Financial Firms

Securities News: Deutsche Bank to Pay $2.5M For Swaps Violations, Fifth Street Finance Sued in Class Action Lawsuit, and Countrywide’s $8.5B MBS Settlement Gets IRS Approval

Published on: October 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Deutsche Bank Reaches Swaps Violation Settlement with CFTC
The Commodity Futures Trading Commission and Deutsche Bank AG (DB) have reached a settlement over the regulator’s order accusing the firm of not properly reporting its swaps transactions from 1/13 through 7/15. The regulator also said there were supervisory failures and that the bank failed to modify the reporting errors at issue until after it found out that the CFTC was conducting a probe.

According to the regulator, Deutche Bank did not properly report swap transaction cancellations in all asset classes, resulting in somewhere between tens of thousands and hundreds of thousands of reporting errors, violations, and oppositions in its reporting of swaps. CFTC believes that the bank knew about the problem but did not notify its Swap Data Repository in a timely manner, nor did it properly probe, deal with, and modify the information deficiencies until last year when it became aware of the investigation. As a result of the reporting failures, the wrong information was put out to the public.

The CFTC believes that the bank’s reporting failures were partly because of deficiencies in its swaps supervisory system. A more adequate system could have better supervised Deutsche Bank’s activities involving compliance with reporting requirements.

Because the bank is a provisionally registered Swap Dealer, it has to abide by certain recordkeeping, disclosure, and reporting duties related to swap transactions. These requirements are supposed to improve transparency, encourage standardization, and lower systemic risk in swaps trading.

Investors File Class Action Securities Case Against Fifth Street Finance
An investor has filed a class action securities fraud case against Fifth Street Finance Corp. on behalf of shareholders. According to the plaintiff, and for those who bought Fifth Street Finance common shares between 7/7/14 and 2/6/15, the company, Fifth Street Asset Management, Inc., and specific directors and officers violated federal securities laws by allegedly taking part in a fraudulent scam to artificially inflate Fifth Street Finance assets and investment income to raise revenue of Fifth Street Management.

Morgan Stanley, JPMorgan, Barclays and Other Banks To Pay $1.86B to Settle Credit Default Swaps Price Fixing Claims

Published on: October 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Details of the settlement involving a dozen big banks accused of conspiring to rig prices and restrict competition in the credit default swaps market have been released. According to papers filed in federal court in Manhattan last week, the following firms will collectively pay nearly $1.9 billion:

· JPMorgan Chase & Co. (JPM): $595M

· Morgan Stanley (MS): $230M

· Barclays Plc (BARC): $178M

· Goldman Sachs (GS): $164M

· Credit Suisse (CS): $159M

· Bank of America Corp. (BAC): $90M

· Deutsche Bank (DB): $120M

· BNP Paribas (BNP): $89M

· Citigroup (C): $60M

· Royal Bank of Scotland (RBS): $33M

· HSBC Holdings Plc (HSBC): $25M

UBS Advisory Firms To Pay Investors $13M For Failure to Disclose Closed-End Fund Strategy Modification

Published on: October 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

UBS Fund Advisor LLC and UBS Willow Management LLC will pay $17.5M, including $13 million to investors that were hurt to resolve Securities and Exchange Commission charges accusing them of failing to disclose that there was a change in an investment strategy involving closed-end fund UBS Willow Fund LLC. The two UBS (UBS) advisory firms have advised the fund.

The SEC contends that from 2000 through 2008, UBS Willow Management – which was a joint venture between an outside portfolio manager and UBS Fund Advisor – invested the assets of the Willow Fund in line with the strategy discussed in marketing collateral and offering documents. However, according to the regulator’s order that instituted a settled administrative proceeding, in 2008, the fund advisor changed tactics and went from focusing on investments in debt put out by beleaguered companies to buying big amounts of credit default swaps.

The Willow fund started to sustain huge losses because of the credit default swaps, which went from 2.6% of the fund’s market value in ’08 to over 25% by March ’09. The fund was eventually liquidated three years later.

The SEC says that UBS Willow Management failed to notify its board of directors or the fund’s investors that the investment strategy had changed. For a time, a marketing brochure given to prospective investors misstated the strategy of the fund, and letters to investors included misleading or false information about credit default swap exposure.
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Barclays Resolves RMBS Lawsuits for $325M

Published on: October 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Barclays (BARC) will pay $325M to resolve two civil cases related to residential mortgage-backed securities sales that took place during the housing boom. The plaintiff of both securities lawsuits is the National Credit Union Administration, which regulates federal credit unions.

A number of credit unions under NCUA’s purview failed after they invested in mortgage-backed securities. The union believes that the banks that underwrote the securities misled buyers.

RMBS are investments that pool the returns and risks of personal mortgages. The quality of these securities came into question several years ago when homeowners began to default on the mortgages backing them. NCUA believes that it is its statutory duty to obtain recoveries for credit unions while making sure that customers are protected.

By settling, Barclays is not admitting fault. According to The New York Times, the bank sponsored and underwrote approximately $35M in mortgage securitizations in the US and sold $19.4B in loans that were originated and sold to third parties by affiliates of an entity that it had acquired. Upon completion of this settlement, NCUA will dismiss pending litigation against Barclays in district court in Kansas and New York.

Ex-Edward Jones Advisor Gets Five Years Behind Bars for Bilking 56-Year-Old Disabled Woman

Published on: October 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Jason Wade Cox, a former advisor for Edward Jones, was sentenced to five years in prison after pleading guilty to charges of mail fraud, wire fraud, and money laundering involving the account of a 56-year-old disabled woman. Cox had been managing the account of Jodene Beaver ever since the death of her father three years ago.

Beaver, who has mental and physical impairments, was left a trust by her father, who chose Cox as her financial adviser. Unfortunately, rather than helping Beaver, Cox stole thousands of dollars, taking money from the original account, moving the funds into her checking account, and then spending a lot of the cash on gambling. Not only did Cox spend all of Beaver’s money, but also he recommended that she sell her condominium and transfer to an apartment that had bed bugs.

According to the Internal Revenue Service, Cox got around federal banking rules by taking out from Beaver’s account just under the amount that would have required him to file currency transaction reports. When bank officials asked Beaver about the money she was withdrawing for the financial adviser, she replied that they were business partners but wasn’t sure what kind of business they were involved in. Her bank closed her accounts and notified the police.

In addition to the prison sentence, Cox must serve three years supervised release and pay over $412,000 in restitution.
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Ex-Rabobank Traders on Trial for Libor Rigging in the US

Published on: October 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

In New York City, the first criminal trial in the US involving traders accused of rigging the London interbank offered rate is underway. Anthony Conti and Anthony Allen, both former Rabobank traders, are accused of conspiring to turn in fraudulent rate reports for Libor to help others make money off the trades.

According to prosecutor Carol Sipperly, from ’06 to ’11 the two men gave Rabobank and themselves “unfair advantage” with their actions. Sipperly cited messages, emails, and testimony from three other ex-Rabobank traders who pleaded guilty to similar criminal charges.

Defense attorneys for Allen and Conti contended that the rate submissions were presented in good faith and that it was the traders who already pleaded guilty who had engaged in wrongdoing. Allen’s lawyer argued that his client never got compensation for the profits made by the other traders.

Libor rates are established daily in London based on submissions made by 16 banks. The four lowest and highest rates are eliminated with the remaining eight averaged. The benchmark that results represents the rates that banks can borrow from each other for specific periods. However, numerous banks, including Barclays (BARC), JPMorgan Chase (JPM) Rabobank, and Citigroup (c) have had to pay billions of dollars to regulators to settle charges of Libor rigging.

UBS To Pay $19.5M Over Notes Tied to Currency Index

Published on: October 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

UBS AG (UBS) has agreed to pay $19.5 million to resolve SEC charges accusing the firm of making misleading or false statements and omissions in offering materials for structured notes connected to a proprietary strategy for foreign exchange trading. The firm is accused of falsely stating to investors in the United States the structured notes linked to the V10 Currency Index with Volatility Cap were dependent upon a systematic and transparent strategy for currency trading that employed market prices to calculate the financial instruments that were underlying the index. The SEC said that UBS made undisclosed hedging trades, which lowered the index price by as much as 5%. The firm is settling without denying or admitting to the regulator’s findings.

About 1900 US investors purchased approximately $19M of structured notes connected to the index from December ’09 to November ’10. The SEC contends UBS did not have an effective procedure, policy, or process for making sure that the individuals mainly responsible for the offering documents for the notes in the US knew that UBS employees in Switzerland were taking part in practices that could hurt the price inputs for calculating the V10 Index. The firm also purportedly did not disclose that it took unwarranted markups on hedging trades, hedged trades with non-systemic spreads, and traded prior to certain hedging transactions.
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FINRA Fines Voya Financial, J.P. Turner, Cetera, and Other Firms For Not Discounting Big REIT Sales

Published on: October 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has fined six independent brokerage firms for not giving clients the proper discounts on big sales of business development companies and real estate investment trusts. According to InvestmentNews, the self-regulatory organization has been scrutinizing whether financial firms are giving the appropriate discounts, also known as breakpoint discounts to clients.

When the sale of certain nontraded real estate investment trusts is anywhere from over $500K up to $1 million, a discount is usually available. This means that the REIT’s price, which is typically at $10/share with the broker getting a 70 cent commission, can go down to $9.90/share and a commission of 60 cents.

FINRA said that J.P. Turner, Voya Financial Inc. (VOYA), Transamerica Financial Advisors Inc., Investacorp., National Planning Corp., and Cetera Investment Services did not identify and put into effect volume discounts for certain eligible purchase of BDCs and non-traded REITs. Because of this, said the SRO, customers paid sales charges that were too high. Now, all six firms will have to pay restitution to the clients that were affected.

UBS Puerto Rico to Pay $18.5M to Settle FINRA Sanctions Over Supervisory Failures Related to Closed-End Fund Sales

Published on: September 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) is fining UBS Financial Services Incorporated of Puerto Rico (UBS PR) $7.5 million for supervisory failures involving its transactions in UBS sponsored Puerto Rican closed-end funds (CEF). The brokerage firm also must pay $11 million in client restitution for losses related to those shares.

According to FINRA, a self-regulatory organization for the brokerage industry, for over four years, UBS PR neglected to monitor the combined concentration and leverage levels in customer accounts to make sure transactions were suitable for the respective profiles and objectives of its customers. FINRA said that considering that the firm’s retail customers typically kept high concentration levels in the country’s assets and frequently used these concentrated accounts as cash loan collateral-and in light of the U.S. territory’s volatile economy-UBS should have put into place a system that could reasonably identify and prevent unsuitable transactions.

Instead, the regulator said, UBS PR persuaded certain customers to establish credit lines that were collateralized by their securities accounts. If the value of the account dropped under the required collateral level, the customer would have to deposit more assets or liquidate securities. A credit line that is collateralized by an account that is very concentrated could significantly increase an investor’s risk of loss. When the market dropped in 2013, and a lot of the CEFs lost value, customers were forced to sustain hefty losses to satisfy the calls they received notifying them that their account’s value was now under the required collateral level.
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Credit Suisse to Pay $4.25M Over Blue Sheet Trading Data that Was Deficient

Published on: September 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Credit Suisse Securities (USA) LLC (CS) with submitting deficient blue sheet data to the regulator about customer trades. The financial firm is settling the charges by paying a $4.25 million penalty. It has admitted to violating federal securities laws. Credit Suisse acknowledged that it made at least 593 deficient blue sheet submissions to the Commission while leaving out 553,400 reportable trades that represented 1.3 billion shares between 2012 and 2014.

Blue sheet data refers to the color of the forms this type of information used to be placed on before being mailed from a broker-dealer to the SEC. The agency uses the trades when conducting investigations and doing other work. The process by which the regulator now procures this information is electronic but the “blue sheet” name has stuck.

The deficiencies at the firm were related to a probe in which the SEC was looking at blue sheet data and comparing them to data that came from the National Securities Clearing Corp. Credit Suisse has identified the cause of the deficient blue sheet submissions as human and technological errors. The firm has since put into place a number of changes to make sure its blue sheets are accurate from now on.