Mortgage-Backed Securities

New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG

Published on: February 20, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Recently, a secret deal came to light involving the Federal Reserve Bank of New York bailing out Bank of America (BAC) that released the latter from all legal claims involving mortgage-backed securities losses that the former obtained when the government rescued American International Group (AIG) in 2008. Some believe that the bank was allowed to abscond responsibility even as AIG sought to recover $7 billion that was loss on these same MBSs.

According to The New York Times, as part of its settlement with BofA, the New York Fed obtained $43 million in a securities dispute involving two of the mortgage securities. For no compensation, the bank was released from all other legal claims.

The roots of this settlement can be traced back to 2008 when the government intervened to rescue AIG . Part of that aid involved AIG selling mortgage securities to Maiden Lane II, which the New York Fed oversees. At the time, the insurer was losing money from toxic mortgages, many of which came from BofA. AIG obtained $20.8 billion for securities valued at $39.2 billion.

JP Morgan Sued by Dexia in $1.7B MBS Lawsuit

Published on: February 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Dexia SA (DEXB) is suing JP Morgan Chase & Co. (JPM ) for over $1.7 billion. In its mortgage-backed securities lawsuit, the Belgian-French bank contends that the loans underlying the securities that the US bank sold it were riskier than what they were represented to be.

JP Morgan and its companies, Washington Mutual (WM) and Bear Stearns Co., are accused of “egregious” fraud for allegedly making and selling mortgage bonds backed by loans that they knew were “exceptionally bad.” Dexia claims it sustained substantial losses.

According to The New York Times, there are a slew of employee interviews and internal e-mails related to this MBS lawsuit that talk about how the three firms disregarded quality controls and problems—perhaps even concealing the latter—in order to make a profit from these mortgages that were packaged into complex securities. They are accused of seeking to avail of the mortgage-backed securities demand during the housing boom even as doubts began to arise about whether or not these investments were good quality. Court filings report that JPMorgan would get mortgages from lenders that didn’t have stellar records, assigning Washington Mutual and American Home Mortgage a “poor” grade on its “internal ‘due diligence scorecard.’” The loans were then swiftly sold off to investors.

Large Financial Firms Roundup: Securities Fraud Suit Against Citigroup is Dismissed by 2nd Circuit, AIG Wants to File MBS-Related Cases Against Banks, & District Court Reconsiders Partial Dismiss of Class Action Against Morgan Stanley in Pension Fund Case

Published on: January 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Second Circuit Dismisses Securities Fraud Lawsuit Against Citigroup

The U.S. Court of Appeals for the Second Circuit has affirmed the district court’s decision to throw out the securities fraud lawsuit filed by a real estate developer against Citigroup (C) and its former CEO Vikram Pandit. Sheldon H. Solow had accused both of them of allegedly making omissions and misstatements that highlighted the bank’s liquidity and capitalization while downplaying financial problems. Because of this, he contends, the financial firm’s stock price became artificially inflated and then fell when the truth about the firm’s financial health became known.

The appeals court held that while Solow, in his securities lawsuit, did an adequate job of pleading alleged misstatements and omissions about Citigroup’s liquidity, he did not succeed in showing that the statements caused his financial losses. It also dismissed his control-person claim against Pandit, saying that there was a failure to plead a primary violation by the bank.

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds

Published on: December 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has filed civil charges against Morgan Keegan founder Allen Morgan Jr. and several other former mutual fund board members for allegedly failing to supervise the managers accused of inaccurately pricing toxic mortgage-backed assets prior to the financial crisis. According to Reuters, this is a rare attempt by the regulator to hold a mutual fund’s board accountable for manager wrongdoing and it is significant. (Fund manager James Kelsoe hasconsented to pay a $500,000 penalty related to this matter and he is barred from the securities industry in perpetuity. Comptroller Joseph Thompson Weller consented to pay a $50,000 penalty.)

Last year, Morgan Keegan and Morgan Asset Management consented to pay $200 million to settle SEC subprime mortgage-backed securities fraud charges accusing them of causing the false valuations of the securities in five funds and failing to use reasonable pricing methods. (This allegedly led to “net asset values” being calculated for the funds.) The inaccurate daily NAVS would then be published and investors would buy shares at inflated prices. The funds’ value eventually declined significantly.

According to the Commission, the eight ex-board members violated laws mandating that fund directors help decide what a security’s fair value is when market quotations don’t exist. Instead of trying to figure out how fair valuation determinations work, the directors allegedly gave this task to a valuation committee but without providing “meaningful substantive guidance.”

Allen Morgan Jr., who is a Morgan Keegan cofounder, was CEO and Chairman until 2003.The seven other board members facing SEC charges include Kenneth Alderman, Mary S. Stone, W. Randall Pittman, Albert C. Johnson, James Stillman R. McFadden, Jack R. Blair, and Archie W. Willis III.

Already, Morgan Keegan is contending with over 1,000 arbitration lawsuits involving its bond funds that had invested in high risk MBS but were marketed as safe. When the subprime market collapsed, the funds lost up to 80% of their value.

Recently, Morgan Keegan and over 10,000 investors in a closed-end fund reached a $62 class million settlement. Lion Fund LP, the lead plaintiff and a Texas hedge fund, claimed that it had made a $2.1 million investment.

Morgan Keegan is owned by Raymond James (RJF), which bought the firm from Regions Financial Corporation. Other securities lawsuits still pending against it also involve conventional and open-ended funds.

Unfortunately, too many people and entities sustained huge losses because the risks of a number of types of securities leading up to the global crisis and the housing bubble’s implosion were downplayed by financial firms and their representatives. At Shepherd Smith Edwards and Kantars, our subprime mortgage-backed securities lawyers represent investors throughout the US. Contact our securities law firm today.

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation, SEC, December 10, 2012

SEC Order (PDF)

More Blog Posts:
Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

Morgan Keegan & Company Ordered by FINRA to Pay $555,400 in Texas Securities Case Involving Morgan Keegan Proprietary Funds, Stockbroker fraud Blog, September 6, 2011

Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011

Institutional Investor Securities Blog: Putnam Advisory Accused of Massachusetts Securities Fraud in $3B CDO Offerings, SEC Claims Yorkville Advisors Fixed Books To Attract Investors, and FINRA Seeks Comments on Revised Proposal Over Bond Market Research

Published on: October 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Massachusetts Securities Division is claiming that Putnam Advisory Co. deceived investors about its actual involvement in Pyxis 2006 and Pyxis 2007, two $1.5 billion collateralized debt obligations comprised of midprime and subprime mortgage-backed securities. In its administrative complaint, the state contends that Putnam represented to investors that it would act as an independent advisor when to the Pyxis CDOs when, in fact, Magnetar Capital, a hedge fund, was also involved creating in and structuring key aspects of both and even recommended that certain collateral to be included in them while then proceeding to take a substantial short position on that collateral. Putnam denies the allegations.

The state says that Magnetar proceeded to benefit from the downgrades of subprime assets in the two CDOs while making a net gain of about $67 million on aggressive positions and equity investments linked to the two of them. Meantime, Putnam earned $8.81 million in collateral management fees for the Pyxis CDOs. Massachusetts Secretary of Commonwealth William F. Galvin says that his office will continue to look at how banks misled the buyers of subprime mortgage-backed securitized debt instruments.

In other securities news, the SEC is accusing Yorkville Advisors LLC, its president and founder Mark Angelo, and CFO Edward Schinik of revising certain books to appeal to potential investors and succeeded in getting pension funds and funds of funds to invest $280 million into two Yorkville hedge funds. This allegedly let Yorkville charge at least $10 million in excessive fees. All three three defendants are denying the allegations.

Class Action MBS Securities Lawsuit Against Goldman Sachs is Reinstated by 2nd Circuit

Published on: September 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit has reinstated a would-be class action securities lawsuit accusing Goldman Sachs (GS) (in the role of underwriter) and related entities of misstating the risks involving mortgage-backed securities certificates. The revival is based on 7 of 17 challenged offerings, causing the appeals court to conclude that the plaintiff can sue on behalf of investors in mortgaged-back certificates whose lenders originated the mortgages backing the certificates that were bought. The 2nd Circuit said that those investors’ claims and the pension fund’s claims implicate the same concerns.

Per the court, NECA-IBEW Health & Welfare Fund is alleging violations of the Securities Act of 1933’s Sections 15, 12(a)(2), and 11 involving a would-be class of investors who bought certain certificates that were backed by mortgages that Goldman had underwritten and one of its affiliates had issued. The certificates were sold in 17 offerings pursuant to the same shelf registration statement but with 17 separate prospectus supplements that came with specific details about each offering.

In its class action securities lawsuit, the plaintiff alleged that the shelf registration statement had material misrepresentations about both the risks involving the instruments and underwriting standards that are supposed to determine the ability of a borrower to repay. A district court dismissed the lawsuit.

The Second Circuit acknowledged that NECA suffered personal injury from the defendants’ use of allegedly misleading statements in the offering documents linked to the certificates that it bought. However, whether the defendants’ behavior implicates the same concerns as their decision to include similar statements in the Offering Documents associated with other certificates is more difficult to answer.

While the plaintiff’s claims are partially based on general allegations of a deterioration in loan origination practices that is industry wide, the most specific claims link the allegedly abusive conduct to the 17 trusts’ 6 main originators. However, Wells Fargo Bank (WFC) and GreenPoint Mortgage Funding Inc., the only two entities that are the originators of the loans behind the certificates that the fund bought, are not defendants in this securities lawsuit.

That the alleged misrepresentations showed up in separate Offering Documents doesn’t alone bring up fundamentally different concerns because their location doesn’t impact a given buyer’s “assertion that the representation was misleading,” said the court. Because of this, and other reasons, the plaintiff has class standing to assert the claims of the buyers of the Certificates from the 5 other Trusts that have loans that were originated by Wells Fargo, Greenpoint, or both.

The second circuit said that the fund didn’t need to “to plead an out-of-pocket loss” to allege a cognizable diminution in the value of a security that was not liquid under that statute. Finding the “requisite inferences” in favor of the plaintiff, the appeals court said that not only was it “plausible,” but also it was obvious that mortgage-backed securities, such as the Certificates, would experience a drop in value because of ratings downgrades and uncertain cash flows. The fund “plausibly alleged” a distinction between how much it paid for the certificates, their value, and when the class action MBS lawsuit was filed.

NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., Justia (PDF)

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme

Published on: August 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Connecticut has decided that the Federal Housing Finance Agency can begin the discovery process in its lawsuit over $190 million in mortgage-backed securities that were sold to Freddie Mac (FMCC) and Fannie Mae (FNM.MU) through several hundred securitizations. FHFA is suing financial firms and banks, contending that they did not properly represent the risks involved in the loans backing these MBS. This ruling rejects an attempt by Royal Bank of Scotland (RBS) to stall discovery.

To stop the discovery process from beginning, Royal Bank of Scotland contended that the Private Securities Litigation Reform Act (PSLRA) mandates a stay of discovery until a motion to dismiss is resolved. The bank said that under PSLRA, FHFA’s lawsuit is a private cause of action because the agency is maintaining the action for private firms. Royal Bank of Scotland also argued that under the Securities Act or PSLRA, there is “no ‘public’ investor suit.” Judge Alvin W. Thompson, however, did not agree and granted permission to FHFA to begin discovery while noting that the agency is suing as a conservator and therefore the concerns that Congress had in choosing to enact PSLRA don’t exist in this case.

In an unrelated securities fraud case, the SEC is suing Ricardo Banally Rajas of Puerto Rico and his firm Shadai Yire over their alleged involvement in a $7M Ponzi scam that targeted about 200 unsophisticated investors, both from the mainland and the island, between August 2005 and February 2009. Rajas is accused of hiring sales agents that worked on commission while making a number of misrepresentations to get investors to join up. Also, the Commission says that Rajas would recruit through individual conversations and group presentations, promising to pay investors 15-50% yearly return rates while claiming that this was a risk-free investment in Shadai Yire subsidiary M & R International Group, Corp., which would then invest in commodities contracts. Unfortunately, Rajas did not invest these clients’ money, instead using the funds to pay off investors with newer investors’ cash. He also allegedly misappropriated at least $700K to support for his lifestyle. The SEC wants disgorgement, injunctions, and fines.

Institutional Investment Roundup: Madoff Ponzi Victims to Get 2nd Payout, Insurer’s MBS Lawsuit Against UBS Can Proceed, SEC Charges 2 in $10M Penny Stock Scam, & Hedge Fund Manager Found Guilty in $900K Insider Trading Scheme

Published on: August 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Bankruptcy Court for the Southern District has issued an order giving Irving Picard, the Bernard L. Madoff Investment Securities LLC liquidation trustee, permission to issue a second interim distribution to the victims of the Madoff Ponzi scam. Picard had asked to add $5.5 billion to the customer fund and issue a second payout of $1.5 billion to $2.4 billion to the investors that were harmed.

According to Bloomberg Businessweek, a $2.4 billion payout would be seven times more than what the bilked investors have been able to get back since Madoff, who is serving a 150-year prison term for his crimes, defrauded them. A huge part of the customer fund is on reserve because there are investors who have filed securities lawsuits contending they should be getting more.

Meantime, the U.S. District Court for the Southern District of New York has decided that the mortgage-backed securities lawsuit filed by insurance company Assured Guaranty Municipal Corp. against UBS Real Estate Securities Inc. can proceed. The plaintiff contends that UBS misrepresented the quality of the loans that were underlying the MBS it insured in 2006 and 2007.

Shareholder Lawsuit Against Goldman Sachs CEO and Other Financial Firm Executives is Dismissed

Published on: August 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In the US District Court for the Southern District of New York, the shareholder complaint against a number of Goldman Sachs Group (GS) executives, including CEO Lloyd Blankfein, COO Gary Cohn, CFO David Viniar, and ex-director Rajat Gupta, has been dismissed. The lead plaintiffs of this derivatives lawsuit are the pension fund Retirement Relief System of the City of Birmingham, Alabama and Goldman shareholder Michael Brautigam. They believe that the investment bank sponsored $162 billion of residential mortgage-backed securities while knowing that the loans backing them were in trouble. They say that Goldman then proceeded to sell $1.1 billion of the securities to Freddie Mac and Fannie May. Their securities complaint also accuses the defendants of getting out of the Troubled Asset Relief Program early so they could get paid more.

According to Judge William Pauley, the plaintiffs did not demonstrate that “red flags” had existed for bank directors to have been able to detect that there were problems with the “controls” of mortgage servicing business or that problematic loans were being packaged with RMBS. He also said that the shareholders did not prove that firm directors conducted themselves in bad faith when they allowed Goldman to pay back the $10 billion it had received from TARP early in 2009, which then got rid of the limits that had been placed on executive compensation.

Even with this shareholder complaint against Goldman tossed out, however, the investment bank is still dealing with other shareholder lawsuits. For example, they can file securities lawsuits claiming that they suffered financial losses after Goldman hid that there were conflicts of interest in the way several CDO transactions were put together.

Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs

Published on: August 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Wells Fargo Securities, formerly known as Wells Fargo Brokerage Services, and former VP Shawn McMurtry for selling complex investments to institutional investors without fully comprehending the investments’ level of sophistication or disclosing all of the risks involved to these clients. To settle the securities charges, Wells Fargo will pay a penalty of over 6.5 million, $16,571.96 in prejudgment interest, and $65,000 in disgorgement.

According to the Commission, Wells Fargo engaged in the improper sale of asset-backed commercial paper that had been structured with risky collateralized debt obligations and mortgage-backed securities to non-profits, municipalities, and other clients. The SEC contends that the financial firm did not secure enough information about the instruments, even failing to go through the investment private placement memoranda (and the risk disclosures in them), and instead relied on credit ratings. With this alleged lack of comprehension of the actual nature of these investment vehicles and the risks and volatility involved, as well as having no basis for making such recommendations, Wells Fargo’s Institutional Brokerage and Sales Division representatives went ahead and recommended the instruments to certain investors who had generally conservative investment objectives.

These allegedly improper sales happened between January and August 2007 when representatives recommended to certain institutional investors that they buy ABCP that were structured investment vehicles that were primarily CDO and MBS-backed (SIVs and SIV-Lites). Unfortunately, a number of the investors that did buy the SIV-issued ABCP, per Wells Fargo’s recommendation, lost money when 3 of these programs defaulted that same year.