Financial Firms

Morgan Stanley to Pay $275M to Settle SEC RMBS Fraud Charges

Published on: July 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) has consented to resolve Securities and Exchange Commission residential mortgage-backed securities charges by paying $275 million. The regulator had accused the firm of misrepresenting the delinquency status of mortgage loans behind two subprime RMBS during the peak of the financial crisis.

According to the SEC, not only did the firm understate how many delinquent loans were underwriting the securitizations, but also it failed to inform investors of the full scope of the facts that they needed to make informed choices. As a result, investors were defrauded.

The securitizations at issue were collateralized by mortgage loans that had an aggregate principal value balance greater than $2.5 billion. The offerings were the:

Bank of America Settles RMBS Allegations with AIG for $650M

Published on: July 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp. (BAC) has paid American International Group Inc. (AIG) $650 million to settle residential mortgage-backed securities fraud claims. The insurer had originally asked for $10 billion when it filed its RMBS fraud lawsuit in 2011.

According to the complaint, Bank of America’s mortgage company Countrywide Financial, misrepresented the quality of mortgage securities it was selling to investors. The settlement resolves the securities fraud litigation brought by the insurer against the bank. This includes lawsuits in California and New York accusing Bank of America of fraudulently causing billions of dollars in losses.

It also takes away the largest obstacle to Bank of America’s $8.5 billion mortgage securities settlement with institutional investors over the financial instruments that Countrywide issued. The investors in that case are 22 institutions, including BlackRock Inc. (BLK.N), and MetLife Inc. (MET.N).

Barclays and Deutsche Bank Under Scrutiny Over Barrier Options Transactions

Published on: July 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Senate Permanent Subcommittee on Investigations plans to conduct a hearing over what it believes are abusive transactions made by financial institutions. Bloomberg is reporting that Deutsche Bank AG (DBK), Barclays PLC (BARC), and hedge fund manager Renaissance Technologies LLC will have representatives testifying at the hearing.

The July 22 hearing is expected to focus on barrier options transactions between the banks and the hedge fund manager. There are tax benefits that allegedly came from the options, which the Internal Revenue Service and Renaissance are in dispute over.

Bloomberg reports that the transactions let the hedge fund manager’s Medallion fund borrow up to $17 for every dollar the fund owned, which is more than it could have in a traditional margin-lending relationship. Under Federal Reserve rules, stockbrokers are not allowed to lend over $1 for each client money dollar. Usually, hedge funds can borrow no more than $5 or $6 for each dollar it has and only if there is a special agreement with the banks.

Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion

Published on: July 14, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup (C) has reached a $7 billion settlement with the U.S. Department of Justice over allegations it misled investors about mortgage-backed securities in the time leading up to the 2008 financial meltdown. The settlement includes a $4 billion penalty to be paid to DOJ, $2.5 billion in consumer relief, and $500 million to a number of states and the Federal Deposit Insurance Group.

According to the U.S. government, Citigroup knew it was selling mortgage-backed securities with loans that had “material defects” and hid this information from investors. Attorney General Holder called this misconduct “egregious.” He said the bank played a role in spurring the economic crisis.

The government released a statement of fact to which Citibank consented. In it are details about how the bank ignored its own warning signs that certain mortgages were subpar and made misrepresentations about the loans that were securitized. One U.S. attorney told The Wall Street Journal that the DOJ discovered 45 mortgage-backed security deals between 2006 and 2007 where inaccuracies about underlying loans’ and their quality were made.

Deutsche Bank, Wells Fargo, Citigroup Sued by Pimco and Blackrock Over Trustee Roles Involving Mortgage Bonds

Published on: July 3, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Pacific Investment Management Co. and BlackRock Inc. (BLK) are leading a group of investors, including Charles Schwab Co. (SCHW), Prudential Financial Inc. (PRU), DZ Bank AG, and Aegon in suing trust banks for losses they sustained related to over 2,000 mortgage bonds that were issued between 2004 and 2008. Defendants include units of US Bancorp (USB), Deutsche Bank AG (DBK), Wells Fargo (WFC), HSBC Holdings (HSBA.LN), Citigroup (C), and Bank of New York Mellon Corp (BK).

The investors are accusing the banks of breaching their duty as trustee when they did not force bond issuers and lenders to buy back loans that did not meet the standards that buyers were told the bonds possessed. It is a trustee’s job to make sure that principal payments and interest go to bond investors. They also need to make sure that mortgage servicing firms are abiding by the rules that oversee defective loans or homeowner defaults.

Trustees, however, have said that their duties are restricted to tasks like supervising the way payments are made to investors and giving regular reports about bond servicing. They disagree about having a wider oversight duty to fulfill.

US Supreme Court Will Hear Appeal Over Libor Antitrust Claims

Published on: July 2, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The United States Supreme Court has agreed to hear an appeal in Ellen Gelboim et al v. Bank of America Corp. The lawsuit was filed by bond investors who lost money in securities tied to the London Interbank Offered Rate and the manipulation of the global benchmark interest rate. Now, the nation’s highest court is granting their request to let their claims go forward and will hold oral arguments on the lawsuit during its next term.

For the last three years, different kinds of investors have filed numerous securities fraud cases against the largest banks in the world claiming that they manipulated Libor. Last year, a district court judge allowed investors to pursue certain claims but threw out their antitrust claims.

Judge Naomi Reice Buchwald said that the settling of Libor was not competitive but, rather, cooperative; it involved banks providing data to a trade group that established the rate. Plaintiffs therefore could not prove that anticompetitive behavior harmed them.

Broker Fraud: Ex-Investors Capital Rep. is Indicted in Ponzi Scheme, Credit Suisse Sues Two Ex-Brokers Over Client Data Theft, and SEC Files More Insider Trading in IBM-SPSS Acquisition

Published on: July 1, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Investors Capital Rep. Charged in $2.5M Ponzi Scam

Patricia S. Miller, a former Investors Capital Corp. representative, has been indicted on charges that she ran a $2.5 million investment fraud. She is accused of promising clients high yields for placing funds in “investment clubs.” Miller allegedly took this money and either gambled it away or used it to pay for her own spending.

According to prosecutors in Massachusetts, alleged fraud took place from 2002 through May 2014. Investors Capital fired Miller last month. Her BrokerCheck Report notes that the independent broker-dealer let her go because she allegedly misappropriated funds, borrowed client money, generated false documents, and engaged in “fraudulent investment activity.” Miller is charged with five counts of wire fraud.

Goldman Sachs Execution & Clearing Ordered to Pay $800K FINRA Fine for Not Preventing Trade-Throughs in its Dark Pool

Published on: July 1, 2014 | by Shepherd Smith Edwards & Kantas, LLP

FINRA is fining Goldman Sachs Execution & Clearing, L.P. (GS) $800,000. The self-regulatory organization says that for almost three years the firm did not have written procedures and policies that were reasonably designed enough to keep trade-throughs of protected quotations in National Market System stocks from taking place through its SIGMA-X dark pool. As a result, over an 11-day period in 2011, almost 400,000 trades were carried out at SIGMA-X through a quotation that was protected with a price that was lower than the NBBO.

Trading centers are supposed to either direct orders to trading centers with the best price quotes or trade at the prices that are the best quotes. The SRO says that the firm did not know this was happening in part because latencies in market information at Goldman’s dark pool were not detected soon enough.

Goldman Sachs has already given back $1.67M to customers who were disadvantaged. By settling, the firm is not denying or admitting to the FINRA charges. However, it agreed to the entry of the SRO’s findings.

NY Sues Barclays Over Alleged High Speed Trading Favors in Dark Pool

Published on: June 26, 2014 | by Shepherd Smith Edwards & Kantas, LLP

New York Attorney General Eric Schneiderman has filed a securities fraud lawsuit against Barclays (BARC) Plc. accusing the British bank of lying about giving preference to high-frequency traders. The state contends that Barclays took part in fraudulent activity related to a dark pool. The British-based bank has 20 days to respond to the securities fraud charges.

Financial Industry Regulatory Authority data says that for the first week of June 2014, LX was the number two biggest alternative trading system in the United States. According to the high frequency trading case, LX, which is Barclays’ dark pool, favors computer-driven firms that can weave their way through the market at super fast speeds yet downplays how much these high-frequency traders use the venue.

Schneiderman says that the bank falsely depicted the way it routes the orders of clients and claimed to protect them from high-speed firms, when really the dark pool was run to the advantage of these traders. He claims that Barclays even specifically sought to bring in high-speed traders to LX, giving them preferential treatment over others by providing them with details about the way the dark pool is run.

FINRA Arbitration Panel Orders Stifel Nicolaus to Pay $2.7M to Ex-Head Trader

Published on: June 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Arbitration Panel says that Stifel Financial Corp. (SF), the brokerage unit of Stifel Nicolaus, must pay $2.7 million to, Sean Horrigan. Stifel’s ex-head trader claims that the brokerage firm defamed him and withheld his bonus without just cause. Now, the panel is holding the broker-dealer liable.

Horrigan was fired from Stifel in 2012. According to his lawyer, his termination happened several weeks after he overheard a phone call in which a manager insulted his wife to a salesperson. Horrigan’s wife was also employed at Stifel at the time. After the incident, he reacted emotionally. It was after trading hours. The firm then demoted him before letting him go just weeks prior to giving him his bonus for 2011.

Stifel contended that Horrigan was not entitled to get that money because on the day that the bonuses were issued he no longer worked for the firm. His attorney, however, says that unless an industry professional signs a contract mandating that an employee has to be employed on bonus payout day, he/she is still entitled to that money.