Mortgage-Backed Securities

Barclays Fights $31B Residential Mortgage-Backed Securities Fraud Lawsuit

Published on: October 11, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In New York federal court, Barclays PLC (BAC) is trying to get the US government’s civil residential mortgage-backed securities fraud lawsuit against it dismissed. Prosecutors went after the British bank, a number of its affiliates, and two ex-employees—former mortgage securitizations head Paul Menefee and former subprime loan acquisitions head trader John T. Carroll.

The government contends that the defendants misrepresented the loans packaged in 36 securitizations from 2005 through 2007 were doing well when, in fact, thousands of them had been deemed defective during the vetting process, with hundreds more in default or delinquent.

The RMBS fraud lawsuit is accusing Barclays of letting the loans be packaged into the securitizations despite knowing they were faulty, and even, on occasion, adding in faulty loans that had already been removed from other deals. According to the government, the securitizations failed badly, over half of the mortgages underlying them defaulted, and investors, including banks that were investors, lost billions of dollars.

Former Mortgage Security President Pleads Guilty to Defrauding Ginnie Mae of $2.5M

Published on: October 7, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Robert Pena, the president and founder of Mortgage Securities Inc., has pleaded guilty to bilking Government National Mortgage Association (Ginnie Mae) of about $2.5M. The now defunct mortgage company was contracted by the government-run corporation, which guarantees mortgage-backed bonds that have been guaranteed by a US government agency, to pool and service eligible residential mortgages. This included collecting principal and interest payments and depositing the money into accounts that Ginnie Mae-held in trust. The company was then supposed to sell the Ginnie Mae-backed mortgage bonds to investors.

However, court documents state that starting in 2011, Pena allegedly diverted funds that borrowers sent his mortgage company, including big-dollar loan payoff checks, into secret, private accounts. He is accused of spending the money on his own business expenses and personal bills. He also purportedly took the escrow funds of borrowers, as well as mortgage-insurance premiums.

Pena is accused of hiding the mortgage fraud by sending Ginnie Mae false reports. The latter was forced to pay investors the about $2.5M that Pena allegedly misappropriated because it had guaranteed their investments.

Appeals Court Upholds $839M MBS Fraud Judgment Against Royal Bank of Scotland Group & Nomura

Published on: September 28, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In a unanimous ruling, a U.S. Court of Appeals for the 2nd Circuit panel has turned down an appeal by Royal Bank of Scotland Group Plc (RBS) and Nomura Holdings Inc. (NMR) to overturn an order mandating that they pay $839M for the false statements, including misrepresentations, that they are accused of making while selling mortgage-backed securities to Freddie Mac (FMCC) and Fannie Mae (FNMA). The MBS fraud award was issued against the two banks in the Federal Housing Finance Agency’s securities lawsuit. FHFA has been the conservator for Fannie and Freddie ever since the US government took them over after the housing market failed in 2008.

Nomura sponsored $2B of securities that were sold to the mortgage companies. RBS was the underwriter on four of the deals. In a filing submitted to US securities regulators last month, RBS said it is looking to be indemnified by Nomura for the losses.

Royal Bank of Scotland Settles FHFA’s MBS Securities Probe For $5.5B

Published on: July 12, 2017 | by Shepherd Smith Edwards & Kantas, LLP

This week, Royal Bank of Scotland Group PLC (RBS) has agreed to pay the Federal Housing Finance Agency $5.5B to resolve the latter’s investigation into the UK government-controlled bank’s sale of toxic mortgage-backed securities to mortgage giants Freddie Mac and Fannie Mae leading up to the 2008 financial crisis. RBS has come under fire for the way it packaged and sold subprime mortgages. The violations allegedly involved private-label residential mortgage-backed securities (PLS) trusts that were purchased between 2005 and 2007.

RBS will pay Freddie Mac about $4.5B and approximately $975M to Fannie Mae to resolve this RMBS fraud case. However, the bank is eligible for a $754M reimbursement according to certain indemnification agreements.

RBS had previously reached, for $1.1B, separate settlements over similar MBS fraud claims that the US National Credit Union Administration had brought in Kansas and California. It remains under investigation by the US Department of Justice and several US agencies who are conducting their own mortgage-backed securities fraud probes.

Jury Finds One Former Nomura Trader Guilty, Acquits Another in RMBS Fraud Case

Published on: June 15, 2017 | by Shepherd Smith Edwards & Kantas, LLP

A jury has found Michael Gramins guilty of conspiracy to lie about mortgage bond prices. Gramins was one of three ex-Nomura (NMR) residential mortgage-backed securities traders charged with fraud and accused of defrauding clients of millions of dollars.

Aside from the guilty RMBS fraud verdict for conspiracy, Gramins was found not guilty of six fraud counts. The jury did not arrive at a verdict on two other charges against him.

Meantime, ex-Nomura trader Tyler Peters was acquitted on all of the criminal fraud charges against him. Although jurors cleared former Nomura trader Ross Shapiro of eight fraud counts, they were unable to arrive at a verdict regarding one conspiracy count against him. It wll be up to prosecutors to decide whether they want to retry Gramins and Shapiro on the counts that were not resolved.

Ex-Nomura Head Traders Charged With Securities Fraud

Published on: May 18, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is charging two-ex Nomura (NMR) head traders with fraud. Kee Chan and James Im ran Nomura Securities International Inc.’s commercial mortgage-backed securities desk. The regulator claims that they purposely lied to customers to inflate profits for themselves and the firm. As a result, said the SEC, the two of them made an additional over $750K in trading profits for the desk. They received healthy bonuses as a result.

Commercial Mortgage-Backed Securities
CMBSs are asset-backed securities that have commercial real estate loans as their underlying assets. These debt obligations are often called bonds. CMBSs are illiquid securities.

According to the Commission, while serving as trade intermediaries with customers seeking to sell and buy CMBSs on the secondary market, Im and Chan made it seem as if they were working out bond purchases with a third-party seller at more than what Nomura paid to obtain the bonds. Im even allegedly told a customer that he had sought to deceive on purpose. Meantime, Chan is accused of modifying a customer email to protect his lie regarding a bond’s bid price.

Hedge Funds Under Investigation Over Bond Valuations

Published on: May 11, 2017 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg, US prosecutors are conducting a criminal probe into whether hedge funds inflated the value of bonds to enhance the fees they were paid. Sources told the news media outlet that prosecutors want to know whether hedge funds solicited fake price quotes from brokers, which would have let the funds artificially raise the value of illiquid securities in their portfolios.

Just this week, a witness in the residential mortgage-backed securities fraud criminal trial against three ex-Nomura Holdings Inc. traders—they are accused of lying about RMBS prices to clients—stated under oath that he had given a Premium Point Investments LP trader fake quotes. The witness, ex-broker Frank DiNucci Jr., claims that two of the defendants, Michael Gramins and Ross Shapiro, are among the ones that trained him to lie to customers about bond prices. DiNucci, who pleaded guilty to fraud and conspiracy and making misrepresentations,previously worked at Nomura. He also worked at Auriga USA LLC and AOC Securities LLC.

Because certain securities are hard to price, hedge funds depend on brokers and third parties for estimates and quotes to determine how to value debt. Holding artificially inflated securities in the portfolios can allow a hedge fund to tout a better performance and get paid more for performance and management fees. It also allows them to conceal when some holdings do poorly.

UBS and Credit Suisse Settle Mortgage-Backed Securities Cases With for $445M and $400M, Respectively

Published on: May 4, 2017 | by Shepherd Smith Edwards & Kantas, LLP

UBS Group AG (UBS) has paid the National Credit Union Administration $445M to settle claims brought on behalf of Western Corporate Federal Credit Union and U.S. Central Federal Credit Union, which both failed after they sustained losses from residential mortgage-backed securities they purchased through the broker-dealer.The two credit unions went into conservatorship several years ago and have since shut down.

UBS settled this latest case without denying or admitting to wrongdoing. The lender had previously paid NCUA $79.3M to resolve similar allegations involving two other credit unions that also failed. With that settlement, the bank also did not deny or admit wrongdoing.

To date, NCUA has recovered nearly $5B in settlements from big banks related to the faulty securities that they sold to corporate credit unions.

SEC Orders Barclays to Pay Over $16.5M Over Alleged RMBS Fraud by Former Traders

Published on: May 1, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission said that Barclays Capital (BARC) has agreed to pay over $16.5M as part of a settlement resolving allegations accusing the company of failing to properly supervise two of its ex-mortgage bond traders. The men are accused of lying to clients, as well as overcharging some of them. According to the regulator, Barclays did not put into place or execute the proper supervisory procedures that could have stopped or detected the alleged residential mortgage-backed securities fraud.

The two traders, David Wong and Yoon Seok Lee, are accused of making misleading or false statements to the firm’s customers about RMBS securities, how much Barclays makes for facilitating the trades, and other pertinent information. Lee and Wong also are accused of making excessive mark-ups on certain transactions without telling customers.

The SEC said that the ex-Barclays traders’ actions, which would have occurred between 6/2009 and 12/2012, caused Barclays to earn $15.5M in profits.

Securities Crimes: Trader Jesse Litvak is Sentenced to Prison for MBS Fraud—Again, North Carolina Who Bilked NFL Players Will Serve Prison Time, and Ex-Stockbroker Gets Jail Time and Must Pay $3.5M to Investors

Published on: April 28, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Jefferies Trader Will Go to Prison for Mortgage-Backed Securities Fraud After All
Jesse Litvak, the ex-Jefferies (JEF) managing director, has once again been sentenced to two years in prison. Litvak was found guilty of mortgage-backed securities fraud in 2014 and sentenced to two years behind bars. The conviction at the time was for multiple securities fraud charges and for making false statements, as well as for defrauding TARP.

Claiming that expert witnesses hadn’t been able to testify for him, Litvak was able to get that sentence tossed. However, the US government continued to go after him and he was found guilty on one fraud count. Now, he has again been sentenced to two years in prions.

Litvak also must pay $2M because he lied about bond prices to a customer. (The earlier conviction had come with a $1.75M fine.) According to U.S. District Judge Janet C. Hall, Litvak’s victims only invested because he lied to them.