Investor Lawyers Blog

$13B MBS Fraud Settlement Between JPMorgan and the US is Under Dispute in New Securities Lawsuit

Published on: February 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Better Markets, a non-profit group, is suing the US Department of Justice to block the $13 billion mortgage-backed securities fraud settlement reached between the federal government and JP Morgan Chase (JPM). The group wants the deal to undergo judicial review.

The settlement resolves DOJ mortgage bond claims with a $2 billion civil penalty and includes $4 billion of consumer relief, another $4 billion to settle claims related to Freddie Mac and Fannie Mae, and another $1.4 billion to settle a National Credit Union Administration-instigated securities case. JPMorgan sold the mortgage bonds in question in the years heading into the housing market collapse. The loans that were involved lost value or defaulted when the bubble burst.

As part of the agreement, the firm acknowledged that it made “serious misrepresentations” about the MBS to investors. While the deal doesn’t release the bank from criminal liability, it grants civil immunity for its purported actions. Now, Better Markets, which describes itself as a “Wall Street” watchdog, is saying that the record settlement between the US government and JP Morgan was “unlawful” because a court did not review the deal.

JPMorgan Will Pay $614M to US Government Over Mortgage Fraud Lawsuit

Published on: February 8, 2014 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. (JPM) has agreed to settle securities allegations that it defrauded federal agencies by underwriting mortgage loans that were sub-standard. As part of the agreement with the US government, the bank acknowledged that for over 10 years it approved thousands of insured loans that were ineligible for insurance by the Department of Veterans Affairs of the Federal Housing Administration. The Justice Department claims that as a result of JPMorgan’s actions, both the VA and FHA sustained significant losses because loans that were not qualified failed.

The mortgage fraud lawsuit is over the financial firm’s involvement in US programs that let private-sector lenders approve mortgages for government refinancing or insurances. According to prosecutors, JPMorgan violated the rules on a routine basis when it approved loans that did not meet the program’s criteria. One example, noted by Bloomberg.com, is the bank’s decision to underwrite a loan for an Indiana property and approving it for FHA insurance even though the rules don’t allow for reliance on documents that are over 120 days old to verify the assets of the borrower. After just three payments, the borrower defaulted. Because JPMorgan was the note’s holder, the Department of Housing and Urban Development paid a $109,253 insurance claim.

The Justice Department says that as part of the securities settlement the bank has also admitted that it did not let agencies know that its own internal reviews uncovered over 500 defective loans that should not have been turned in for VA and FHA insurance. According to United States attorney in Manhattan Preet Bharara, JPMorgan put “profits ahead of responsibility.”

How Can you Recover Your Loss on UBS Puerto Rico Municipal Bonds?

Published on: February 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Previous articles have described the numerous problems that many investors currently face as a result of investments their broker at UBS or another brokerage firm made to invest in Puerto Rican municipal bonds. Other posts have discussed why UBS knew or should have known that those problems were imminent, and yet kept selling those bonds to virtually all of its clients. Those problems have even gotten worse, as Moody’s has followed suit from Standard & Poor’s and downgraded approximately $55 billion worth of Puerto Rico’s outstanding bonds, pushing many of those into junk bond status. The question becomes, now what? What options do investors have?

Broker-dealers, like UBS and UBS Puerto Rico, are regulated by the Financial Industry Regulatory Authority (“FINRA”). FINRA rules give customers of broker-dealers the option of filing complaints against their broker and his employing company in arbitration. Arbitration is a court alternative. It can be quicker and less expensive than a claim filed in a state or federal court; FINRA arbitration cases typically take between 12 to 18 months from when they are filed to when a decision is rendered by the arbitrators.

The proceedings are also much less invasive for the customer bringing the claim. Typically, customers are not required to respond to written questions under oath, submit to depositions, or in person questioning on the record, or other similar discovery procedures which occur in court litigation. Instead, the customers are generally only required to produce certain paper documents in their possession; things like statements from their broker, letters and/or emails between themselves and their broker, certain tax records, etc. The only other requirement is to attend a final, in person hearing, similar to a trial in court, where the customer will have the opportunity to explain their story before the arbitrators.

Standard and Poor’s Reduces Puerto Rico Obligation Debt to Junk Status

Published on: February 6, 2014 | by Shepherd Smith Edwards & Kantas, LLP

This week, Standard & Poor’s (“S&P”) cut the credit rating for Puerto Rico’s general obligation debt to junk-bond status due to concerns about an inability to access capital markets. S&P had put the US territory’s rating on notice for such a downgrade late last year. Now, the credit rating agency announced, it is officially issuing that downgrade to a “BB”-a level under investment grade.

The credit rating agency believes that the Caribbean island’s ability to sell additional debt in $3.7 trillion municipal bond market is limited and cash shortages could happen. Because of such “liquidity constraints,” S & P does not feel that an investment-grade rating is warranted. The agency also cut its rating on Puerto Rico’s Government Development Bank to a BB, as well.

Puerto Rico has been in peril of getting a ratings downgrade by all three US credit raters for some time now in part because of its $70 billion of tax-free debt. Responding to the junk status downgrade, Puerto Rico’s Treasury Secretary and Government Development Bank said that S & P’s decision was a disappointment but they remained “confident” that the US territory had enough liquidity to meet such needs through the fiscal year’s conclusion.

Claims Mount: UBS Loss Larger Than Reported in Puerto Rico

Published on: February 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The losses that investors in Puerto Rico bonds and UBS Puerto Rico bond funds have suffered continue to mount, and the downgrade to high risk, or “junk bond” status is only going to make things worse. In 2013 alone, investors in Puerto Rican bonds saw losses of over 20%. However, those losses do not include the leverage that many investors were ultimately exposed to. Many investors were sold proprietary investments funds created by UBS. Those funds borrowed additional funds to be able to purchase even larger amounts of Puerto Rican bonds. This strategy increases the potential gains an investor can make, but also increases the potential losses. Investors in funds that were 50% leveraged, which many UBS funds were, saw losses closer to 40%.

This permitted these UBS funds to see losses of over $1.6 billion. Moreover, these losses do not take into account the losses of investors who were convinced to buy Puerto Rico bonds outside of these funds, or investors who lost additional money through extra leverage sold by their brokers.

Many investors were convinced to borrow more money, either through a margin account, a bank loan, or through a second mortgage, to make even larger investments, exponentially increasing their risk. These layers of borrowed money made it possible for some investors to see their entire accounts get wiped out.

SEC Suspends 225 Dormant Shell Companies to Prevent Pump-and-Dump Scams

Published on: February 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission said that as part of Operation Shell-Expel, its initiative to fight microcap fraud, it is suspending trading in 255 dormant shell companies that it says are “ripe for abuse in the over-the-counter market.” The regulator’s Office of Market Intelligence in its Enforcement Division has been looking through penny stocks and finding inactive companies.

Already, several hundred dormant shell companies have been suspended to protect them from fraudsters and from pump-and-dump scams, which is common with microcap companies. Schemers will use misleading and false statements to talk up a company’s thinly traded microcap stock. They will then buy the stock at a low figure to inflate the price to make it appear as if there is market activity. The next step involves getting rid of the stock by selling at that higher price and making huge profits.

These latest suspensions involve companies in two foreign countries and 26 US states. If a stock gets suspended from trading, relisting is not possible unless the company gives current financial data to show that it is still in business. Because many dormant shell companies are unlikely to do this, the shells become worthless to fraudsters.

Morgan Stanley to Pay $1.25B in Mortgage-Backed Securities Lawsuit by FHFA

Published on: February 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) will pay $1.25 billion to the Federal Housing Finance Agency to resolve the latter’s securities fraud lawsuit accusing the firm of selling mortgage bonds to Freddie Mac (FMCC) and Fannie Mae without apprising them of the risks. A lot of the loan involved in this MBS lawsuit against Morgan Stanley came from subprime lenders, such as IndyMac and New Century. The loans were packaged into bonds.

The brokerage firm, which sold $10.58 billion in mortgage-backed securities that were issued between September 2005 and September 2007, is the eighth financial firm to settle with FHFA over the more than $200 billion in securities that came with offering materials that purportedly misled the two government-backed lenders about the quality of the loans behind their investments. FHFA sued 18 financial institutions asking for unspecified damages in 2011.

To date, the government agency has collected about $9.1 billion. Recent settlers include Deutsche Bank AG (DB), which is paying $1.93 billion and JP Morgan Chase (JPM), which settled for $4 billion. Among those that have yet to settle with FHFA is Bank of America Corp. (BAC), which is being sued, along with two of its firms—Merrill Lynch & Co. (MER) and Countrywide Financial Corp.—for over more than $57.4 billion in securities. FHFA wants at least $6 billion from them.

SIFMA Tells Labor Department To Wait For SEC on Fiduciary Rulemaking

Published on: February 3, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Industry and Financial Markets Association wants the US Labor Department to hold back on putting out its expected proposed rule modifying its definition of fiduciary standard of care until the Securities and Exchange Commission decides whether it will put out its own standard for financial professionals. SIFMA is worried that new DOL rules might harm brokers that purchase and sell bonds and stocks in addition to offering investment advice.

The SEC and DOL are both working on fiduciary rules. While many agree that brokers such have fiduciary duties to their clients, there are those who worry that this could make commission-based professional relationships in which a financial representative offers products from his/her employer more challenging. SIFMA says it would like a business model that includes a uniform fiduciary standard that doesn’t prevent a client from buying such products if desired.

The Labor Department, which is accountable for enforcing Employee Retirement Income Security Act rules over qualified plans, is expected to propose a stronger standard than the SEC. Already, ERISA places high care standards and loyalty on the fiduciaries of IRAs and pension plan and the DOL makes it a priority to protect customers from the conflicts of interest of advisors.

Seniors and Retirees Suffer Massive Losses in Puerto Rico

Published on: January 31, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Many of the people hit hardest by the massive collapse of the market for Puerto Rico bonds have been seniors and retirees, for two main reasons. First, seniors and retirees have the most amount of money available to invest on average. They have worked for their entire lifetimes, dutifully and diligently saving for a comfortable retirement. This means that these individuals are highly desirable and sought after clients for brokers, whose income is largely dependent upon how much money they are managing for people. This also means that when brokers give bad advice, seniors and retirees have the most to lose. Sadly, they are also the least able to recover from those losses, as they have little, if any, time left working to try to save and replace what was lost.

For the last several years, UBS Puerto Rico has been pushing Puerto Rico bonds and UBS’s proprietary Puerto Rico bond funds on many if not most of its clients. Previous posts have discussed what many of those recommendations have entailed, and why they were inappropriate for most people. The second reason seniors have been some of the hardest hit is that the sales pitch for those bonds were very simple. Brokers would explain that municipal bonds are traditionally one of the safest investments available. Brokers would explain that retirees could also use those bonds to generate regular income for themselves, and, best of all, the income was tax free! The bonds practically sell themselves.

However, what most seniors and retirees did not understand, and what the UBS brokers apparently were not telling them, is that Puerto Rico bonds were actually very high risk investments. UBS was artificially propping up the market for the bonds so that they appeared safer and more stable than they truly were. Moreover, the bonds are backed by Puerto Rico, in varying ways. UBS was well aware that Puerto Rico was suffering massive problems with its economy and tax base, making it very difficult, if not impossible, for Puerto Rico to support the debt it was carrying. Finally, UBS’s recommendations to invest heavily, if not exclusively, in Puerto Rico bonds changed what is commonly a conservative investment, municipal bonds, into a speculative investment.

FINRA Issues Investor Alert on IRA Rollovers

Published on: January 31, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has put out an alert to help investors figure out whether an IRA rollover is the right choice. Gerri Walsh, the self-regulatory organization’s senior VP for Investor Education said that comparing investment choices and costs can prevent “unnecessary cracks” to one’s “nest egg.”

FINRA offers 10 tips when deciding about an IRA Rollover:

• Assess your transfer options: do you keep in an ex-employer’s plan, move assets to a new employer’s plan, roll over plan assets into an IRA, or cash out your balance?