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The Financial Industry Regulatory Authority has filed a securities fraud case against Hank Mark Werner. The self-regulatory organization is accusing the New York broker of churning the account of a 77-year old widow who is blind, and engaging in unsuitable and excessive trading involving her account. FINRA claims that Werner charged the elderly customer over 243K in commissions while he churned her accounts for over three years and caused her to sustain about $184K in losses.

According to FINRA, Werner, who had been the broker of the elderly widow’s husband since 1995, until he passed away four years ago, started aggressively trading her accounts after he died. The SRO claims that Werner did this to earn excessive commissions.

From 10/12 to 10/15, Werner placed more than 700 trades in over 200 securities while charging the elderly customer commission or a markup on every sale and purchase. Because she was seriously debilitated, blind, and needed in-home care, the woman was totally dependent on Werner to let her know how her account was doing.

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The Securities and Exchange Commission is charging AlphaBridge Capital Management and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios that the firm managed. The feeder funds involved are the private funds AlphaBridge Fixed Income Partners, LP and the AlphaBridge Fixed Income Fund, Ltd.

The securities in question are inverse, interest-only floaters and interest only floaters. Both are tranches of collateralized mortgage obligations. To settle the charges, the Connecticut-based investment advisory firm and its owners, Michael J. Carino and Thomas T. Kutzen, will pay $5M.

According to the regulator, AlphaBridge told investors that broker-dealers provided it with independent price quotes for residential mortgaged-backed securities that were thinly traded and unlisted even though the firm derived these valuations internally. The hedge fund advisory firm purportedly told brokers to say that the valuations came from their brokerage firms.

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Pending court approval, Citigroup Inc. (C) will $730 million to resolve claims that it misled debt investors regarding its financial state during the economic crisis. The plaintiffs had purchased Citi preferred stock and bonds from 5/06 through 11/8. They are accusing Citigroup of misleading the buyers of 48 issues of its corporate bonds. Included among the plaintiffs of this bond lawsuit are the City of Philadelphia Board of Pensions and Retirement, the Louisiana Sheriffs’ Pension and Relief Fund, and the Minneapolis Firefighters’ Relief Association.

The bonds’ declined as the US mortgage market collapsed and the losses grew. According to Bloomberg.com, at one point, Citigroup’s $4 billion of 10-year notes declined to 79.7 cents on the dollar. It went on to lose over $29 billion in ‘08 and ’09.

Struggling from losses involving subprime mortgages, Citigroup ended up having to take a $45 million bailout in 2008, which it has since repaid. However, it is one of the Wall Street firms still coping with the aftermath of the financial crisis. Just last year, Citi consented to pay $590 million over a securities case filed by investors of stock contending that they too had been misled.

Lehman Brothers subsidiary Lehman Brothers Australia has been found liable for collateralized debt obligation losses sustained by 72 councils, churches, and charities during the global economic crisis. The class action securities lawsuit was led by three Australian counsels—Wingecarribee, Parkes and Swan City. A fixed settlement amount, however, has not yet been reached. The parties will have to meet to figure out the damages, and their submissions will then be presented to the Federal Court later this year. (Because the defendant, previously known as Grange Securities, is in liquidation, it cannot make any payments right now). The three lead plaintiffs had sought up to $209M (US dollars), which is how much they say was lost from the CDOs.

The majority of the CDOs that caused the investors losses had been purchased from Grange Securities before Lehman Brothers Australia acquired the firm in 2007, which is the year when the bond world started to fall apart as the global economic crisis began to unfold. The plaintiffs are claiming alleged breach of fiduciary duty, misconduct, and negligence for how the defendant marketed the synthetic derivative investments.

Federal Court Justice Steven Rares, who issued the ruling, said the CDOs were presented as if they were liquid like cash and safe investments even though they were, in fact, a risky, “sophisticated bet.” He said the plaintiffs were told that they would get their money back if they held on to the CDO’s until maturity and that high credit ratings placed the securities in the same arena as the AAA-rated Australian government’s debts. They also presented the investments that it recommended or made for the plaintiffs as suitable for investors that had conservative goals.

The judge noted that although that each of the three councils that were the lead plaintiffs had different complaints, in relation to two councils, the defendant was negligent in the advice and recommendation it offered them. Also, as financial advisor to two of the councils, the financial firm breached its fiduciary duty and took part in deceptive and misleading behavior when it pushed the CDOs as suitable for them.

Court finds Lehman Brothers Australia liable in crash, AFP, September 21, 2012

Court orders Lehman Brothers Australia liable
, Channel News Asia, September 21, 2012


More Blog Posts:

Stockbroker Securities Roundup: Criminal Convictions Vacated Against Six Charged in Front Running Scam and Citigroup Broker Cleared in $1B CDO Deal SEC Case, Stockbroker Fraud Blog, August 11, 2012

Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed, Institutional Investor Securities Blog, September 24, 2011

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLPn, Stockbroker Fraud Blog, September 30, 2008

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Citigroup (C) has agreed to pay $590 million settle a shareholder class action collateralized debt obligation lawsuit filed by plaintiffs claiming it misled them about the bank’s subprime mortgage debt exposure right before the 2008 economic collapse By settling, Citigroup is not admitting to denying any wrongdoing. A federal judge has approved the proposed agreement.

Plaintiffs of this CDO lawsuit include pension funds in Illinois, Ohio, and Colorado led by ex-employees and directors of Automated Trading Desk. They obtained Citigroup shares when the bank bought the electronic trading firm in July 2007. The shareholders are accusing bank and some of its former senior executives of not disclosing that Citigroup’s CDOs were linked to mortgage securities until the bank took a million dollar write down on them that year. Citigroup would later go on to write down the CDOs by another tens of billions of dollars.

The plaintiffs claim that Citigroup used improper accounting practices so no one would find out that its holdings were losing their value, and instead, used “unsupportable marks” that were inflated so its “scheme” could continue. They say that the bank told them it had sold billions of dollars in collateralized debt obligations but did not tell them it guaranteed the securities against losses. The shareholders claim that to conceal the risks, Citi placed the guarantees in separate accounts.

Prior to the economic collapse of 2008, Citi had underwritten about $70 billion in CDOs. It, along with other Wall Street firms, had been busy participating in the profitable, growing business of packaging loans into complex securities. When the financial crisis happened, the US government had to bail Citigroup out with $45 billion, which the financial firm has since paid back.

This is not the first case Citigroup has settled related to subprime mortgages and the financial crisis. In 2010, Citi paid $75 million to settle SEC charges that it had issued misleading statements to the public about the extent of its subprime exposure, even acknowledging that it had misrepresented the exposure to be at $13 billion or under between July and the middle of October 2007 when it was actually over $50 billion. Citigroup also consented to pay the SEC $285 million to settle allegations that it misled investors when it didn’t reveal that it was assisting in choosing the mortgage securities underpinning a CDO while betting against it.

This week, Citi agreed to pay a different group of investors a $25 million MBS settlement to a securities lawsuit accusing it of underplaying the risks and telling lies about appraisal and underwriting standards on residential loans of two MBS trusts. The plaintiffs, Greater Kansas City Laborers Pension Fund and the ‪City of Ann Arbor Employees’ Retirement System,‬ had sued Citi’s Institutional Clients Group. ‬

This $590 million settlement of Citigroup’s is the largest one reached over CDOs to date and one of the largest related to the economic crisis. According to The Wall Street Journal, the two that outsize this was the $627 million that Wachovia Corp. (WB) agreed to pay over allegations that investors were misled about its mortgage loan portfolio’s quality and the $624 million by Countrywide Financial (CFC) in 2010 to settle claims that it misled investors about its high risk mortgage practices.

Citigroup in $590 million settlement of subprime lawsuit, The New York Times, August 29, 2012

Citi’s $590 million settlement: Where it ranks, August 29, 2012

Citigroup to Pay $25 Million to Settle MBS Lawsuit, American Banker, August 31, 2012

Citigroup Said To Pay $75 Million To Settle SEC Subprime Case, Bloomberg, July 29, 2010

More Blog Posts:
Amerigroup Shareholders Claim Goldman Sachs Advisers’ Had Conflicts of Interest That Influenced $4.5B Sale of Company to WellPoint, Institutional Investor Securities Blog, August 21, 2012

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs, Institutional Investor Securities Blog, August 14, 2012

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The Financial Industry Regulatory Authority says that it is fining Merrill Lynch, Pierce, Fenner & Smith, Inc. $2.8M in the wake of certain alleged supervisory failures that the SRO says led to the financial firm billing clients unwarranted fees. The financial firm paid back the $32M in remediation to affected clients, in addition to interest.

According to FINRA, from 4/03 to 12/11, Merrill Lynch lacked a satisfactory supervisory system that could ensure that certain investment advisory program clients were billed per the terms of their disclosure documents and contract. As a result, close to 95,000 client account fees were charged.

Also, due to programming mistakes, Merrill Lynch allegedly did not give certain clients timely trade confirmations. These errors caused them to not get confirmations for over 10.6 million trades in more than 230,000 customer accounts from 7/06 to 11/10. Additionally, FINRA contends that Merrill Lynch failed to properly identify when it played the role of principal or agent on account statements and trade confirmations involving at least 7.5 million mutual fund buy transactions. By settling, Merrill Lynch is not denying nor admitting to the charges. It is, however, agreeing to the entry of FINRA’s findings.

Cliff Popper, the South Florida trader and former Brookstreet Securities broker known for convincing retail investors to get to behind risky subprime mortgages and defrauding them of over $100 million, has died. Popper, who was awaiting the judge’s decision in a civil securities fraud trial where he was a defendant, killed himself earlier this week.

The US Securities and Exchange Commission had accused him of designing an investment program that misled clients, who ended up losing their investments when the housing market collapsed. While with Brookstreet, Popper traveled the US and coached brokers on how to sell the financial instruments. He and his team played a key role in selling CMOs, and as clients invested over $300 million in mortgaged backed securities, they made over $18 million in salary and commissions in three years.

In June 2007, however, as the sub-prime loan market declined and loan-based securities dropped significantly, certain investors borrowed up to 90% of all their investments. Brookstreet Securities Corp. went into decline after National Financial Services LLC (its clearing company) issued a margin call on accounts with collateralized mortgage obligations. The losses caused the financial firm to make shortfalls and lose all its capital. Brookstreet was forced to shut down its operations later that year. More than 600 brokers became unemployed.

In 2009, the SEC charged Popper and several others with securities fraud and of depleting the finances of investors, many of whom lost their life savings, retirement, and homes. At the civil securities fraud trial against him, Popper claimed that he never purposely made misrepresentations to anyone.

Popper was known for his extravagant lifestyle, including a $2.4 million condo and a Sun Life Stadium sky box. During the Superbowl XXXIX weekend in 2005, he spent $2,000 on a limo to transport clients to a Hawaiian Tropic model event. Popper previously worked for four financial firms, including Merrill Lynch Pierce Fenner & Smith Inc. and Workman Securities Corp.

Shepherd Smith Edwards & Kantas LTD, LLP has filed individual claims on behalf of investors that lost money from investing in mortgage backed securities through Brookstreet. Many clients were left in a state of financial limbo when the financial firm shut its doors.

CMO Securities
Investors in a CMO purchase entity-issued bonds and get payments in accordance to specific rules. The mortgages are the collateral and the bonds are known as “tranches.” CMOs transform illiquid, individual financial assets and turn them into liquid, tradable capital market instruments so that mortgage originators can fill up their funds, which can then go toward more origination activities.

Broker who touted subprime mortgages kills himself, Miami Herald, January 5, 2011

Subprime suicide: Notorious broker found dead, MSNBC, January 6, 2011

Brookstreet closes down, The OC Register, June 21, 2007

More Blog Posts:
Wedbush Hit with Nun’s Complaint over CMO’s – May Have More Than Brokers in Common with Brookstreet, Stockbroker Fraud Blog, July 18, 2007

Some Brookstreet Brokers Become Wedbush Morgan Brokers, Stockbroker Fraud Blog, July 9, 2007

Northern Trust Securities Agrees to $600,000 FINRA Fine Over Charges It Failed to Properly Monitor High-Volume Securities Trades and CMO Sales, Institutional Investor Securities Blog, June 8, 2011

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Ilya Eric Kolchinsky, a former Moody’s Investors Service executive, is suing the credit ratings agency for defamation. This is one of the first lawsuits involving a Wall Street company and an ex-employer that blew the whistle on it. Kolchinsky is seeking $15 million in damages in addition to legal fees.

Kolchinsky claims that Moody’s tried to ruin his reputation after he publicly talked about problems with its ratings model. Kolchinsky, who supervised the ratings that were given to subprime mortgage collateralized debt obligations (many of these did not live up to their triple-A ratings), testified before Congressional panels about his concerns. He addressed the potential conflicts that can arise as a result of the issuer-pay ratings model, which lets banks and borrowers that sell debt securities pay for ratings. He alleged securities fraud and claimed that the ratings agency placed profits ahead of doing their job. He also claimed that Moody’s lacked the resources to enforce its rules.

Kolchinsky contends that Moody’s began attacking him through the media and that the statements that the credit ratings firm issued have caused him to become “blacklisted by the private sector financial industry.” Moody’s suspended him last year. In his civil suit, Kolchinsky notes that he was attacked by the credit ratings agency even though it went on to adopt some of his recommendations.

The recently passed financial reform bill provides greater protections for whistleblowers while offering financial rewards for those brave enough to tell regulators about their concerns. However, it is unclear whether Kolchinsky’s complaint will benefit from the new law because his case involves alleged actions that occurred prior to the bill’s passing.

Related Web Resources:
Former Moody’s Executive Files Suit, New York Times, September 13, 2010
Exec who blew whistle on Moody’s ratings sues for defamation, Central Valley Business TImes, September 14, 2010
Wall Street Whistleblowers May Be Eligible to Collect 10 – 30% of Money that the Government Recovers, Stockbroker Fraud Blog, July 29, 2010 Continue Reading ›

A class-action securities complaint has been filed against Charles Schwab & Co. on behalf of investors that own Schwab Total Bond Market Fund (Nasdaq: SWBLX) shares that were purchased after May 31, 2007. The securities fraud lawsuit accuses Charles Schwab of causing the fund to deviate from its fundamental business objective, which was to track the Lehman Brothers U.S. Aggregate Bond Index, and of violating the California Business & Professions Code.

According to the plaintiffs’ legal representation, the defendant caused investors to suffer financial losses when it started investing in high-risk mortgage backed securities without letting shareholders know. Per the fund’s prospectus, Charles Schwab is supposed to obtain shareholder approval through a vote.

The plaintiffs contend that by investing 25% of the fund’s portfolio assets in high-risk, non-agency collateralized mortgage obligations (CMO’s) and mortgage-backed securities that were not part of Lehman’s US Aggregate Bond Index, Charles Schwab failed to stay true to its stated fundamental investment objective. They claim that this deviation led to tens of millions of dollars in shareholder losses because of the decline in the non-agency mortgage-backed securities value. According to their lawyers, the investors ended up experiencing a negative 12.64% in differential in total return for the fund compared to the Lehman Bros. U.S. Aggregate Bond Index from August 31, 2007 to February 27, 2009.

The investor plaintiffs are seeking restitution for all class members and for the return of management and other associated fees collected after the fund’s alleged deviation from its fundamental business objective.

Related Web Resources:
Class Action Lawsuit Filed Against Charles Schwab & Co., Star Global Tribune, September 7, 2010
Plaintiffs charge Total Bond Market Fund deviated from stated investment strategy, Investment News, September 7, 2010

Related Blog Stories Resources:
Schwab Must Pay SSEK Client $604,094 Over California Yield Plus Fund Investments, Says FINRA Arbitration Panel, https://www.stockbrokerfraudblog.com, April 22, 2010
Securities Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Investor Claims Related to Short Term Bond Funds, https://www.stockbrokerfraudblog.com, August 9, 2008 Continue Reading ›

HSBC Securities has agreed to pay $375,000 to settle Financial Industry Regulatory Authority charges that it recommended the unsuitable sale of inverse floating rate collateralized mortgage obligation to retail clients. The SRO is also accusing the investment bank HSBC of inadequate supervision of the suitability of the CMO sales and failure to fully explain the risks involved in CMO investments to clients. The investment bank has already reimbursed clients $320,000.

Per FINRA, six HSBC brokers made 43 unsuitable inverse floater sales to “unsophisticated” retail clients. Even though HSBC requires that a supervisor approve all retail clients sales larger than $100,000, 25 of the sales were larger than this amount. 5 resulted in $320,000 in losses for clients. According to FINRA executive vice-president and acting enforcement chief James S. Shorris, the clients’ financial losses could have been prevented.

FINRA contends that HSBC brokers were not given enough training and guidance about the risks involved with CMOs. They also were not specifically told that inverse floaters were only suitable for investors with high-risk profiles.

FINRA also says that HSBC was not in incompliance with a rule requiring brokerage firms to offer specific educational collateral prior to a CMO sale to anyone that is not an institutional investor. FINRA says that not only did HSBC’s registered representatives not know that they were required to offer this material, but also the brochures that were offered did not meet content standards regarding required educational information.

By agreeing to settle, HSBC is not admitting or denying the allegations.
Related Web Resources:
FINRA Fines HSBC $375,000, On Wall Street, August 19, 2010
FINRA fines HSBC for unsuitable sales of CMOs, Banking Business Review, August 20, 2010
FINRA

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