Mortgage-Backed Securities

SEC and DOJ Sue Bank of America Over Alleged $850M RMBS Fraud

Published on: August 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America (BAC) and two subsidiaries are now facing SEC charges for allegedly bilking investors in an residential mortgage-backed securities offering that led to close to $70M in losses and about $50 million in anticipated losses in the future. The US Department of Justice also has filed its securities lawsuit over the same allegations.

In its securities lawsuit, submitted in U.S. District Court for the Western District of North Carolina, the Securities and Exchange Commission contends that the bank, Bank of America Mortgage Securities (BOAMS) and Banc of America Securities LLC, which is now known as Merrill Lynch, Pierce, Fenner & Smith, conducted the RMBS offering, referred to as the the BOAMS 2008-A and valued at $855 million, in 2008. The securities was sold and offered as “prime securitization suitable for the majority of conservative RMBS investors.

However, according to the regulator, Bank of America misled investors about the risks and the mortgages’ underwriting quality while misrepresenting that the mortgage loans backing the RMBS were underwritten in a manner that conformed with the bank’s guidelines. In truth, claims the SEC, the loans included income statements that were not supported, appraisals that were not eligible, owner occupancy-related misrepresentations, and evidence that mortgage fraud was involved. Also, says the regulator, the ratio for original-combined-loan-to-value and debt-to-income was not calculated properly on a regular basis and, even though materially inaccurate, it was provided to the public.

Liquidators of Bear Stearns Hedge Funds Sue S & P, Moody’s and Fitch for $1.12B

Published on: August 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Liquidators are suing Moody’s Investors Service (MCO), Standard & Poor’s, and Fitch Ratings over their issuing of allegedly fraudulent and inflated ratings for the securities belonging to two offshore Bear Stearns (BSC) hedge funds. The plaintiffs are seeking $1.12 billion.

The credit raters are accused of misrepresenting their autonomy, the timeliness of their residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) ratings, and the quality of their models. Because of the purportedly tainted ratings for securities that were supposedly “high-grade,” the funds lost $1.12B.

The funds, which were operated by Matthew Tannin and Ralph Cioffi, failed in 2007. The US government later pursued the two men for securities fraud, but they were acquitted. They did, however, settle an SEC securities case over related allegations last year.

Both Sides Rest in Ex-Goldman Sachs Bond Trader Fabrice Tourre’s Trial For Alleged Mortgage-Backed Securities Fraud

Published on: July 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In federal court, both the Securities and Exchange Commission and former Goldman Sachs Group (GS) vice president Fabrice Tourre have both rested their case in the civil trial against the bond trader. Tourre is accused of MBS fraud for his alleged involvement in a failed $1 billion investment connected to the collapse of the housing market. After the SEC finished presenting its evidence, U.S. District Judge Katherine Forrest turned down Tourre’s bid to have the securities case against him thrown out. He denies wrongdoing and says that his career is in now in shambles.

According to the regulator, Tourre purposely misled participants in the Abacus 2007-AC about the involvement of John Paulson’s hedge fund Paulson and Co. The Commission contends that Tourre concealed that Paulson helped select the portfolio of the subprime MBS underlying Abacus—a $2 billion offering linked to synthetic collateralized debt obligations. The latter then shorted the deal by betting it would fail.

The SEC’s complaint points to Tourre as primarily responsible for the CDO, which it says says he devised and prepped marketing collateral for and was in direct contact with investors. The regulator believes that by failing to disclose Paulson’s role, Tourre broke the law. They also contend that instead the bond trader instead told customers that as an Abacus investor, Paulson’s hedge fund expected the securities to go up.

Financial Firm Roundup: Citigroup Settles $3.5B MBS Lawsuit with FHFA, JPMorgan Unit Fined $4.64M, Court Won’t Dismiss USB Whistleblower’s Action, & Ex-Goldman Sachs Executive to Pay $100K Over Pay-To-Play Scam

Published on: June 8, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup (C) Settle $3.5B securities lawsuit Over MBS Sold to Freddie Mac, Fannie Mae

Citigroup has settled the $3.5 billion mortgage-backed securities filed with the Federal Housing Finance Agency. The MBS were sold to Freddie Mac and Fannie Mae and both sustained resulting losses. This is the second of 18 securities fraud cases involving FHFA suing banks last year over more than $200B in MBS losses by Fannie and Freddie. The lawsuit is FHFA v. Citigroup.

J.P. Morgan International Bank Ltd. Slapped with $4.64M Fine by UK Regulator

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement

Published on: June 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

American International Group (AIG) and Maiden Lane II dismissing lawsuit against the Federal Reserve Bank of New York regarding the $182.3 billion financial bailout that the insurer received during the 2008 economic crisis. In dispute was whether AIG still had the right to pursue a lawsuit over residential mortgage-backed securities losses and if the company had moved $18 billion of litigation claims to Maiden Lane, which is a New York Fed-created entity.

An AIG spokesperson said that in the wake of a recent ruling by a district judge in California that the company did not assign $7.3 billion of the claims to Maiden Lane, both are dropping their action without prejudice. This means that AIG can now pursue Bank of America (BAC) for these claims, which is what the insurer wants to do.

Bank of America had said that AIG could not sue it over the allegedly fraudulent MBS because the latter transferred that right when the New York Fed bought the instruments in question 2008. However, according to Judge Mariana R. Pfaelzer, even if the New York Fed meant for Maiden Lane II to have these claims, that intention was not made clear.

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis

Published on: May 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Central District of California, Standard & Poor’s Financial Services LLC is asking for the dismissal of a US Department of Justice securities fraud lawsuit accusing the ratings firm of knowing that it was issuing faulty ratings to collateralized debt obligations and residential mortgage-backed securities during the financial crisis. S & P is contending that the claims are against judicial precedent and don’t establish wrongdoing.

The government sued the credit rating giant and its parent company McGraw-Hill Companies Inc. (MHP) earlier this year. It claims that S & P took part in a scheme to bilk investors by wrongly representing that its ratings for collateralized debt obligations and residential mortgage backed securities were independent and objective, purposely giving artificially high ratings to specific securities, and ignoring the risks involved. Submitted under the 1989 Financial Institutions Reform, Recovery, and Enforcement Act, this is the first federal legal action filed against a rating agency related to the economic crisis.

Now, however, S & P is arguing that the DOJ’s RMBS lawsuit does not succeed in alleging fraud. The credit rater says that it shouldn’t be blamed for not having been able to foresee the financial crisis of 2008.

Standard Poors Wants DOJ’s Mortgage Debt Lawsuit Against It Tossed

Published on: April 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Standard Poors is asking a judge to dismiss the US Justice Department’s securities lawsuit against it. The government claims that the largest ratings agency defrauded investors when it put out excellent ratings for some poor quality complex mortgage packages, including collateralized debt obligations, residential mortgage-backed securities, and subprime mortgage-backed securities, between 2004 and 2007. The ratings agency, however, claims that the DOJ has no case.

Per the government’s securities complaint, financial institutions lost over $5 billion on 33 CDOs because they trusted S & P’s ratings and invested in the complex debt instruments. The DOJ believes that the credit rater issued its inaccurate ratings on purpose, raising investor demand and prices until the latter crashed, triggering the global economic crisis. It argues that certain ratings were inflated based on conflicts of interest that involved making the banks that packaged the mortgage securities happy as opposed to issuing independent, objective ratings that investors could rely on.

Now, S & P is claiming that the government’s lawsuit overreaches in targeting it and fails to show that the credit rater knew what the more accurate ratings should have been, which it contends would be necessary for there to be grounds for this CDO lawsuit. In a brief submitted to the United States District Court for the Central District of California, in Los Angeles, S & P’s lawyers argue that there is no way that their client, the Treasury, the Federal Reserve, or other market participants could have predicted how severe the financial meltdown would be.

UBS Loses Appeal to Have FHFA’s $6.4 Billion MBS Fraud Lawsuit Dismissed

Published on: April 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The US Court of Appeals for the Second Circuit is denying UBS AG’s (UBSN) bid to dismiss the Federal Housing Finance Agency’s mortgage-backed securities lawsuit accusing the financial firm of misrepresenting the quality of the loans underlying the residential MBS that Freddie Mac and Fannie Mae bought. FHFA is the mortgage financiers’ appointed conservator.

In its appeal, UBS contended that the MBS lawsuit was filed too late under federal law. However, the 2nd circuit, affirming U.S. District Judge Denise Cote’s ruling, determined that the filing period for type of securities case was extended by the Housing and Economic Recovery Act of 2008.

The RMBS lawsuit is one of 17 FHFA cases against large financial institutions over alleged misrepresentations involving over $200 million in mortgage-backed securities. Judge Cote is presiding over 15 of these MBS lawsuits.

RMBS Lawsuit Against Deutsche Bank Can Proceed, Says District Court

Published on: April 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York is refusing to throw out the shareholder securities fraud lawsuit filed against Deutsche Bank (DB) and three individuals over their alleged role in marketing residential mortgage-backed securities and mortgage-backed securities before the economic crisis. The court found that the plaintiffs, led by Building Trades United Pension Fund, the Steward International Enhanced Index Fund, and the Steward Global Equity Income Fund, provided clear allegations that omissions and misstatements were made and there had been a scam with intent to defraud.

The RMBS lawsuit accuses Deutsche Bank of putting out misleading and false statements regarding its financial health prior to the financial crisis. The plaintiffs contend that the financial firm created and sold MBS it was aware were toxic, while overstating how well it could handle risk, and did not write down fast enough the securities that had dropped in value. Because of this, claim the shareholders, the investment bank’s stock dropped 87% in under 24 months.

U.S. District Judge Katherine Forrest said that the plaintiffs did an adequate job of alleging that even as Deutsche Bank talked in public about its low risk lending standards, senior employees at the firm were given information showing the opposite. She said that there are allegations of recklessness that are “plausible.” The district court also found that the complaint adequately alleged control person and antifraud violations involving defendants Chief Executive Officer Josef Ackermann, Chief Financial Officer Anthony Di Iorio, and Chief Risk Officer Hugo Banziger, who are accused of making material misstatements about the risks involved in investing in CDOS and RMBS while knowing they were less conservative than what investors might think. Claims against defendant ex-Supervisory Board Chairman Clemens Borsig, however, were thrown out due to the plaintiffs’ failure to allege that he made an actual misstatement.

2nd Circuit Eases MBS Lawsuits by Reinstating Pension Fund’s Case Against Wells Fargo, Royal Bank of Scotland, Wachovia, & Others

Published on: March 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit has reinstated New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group PLC (RBS), which also includes defendants Wells Fargo Advisors (WFC), McGraw-Hill (MHP), and a number of others. The decision will ease class action mortgage-backed securities lawsuits by investors.

Holding that the plaintiff did not satisfy pleading requirements under the Securities Act of 1933 for lawsuits, a district court had thrown out the case, which was filed by the New Jersey pension fund. The 2nd circuit, however, reversed the ruling, finding that the allegations made (that an unusually high number of mortgages involving a security had defaulted, credit rater agencies downgraded the ratings of the security after modifying how they account for inadequate underwriting, and ex-employees of the relevant underwriter vouched that underwriting standards were being systematically ignored) make a plausible claim that the security’s offering documents incorrectly stated the applicable writing standards. This would be a Securities Act of 1933 violation.

Expected to benefit from the ruling are federal credit union regulators, including the National Credit Union Administration, which has submitted a number of MBS lawsuits against financial firms and banks. Last year, NCUA filed a $3.6 billion action against JP Morgan Chase (JPM) accusing the latter’s Bear Stearns & Co. unit of employing misleading documents to sell mortgage-backed securities to four corporate credit unions that went on to fail. The credit union agency contends that the mortgage in the pools collateralizing the RMBS (residential mortgage-backed securities) did not primarily adhere to underwriting standards noted in the offering statements and the securities were much riskier than what they were represented to be. NCUA has also sued a few of the defendants that the New Jersey Carpenters Health Fund is suing, as well as Goldman Sachs Group (GS) and Barclays.