Financial Firms

JPMorgan and the DOJ Finalize Their $13 Billion Settlement

Published on: November 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

After months of back-and-forth, the US Justice Department and JPMorgan Chase (JPM) have agreed to a $13 billion settlement. The historic deal concludes several of lawsuits and probes over failed mortgage bonds that were issued prior to the economic crisis. It also is the largest combination of damages and fines to be obtained by the federal government in a civil case with just one company. JPMorgan had initially wanted to pay just $3 billion.

The $13 billion deal is the largest crackdown this government had made against Wall Street over questionable mortgage practices. US Attorney General H. Eric Holder and other lead DOJ officials were involved in the settlement talks with JPMorgan CEO Jamie Dimon and other senior officials.

The settlement is over billions of dollars in residential mortgage backed securities involving not just the firm but also its Washington Mutual (WAMUQ) and Bear Stearns (BSC) outfits. The government claims that the RMBS were based on mortgages that were not as solid as what they were advertised to be.

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt

Published on: November 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, hedge funds are starting to bet big on municipal debt by demanding high interest rates in exchange for financing local governments, purchasing troubled municipalities’ debt at cheap prices, and attempting to profit on the growing volatility (in the wake of so many small investors trying to get out because of the threat of defaults). These funds typically invest trillions of dollars for pension plans, rich investors, and college endowments. Now, they are investing in numerous muni bond opportunities, including Puerto Rico debt, Stanford University bond, the sewer debt from Jefferson County, Alabama, and others.

Currently, hedge funds are holding billions of dollars in troubled muni debt. The municipal bond market includes debt put out by charities, colleges, airports, and other entities. (Also, Detroit, Michigan’s current debt problems, which forced the city into bankruptcy, caused prices in the municipal bond market to go down to levels that appealed to hedge funds.)

Hedge fund managers believe their efforts will allow for more frequent trading, greater government disclosures, and transparent bond pricing and that this will only benefit municipal bond investors. That said, hedge fund investors can be problematic for municipalities because not only do they want greater interest rates than did individual investors, but also they are less hesitant to ask for financial discipline and better disclosure.

JPMorgan and Institutional Investors Agree to $4.5B Mortgage-Backed Securities Settlement

Published on: November 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. (JPM) says it will pay $4.5 billion to investors for losses that they sustained from mortgage-backed securities that were purchased from the firm and its Bear Stearns Cos. during the economic crisis. The institutional investors include Allianz SE (AZSEY), BlackRock Inc. (BLK), Pacific Investment Management Group, MetLife Inc. (MET), Goldman Sachs Asset Management LP, Western Asset Management Co., and 16 of other known institutional entities. This is the same group that settled their MBS fraud case against Bank of America Corp. (BAC) for $8.5 billion.

The $4.5 billion will be given to 330 RMBS trusts’ trustees over investments that were sold by the two financial institutions between 2005 and 2008. A number of the trustees, including Bank of New York Mellon Corp. (BK) still have to approve the agreement, as does a court.

Still, the claims related to the Washington Mutual-sold MBS have yet to be resolved.

Advice to Advisors: Financial Advisors Taught Ways to Avoid SEC Scrutiny

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

According to the Securities and Exchange Commission Office of Compliance Inspections and Examinations Director Andrew J. Bowden, next year the regulator intends to examine about 4,000 registered investment financial advisors who have never been visited by its inspectors before. Bowden said that the agency will target about 50% of firms that have yet to be examined. Some of these investment advisers have been registered for over three years.

Of the close to 11,000 financial advisors that the SEC oversees, nearly 40% have never undergone inspection by the regulator. Still, some are questioning whether Bowden’s office even has the resources to perform all these inspections.

In InvestmentNews, Ascendant Compliance Management partner Keith Marks lists the compliance issues that these yet to be inspected RIAs should deal with now so that they are ready should the agency come knocking:

AIG Settles Ex-Executive’s $274M Lawsuit Over Alleged Failure to Pay Him During 2008 Economic Crisis

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

American Insurance Group and one of its ex-executives, Kevin Fitzpatrick, have reached a settlement deal over his $274 million lawsuit against the insurer. Fitzpatrick, the former president of the AIG Global Real Estate Investment Corp. unit, claims that his then-employer would not pay him during the 2008 economic crisis. The insurer’s refusal to pay occurred not long after the US government said yes to the first part of what would turn into a $182 billion bailout.

Fitzpatrick, who worked for American Insurance Group for 22 years, said that the company breached agreements it had with him and entities under his control. He claims the agreements entitled him to a share of profits made on the insurer’s real estate investments but that on October 2008 they stopped paying him and others who were entitled to profit distributions. Fitzpatrick then quit.

Fitzpatrick sued in 2009, claiming that the company owed him $274 million and that he wanted interest and punitive damages, which is right around the time that the insurer was trying to get past public disapproval over $165 million in bonuses that were paid to employees in the AIG Financial Products unit. That is the group that handled the complex financial instruments that led to its huge losses.

AIG denied wrongdoing and said that Fitzpatrick was paid what he was owed. The insurer contended that Fitzpatrick actually was fired and that he stole data that was confidential and belonged to the company.

In other AIG-related news, a district court judge just threw out a shareholder lawsuit accusing Bank of America (BAC) of not telling them that the insurer was planning to sue the bank with a $10 billion fraud lawsuit. AIG accused Bank of America of misrepresenting the quality of more than $28 million of MBSs that AIG bought from the latter and its Countrywide and Merrill Lynch (MER) units.

Also, there are reports that AIG might file mortgage-backed securities case against Morgan Stanley (MS) over $3.7 billion of MBS.

Morgan Stanley Says AIG May Sue Over Mortgage-Linked Investments, Bloomberg, November 4, 2013

Bank of America wins dismissal of lawsuit on AIG disclosures, Reuters, November 4, 2013

AIG Sued by Its Own Executive as Tragedy Turns to Farce, CBS, December 10, 2009

Judge Dismisses Shareholder Lawsuit Suing Bank of America For Allegedly Concealing AIG Fraud Case

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

A judge has thrown out a securities lawsuit by shareholders accusing Bank of America Corp. (BAC) of concealing that insurer AIG (AIG) intended to file a $10 billion fraud case against it. U.S. District Judge John Koeltl in Manhattan said that BofA and four of its officers were not obligated to reveal in advance that the lawsuit was pending or that it was a large one.

AIG filed its securities fraud lawsuit against Bank of America in 2011. The insurer claimed that the bank misrepresented the quality of over $28 billion of mortgage-backed securities it purchased not just from the bank but also from its Merrill Lynch (MER) and Countrywide units. On the day that the complaint was filed, shares of Bank of America dropped 20.3% and Standard & Poor’s revoked the tripe-A credit rating it had issued.

The shareholder plaintiffs claim that the bank’s officers, including Chief Executive Brian Moynihan, knew about the MBS fraud case six months before the lawsuit was submitted and they should have given them advance warning.

JPMorgan’s Admission to CFTC of “Reckless” Trading Could Lead to More Securities Fraud Cases

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

According to one brokerage executive who spoke with Advisen, JPMorgan Chase & CO.’s (JPM) admission to the Commodities Futures Trading Commission when settling securities allegations over its London Whale debacle that it engaged in “reckless” trading could get the financial firm into more legal trouble with investors.

The CFTC implied that because of certain “manipulative” actions, JPMorgan managed to sell $7B in derivatives in one day, including $4.6 billion in three hours. That the term “manipulate” was used could prove useful to plaintiffs (The regulator also accused the firm of using manipulative device related to credit default swaps trading, which violated a Dodd-Frank provision prohibiting such behavior). JPMorgan will pay $100 million to settle the securities fraud cause with the agency.

With the Securities and Exchange Commission also now seeking to obtain admission of wrongdoing from defendants in certain instances, such acknowledgments to regulators could impact firm’s insurance coverage terms. Right now, standard directors and officers coverage policies exclude personal profiting, fraud, and other illegal conduct. Admissions of fraud, however, could nullify such policies.

SAC Capital Advisors LP Expected to Plead Guilty to Insider Trading Criminal Charges

Published on: October 31, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, hedge fund SAC Capital Advisors is expected to plead guilty to criminal charges involving securities fraud allegations as early as next week. The multibillion-dollar hedge fund is owned by billionaire Stephen Cohen.

Sources told the WSJ that SAC will plead guilty as part of a settlement to resolve insider trading allegations made by federal prosecutors. Also, Cohen is expected to agree to stop managing money outside the fund and pay about $1.2 billion in government penalties—the largest penalty ever for insider trading.

Meantime, SAC and Cohen are still in the middle of hashing out the securities case filed by the Securities and Exchange Commission. That civil lawsuit also seeks a ban against Cohen from managing outside funds because he allegedly disregarded signs that insider trading was taking place at his firm. They say he inadequately supervised employees, allowing the fraud to happen.

Massachusetts Securities Regulators Fine Merrill Lynch $500,000 For Alleged Failure to Stop Rogue Broker

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

Merrill Lynch Pierce Fenner & Smith Inc. (MER) must now pay Massachusetts securities regulators a fine for allegedly failing to supervise a broker who went on to defraud customers. According to regulators and prosecutors, when she was with Merrill, now ex-broker Jane E. O’Brien borrowed over $2 million of clients’ funds. She pleaded guilty to fraud charges last year and is barred from the securities industry.

O’Brien received a thirty-three month prison term and was told to pay restitution of $240,000. She was the top producer at the firm’s Boston office, where she brought in close to $154 million in client assets and earned $903,734 in revenue during her first year with Merrill. Massachusetts Secretary of the Commonwealth William Galvin, whose office oversees the regulators there, said that this was another example of top producers “being held to a different standard” because of the money they make for their firms.

Although Merrill agreed to pay the “failure to supervise” fine, it has not admitted to violating any laws. A firm spokesperson says that as soon as they knew there might be a problem, an internal investigation was conducted and O’Brien resigned.

Is JPMorgan on the Verge of Settling A $5.75 Billion Mortgage-Backed Securities Case Filed by BlackRock & Neuberger Berman Group?

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

After its tentative $13 billion residential mortgage-backed securities settlement with the US Department of Justice, now JPMorgan Chase & Co (JPM) looks like it could be getting ready to settle yet another MBS fraud case, this time with bondholders, such as Neuberger Berman Group LLC, Allianz SE’s Pacific Investment Management, and BlackRock Inc. (BLK). Investors want at least $5.75 billion dollars.

The group of over a dozen bondholders already had reached a settlement in 2011 in an $8.5 billion mortgage-backed securities case against Bank of America Corp (BAC) over similar allegations. Now, the institutional investors want restitution over bonds that JPMorgan sold—those from the firm itself and also from Washington Mutual (WAMUQ) and Bear Stearns (BSC).

JPMorgan has been settling a lot of securities cases lately. Its $13B RMBS deal with the DOJ resolves a number of matters, including Federal Housing Finance Agency claims for $4 billion. The FHFA believes that J.P. Morgan gave Fannie Mae (FNMA) and Freddie Mac (FMCC) inaccurate information about the quality of the loans they bought from the bank ahead of the decline of the economy in 2008. $5 billion of the proposed RMBS settlement is for penalties and the remaining $4 billion is for the relief of consumers.