Financial Firms

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.

J.P. Morgan’s $13B Residential Mortgage-Backed Securities Deal with the DOJ Stumbles Into Obstacles

Published on: October 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Reuters is reporting that according to a source in the know, J.P. Morgan Chase & Co.’s (JPM) tentative $13 billion residential mortgage-backed securities settlement with the US Justice Department has hit a couple of stumbling blocks. The firm is reportedly trying to include a provision that would close any criminal probes into its packaging and sale of mortgage securities-except for an inquiry by California prosecutors. This counters the bank’s earlier decision to agree to keep criminal investigations out of the deal.

The settlement, preliminarily reached last week, includes $4 billion to resolve claims made by the Federal Housing Finance Agency, which contends that J.P. Morgan misled Freddie Mac (FMCC) and Fannie Mae (FNMA) about the quality of loans the latter two bought from the investment bank before the 2008 economic crisis. Another $4 billion is for consumer relief, while $5 billion is for penalties.

The agreement also would settle a separate mortgage securities lawsuit filed separately by NY AG Eric Schneiderman against the firm over Bear Stearns (BSC)-packaged mortgage bonds. The state’s top prosecutor contended that Bear Stearns misled investors about the faulty loans behind the securities, neglected to complete assess the debt, disregarded defects that were found, and concealed its failure to properly examine the loans or reveal their risks.

Puerto Rican Labor Groups Want the US Territory to Sue UBS over the Bond Debacle

Published on: October 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services, Inc. and its Puerto Rican divisions (UBS) continue to feel the heat in the Puerto Rico Bond crisis, as labor groups in the US territory call on its government to file a bond fraud claim against the bank. They are claiming that the financial firm “tricked” the Puerto Rican government into issuing products that they knew would fail.

Also, lawmakers from the New Progressive Party want the government to investigate UBS’ practices in Puerto Rico. Already Rep. Ricardo Llerandi Cruz is asking for a Capital Inquiry into the firm, while Rep. Ángel Muñoz Suárez announced he would file a bond fraud case with the Securities and Exchange Commission.

Meantime, Carlos Ubiñas, the CEO of UBS Puerto Rico, maintains that the firm is not accountable for “market events.” Issuing a statement, Ubiñas said that the loss in the Puerto Rico bonds’ value has more to do with the market and the lingering questions about the US Commonwealth’s credit.

Merrill Lynch, Morgan Stanley Call A Broker Recruiting Truce

Published on: October 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp. (BAC) and Morgan Stanley (MS), which own the largest brokerage firms in the world, are declaring a cease-fire when it comes to using big bonuses to keep their own brokers and lure each other’s brokers away. Bank of America Corp. owns Merrill Lynch (MER).

After payments tied to Bank of America’s purchase of Merill Lynch expire in approximately two years, new retention bonuses will no longer be offered to the latter’s lead performers. Also, Morgan Stanley’s chief executive James Gorman has said that with brokers seeking to switch firms less often, compensation costs could fall.

A decline in recruiting could push up broker-dealer profits, which has been held back because of the fight between firms for the leading advisers. Some brokers have even been offered multiple times their yearly salary to move and bring their client roster with them.

Puerto Rican Bond Crisis Places Oppenheimer Funds at Risk

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

According to Investment News, along with the much publicized-UBS Puerto Rican Bond Funds, the municipal bond funds of OppenheimerFunds appear to have also been hit by Puerto Rico’s financial problems. The Oppenheimer Rochester Virginia Municipal Bond Fund (ORVAX), valued at $125 million, is down by over 15%, which places it last in the lineup of single-state municipal bond funds.

Such losses could prove an unpleasant surprise for investors in Virginia. The media publication blames the fund’s poor performance on the huge bet is placed on the Puerto Rican bond funds, which have not done very well in the wider municipal bond market because of the territory’s financial issues and the bonds’ low rating.

Investment research firm Morningstar Inc. says that the single-state municipal bond funds with over 25% of assets in the beleaguered bonds are The Oppenheimer Rochester North Carolina, Massachusetts, Arizona, and Maryland funds, with each fund down through last week by over 11%. A median single-state municipal bond fund usually holds no more than 2.38% of assets in the bonds from Puerto Rico.

Muni Bond Funds Hit by Puerto Rico’s Debt Problems

Published on: October 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The SSEK Partners Group is investigating claims by investors who bought Puerto Rico municipal bonds from UBS (UBS), Banco Santander (SAN.MC), Banco Popular and other brokerage firms. We are also looking into claims involving other muni funds that have been exposed to Puerto Rico, including the:

• Franklin Double Tax-Free Income A (ticker: FPRTX): 65% of its holdings involve Puerto Rico obligations.

• Oppenheimer Rochester VA Municipal A (ORVAX): 33% of its holdings in Puerto Rico bonds.

FINRA Arbitration Panel Awards Ex-Wedbush Securities Broker $4.2M Against the Firm

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

In a case preceding the credit crisis, a Financial Industry Regulatory Authority panel has awarded Michael Farah, an ex-star broker at Wedbush Securities Inc, a $4.2M arbitration award against the brokerage firm. Farah had accused the broker-dealer of making misrepresentations and omissions related to the collateralized-mortgage-obligation investments he recommended to clients, which he contends resulted in him losing not just customers but also yearly income.

He was the firm’s leading producer for a long time, working there from 1995 to 2005. Farah filed his securities claim against Wedbush Securities, formerly known as Wedbush Morgan Securities Inc., in 2005 and then submitted an amended case last year.

Farah sold millions of dollars in CMOs. He claimed that he was told that the securities were bond replacements. However, he contends that the plunging of CMOs price in early 2003 was not in line with what the bond desk had informed him about the securities’ volatility.

UBS Faces Legal Battle Over Failing Puerto Rico Bond Funds with Local Investors

Published on: October 3, 2013 | by Shepherd Smith Edwards & Kantas, LLP

As the value of proprietary closed-end bond funds invested created by a UBS AG unit (UBS) in Puerto Rico continue to drop, the financial firm and its 132 financial advisers find themselves facing what is expected to be a protracted legal battle with local investors who want their money back. The value of the Puerto Rico bond funds sank after over $10 billion were sold to investors. UBS is also contending with allegations that a number of its brokers persuaded clients to purchase the bond funds and bonds on a credit line and margin.

The UBS Puerto Rico funds are comprised of 14 close-end funds that were sold through UBS Financial Services Inc. of Puerto Rico’s registered representatives and brokers. As tension over the broader municipal bond market hit the US commonwealth, the net asset value of the funds became eroded, falling from an initial price of $10 to roughly $3 for some of the funds.

Unlike closed-end municipal bond funds domiciled in the US—these are only allowed to have leverage as high as 30% of the assets in the fund—the Puerto Rico bond funds’ leverage can reach as high as 50% of total assets (55%, under certain conditions). Such leverages can only make any losses greater.

JPMorgan Considers $11B Mortgage-Backed Securities Settlement

Published on: September 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Now that US Attorney General Eric Holder has turned down JPMorgan Chase’s (JPM) offer to settle criminal and civil charges related a mortgage-backed securities probe, the financial firm is looking at a settlement of possibly $11 billion. The financial figure has gone up as talks have expanded to include additional cases with more regulators.

The MBS investigations are over residential mortgage-backed securities (RMBS) that JPMorgan, Washington Mutual (WAMUQ), and Bear Stearns (BSC) issued between 2005 and 2007. Authorities have been looking into whether JPMorgan, which the other two firms acquired during the financial crisis, misled investors of the quality of the mortgages that were backing the securities. A lot of these RMBS failed as housing prices dropped. JPMorgan says that Washington Mutual and Bear Stearns issued about 70% of these RMBS.

One possible settlement could include $4 billion in relief to consumers and a $7 billion penalty. However, according to sources familiar with the settlement talks, the two sides have not come close to agreeing on the figure and the amount could change.