Financial Firms

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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Municipal Bond Violations: J.P. Turner to pay $140K to FINRA, SEC Fines Underwriters $4.58M Over False Statements

Published on: February 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is sanctioning J.P. Turner & Co. for violating a rule mandating that brokers must make sure that municipal securities transactions between a customer’s account and the firm’s account occur at a price that is “fair and reasonable.” The SRO contends that the firm’s supervisory system did not provide the kind of supervision that could achieve compliance with securities regulations involving fair pricing

As part of the settlement, J.P. Turner will pay a $140K fine and over $76K plus interest in customer restitution.

The brokerage firm will also pay a $75k fine related to the ongoing use of a third-party telemarketer, which continued after it made the decision to stop using the marketing firm. Because the telemarketer stopped getting a do-not-call list from the firm, it continued to call people on the registry.

J.P. Turner agreed to settle both cases without denying or admitting to the charges.

In other news, the Securities and Exchange Commission is charging and fining 14 muni bond underwriting firms for issuing inaccurate information to investors. Collectively, the firms will pay about $4.58M for federal securities law violations that purportedly occurred between ’11 and ’14. The alleged violations involved the sale of municipal debt that used offering documents with materially false statements or omissions about borrower compliance as they pertain to disclosure duties. The SEC said that the firms did not perform proper due diligence to identify issues before selling the bonds.Barclays Capital Inc. (BARC), which will pay $500K, Wells Fargo Bank (WFC) N.A. Municipal Products Group, which will pay $440K, Jefferies LLC (JEF), which will pay $500K, and TD Securities USA LLC, which will pay $500K.

RMBS Cases and Institutional Fraud: Morgan Stanley to Pay $62.9M, Hedge Funds File Lawsuit Against TWC Asset Management, and Deutsche Bank Must Contend With Allegations Claiming Investor Losses of $3.1B

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

Morgan Stanley Settles RMBS Case with FDIC
Morgan Stanley (MS) will pay $62.9M to resolve allegations that it misrepresented residential mortgage-backed securities prior to the 2008 financial crisis. The deal was reached with the Federal Deposit Insurance Corp., which sued the investment bank on behalf of Colonial Bank in Alabama, Security Savings Bank in Nevada, and United Western Bank in Colorado. All three banks failed after or during the crisis. By settling, Morgan Stanley is not denying or admitting liability.

According to the FDIC, in offering documents Morgan Stanley misrepresented claims for 14 RMBS mortgage backed securities. This is not the first time the investment bank has reached a deal over RMBS with the FDIC. In 2015, the firm resolved similar claims brought on behalf of Franklin Bank in Texas for $24M.

Also last year, Morgan Stanley arrived at a deal for $2.6B to resolve a U.S. Department of Justice probe into mortgage bonds. The government accused the investment bank of misrepresenting the quality of home loans packed into bonds.

Assett Management Firm Must Face RMBS Lawsuit Brought by Hedge Funds
A New York Court refused to grant TCW Asset Management Company’s motion to dismiss RMBS fraud claims brought Basis Yield Alpha Fund and Basis Pac-Rim Opportunity Fund. The Cayman Island hedge funds claim that TWC Asset Management marketed a system for dealing with the RMBS market that it claimed could determine which were the good investments. The purported strategy involved the collateralized debt obligation Dutch Hill Funding II, Ltd., which took a net long position on high-risk RMBS.

The two hedge funds invested over $28.1M in Dutch Hill in May 2007. By July, their investment had become worthless. They sued TCW Asset Management Company in 2012, accusing the firm of fraudulent misrepresentations and a failure to choose Dutch Hill’s RMBS collateral in the ways that it promised. The Basis Funds contended that the defendant knew that the investment strategy couldn’t get the job done.

Citigroup to Pay $23M to Resolve Yen Libor and Euroyen Tibor Rigging Claims

Published on: February 2, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup (C) Inc. has agreed to pay $23M in an institutional investor fraud lawsuit accusing the bank of conspiring to manipulated the Euroyen Tibor and yen Libor benchmark interest rates and Euroyen Tibor futures contracts. Plaintiff investors included hedge fund Hayman Capital Management LP and the California State Teachers’ Retirement System. They contend that Citigroup and other banks benefited their trading positions from ‘06 through at least ’10 when they conspired to manipulate rates. As part of the settlement Citigroup said it would cooperate with the plaintiffs, whose lawsuits are still pending against other banks.

Also settling but without having to anything is broker-dealer RP Martin. Defendants that have yet to settle include Barclays Plc (BARC), JPMorgan Chase & Co. (JPM), Deutsche Bank AG (DB), UBS AG (UBS), HSBCA Holdings Plc (HSBC), Sumitomo Mitsui Trust Holdings Inc., and Mitsubishi UFJ Financial Group Inc.

Senator Warren Accuses the SEC of Poor Enforcement

Published on: January 31, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Senator Elizabeth Warren has issued a report in which she claims that the U.S. Securities and Exchange Commission and the U.S. Department of Justice have been doing a poor job on enforcement when it comes to going after companies and individuals for corporate crimes.

In Rigged Justice: How Weak Enforcement Lets Corporate Offenders off Easy, Warren takes a closer look at what she describes as the 20 worst federal enforcement failures of 2015. The Senator noted that that when federal agencies caught large companies in illegal acts, they failed to take substantial action against them. Instead, companies were fined for sums that in some cases could be written off as tax deductions.

Some of the 2015 cases that Warren Mentions:
• Standard & Poor’s consented to pay $1.375B to the DOJ, DC, and 19 states to resolve charges that it bilked investors by putting out inflated ratings misrepresenting the actual risks involved in collateral debt obligations and residential mortgage-backed securities. Warren Points out that the amount the credit rater paid is less than one-sixth of the fine the government and states had sought against it, and at S & P did not have to admit wrongdoing. No individuals were prosecuted in this case.

• Citigroup (C), Barclays (BARC), JPMorgan Chase (JPM), Royal Bank of Scotland (RBS), and UBS AG (UBS) paid the DOJ $5.6B to resolve claims that their traders colluded together to rig exchange rates. As a result, the firms made billions of dollars while investors and clients suffered. While admissions of guilt were sought, no individuals were prosecuted. Also, the SEC gave the banks waivers so they wouldn’t have to deal with collateral damages from pleading guilty.

Morgan Stanley Pays Widow Over $95K for Puerto Rico Securities Losses

Published on: January 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (FINRA) arbitration Panel has ordered brokerage firm Morgan Stanley to pay Morrisa Schiffman (Schiffman) $95,632 for the losses she sustained from investing in Puerto Rico securities. Schiffman, who is a widow from New Jersey, had been using the income from the Puerto Rico investments to supplement her retirement. She accused the firm of making unsuitable recommendations and engaging in negligent supervision and disclose failures.

Bloomberg reports this is one of the first cases involving an investor in the U.S mainland seeking financial recovery related to the Commonwealth’s debt. More than 1,300 FINRA arbitration cases have already been filed in Puerto Rico for residents of the island who sustained heavy losses when Puerto Rico bonds began their fall in 2013.

Puerto Rico bonds were a big draw for investors in and out of Puerto Rico for a number of years because the securities are tax-exempt in the U.S. However, since these bonds dramatically declined in value nearly three years ago, investors have come forward to file arbitration claims against brokerage firms who recommended the bonds to them.

Our securities firm’s analysis has shown that, despite their tax advantages, most Puerto Rico bonds were not suitable for many customers’ investment goals or their portfolios. Brokers should have steered customers away from the Puerto Rico securities instead of toward them. Because of their negligence, there are investors who have lost all of their money in these bonds.

Firms named in recent Puerto Rico muni bond fraud cases include UBS Financial Services Incorporated of Puerto Rico (UBS), Banco Santander, Banco Popular, Stifel Nicolaus & Co. (SF), Bank of America’s (BA) Merrill Lynch, and others.

Puerto Rico owes $70 billion in debt. The Commonwealth recently defaulted on $37 million of payments that were due to certain creditors so that it could pay more of the general obligation debt that the island owes.

Insurers Ambac Assurance Corporation (AMBAC), Financial Guaranty Insurance Company (FGIC), and Assured Guaranty Corp. (Assured) are now suing the territory over the default, for which they’ve had to pay millions of dollars on claims.
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Credit Suisse and Barclays Settle Dark Pool Cases for $150M

Published on: January 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse Securities (USA) LLC (CS) and Barclays Capital Inc. (BARC) will settle their respective cases brought against them by the U.S. Securities and Exchange Commission and the New York Attorney General. The firms are accused of violating federal securities laws will running dark pools. At issue is whether the banks disclosed enough information to clients about the trading that took place in their dark pools.

Barclays will pay $35M to the SEC and $70M to the NY AG. It has admitted wrongdoing in the Commission’s case. The bank had said that a Liquidity Profiling feature in its LX dark pool was going to “continuously police” the alternative trading system. The firm also stated that it would conduct weekly surveillance reports to look for order flow that was toxic.

Instead, contends the SEC, Barclays did not continuously regulate the dark pool with the tools it promised it would use nor did it conduct the surveillance runs. The firm also failed to properly disclose that it occasionally overrode the Liquidity Profiling feature when it transferred subscribers from categories that were the most aggressive to the ones that were the least aggressive. Because of this, said the regulator, subscribers that chose to block trading with subscribers that were aggressive ended up dealing with them anyways. Barclays is also accused of misrepresenting the kinds and amounts of market data feeds that it utilized to determine the Best Bid and Offer in the dark pool.

Meantime, Credit Suisse, which is not denying or admitting to the charges against it, will pay $84.3M I total—$24.3M to the SEC as disgorgement and prejudgment interest, along with a $30M penalty, and $30M to the NY AG.