Miscellaneous

M & T Bank Settle Fraud Case for $64M

Published on: May 18, 2016 | by Shepherd Smith Edwards & Kantas, LLP

M & T Bank (MTB) will pay the U.S. government $64M to resolve a lawsuit about housing loans. The case stems from a whistleblower case filed by an ex-M & T underwriter accusing the bank of underwriting fraud. Following its investigation, the Department of Justice said that M & T had awarded loans that failed to meet certain Federal Housing Administration (FHA) requirements.

As part of the deal reached, M & T Bank admitted that between 1/07 and 12/11, it certified mortgage loans that were insured by the FHA even though they did not satisfy the Department of Housing and Urban Development’s (HUD) underwriting requirements and failed to adhere to the federal government’s quality control requirements. M & T Bank also admitted that before 2010, it did not preview every Early Payment Default loan, which are loan that become 60 days past due during the first six months of repayment, nor did it review an adequate FHA loan sample between ’06 and ’11 even though this was an HUD requirement.

M & T also established a quality control process that let it generate preliminary major errors that were much lower than what that rate would have been if the preliminary major error rate were determined more appropriately. The bank did not abide by HUD’s self-reporting requirements even after identifying that a number of FHA insured loans had these “major errors.” It wasn’t until 2008 that it began to self-report loans with errors.

GL Capital Partners Ex-CEO Pleads Guilty to $15M Fraud

Published on: March 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Daniel Thibeault, the ex-CEO of GL Capital Partners, has entered a guilty plea to criminal charges accusing him of bilking fund investors of $15M. According to the Securities and Exchange Commission, Thiebeault used funds that were in the GL Beyond Income Fund to make fake consumer loans.

Meanwhile, investors were led to believe that their money was going toward buying or making real consumer loans. They hoped to make a return from the interest. Instead, the fake loans were reported as GL Beyond Income Fund assets to hide the money that Thibeault was misappropriating.
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Foreign Corrupt Practices Act Violation Allegations: VimpelCom, Qualcomm, and PTC Inc. Settle with Regulators

Published on: February 28, 2016 | by Shepherd Smith Edwards & Kantas, LLP

VimpelCom Resolves FCPA Violations for $795M
The U.S. Securities and Exchange Commission, the U.S. Department of Justice, and regulators in the Netherlands have arrived at a global settlement with VimpelCom Ltd. to resolve Foreign Corrupt Practices Act violations. The telecommunications provider purportedly committed the offenses in order win business in Uzbekistan.

According to the regulator, the company offered bribes to an Uzbek government official who was the relative of Uzbekistan’s President, just as VimpelCom entered that nation’s telecommunications market. VimpelCom needed government-issued licenses, channels, frequencies, and mobile blocks. At least $114M in bribes were funneled through an entity with ties to the official who was bribed, while about $500K was hidden under the guise of “charitable donations” that were also affiliated to the same official.

As a result of the alleged FCPA violations, said the SEC, the telecommunications company earned massive revenues in Uzbekistan. As part of the settlement, VimpelCom will pay $167.5M to the SEC, $130.1M to the DOJ, and $397.5M to Dutch regulators.

PTC Inc. is Accused of Bribing Chinese Officials to Win Business
PTC Inc. and its two Chinese subsidiaries (PTC-China) have consented to collectively pay $28M to resolve civil and criminal actions accusing them of violating the Foreign Corrupt Practices Act. According to the regulator, the two subsidiaries provided improper payments and non-business related travel to Chinese government officials to garner business. The SEC order, which institutes a settled administrative proceeding against the Massachusetts-based technology company, states that the two subsidiaries spent almost $1.5M on improper travel, entertainment, and gifts for the Chinese government officials who worked for state-owned entities that were customers of PTC. This purportedly made the company about $11.8M in profits from sales contracts with these entities.

Aequitas Lays Off More Employees in the Wake of Faulty Subprime Bets

Published on: February 12, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In the second round of layoffs, Aequitas Capital Management announced that it is letting of even more workers in the wake of financial problems. A week after disclosing that it would lay off about a third of its workers, the investment firm told employees that almost everyone else would have to go. Workers were given 60 days notice. A spokesperson for Aequitas explained that the Oregon-based investment firm was modifying its strategy and changing its business model.

The firm which manages investments for rich individual investors appears to be having serious cash flow issues. This is a definite about-face for a company that once held $500 million in assets under management. Not only was it a challenge for Aequitas to make payroll during the first month of this year, but also the firm angered investor clients last year when it told them that it couldn’t meet scheduled payouts because of liquidity issues. Company officials claimed that the delays were unexpected because of “incoming investments” and “timing mismatches involving cash flow.”

Over the last few years, the investment firm has become more focused on subprime credit to purchase consumer healthcare debt, student debt, and motorcycle loans. In total, investors have bet close to $600M on Aequitas’ subprime lending strategies.

Aequitas was also connected Corinthian Colleges Inc., which has been accused by federal regulators of using deceptive and predatory tactics to get students to enroll and borrow money for tuition. According to The Oregonian, a firm affiliate purchased over $500M in Corinthian student loans at a reduced rate and charged the college chains millions of dollars in fees for its assistance. The company had set up the Campus Student Funding LLC to purchase the debt from Corinthian.

Chesapeake Energy Corp. Stops Investor Payouts After Its Shares Plummets

Published on: February 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. natural gas driller Chesapeake Energy Corp. (CYC) has been halting investor payouts and cutting jobs to keep its cash flow from drying up. Now, with its shares dropping 51% following reports by Debtwire that the company has hired restructuring attorneys to help deal with its $9.8 billion debt, investors may have a reason to worry. During the first hour of trading alone on Monday, $838M in market value was eliminated.

Chesapeake has a debt load that is eight times larger than its market value. Even though it pumps more gas in the U.S. than any driller besides Exxon Mobil Corp., Chesapeake has $1.3B in debts that are scheduled to mature by the end of next year.

Last month, Standard & Poor’s reduced Chesapeake’s credit rating to CCC+, while issuing a negative outlook that gas and oil prices would stay on the weak end. S & P declared the natural gas driller’s debt leverage “unsustainable.

Investors are not the only ones at risk now that Chesapeake is in trouble. Oil and gas pipeline companies, many of which are master limited partnerships, with contracts worth billions of dollars could also take a hit. Companies with contracts with Chesapeake include Kinder Morgan Inc., Williams Companies Inc., Marathon Petroleum Corp’s unit MPLX LP, Columbia Pipeline Partners LP, and Spectra Energy Partners LP. Reuters reports that according to federal filings, Chesapeake said it is on the line for about $2B a year for pipeline space run by MLPs.
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Plummet in Oil Prices is a Worry to Investors

Published on: February 4, 2016 | by Shepherd Smith Edwards & Kantas, LLP

With oil prices plummeting, investors may have reason for concern. This week, ConocoPhilip cut its dividend by two-thirds because of the drop in oil prices to $30/barrel. Its dividend went from 74 cents/share to 25 cents/share
And Conoco isn’t the only company whose dividends are in trouble because of cheap oil. In January, Noble Energy slashed dividend payout by 44%. Last year, Eni (E) in Italy also made a substantial dividend cut, as did pipeline company Kinder Morgan with a 75% cut in December. Investors are worried that big oil companies, such as Chevron (CVX) and ExxonMobil (XOM), may be next.

Such speculation wasn’t helped by the abrupt liquidation of a $600M leveraged fund bet on falling prices. According to Reuters, unknown investors in the VelocityShares 3x Inverse Crude Oil Exchange Traded Note left the fund after jumping in just last month. Over 1.8M shares of $602M were redeemed, which, according to FactSet Research data, is the largest ETN outflow over the past year. Credit Suisse (CS), the ETN’s issuer, was forced to repurchase short positions in quick measure.
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Diversified Stock Funds Drop in Value

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

A number of diversified stock funds posted significant losses at the end of the January. For example, funds seeking underpriced stocks saw their holdings lose value as did value funds. Here is a list (From Morningstar):

· PIMCO RAE Fundamental Plus EMG (PEFIX)

· Templeton Foreign A

401(K) Plan Lawsuit Accuses Anthem of Charging Excessive Fund Feeds

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

Participants in Anthem Inc.’s 401(K) plan are accusing the plan’s fiduciaries of breaching their fiduciary duties under the Employee Retirement Income Security Act of 1974. They claim that the fiduciaries churned excessive administrative and investment management fees in Vanguard mutual funds. Vanguard Group is the fund’s record-keeper.

According to plaintiffs, the plan fiduciaries chose mutual fund share classes that were “high-priced” instead of equivalent ones that didn’t cost as much and were also available to the plan. As of 12/14, Anthem’s 401(k) plan offered 11 Vanguard mutual funds, including Institutional and Admiral share classes: Vanguard target-date collective investment trust funds, a fund offered by Touchstone Investments, funds by Artisan Partners, and an Anthem common stock fund. The lawsuit claims that each fund in the plan charged fees excessive to what Anthem could have gotten elsewhere with funds that were comparable.

The Anthem 401(k) fund participants also contend that Vanguard was paid excessive fees for record-keeping related services from ’10-’13, which was when the plan paid about $80-$94/participant for record keeping through revenue-sharing and hard-dollar fees. It wasn’t until 9/13 that the cost was reduced to a flat yearly fee of $42/participant.

The plaintiffs argued that a reasonable fee’s “outside limit” for this particular plan should have been no higher than $30. The class-action securities case also claims that instead of including a stable value fund in the plan, there was a money market fund that generated returns that were “microscopic.”

Oil Companies Expected to Default

Published on: November 11, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Unpaid debt incurred by oil companies to pay for new drilling equipment and rigs could lead to a number of them defaulting. According to CNN, many of these companies had expected prices for oil to hit the $100 range when they incurred the debt and are now contending with oil prices of about $45 and no sign of the original expectation being met in the near future.

Unlike a year ago, when low interest rates and junk bond markets helped spur the energy boom in the United States and inexpensive credit let companies invest in new technologies for oil drilling, there has been a rise in credit costs. At ETF.com’s recent Fixed Income Conference, DoubleLine Capital founder Jeffrey Gundlach said that while US production of oil has slowed, the inventories for domestic crude oil levels have stayed high.

In August, Moody’s Investors Services said that it expected more US oil companies to default because banks have become stricter about lending standards and contracts that had committed to higher crude prices for production in the future get set to expire. The credit rating agency said that the energy sector would be a main default driver in 2016.
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DOL Says It Will Modify Fiduciary Rule Proposal Involving Retirement Accounts

Published on: July 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of criticism regarding its proposed rule to enhance the investment advice standards that brokers must abide by when working with retirement accounts, the U.S. Department of Labor official reportedly will make modifications. Under the current proposal, brokers would have to act in their clients’ best interests in individual retirement accounts and 401(k) accounts.

The Labor Department introduced the fiduciary rule proposal earlier this year with the backing of the White House. Public comments were sought.

Members of the financial industry have been critical of the proposal’s provision over best interest contract exemption. By signing a legally binding duty with a client to be in a fiduciary relationship with him/her, a broker is entitled to collect compensation in numerous ways, including commissions, as long as he/she acts in that client’s best interests. Some have expressed concern that such an agreement at the start of talks between a potential client and a broker could be problematic. Others are worried that certain costly changes would have to take place for brokers and their firms abide by the rule, and clients may end up having to foot the extra fees.