Misrepresentations and Omissions

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

Published on: May 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man

Published on: May 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has charged David M. Connolly with running a Ponzi-like scam involving investment vehicles that bought and managed Pennsylvania and New Jersey apartment rental buildings. According to prosecutors in New Jersey, Connolly’s alleged victims were defrauded of $9 million. He also faces criminal charges.

None of Connolly’s securities offerings were registered with the SEC. (Since 1996, he had raised more $50 million from over 200 clients who invested in over two dozen investment vehicles.)

Per the Commission’s complaint, in 2006 Connolly allegedly started misrepresenting to clients that their funds were to be solely used for the property linked to the vehicle they had in invested in when (unbeknownst to them) he actually was mixing monies in bank accounts and using their funds for other purposes. Although clients were promised monthly dividends from cash-flow profits that were to come from apartment rentals and their principal’s growth from property appreciation, these projected funds did not materialize. Instead, Connolly allegedly ran a Ponzi-like scam that involved earlier investors getting their dividend payments from the money of newer investors.

He also allegedly made materially false and misleading omissions and statements about: investors’ money being placed in escrow until a purported real estate transaction closed, the financial independence and state of each property, the amount of equity victims had in properties, and the condition of each property. (Also containing allegedly false material misrepresentations and omissions was the “offering prospectus,” which provided information about how the investment vehicles would use the investor funds, the projected investment returns, prior vehicles performances, the mortgage financials for the real estate held in the investment vehicles, and the apartment buildings’ vacancy rates.)

Connolly is accused of improperly using proceeds from refinanced properties to keep his scheme running, and he even allegedly took $2 million of investors’ funds for himself. After he stopped giving dividend payments to investors in April 2009 (when money from new investors stopped coming in and the investment vehicles’ properties went into foreclosure), Connolly allegedly kept making sure he was getting dividends and a $250,000 income from the remaining client funds.

Meantime, a federal grand jury has charged him with one count of securities fraud, three counts of wire fraud, five counts of mail fraud, and seven counts of money laundering. A conviction for securities fraud comes with a 20-year maximum prison term and a $5 million fine. The other charges also come with hefty sentences and fines.

Read the SEC Complaint (PDF)

Multimillion-Dollar Real Estate Ponzi Schemer Indicted For Fraud And Money Laundering, Justice.gov, May 17, 2012

More Blog Posts:
Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term, Stockbroker Fraud Blog, May 8, 2012

JPMorgan Chase $2B Trading Loss Leads to Probes by the SEC, Federal Reserve, and FBI, Institutional Investor Securities Blog, May 15, 2012

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss

Published on: May 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Two securities lawsuits have been filed on behalf of shareholders and investors of JPMorgan Chase & Co. (JPM) over the financial firm’s $2 billion trading loss from synthetic credit products. According to CEO Jamie Dimon, the massive loss is a result of “egregious” failures made by the financial firm’s chief investment officer and a hedging strategy that failed. Both complaints were filed on Tuesday in federal court.

One securities case was brought by Saratoga Advantage Trust — Financial Services Portfolio. The Arizona trust is seeking to represent everyone who suffered losses on the stock that it contends were a result of alleged misstatements the investment bank had made. Affected investors would have bought the stock on April 13 (or later), which is the day that Dimon had minimized any concerns about the financial firm’s trading risk during a conference call.

Per Saratoga Advantage Trust v JPMorgan Chase & Co., the week after the call, losses from the trades went up to about $200 million a day. The Arizona Trust is accusing Dimon and CFO Douglas Braunstein of issuing statements during that conversation that were misleading and “materially false,” as well as misrepresenting not just the losses but also the risks from major bets placed on “derivative contracts involving credit indexes reflecting corporate bonds interest rates.”

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities

Published on: May 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The 11th U.S. Circuit Court of Appeals has revived the US Securities and Exchange Commission’s fraud lawsuit against Morgan Keegan & Co. accusing the financial firm of allegedly misleading investors about auction-rate securities. The federal appeals court said that a district judge was in error when he found that alleged misrepresentations made by the financial firm’s brokers were immaterial. The case will now go back to district court. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit.

The SEC had sued Morgan Keegan in 2009. In its complaint, the Commission accused the financial firm of leaving investors with $2.2M of illiquid ARS. The agency said that Morgan Keegan failed to tell clients about the risks involved and that it instead promoted the securities as having “zero risk” or being “fully liquid” or “just like a money market.” The SEC demanded that Morgan Keegan buy back the debt sold to these clients.

In 2011, U.S. District Judge William Duffey ruled on the securities fraud lawsuit and found that Morgan Keegan did adequately disclose the risks involved. He said that even if some brokers did make misrepresentations, the SEC had failed to present any evidence demonstrating that the financial firm had put into place a policy encouraging its brokers-dealers to mislead investors about ARS liquidity. Duffey pointed to Morgan Keegan’s Web site, which disclosed the ARS risks. He said this demonstrated that there was no institutional intent to fool investors. He also noted that a “failure to predict the market” did not constitute securities fraud and that the Commission would need to show examples of alleged broker misconduct before Morgan Keegan could be held liable.

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges

Published on: December 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has charged six ex-executives of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) with securities fraud. The Commission claims that they not only knew that misleading statements were being made claiming that both companies had minimal holdings of higher-risk mortgage loans but also they approved these messages.

The six people charged are former Freddie Mac CEO and Chairman of the Board Richard F. Syron, ex-Chief Business Officer and Executive Vice President Patricia L. Cook, and former ex-Single Family Guarantee Executive Vice President Donald J. Bisenius. The three ex-Fannie Mae executives that the SEC has charged are former CEO Daniel H Mudd, ex-Fannie Mae’s Single Family Mortgage Executive Vice President Thomas A. Lund, and ex- Chief Risk Officer Enrico Dallavecchia.

In separate securities fraud lawsuits, the SEC accuses the ex-executives of causing Freddie Mac and Fannie Mae to issue materially misleading statements about their subprime mortgage loans in public statements, SEC filings, and media interviews and investor calls. SEC enforcement director Robert Khuzami says that the former executives “substantially” downplayed what their actual subprime exposure “really was.”

The SEC contends that in 2009, Fannie told investors that its books had about $4.8 billion of subprime loans, which was about .2% of its portfolio, when, in fact, the mortgage company had about $43.5 billion of these products, which is about 11% of its holdings. Meantime, in 2006 Freddie allegedly told investors that its subprime loans was somewhere between $2 to 6 billion when, according to the SEC, its holdings were nearer to $141 billion (10% of its portfolio). By 2008, Freddie had $244 billion in subprime loans, which was 14% of its portfolio.

Yet despite these facts, the ex-executives allegedly continued to maintain otherwise. For example, the SEC says that in 2007, Freddie CEO Syron said the mortgage firm had virtually “no subprime exposure.”

It was in 2008 that the government had to bail out both Fannie and Freddie. It continues to control both companies. The rescue has already cost taxpayers approximately $150 billion, and the Federal Housing Finance Administration, which acts as its governmental regulator, says that this figure could rise up to $259 billion.

Today, Freddie Mac and Fannie Mae both entered into agreements with the government that admitted their responsibility for their behavior without denying or admitting to the charges. They also consented to work with the SEC in their cases against the ex-executives.

The Commission is seeking disgorgement of ill-gotten gains plus interest, financial penalties, officer and director bars, and permanent and injunctive relief.

SEC Charges Former Fannie Mae and Freddie Mac Executives with Securities Fraud, SEC, December 16, 2011

More Blog Posts:
Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance, Institutional Investor Securities Blog, November 30, 2011

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

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange, Stockbroker Fraud Blog, June 25, 2010

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities

Published on: December 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America, Corp. has agreed to pay investors $315 million to settle their class action claim accusing Merrill Lynch of misleading them about the risks involved in investing in mortgage-backed securities. If approved, the proposed settlement would be one of the largest reached over MBS that caused investors major losses when the housing market collapsed. The lead plaintiff in this securities case is the Public Employees’ Retirement System of Mississippi pension fund.

The class action lawsuit accused Merrill of misleading investors about $16.5 billion of MBS in 18 offerings that were made between 2006 and 2007. They are claiming possible losses in the billions of dollars. (The offerings occurred before Bank of America bought Merrill.)

The plaintiffs contend that Merrill’s offering documents were misleading. They also believe that the original investment-grade ratings for the securities, which had been backed by loans from Countrywide, IndyMac Bancorp Inc., First Franklin Financial unit, and New Century Financial Corp. were unmerited. Most of these investments were later downgraded to “junk” status.

By agreeing to settle, Bank of America is not admitting to or denying wrongdoing.

This settlement must be approved by US District Judge Jed Rakoff, who just last week rejected the proposed $285M securities settlement between Citigroup Global Markets Inc. and the Securities and Exchange Commission. He ordered that the case be resolved through trial. Rakoff was also the one who refused to approve another proposed Bank of America securities settlement—the one in 2009 with the SEC—for $33 million over misstatements that were allegedly made regarding the purchase of Merrill. Rakoff would later go on to approve the revised settlement of $150 million.

Rakoff has criticized a system that allows financial firms to settle securities fraud allegations against them without having to admit or deny wrongdoing. He also has expressed frustration at the “low” settlements some investment banks have been ordered to pay considering the amount of financial losses suffered by investors.

Our securities fraud lawyers represent individual and institutional clients that sustained losses related to non-traded REITs, private placements, principal protected notes, auction-rate securities, collateralized debt obligations, mortgage-backed securities, reverse convertible bonds, high yield-notes and other financial instruments that were mishandled by broker-dealers, investment advisers, or their representatives. We also work with victims of Ponzi scams, affinity scams, elder financial fraud and other financial schemes.

BofA Merrill unit in $315 mln mortgage settlement, Reuters, December 6, 2011

Public Employees’ Retirement System of Mississippi

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

Ex-Lehman Brothers Holdings Chief Executive Defends Request that Insurance Fund Pay Legal Bills, Stockbroker Fraud Blog, October 19, 2011

SEC Says Former United Commercial Bank Executives Concealed Millions of Dollars in Losses that Caused Bank’s Failure

Published on: October 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed securities fraud charges against former United Commercial Bank executives accusing them of concealing loss from assets and loans from auditors that resulted in UCBH Holdings Inc., its public holding company, to understate its operating losses in 2008 by at least $65 million. As the bank’s loans continued to go down in value, the financial firm went on to fail and the California Department of Financial Institutions was forced to shut it down. This resulted in a $2.5 billion loss to the Federal Deposit Insurance Corporation’s insurance fund.

Per the SEC’s complaint, former chief operating officer Ebrahim Shabudi, chief executive officer Thomas Wu, and senior officer Thomas Yu were the ones that hid the bank’s losses. All three men are accused of delaying the proper recording of the loan losses and making misleading and false statements to independent auditors and investors and concealing from them that there had been the major losses on a number of large loans, property appraisals had gone down, property appraisals had been reduced, and loans were secured by worthless collateral.

Also accused of securities fraud by the SEC is former United Commercial Bank chief financial officer Craig On. The Commission said that he aided in the filing of false financial statements and misled outside auditors. To settle the SEC charges, On has agreed to pay a $150,000 penalty. He also agreed to an order suspending him from working before the SEC as an accountant for five years. He is permanently enjoined from future violations of specific recordkeeping, reporting, anti-fraud, and internal controls provisions of federal securities laws.

Criminal charges have also been filed against Shabudi and Wu. A grand jury indicted both men of conspiring to conceal loan losses, misleading regulators and investors, and lying to external auditors. Wu and Shabudi allegedly used accounting techniques and financial maneuvers, including concealing information that would have shown its decline, understating loan risks, and falsifying books, to hide the fact that that the bank was in trouble.

This is the first time such charges have been made against executives who worked at a bank that obtained government money—$298 million from TARP—to keep it running during the economic collapse.

Prior to its demise, United Commercial Bank, which was the first US bank to acquire a bank in China was considered a leader in the industry. It amassed assets of up to $13.5 billion in 2008. However, it also soon $67.7 million—way down from its $102.3 million profit in 2007. East West Bank acquired United Commercial Banks after regulators took it over in 2009.

Meantime, the FDIC is taking steps to bar 10 former United Commercial Bank officers from ever taking part in the banking industry.

SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis, SEC, October 11, 2011

Read the SEC Complaint (PDF)

Feds file charges against execs of failed United Commercial Bank, Mercury News, October 11, 2011

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