC Fines Credit Suisse $8M Over Improper Investments, $5M Investment Fraud Case Leads to Guilty Plea, and Florida Man is Ordered to Pay Back Investors $2.9M

Published on: April 6, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse Unit and Ex-Investment Adviser Settle SEC Charges, Pay $8M Fine
Credit Suisse AG (CS) unit Credit Suisse Securities and Ex-investment adviser Sanford Michael Katz have settled SEC charges accusing them of improperly investing the funds of clients in “Class A” mutual fund shares instead of “institutional” shares that were less costly. According to the regulator, the firm and Katz did not adequately disclose the conflict of interest presented by choosing the Class A investment, which allowed them to profit more at investors’ expense. They are accused of breaching their fiduciary duties.

The SEC’s orders state that Credit Suisse made about $3.2M in 12b-1 fees that could have been avoided. According to the Commission, about $2.5M of those fees came from Katz’s clients. The regulator said that the firm did not put into place policies and procedures to prevent fiduciary breaches.

Both Credit Suisse and Katz settled the SEC charges without denying or admitting to the regulator’s findings. Together, they have to pay over $3.2M of disgorgement, over $577K of prejudgment interest, and an over $4.1M penalty. A fair fund has been set up to compensate clients.

Federal Judge Orders Wells Fargo to Face Institutional Investors’ MBS Fraud Lawsuits

Published on: April 3, 2017 | by Shepherd Smith Edwards & Kantas, LLP

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.

CFTC Cases: Ex-Citigroup Global Markets Traders Settle Spoofing Charges and Vision Financial Partners to Pay Over $6.5M in Off-Exchange Binary Options Fraud Case

Published on: March 31, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Former Citigroup Global Markets Traders to Pay Penalties for Spoofing

Ex-Citigroup Global Markets Inc. (C) traders Jonathan Brims and Stephen Gola have settled spoofing charges that the US Commodity Futures Trading Commission brought against them. According to the regulator, the two men engaged in spoofing while trading for the firm, and they must now pay $200K and $350K in civil monetary penalties, respectively. They also are temporarily “banned from trading in futures markets.” Goal and Brims won’t be allowed to resume trading in the futures markets until six months after they’ve paid their penalties in full.

According to their respective orders, the two men engaged in spoofing, which involves making a bid or offer with the intention to cancel the bid or offer prior to execution of the bid. They did this over 1,000 times in different Chicago Mercantile Exchange US Treasury futures products. They would make offers or bids of at least 1,000 lots even though they planned to cancel the orders before they actually occurred.

The orders were made after another small offer or bid was made on the other side of the same market “or a correlated futures or cash market.” The CFTC said that the two men initiated the orders in order set up or increase an already existing imbalance in the order book. They purportedly canceled the orders after the smaller orders were filed or if they determined that there was too high a risk that their orders might actually go through.

UBS Financial Services Ordered to Pay Many Millions to Another Investor For Puerto Rico Bond And Closed-End Fund Losses

Published on: March 31, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Once again, a Financial Industry Regulatory Authority (FINRA) panel has ordered UBS Financial Services (UBS) to pay a large arbitration award to an investor. Dr. Luis E. Cummings claimed losses related to his investing in Puerto Rico bonds and Puerto Rico closed-end funds. Cummings also said sustained losses from loans made against these securities.

In his Puerto Rico bond fraud case, Cummings accused UBS of negligence, recklessness, deceit, fraud, and fault. Meantime, the brokerage firm is once again claiming that this is yet another investor who was experienced enough to make a “fully informed decision” about whether to leverage investments and invest a healthy portion of his portfolio in Puerto Rico closed-end funds and bonds.

But as Shepherd Smith Edwards & Kantas Partner Sam Edwards said when commenting on a previous case in which UBS also was ordered to pay an investor over their similar losses, “even customers who are business savvy can be abused.” The FINRA Panel ultimately awarded Dr. Cummings more than $5 million in compensation as well as forgiveness of a similar amount of debt.

Securities News: Deutsche Bank Unit Ordered to Pay $150M for Libor Rigging, FINRA Bars Broker Indicted in NY Pension Fund Scam, and Hedge Fund Manager Who Lost Investors’ Money In Madoff Ponzi Scam Commits Suicide

Published on: March 30, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Judge Orders Deutsche Bank Subsidiary to Pay $150Mfor Libor Rigging
A federal judge is ordering Deutsche Bank Group Services, a subsidiary of Deutsche Bank (DB), to pay $150M for its involvement in an interest rate manipulation scam. The London unit pleaded guilty last year to rigging the London Interbank Offered Rate benchmark.

The fine comes two years after Deutsche Bank settled Libor rigging allegations with US and British regulators for $2.5B. According to prosecutors, derivatives traders at the German bank and at other banks colluded together to manipulate LIBOR rates to preference their trading positions.

Libor rigging allegations are not the only claims that Deutsche Bank has been contending with. Recently, the German Bank reached a $7.2B settlement with the US DOJ over its part in the 2008 global financial crisis. Meantime, NY and British officials ordered Deutsche Bank to pay $630M in fines because of alleged money laundering that occurred in Russia.

MBS Fraud Cases: Wells Fargo, Deutsche Bank AG, and Royal Bank of Scotland Reach $165M Class Action Settlement, Bank of NY Mellon Ordered to Face $1B Lawsuit Brought by Commerzbank, and Judge Says Royal Park Must Better Define “Class” in Securities Case

Published on: March 25, 2017 | by Shepherd Smith Edwards & Kantas, LLP

$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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Insider Trading Cases: Ex-Oppenheimer Adviser Sentenced to Six Months, Las Vegas Sports Gambler is on Trial, and SEC Files Civil Case Against Ex-Home Security Guard

Published on: March 18, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Oppenheimer Stockbroker Pleads Guilty in Insider Trading Case
David Hobson, an ex-Oppenheimer Holdings (OPY) investment adviser, was sentenced to six months behind bars for insider trading using information provided to him by a friend who was employed with Pfizer Inc. at the time.

Hobson pleaded guilty to the criminal charges against him. He was ordered to forfeit over $385K. His friend, Michael Maciocio, reached a plea deal with prosecutors for his part last year.

Hobson started insider trading in 2008 while employed at RBC Capital Markets and he continued with his illicit activities at Oppenheimer. He was Maciocio’s stockbroker.