Financial Firms

Lehman Makes Deal with SAP Founder, Frees Up Another $1.8B for Creditors

Published on: February 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Lehman Brothers Holdings Inc. has arrived at an agreement with Klaus Tschira, the founder of SAP AG (SAP). The German software company had been the only holdout to a multibillion-dollar settlement with the firm’s former Swiss derivatives unit Lehman Brothers Finance AG. The deal should free up another $1.8 billion that can now go to the firm’s creditors.

When Lehman failed in September 2008, this became the largest bankruptcy in our nation’s history. Markets became troubled and the global financial crisis was started. Barclays PLC (BCS) bought Lehman’s main business.

Tschira had been in a dispute with the subsidiary for years over derivatives contracts that were canceled after Lehman collapsed in 2008. The disagreement was over the way the unit calculated dames related to the termination of certain forward contracts. While two entities, a nonprofit that Tschira controls and an investment vehicle that manages his money, accused the derivatives unit of owing them $798.7 million, the unit said that the entities were the ones that owed it money.

Berthel Fisher & Affiliate Fined $775K by FINRA Over Supervisory Failures Involving Non-Traded REITs and Leveraged and Inverse ETFs

Published on: February 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Berthel Fisher & Company Financial Services, Inc. and its affiliate, Securities Management & Research, Inc. are going to pay the Financial Industry Regulatory Authority a combined $775,000 for purported supervisory deficiencies related to leveraged and inverse exchange-traded funds and non-traded real estate investment trusts. The firm settled without deny or admitting to the allegations.

FINRA claims that from January 2008 to December 2012 Berthel Fisher had inadequate written procedures and supervisory systems to deal with the sale of alternative investment products, such as managed futures, non-traded REITs, oil and gas programs, managed futures, business development companies, and equipment leasing programs. The SRO says that the brokerage firm’s staff were improperly trained with regard to state suitability standards, and criteria wasn’t properly enforced in a number of alternative investment sales because the firm did not figure out the correct concentration levels of certain financial instruments.

FINRA also said that from 4/09 to 4/12, Berthel Fisher lacked a reasonable basis for certain ETF sales, resulting from numerous reasons, including a failure to properly review or research non-traditional ETFs before letting registered representatives make recommendations to customers. Inadequate sales training was not provided and some customers suffered losses because the brokerage firm did not monitor investment holding periods.

Morgan Stanley to Pay $275M to SEC to Settle Subprime MBS Investigation

Published on: February 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) has agreed to pay $275 million to the Securities and Exchange Commission to resolve the regulator’s investigation into the firm’s sale of subprime mortgage-backed securities seven years ago. The settlement reached is an “agreement in principal” and, according to the firm in its annual filing this week, it does not have to admit wrongdoing. However, the accord still needs SEC approval to become final.

The regulator had been probing the bank’s roles as an underwriter and sponsor of subprime mortgage-backed bonds that sustained losses after it was issued in 2007. Other firms that have reached similar agreements with the SEC include Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS).

Morgan Stanley is still facing litigation from government entities and private parties over derivatives and mortgage bonds that were set up leading up to the mortgage crisis. Last year, it’s litigation expenses reached $1.95 billion, which is a significant increase from $513 million in 2012.

Credit Suisse Admits Wrongdoing and Will Pay $196M to Settle SEC Charges That It Provided Unregistered Services to US Customers

Published on: February 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse (CS) is agreeing to pay $196 million and has admitted to wrongdoing as part of its settlement with the Securities and Exchange Commission over allegations that it violated federal securities laws when it gave cross-border investment advisory and brokerage services to US clients even though it was not registered with the regulator. According to the SEC’s order to institute resolved administrative proceedings, the financial firm gave cross-border securities services to thousands of clients in this country even though it hadn’t met federal securities laws’ registration provisions. In the process, Credit Suisse made about $82 million in fees even though its relationship managers that were involved had not registered with the Commission nor did they have affiliation to any registered entities.

The firm began providing cross-border brokerage and advisory services for customers in the US in 2002, setting up as much as 8,500 accounts that held about $5.6 billion in securities assets. Relationship managers visited the US about 107 times and serviced hundreds of customers when they were here. They would offer investment advice and effect securities transactions. When they were abroad, the managers worked with US clients via phone calls and e-mails. Also, some of the customers involved were Americans who had Swiss bank accounts at the firm. Criminal authorities continue to look into whether there were tax violations and if the clients were able to avoid paying taxes as a result.

Even though the firm knew about the registration requirements and made efforts to prevent violations, their initiatives didn’t work that well due to improper monitoring and the inadequate implementation of internal controls. The SEC says that it wasn’t until the civil and criminal probe into similar conduct by UBS (UBS) in 2008 that Credit Suisse started taking action to stop providing these cross border advisory services to UC clients. These types of activities were completely terminated but not until the middle of last year. During that time, the financial firm kept collecting investment adviser fees on some broker accounts.

Lehman Brothers Holdings’ $767M Mortgage Settlement to Freddie Mac is Approved by Judge

Published on: February 19, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A judge in US bankruptcy court has approved the $767 million mortgage securities settlement reached between Lehman Brothers Holdings Inc. and Freddie Mac (FMCC). The deal involves a $1.2 billion claim over two loans made by the mortgage giant to Lehman prior to its collapse in 2008.

As part of the accord, Freddie will provide loan data to the failed investment bank so that Lehman can go after mortgage originators over alleged misrepresentations. Lehman will pay the $767 million in a one-time transaction.

Its bankruptcy was a main trigger to the 2008 global economic crisis. According to Matthew Cantor, chief general counsel of the unwinding estate, the bank has already paid creditors $60 billion, with more payouts.

Three Ex-Barclays Employees Charged by UK Prosecutors in Libor Rigging Scandal

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

Prosecutors in the United Kingdom are charging three ex-Barclays Plc (ADR) employees with conspiring to manipulate the London interbank offered rate. The Serious Fraud Office charged Jonathan James Mathew, Peter Charles Johnson, and Styilianos Contogoulas with conspiring to defraud. These are the first criminal charges involving the manipulation of the US dollar Libor.

Over a dozen firms are under investigation by regulators and prosecutors around the world over collusion in rigging the London interbank offered rate and related benchmarks. Mathew and Johnson were employed by Barclays, the first firm fined ($450 million) over Libor by UK and US authorities two years ago, between 2001 through September 2012. Contogoulas, who worked with Barclays from 2002 through 2006, was with Merrill Lynch (MER) after that through September 2012.

Previous to the allegations against Contogoulas, Johnson, and Mathew, criminal charges against persons in the UK and the US solely had involved an alleged rate-manipulating ring led by trader Tom Hayes, a former Citigroup Inc. (C) and UBS AG (UBS) employee. He pleaded not guilty to US charges. With this latest criminal case against the three men, 13 individuals now face criminal cases in the UK probe into Libor.

OppenheimerFunds Increases Its Exposure to Puerto Rico Debt Despite Downgrade by Moody’s, S & P, and Fitch to Junk Status

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

Even though Puerto Rico’s debt has been downgraded to “junk” status by the three major ratings agencies (Standard & Poor’s, Moody’s, and Fitch Ratings), OppenheimerFunds (OPY) has increased its holding of Puerto Rican debt in two of its municipal bond funds that carry lower risk. The credit raters downgraded the US Commonwealth over worries about its failing economy and decreased ability to finance its deficits in capital markets.

According to Reuters, Lipper Inc. says that at the end of last year, the Oppenheimer Rochester Short-Term Municipal Fund’s (ORSCX) exposure to Puerto Rico’s debt had risen 13% from a year ago, while its Intermediate-Term Municipal Fund more than doubled its exposure to 17%. (Details of the holdings in both funds since then are still unavailable.) Both have a 5% limit on how much junk-rated debt they can contain. However, because the US territory’s debt was downgraded after the buys were made, Oppenheimer, which is part of MassMutual Financial Group, may not obligated to unload the assets.

The company has continued to support Puerto Rico municipal bonds, even as a lot of other mutual fund firms have lowered their exposure to Puerto Rico debt. This week, Oppenheimer downplayed the investment risk involved, noting that most bonds involved are insured (Reuters reports that 27% of the holdings in the intermediate-fund and another 4% in the short-term fund, do not have insurance).

SEC Restructures Trial Unit in an Effort to Decrease Courtroom Losses

Published on: February 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of recent losses in the courtroom, the Securities and Exchange Commission is changing up the way it gets ready for trial. The Wall Street Journal says that SEC Chairwoman Mary Jo White has retooled the agency’s trial unit. One of the reasons for the restructuring is so litigators and investigators can work more closely together.

The SEC’s victory rate has been dropping. The agency won just 55% of trials in the last four months, which a definite decline compared to the last three years when it had been winning over 75% of the time. Since October, however, juries and judges have ruled in favor of 10 out of 25 persons and firms in securities litigation against the SEC, and the government lost 5 of 11 trials. This is a definite downswing from the 12 months prior when just 5 of 34 defendants beat the regulator. Although the cases that the regulator lost were filed before White took over the helm, defense lawyers believe that the Commission’s current losing trend will compel more people to go up against it instead of settling.

The Commission’s trial unit has now been split into four groups so that this more closely mirrors the work of enforcement officials when they probe cases. Senior officials are also conducting practice openings for trials.

Ex-Bank of America Corp. Executive Enters Guilty Plea in Municipal Bond Rigging Scam

Published on: February 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Phillip D. Murphy, an ex-Bank of America Corp. (BAC) executive that used to run the municipal derivatives desk there, has pleaded guilty to wire fraud and conspiracy charges in a muni bond rigging case accusing him of conspiring to bilk the US government and bond investors. In federal court, he admitted to manipulating the bidding process involving investment agreements having to do with municipal bond proceeds.

The illegal activity was self-reported by his former employer. Bank of America has been cooperating with prosecutors that have accused bankers of paying kickbacks to CDR Financial Products to fix bids on investment contracts purchased by local governments. The contracts were bought using money from bond sales.

According to the indictments, from 1998 to 2006, Murphy and CDR officials conspired to up the amount and profitability of investment deals and municipal finance contracts that went to Bank of America. Murphy purportedly won actions for certain contracts after other banks consented to purposely turn in losing bids.

$13B MBS Fraud Settlement Between JPMorgan and the US is Under Dispute in New Securities Lawsuit

Published on: February 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Better Markets, a non-profit group, is suing the US Department of Justice to block the $13 billion mortgage-backed securities fraud settlement reached between the federal government and JP Morgan Chase (JPM). The group wants the deal to undergo judicial review.

The settlement resolves DOJ mortgage bond claims with a $2 billion civil penalty and includes $4 billion of consumer relief, another $4 billion to settle claims related to Freddie Mac and Fannie Mae, and another $1.4 billion to settle a National Credit Union Administration-instigated securities case. JPMorgan sold the mortgage bonds in question in the years heading into the housing market collapse. The loans that were involved lost value or defaulted when the bubble burst.

As part of the agreement, the firm acknowledged that it made “serious misrepresentations” about the MBS to investors. While the deal doesn’t release the bank from criminal liability, it grants civil immunity for its purported actions. Now, Better Markets, which describes itself as a “Wall Street” watchdog, is saying that the record settlement between the US government and JP Morgan was “unlawful” because a court did not review the deal.