Financial Firms

The FCA Bars Ex-Royal Bank of Scotland Trader Over Libor Rigging

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

U.K.’s Financial Conduct Authority is barring Paul White, an ex-Royal Bank of Scotland (RBS) trader, for misconduct involving the rigging of the London interbank offered rate. The FCA said that White behaved with recknlessness and was not in integrity when he would submit information about Libor related to the Swiss frank and the Japanese yen.

According to the British regulator, from 5/07 to 11/10, White improperly considered requests that came from derivatives traders at two banks when issuing Libor submissions. If any of the information he turned in wasn’t been accurate, this could have changed the rate for Libor in a manner benefitting White and others. In a news release, the FCA said that White had a duty to make sure his submissions were correct and not influenced by his own financial interests or the interests of others.

The regulator provided a transcript that included electronic messages between a broker at another bank and White. The messages indicated that they worked together to rig Libor.

White was the recipient of 68 communications from RBS derivatives traders for Libor submissions. In the exchanges, said the FCA, the traders sought to help their trading positions. There was also a Swiss franc trader that purportedly made such requests verbally for twenty months. White also received requests from a yen derivatives trader who did not work at the firm.

The FCA’s final notice states that White claims that although he took into account trading positions when issuing Libor submissions, his entries were always “correct” and within a range that was acceptable according Libor’s definition. White claimed that he engaged in seemingly improper communications only to “appease.” FCA, however, rejects White’s account of what happened. Yet despite imposing an industry bar against him, the regulator waived what could have been a $354,000 fine because White is undergoing financial difficulties.

Morgan Stanley Still Embroiled in $147M RMBS Lawsuit Brought by IKB Deutsche Industriebank

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

More than three years after IKB Deutsche Industriebank AG sued Morgan Stanley (MS) for over $147.1M in residential mortgage-backed securities, the brokerage firm is asking the New York appeals court to dismiss the case. Morgan Stanley claims that it was the German lender that did not conduct the necessary due diligence.

IKB claims the Morgan Stanley provided offering documents that left out or did not properly characterize different underwriting standards involving the loans that were underlying the securities. The bank claims there were misrepresentations and omissions regarding loan-to value ratios.

The lender says it received inaccurate information about the underlying loans related to how much homeowners had borrowed, the securities’ credit ratings, and the percentage of properties that were occupied by the owners. IKB cited purportedly incorrect statements made about trusts, loans, and mortgages. It accused Morgan Stanley of taking the loans from different originators and bundling them together to package the securities despite knowing there were issues that could make the RMBS problematic.

Goldman Sachs Will Pay $5.06B Over Mortgage-Backed Securities Practices

Published on: April 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs (GS) has settled a mortgage case brought by the U.S. Department of Justice accusing the firm of deceptive mortgage practices leading up to the 2008 financial crisis. As part of the deal, Goldman will pay $5.06B to resolve the charges. According to the DOJ, the bank also admitted that it issued representations that were “false and misleading” to prospective investors about the MBS that were up for sale. Details of the deal were announced in January after an agreement was reached in principal.

In a statement of facts, Goldman said that “significant percentages” of the mortgages it bundled with securities sold between ’05 and ’07 were not in line with the information provided to investors about the loans. The bank’s Mortgage Capital Committee approved every residential mortgage-backed security it assesses between December ’05 and ’07 even though they were aware that a lot of the home loans contained compliance and credit defects.

The settlement shows that Goldman was aware that a lot of the subprime loans it was packaging into securities could be defective, including an RMBS it created in ’06 using loans made by Countrywide Financial, which was the largest subprime loan provider. It was during this time that a Goldman manager issued an equity research report recommending that the stock be brought. Responding to the report, the bank’s due diligence head that had supervised the scrutiny of several Countrywide mortgage pools replied, “If only they knew.”

The government said that 70% of total loan pools were not examined for problems even though in one bond pool about 25% of loans that were examined were dropped because their quality was poor. For example, in 2006, Goldman notified investors via marketing materials that one underwriter in particular was dedicated to “quality over volume” when it came to the loans even though its own analysis determined that the underwriter, a Fremont General Corp unit, applied “off market” guidelines. In early 2007, the Fremont unit was shut down after the Federal Deposit Insurance Corp. said that the lender allowed people who couldn’t afford to pay back the mortgages to have them anyways.

Credit Suisse Wants Appeals Court to Dismiss NY AG’s $11.2B Residential Mortgage-Backed Securities Fraud Lawsuit

Published on: April 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A number of Credit Suisse Group (GS) units want a NY court to rule that the RMBS case brought by Attorney General Eric Schneiderman is time-barred in the wake of precedent from the state’s highest court. The AG, who brought the case under the Martin Act, is seeking more than $11.2B.

According to the complaint, in ’06 and ’07 Credit Suisse put together over 60 residential mortgage-backed securities with about 248,000 loans. 24% of the loans have since been liquidated and investors have lost $11.2B on initial balances of about $93.8B. The state claims that investor losses resulted because of the bank’ determination to raise the volume of mortgages it bought and the securities it generated. Credit Suisse employees purportedly paid a higher price for mortgages and didn’t address reports of problems identified by due diligence forms so as to preserve relationships with mortgage originators. The bank is accused of making false claims about due diligence when choosing which mortgages to bundle with the securities.

California Sues Morgan Stanley for Purportedly Selling Bad Investments

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

The State of California is suing Morgan Stanley (MS) for allegedly selling bad residential mortgaged backed securities. According to lawmakers, the firm sold residential mortgage-backed securities as risky loans to subprime lenders while downplaying or hiding the risks and at times encouraging credit raters to bestow the securities with high ratings that were not warranted. Because of these RMBS sales, contends the state, the California Public Employees’ Retirement System (CALPERS) and California State Teachers Retirement System (CalSTRS) sustained devastating losses.

California claims that the firm violated the state’s False Claims Act and securities laws. A significant part of the case challenges Morgan Stanley’s behavior when marketing the Cheyne SIV, which was a structured investment vehicle that failed nine years ago. State Attorney General Kamala Harris is seeking $700M from the firm, as well as over $600M in damages.

Meantime, Morgan Stanley has argued that the case is meritless. It contends that the RMBSs were sold and marketed to institutional investors who were sophisticated enough to understand the investments. They claim that the RBMBs performed in a manner that was in line with the sector to which it belonged.

It was just recently that Moody’s Corp. reached an agreement with CalPERS to pay the California pension fund $130M to resolve allegations that the credit rating agency may have acted negligently by giving high ratings to toxic investments. CalPERS contended that its purchase of the investments cost it hundreds of millions of dollars.

Insider Trading: Ex-Goldman Employee to Pay $900K Fine, Former Harman VP Enters Guilty Plea, and Ex-AMO CEO Asks Judge To Stay Lawsuit

Published on: March 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Former Goldman Employee Fined Over $900K For SEC Insider Trading Case
Former Goldman Sachs (GS) compliance worker Yeu Han will pay over $903,000 to settle allegations by the U.S. Securities and Exchange Commission accusing him of insider trading. Han was hired by the firm to develop surveillance software to help Goldman identify illegal conduct, including insider trading and market manipulation.

According to the regulator, Han was employed in the firm’s compliance division. He had access to the emails of other Goldman employees who worked on confidential acquisition and merger deals. The SEC contends that even though Han was aware that this information was privileged and nonpublic, and that he would have to get supervisory clearance and disclose his brokerage accounts to engage in any trading, in December 2014 he started trading in the securities of a number of companies before each one publicly announced acquisition and merger news. These companies included Zulily Inc., Yodlee Inc., KLA-Tencor Corp., and Rentrak Corp.

The Commission is accusing Han of making over $468K through his personal account and more than $434K through the account of a relative. Last October, Han left the United States and went to China, where he is a citizen. In November, the SEC filed the insider trading charges against him.

Ex-Harman International VP Pleads Guilty to Insider Trading
Dennis Hamilton, a former vice president of tax at Harman International Industries Inc. has pleaded guilty to insider trading. For the one count of securities fraud, the 45-year-old faces up to 20 years behind bars—although recommended federal guidelines could help him to procure a one-to-two-year prison term instead.

ISDAFix-Rigging Lawsuits Against Bank of America, Citigroup, Deutsche Bank, and Others May Proceed, Says Judge

Published on: March 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Jesse Furman has turned down the request by Barclays Plc (BARC), Bank of America Corp. (BAC), Deutsche Bank AG (DB), Citigroup Inc. (C), Royal Bank of Scotland Group Plc (RBS), BNP Paribas SA, Credit Suisse Group AG (CS), HSBC Holdings Plc, Goldman Sachs Group Inc. (GS), UBS AG (UBS), JPMorgan Chase & CO. (JPM), Wells Fargo & CO. (WFC), and Nomura Holdings Inc. to dismiss the antitrust lawsuits accusing them of working together to rig the ISDAfix. The benchmark rate is used to establish prices on commercial real estate mortgages, interest-rate swap transactions, and other securities. Another defendant is ICAP Plc, which brokered transactions that set the rate for ISDAfix.

Furman said that plaintiff Alaska Electrical Pension Fund and other investors have brought up “plausible allegations” that there may have been a conspiracy between the defendants that allowed them to collude with one another. The investors are seeking billions of dollars in losses they believe they sustained because ISDAFix was allegedly rigged. In this case, the judge let the breach-of-contract claims and antirust claims proceed to trial but dismissed the other claims.

UBS Ordered to Pay Investors Over $47K in Puerto Rico Bond Fraud Case

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

UBS Group AG (UBS) must pay Obdulio Melendez Ramos, Carlos L. Merced, and Ramon Velez Garcia over $470K for losses they sustained from investing in Puerto Rico bonds/bond funds that lost value. The three men filed their case with the Financial Industry Regulatory Authority. They contend their accounts were over-concentrated in risky Puerto Rico bonds/bond funds. Ramos, Garcia, and Merced had alleged negligent supervision and fraud.

Addressing the panel’s ruling, a spokesperson for UBS called the decision “disappointing” and said that he disagreed with the outcome. In an emailed statement, Gregg Rosenberg contended that that there were specific circumstances involved with this case and its outcome was not a indicative of how other arbitrators might rule in similar cases. However, according to a recent supplement for the firm’s fourth quarter earnings results, since August 2013 drops in Puerto Rico municipal bond prices, as well as in the prices of related proprietary funds UBS manages and distributes, have led to customer complaints, regulatory inquiries, and arbitrations filed against the firm.

Claimed damages against UBS are estimated to total $1.5B. The vast majority of those claims are still outstanding.

Many investors have accused UBS Puerto Rico of inappropriately persuading them to invest in the island’s municipal bonds even though these investments were not appropriate for them. UBS brokers even purportedly encouraged some investors to borrow so that they could become more heavily invested in the bonds. When Puerto Rico bond prices plunged, it was the investors, many of whom were retirees, that suffered.

Mortgage Securities News: Supreme Court Rejects Banks’ FDIC Case, Credit Suisse to Pay NCUA $29M in MBS Case Involving Credit Unions, & Former Fannie Mae CEO Must Contend With SEC Fraud Claims

Published on: March 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

US Supreme Court Turns Down Banks’ Bid that It Examine FDIC Case
The U.S. Supreme Court has decided not to review the 2015 ruling made by the Fifth Circuit Court of Appeals that revived the Federal Deposit Insurance Corporation’s (FDIC) securities case accusing Goldman Sachs (GS), Royal Bank of Scotland (RBS), and Deutsche Bank (DB) of misrepresenting the quality of securities it sold to Guaranty Bank, which later failed. The FDIC took the Texas bank into receivership in 2009 and sued the banks in 2014.

A judge in Austin, Tx. dismissed the case, citing a state law requiring that lawsuits be brought within five years of a mortgage-backed security’s sale. The complaint had been filed at least 9 years after the MBSs were sold.

Last August, the Fifth Circuit cited a 1989 federal law and revived the case. The appeals court said that the FDIC is allowed an extended time period to file complaints for institutions that it insures and have gone into receivership. Circuit Judge Carolyn Dineen King wrote that it was this federal law that made it possible for the FDIC to concentrate on dealing with bank failures rather than worrying about possible statutes and their limitations.

RBS, Goldman, and Deutsche then filed their petitioned with the U.S. Supreme Court. The banks pointed to a past holding by the highest court that barred other courts from preempting state law unless the U.S. Congress has made such a preemption clear.

Credit Suisse Resolves MBS Case for $29M
Credit Suisse (CS) must pay $29M to settle the National Credit Union Administration’s claim that it sold bad mortgage-backed-securities to credit unions. NCUA’s lawsuit revolves around MBSs that UBS (UBS) underwrote and sold to Members United Corporate Federal Credit Union and the Southwest Corporate Federal Credit Union for over $228M from ’06 to ’07. Both credit unions have since failed.

Elder Investors: Morgan Stanley Must Pay Home Shopping Network’s Estate Over $34M, Broker Accused of Making Over $1.7M From Churning at Craig Scott Capital, and $10M Ponzi Scam Involving Jamaican Businesses Targets Older Investors

Published on: March 24, 2016 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Panel Awards Estate Over $34M from Morgan Stanley in the Wake of Churning Allegations
A Financial Industry Regulatory Authority arbitration panel awarded the estate of Home Shopping Network Roy M. Speer over $34M in its case against Morgan Stanley (MS). The panel ruled that the firm, branch manager Terry McCoy, and broker Ami Forte were jointly liable for breach of fiduciary duty, negligence, unauthorized trading, constructive fraud, unjust enrichment, and negligent supervision. The alleged negligence would have occurred from 1/09 to 6/12 and involved investments in the financial services and banking sectors.

According to Mrs. Speer’s lawyer, in six of Mr. Speer’s accounts, about 12,000 transactions took place, most of them involving municipal bond trading and corporate trading. Many of these trades were unauthorized.

The arbitrators awarded $32.8M in compensatory damages to Speer’s widow, Lynnda Speer, and $1.5M for the costs involved in the arbitration process. The panel said that Morgan Stanley violated a law in Florida that prohibits the exploitation of vulnerable adults. Mr. Speer had dementia. Forte, who was his broker, is said to have been in a relationship with him.

Former Craig Scott Capital Broker Accused of Elder Financial Fraud
FINRA is accusing broker Edward Beyn of making over $1.7M in commissions and fees by engaging in excessive trading in client accounts while he was a registered representative at Craig Scott Capital. He is now with Rothschild Liberman. Beyn is accused of churning nine accounts of six customers, all of them over the age of 60, from 3/12 through 5/15. They all sustained losses.