Financial Firms

Deutsche Bank and DOJ Still In Negotiations Over Mortgage-Backed Securities Case

Published on: September 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Deutsche Bank (DB) and the U.S. Department of Justice have yet to reach a settlement over allegations about the way that the German lender packaged toxic mortgages leading up to the 2008 financial crisis. According to The Wall Street Journal, The DOJ wants the bank to pay $14B. Deutsche Bank, however, said it has no plans to pay “anywhere near the number cited” and sees that figure as a starting point in negotiations.

In a statement, the firm said that it expected the final figure to be much lower and closer to what other banks have paid over similar allegations. InvestmentNews reports that it has not been uncommon for the DOJ in its investigation into MBSs to first put forward higher penalties than the eventual settlement that is reached.

Other firms and their deals over their mortgage lending activities include Bank of America (BAC) for $16.7B, Citigroup (C) for $7B, JPMorgan Chase (JPM) for $9B, Goldman Sachs (GS) for $5.1B, and Morgan Stanley (MS) for $3.2B. Goldman Sachs admitted to wrongdoing when it settled claims that it did not properly vet MBS before selling them as quality debt to investors.

Voya Sued in 401(K) Lawsuit, is Accused of Partaking of Investment Advice Fee Charge

Published on: September 14, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Voya Financial Inc. (VOYA) is the defendant in a 401(k) lawsuit alleging excessive fees. According to a Nestle 401(k) Savings Plan participant, Voya and managed-account provider Financial Engines came up with an arrangement that allowed Voya to collect excessive fees for service related to investment advice, but without disclosing that this was part of their deal. In Patrico v. Voya Financial, Inc. et al., the plaintiff is claiming breach of fiduciary duty under ERISA.

The proposed class action lawsuit contends that Voya offered participants an advice program via the Voya Retirement Advisers but subcontracted to have Financial Engines give the advice. The plaintiff contends that even though Voya didn’t provide “material services” related to the advice that participants were given through the program, the company collected a fee to which it purportedly had no right. Voya allegedly keeps a “substantial” part of the fee, while giving some of the fee to Financial Engines.

Voya denies any wrongdoing.

UBS Ordered To Pay Three Investors $750K in Puerto Rico Bond Fraud Case

Published on: September 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority announced that UBS Financial Services and its Puerto Rico subsidiary (UBS) must collectively pay three investors $750,000 in damages for losses they sustained from investing in UBS’s proprietary Puerto Rico closed-end bond funds and Puerto Rico bonds. The claimants are Jenny Robles Adorno, Desarrollos Jarra SE, and Jose A. Rivera.

The investors accused UBS of recklessness, fraud, and negligence. They sought compensatory damages, punitive damages, and reimbursement of commissions that they said were unlawful. In San Juan, the FINRA arbitration panel awarded Rivera $562,500, Robles $30,000 and Jarra $157,500. UBS said it was “disappointed” with the panel’s decision to award any damages to the claimants.

This is not the first Puerto Rico bond fraud arbitration case in which UBS has been ordered to pay investors. Just this March, the firm had to pay over $470,000 to three investors who said their accounts were over-concentrated in the same Puerto Rico focused investments. The claimants in that particular case alleged negligent supervision and fraud. Similarly, UBS was ordered to pay a former television executive over $1,400,000 in the fall of 2015 for over-concentrating the former customer in UBS’s proprietary funds and misrepresenting the risks of those investments.

Ex-MF Global Chief Jon Corzine and CFTC Arrive At Tentative Settlement

Published on: September 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to the New York Times, Ex-MF Global Chairman and CEO Jon S. Corzine has reached a tentative agreement with the Commodity Futures Trading Commission in the regulator’s civil case against him. The CFTC sued him 2013 after MF Global failed and the futures brokerage firm was accused of misusing $1B in customer funds.

Corzine, 69, used to be the governor of New Jersey, a Democratic US Senator, and the co-chief of Goldman Sachs (GS). Although the settlement is not yet final, sources tell the NY Times that Corzine could be expected to pay up to $5M in penalties, which is a lot more than what the CFTC could win against him at trial. The regulator would like Corzine to pay the penalties out of his own fund and not use insurance money. He also would be expected to accept a lifelong ban from trading other people’s funds in the futures industry.

Corzine has not been charged with any criminal wrongdoing related to the MF Global financial debacle. Although the CFTC has not said that Corzine was directly connected to the misuse of funds at the brokerage firm, the regulator felt that he failed to “diligently supervise” the firm as it placed clients’accounts in peril.

MF Global went into a financial tailspin after Corzine made a $6.3B bet on European sovereign debt. Rather than restore the brokerage firm to profitability, the firm began to fail and the improper transfer of customer monies increased as executives sought to enhance liquidity. MF Global was eventually liquidated in bankruptcy.

Securities News: Ex-Fannie Mae CEO Settles Mortgage Fraud Case, WL Ross to Pay Back $11.8M to its Funds, SEC Chastises Bank of America For Not Explaining COO’s $15.5M Compensation, and Pension Returns Drop

Published on: August 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Former Fannie Mae CEO Settles SEC Charges for $100K
Daniel Mudd has agreed to pay $100K to settle Securities and Exchange Commission charges accusing the ex-Fannie Mae CEO of misleading investors about the degree to which the mortgage company was exposed to subprime loans leading up to the 2008 economic crisis. The regulator had filed its civil case against Mudd and two other Fannie Mae executives in 2011. The latter two settled with the Commission last year.

Mudd maintains he did nothing wrong.

WL Ross Resolves Fee-Allocation Disclosure Charges
WL Ross & Co. will reimburse specific WL Ross funds about $11.8M to resolve SEC charges related to its fee allocation practices and disclosures. The firm will also pay a $2.3M civil penalty.

According to the SEC, WL Ross was given transaction fees by portfolio companies. This lowered the management fees that funds had to pay the firm. The regulator points to WL Ross’s limited partnership agreements that were unclear regarding fee offsets when multiple funds and other co-investors share ownership.

Morgan Stanley and Edward Jones Are Sued in Separate 401(K) Lawsuits

Published on: August 22, 2016 | by Shepherd Smith Edwards & Kantas, LLP

An ex-participant in Morgan Stanley’s (MS) 401(k) plan is suing the financial firm. The plaintiff is alleging self-dealing and excessive retirement plan fees. Robert Patterson contends that the firm enriched itself at cost to employees. The case is Patterson v. Morgan Stanley et al. He is alleging breaching of fiduciary duty under ERISA. Patterson believes that plan participants sustained millions of dollars in losses in retirement funds from 1/11 through 4/14 because of the alleged breaches.

He is seeking class action status for case over the losses sustained and he wants the firm to pay $150M. The Morgan Stanley 401(k) Plan includes several Morgan Stanley mutual funds. According to the complaint these funds suffered “high relative fees” and/or “poor relative performance.” Although there were a number of non-proprietary investments included in the retirement plan, Patterson claims that they also performed poorly.

Meantime, Edwards Jones is also now a defendant in a 401(k) lawsuit. The plaintiff is a plan participant who claims that the firm caused employees to pay excessively high fees for record keeping and investment management services that purportedly resulted in the loss of millions of dollars in retirement savings. The proposed class-action lawsuit is McDonald v. Edward D. Jones & Co. L.P. et al.

CFTC and FINRA File Charges Against Deutsche Bank Over Swap Data and Information Transmitted Over Squawk Boxes

Published on: August 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Commodity Futures Trading Commission has filed a civil case against Deutsche Bank AG (DB). According to the regulator, for five days the firm, which is a provisionally registered Swap Dealer, did not report any swap data for a number of asset classes, turned in untimely and unfinished swap information, failed to supervise the staff responsible for the reporting of the swap data, and had an inadequate Business and Continuity and Disaster Recovery Plan.

The bank’s swap data reporting system had suffered a System Outage. The CFTC said that the swap data reported prior to and after the outage showed that there had been ongoing problems with specific data fields and their integrity. As a result, the market data issued to the public was affected. Some of it purportedly continues to be affected to this day. The CFTC said that a reason for the System Outage and the reporting problems is that Deutsche Bank lacked an adequate Business Continuity and Disaster Recovery Plan or another supervisory system that was equally satisfactory.

Earlier this month, the Financial Industry Regulatory Authority fined Deutsche Bank $12.5M for substantive supervisory failures involving trading-related information and research that the firm had issued to employees over internal speakers, also referred to as squawk boxes. The self-regulatory organization said that even though there were red flags related to this matter, Deutsche Bank neglected to set up supervision that was adequate over both the access that registered representatives had to the “squawk,” or “hoots,” which is the information issue through the squawk boxes, and the communication of this data to customers.

Securities Fraud News: Hedge Fund Manager Accused of Securities Fraud Involving Payoffs to the Terminally Ill, SEC Halts Trading in Neruomama Shares, and Commodity Pool Fraud Leads to More than $10M in Penalties and Restitution

Published on: August 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Investment Advisor Firm Accused of Paying Off Terminally Ill Patients to Commit Fraud
The SEC has filed fraud charges against Donald Lathen and his Eden Arc Capital Management. Lathen is accused of recruiting at least 60 individuals who had less than six months to live and agreeing to pay them $10K each for the use of their names on joint brokerage accounts. When one of these individuals would die, he would allegedly redeem the investments by falsely representing that he and the terminally individual person were joint account holders.

Lathen recruited the terminally ill patients through contacts he had at hospices and nursing homes. In reality, it was Lathen’s hedge fund that owned the option investments.

As a result, of the purported omissions and misrepresentations, issuers paid over $100M in early redemptions. Lathen is accused of violating the custody rule by not properly putting the securities and money from the hedge fund in an account under the name of the fund or in one that held only client money and securities.

SEC Stops Trading in Neromamam Ltd.
The SEC has stopped the trading of Neuromama Ltd. (NERO) shares. The shares trade on the mostly unregulated over-the-counter markets and the regulator is concerned about transactions that may be “potentially manipulative, as well as other red flags that have purportedly been cropping up for years.

Neruomama’s paper value went up times four to $35B this year despite not much volume. The company’s shares went up by four times to $56/share. (On January 15, ’14, its value was $4.73B.)

Ex-Goldman Sachs Trader to Pay $400K Fine to Settle RMBS Fraud Case

Published on: August 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Edwin Chin, an ex-Goldman Sachs Group Inc. (GS) senior trader, will pay $400K to resolve U.S. Securities and Exchange Commission charges accusing him of misleading the bank’s customers when he sold them residential mortgage-backed securities at prices that were higher than they should have been. Even though he is settling, Chin is not denying or admitting to the regulator’s findings. He has, however, agreed to the entry of the order stating that he violated the Securities and Exchange Act of 1934 and Rule 10b-5.

According to the Commission’s order, from 2010 until 2012, which is when Chin left the bank, the former Goldman trader made extra money for the firm by concealing the prices that it had paid for different RMBSs and reselling the securities at higher prices to customers. The difference in cost would go to Goldman.

The SEC said Chin made over $1.5M in additional trading profits. Because Goldman made more money, Chin did as well.

The regulator accused Chin of sometimes misleading buyers by suggesting that he was in the process of negotiating a transaction between customers when he was merely selling residential mortgage-backed securities from Goldman’s inventory. In one alleged incident, Chin earned an additional $200K by telling a hedge fund client that he would sell a bond at cost price and without compensation. Unfortunately, he purportedly neglected to tell the hedge fund that he had already bought the security, had it in inventory, and was charging the fund a worse price than what Goldman paid earlier that day. The SEC said that Chin misled the same client about the price of a different security the following day, resulting in an additional $100K in profit.

UBS to Pay $250K For Not Waiving Mutual Fund Fees

Published on: August 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority said that a UBS Group AG (UBS) unit will pay $250K to resolve charges accusing it of not waiving certain fees for mutual fund customers that were eligible for the reduction. FINRA said that the broker-dealer overcharged customers $277,636 to invest in mutual funds. The failure to wave these fees purportedly took place from 9/09 to 6/13.

The self-regulatory organization cited alleged supervisory failures. According to the settlement notice, UBS depended largely on its registered representatives to identify when sales charge waivers were warranted and identifying them. These waivers were linked to the reinstatement rights that let investors get around having to pay front-end sales charges.

Under these rights, individual investors are generally allowed to reinvest money made from selling class A mutual fund shares in the same fund family or the same fund without having to pay fees at the front end. They are given 90-120 days to reinvest for the waiver to be applicable.