Financial Firms

Bank of New York Mellon Must Face $1.12B RMBS Lawsuit

Published on: March 3, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Judge Gregory Woods in Manhattan says that Bank of New York Mellon Corp. (BK) must face a residential mortgage-backed securities fraud lawsuit holding the bank liable for $1.12B of investor losses. Royal Park Investments SA/NV, which is a Belgian investment fund, may now proceed with its claims, including those alleging breach of trust, breach of contract, and Federal Trust Indenture Act violations.

In its case against BNY Mellon, Royal Park wants class action status for other investors. It claims that its RMBS in the trusts at issue are now “”completely worthless.”

The investment fund contends that BNY Mellon, in its role of trustee for five trusts, disregarded the abuse occurring in the way the underlying loans were serviced and underwritten and did not mandate that bad loans be bought back. Royal Park believes that BNY Mellon breached its obligations out of fear it would lose business or make other financial service companies angry.

Over the past year, the investment fund has been allowed to pursue similar cases against HSBC Holdings Plc. (HSBC) And Deutsche Bank AG (DB). In the investment fund’s case against Deutsche Bank. U.S. District Judge Alison J. Nathan in New York recently denied the bank’s bid to get the proposed class action over $3.1B in RMBS losses dismissed. She did, however, dismiss derivative claims. Royal Park claims that Deutsche Bank knew by April 2011 that loans involved were highly defective but refused to force loan sellers to buy back the loans or replace them when it became clear that the mortgages backing the bonds were defaulting. Nathan also said that the plaintiffs detailed claims of significant losses, high default rates, and widespread probes into RMBS securitization were sufficient that the court was able to draw “reasonable inference” that loan guarantees had been breached.

Study Accuses Nearly 20% of Oppenheimer Advisers, 15% of Wells Fargo and UBS Advisers, Others of Misconduct

Published on: March 1, 2016 | by Shepherd Smith Edwards & Kantas, LLP

InvestmentNews reports that according to a new working paper by business school professors at the University of Minnesota and the University of Chicago, 7% of financial advisers have been subject to discipline for misconduct. The study noted that at certain large firms, the trend of misconduct exceeds that average. For example, found the paper, at Oppenheimer & Co., almost 20% of its advisors’ records indicate misconduct.

Other advisor firms noted for their high misconduct rates included First Allied Securities at 17.7%, Wells Fargo Advisors (WFC) at 15.3%, UBS Financial Services (UBS) at 15.14%, Cetera Advisors at 14.39%, Securities America at 14.3%, National Planning Corp. at 14%, Raymond James Financial Inc. (RJF) at 13.74%, Stifel Nicolaus & Co. at 13.27%, (SF) and Janney Montgomery Scott at 13.27%. Firms with the lowest misconduct rates among its advisers included Morgan Stanley & Co. (MS), Goldman Sachs & Co. (GS), BlackRock Investment (BLK), UBS Securities, Jefferies, Prudential Investment Management, and Wells Fargo Securities, among others.

University of Chicago finance professor Amit Seru, who co-authored the working paper, titled “The Market for Financial Adviser Misconduct” called this misconduct problem “pervasive.” He also said that he believes the study did a conservative job of measuring misconduct, which ranges from behavior such as placing clients in unsuitable investments to the more extreme type, such as using client accounts to trade without their permission. Insurance products were reportedly factor in many misconduct cases.

The study noted that firms often do take action when misconduct by its advisers is discovered. About half of those caught are fired, although 44% of these individuals will typically end up going to another firm. Often these places will have higher misconduct rates, making it possible for the advisers to continue engaging in wrongful behavior. The study said that prior offenders are five times more likely to taking part in new actions of misconduct than the average adviser.
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Seminole Tribe Accuses Wells Fargo of Fraud

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

The Seminole Tribe of Florida is suing Wells Fargo (WFC). The Tribe claims that the bank mismanaged its funds for years while charging it millions of dollars in fees that were not warranted. The plaintiff is claiming over $100M in losses.

The Seminole Tribe said that it set up a trust account with Wachovia Bank, which was Wells Fargo’s predecessor in interest, for the purpose of using the revenue from gaming facilities to help the Tribe garner self-sufficiency, economic development, and strong governments. Rather than helping the Tribe achieve its goals, the bank, instead, purportedly set up confusing and deficient accounts statements to conceal unauthorized fees. The tribe also said that they lost at least $100M from mismanagement and poor investment strategies. The Seminole Tribe contends that the bank failed to give proper investment advice, invested in a deficient portfolio to bilk minor beneficiaries, and charged fraudulent fees.

The trust fund is the Seminole Tribe of Florida Minors’ Per Capita Payment Trust Agreement. It was set up in 2005. The Tribe said it put in $16.8M into the trust during the first year, with the Trust principal eventually growing to about $1.4B.

According to the Tribe’s complaint, in 11/07, it merged its 2005 trust into three trust investments. Wachovia was reappointed as trustee. Wachovia then revised the fee schedule of the trust five times in five years. The Tribe contends that even though the fees were adjusted downward, Wachovia was also collecting fees that were concealed from the minor beneficiaries. It was last year while reviewing the account records of the Minor’s Trust that the tribe claims that they discovered an elaborate fraud involving the unauthorized fees.

Securities News: UBS To Pay $33M to NCUA For Mortgage-Backed Securities, CFTC, FCA May File More Civil Charges Against Banks for Libor Rigging, Moody’s Waits for end of DOJ’s Subprime Mortgage Probe

Published on: February 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

UBS to Pay $33M to NCUA Related to MBS Sold to Credit Unions
UBS AG (UBS) will pay $33 million to resolve a lawsuit filed by the National Credit Union Administration accusing the bank of selling toxic mortgage-backed securities to credit unions. The case revolves around MBS that were underwritten and sold by UBS. The securities were purchased by Members United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union for almost $432.4M from ’06 to ’07.

NCUA alleged that offering documents for the securities sold included untrue statements claiming that the loans were originated in a manner that abided by underwriting guidelines when, in fact, the loans’ originators had “systematically abandoned” said guidelines. The false statements made the securities riskier than what was represented to the credit unions. Eventually, the MBS failed, resulting in substantial losses.

To date, NUCA has recovered almost $2.46B from banks over MBS sales that occurred prior to the 2008 financial crisis.

US, UK Regulators May Pursue More Banks Over Libor
According to the The Wall Street Journal, the US Commodity Futures Trading Commission and the UK Financial Conduct Authority are working on pressing the last civil charges against a number of banks for alleged rigging of the London interbank offered rate. LIBOR is the benchmark that underpins interest rates on trillions of dollars of financial contracts around the globe.

Sources tell WSJ that the firms under scrutiny include Citigroup (C), J.P. Morgan Chase & Co (JPM)., and HSBC Holdings (HSBC)—although the FCA has already dismissed its probe into J.P. Morgan.

Raymond James Must Pay Investor $795K

Published on: February 24, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In a Financial Industry Regulatory Authority arbitration case, Raymond James Financial Services Inc. (RJF) has been ordered to pay David B. Silipigno $593,540 plus 3 years and 9 months of interest. That’s an award of about $795,000. According to Silipigno’s attorney, the securities arbitration case involved an RIA who may not have not licensed with FINRA but worked out of the Raymond James independent contractor branch office.

The attorney said that such a work configuration may cause problems in that a non-registered adviser could effectively become a defacto employee of a brokerage firm. OnWallStreet.com names the broker involved as Karen Powell, who has been affiliated with Raymond James since 1999.

Silipingo, in his claim, asserted a number of causes of action, including common law fraud, breach of fiduciary duty, beach of contract, suitability, churning, failure to supervise, and violations of Rule 10b-5 of the Securities Exchange Act violation and The Florida Securities Investor Protection Act. Raymond James continues to deny the allegations. The arbitration panel denied the firm’s request to have Powell’s CRD expunged in this matter.
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London Whale Says He is Not Responsible for Over $6.2B in Losses Involving JPMorgan

Published on: February 24, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Bruno Iksil, the man dubbed the London Whale, has finally spoken out. Iksil, a former trader for JPMorgan Chase & Co. (JPM), was blamed for up to $6.2B in losses—a massive sum, hence the nickname. Unlike others involved, however, Iksil has been able to avoid prosecution after reaching a deal in which he agreed to help U.S. authorities with their cases and testify against others involved.

In a letter to Bloomberg, Iskil said that managers in the London chief investment office “repeatedly” told him to execute the strategy that led to the losses. He noted that the nickname he was given, “London Whale,” implies that one person was responsible for the trades involved when, he contends, others were involved in the debacle. Iksil said that his responsibility was to execute a strategy that senior management had put forth, approved, supervised, and ordered.

He maintains that he told superiors that there was a risk of huge loss with a trading strategy that they wanted him to execute, in part to lower the unit’s risk-weighted assets. Despite his concerns, said Iksil, his supervisors continued to tell him to continue with the strategy.

The trades involved were credit-swap index tranches. Tranches let investors bet on different levels of risk among a number of companies. If a borrower doesn’t meet its obligation, then the credit swaps must pay the buyer at face value. If t debt is defaulted, then the value the buyer must be paid is less.

JPMorgan Says to Expect Losses on Energy Loans

Published on: February 23, 2016 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase 7 Co. (JPM) reported a double-digit drop in investment banking revenues, along with a $500 increase in provisions set aside for losses expected on energy loans. The latter is a result of declining oil prices, market volatility, regulator pressure, low interest rates, and other issues. Crude oil dropping to about $32/barrel has not helped.

According to Forbes, previously, the bank had set aside $815M to cover lending losses in the energy sector. The firm also has exposures to the extent that JPMorgan has put aside $350M for credit losses related to mining. The bank also is involved in $4.1B of commercial real estate lending in areas that are energy sensitive and a $2.7B business banking book in the gas and oil industry.

The Business Recorder reports that the firm’s portfolio for oil and gas is $43 billion. Its latest projections are a departure from last month, when JPMorgan told investors that it expected to make incremental increases to loss reserves related to energy-related loans.

Ex-Deutsche Bank Analyst to Pay $100K Penalty To Resolve SEC Charges Related to Rate Stock Certification

Published on: February 19, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is accusing ex-Deutsche Bank (DB) research analyst Charles P. Grom of certifying a rating on a stock in a manner that was not in line with his personal view. According to the regulator, Grom certified that his research report on 3/29/12 about Big Lots was an accurate reflecting of what he honestly believed about the company and it securities even though in private communications with firm research and sales staff, he indicated that he decided not to downgrade the discount retailer from a “BUY” recommendation because he wanted to keep up his relationship with the company’s management. Now, Grom must pay a $100K penalty.

The SEC contends that Grom violated Regulation AC’s analyst certification requirement, which mandates that research analysts include a certification that the views expressed in a research report are an accurate reflection of what they believe about a company and its securities. The regulator said that Grom became worried about what he considered cautious comments by Big Lot executives when he and his firm hosted them during a non-deal roadshow the day before he certified the report at issue in March 2012.

UK Regulator Fines Ex-JPMorgan Executive $1.1 Over London Whale Debacle

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

The UK’s Financial Conduct Authority is fining former JPMorgan Chase (JPM) executive Achilles Macris approximately $1.1M for failing to cooperate and communicate properly with regulators during the agency probe into the London Whale fiasco. Although Macris is now agreeing to settle the securities charges, he continues to defend himself. He insists that he stayed “above and beyond any reasonable” transparency standards and that he is only agreeing to resolve this case because the F.C.A. had accepted his contention that he did not mislead anyone on purpose. The FCA would not comment on Macris’ statements about the settlement.

The former JPMorgan executive was in charge of the firm’s chief investment office in London, which was supposed to invest funds for the bank and help offset possible losses. Unfortunately, a bad bet made by the unit on credit derivatives cost the bank $6.2B.

FINRA Cases: Firms To Pay $1.2M Over UIT Sales, Broker Charged for Lying to a Native American Tribe, and Morgan Stanley Ordered to Pay Clients $825K

Published on: February 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Brokerage Firms to Pay $1.2M for Not Applying UIT Discounts
The Financial Industry Regulatory Authority has charged Next Financial Group Inc., Stephens Inc., and Key Investment Services with failing to grant sales charge discounts when certain customers that were buying unit investment trusts were eligible for the reduced rates. The three broker-dealers are also face charges for inadequate supervision. The self-regulatory organization is ordering the three firms to pay $1.2M in restitution and fines. The FINRA settlements stated that Stephens did not give the discounts from 1/10 to 5/15 and the other two firms did not give them from 5/09 to 4/14.

Unit Investment Trusts
A UIT is a fund that combines a fixed portfolio of income-producing securities that are bought and held to maturity and an actively managed fund. These funds usually issue securities, also known as units that are redeemable-meaning that the UIT will repurchase the units from an investor at the approximate net asset value.

FINRA has been looking into whether firms are giving clients that are entitled to purchase discounts the reduced rates. Last year, the SRO ordered a number of firms to pay $6.7M in restitutions and fines for not giving discounts to clients when selling them UITs.

Broker Accused of Fraud, Targeting Native American Tribe
Broker Gopi Krishna Vungarala is facing FINRA charges for lying to a Native American Tribe about the $11M in commissions they paid him when he sold the tribe $190M of business development companies (BDCs) and nontraded REITS. The SRO said that from 6/11 to 1/15 Vungarala, who was the tribe’s treasury investment manager and registered representative, lied to the tribe about investments he recommended to them.
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