Investor Lawyers Blog

JP Morgan Sued by Dexia in $1.7B MBS Lawsuit

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

Dexia SA (DEXB) is suing JP Morgan Chase & Co. (JPM ) for over $1.7 billion. In its mortgage-backed securities lawsuit, the Belgian-French bank contends that the loans underlying the securities that the US bank sold it were riskier than what they were represented to be.

JP Morgan and its companies, Washington Mutual (WM) and Bear Stearns Co., are accused of “egregious” fraud for allegedly making and selling mortgage bonds backed by loans that they knew were “exceptionally bad.” Dexia claims it sustained substantial losses.

According to The New York Times, there are a slew of employee interviews and internal e-mails related to this MBS lawsuit that talk about how the three firms disregarded quality controls and problems—perhaps even concealing the latter—in order to make a profit from these mortgages that were packaged into complex securities. They are accused of seeking to avail of the mortgage-backed securities demand during the housing boom even as doubts began to arise about whether or not these investments were good quality. Court filings report that JPMorgan would get mortgages from lenders that didn’t have stellar records, assigning Washington Mutual and American Home Mortgage a “poor” grade on its “internal ‘due diligence scorecard.’” The loans were then swiftly sold off to investors.

Amendments Clarify FINRA’s Right to Look at Firm Records, Books

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

The Securities and Exchange Commission has approved rule amendments that provide greater clarity about the Financial Industry Regulatory Authority’s right to examine and copy the records and books of its member financial firms and associated persons. Per amended Rule 8210, staff and adjudicators are entitled to copy and inspect “data in the “possession, custody or control” of members and any others that the SRO has jurisdiction over. This amended rule becomes effective on February 25.

The amendments makes clear that the records and books are covered by rule 8210.The phrase “possession, custody or control” was added to including concept of the existing body of case law that defines these three terms they way that they are used in the Federal Rules of Civil Procedure’s Rule 34. The broker-dealer and associated persons relationship is also clarified so it is obvious that all aspects of that affiliation are subject to a Rule 8210 request.

The SEC has also approved amendments to FINRA arbitration codes. This will let arbitrators order member firms and associated persons to serve as witnesses or produce documents without being subject to the subpoena process. Additionally, the amendments added procedures for non-parties to contest subpoenas and for non-parties and parties to oppose arbitrator orders of production.

Oppenheimer Must Pay $30M to US Airways Group Over ARS Losses

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

A Financial Industry Regulatory Authority arbitration panel says that Oppenheimer & Co. has to pay US Airways Group Inc. (LCCC) $30 million for losses that the latter sustained in auction-rate securities. The securities arbitration case is related to the airline group’s contention that the financial firm and one of its former brokers misrepresented certain ARS that were structured and private placement.

US Airways had initially sought $110M in compensatory damages and $26 million in interest and legal fees. The FINRA panel, however, decided that Oppenheimer and its ex-broker, Victor Woo, owed $30 million—Woo’s part will not be greater than what he made in commissions. Oppenheimer is now thinking about whether to submit a motion to vacate the arbitration panel’s order.

The financial firm is, however, going to go ahead with the arbitration it had filed against Deutsche Bank (DB) to get back the award money and associated costs from this case. Oppenheimer’s claim against Deutsche Bank is linked to the US Airways case but became a separate proceeding in 2010.

JPMorgan, Goldman Sachs, Bank of New York Mellon, Charles Schwab Disclose Market-Based NAVs of Money Market Mutual Funds

Published on: February 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

While regulators continue pondering whether to impose more regulations on money market mutual funds, a number of financial institutions, including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Fidelity Investments, BlackRock Inc. (BLK), Bank of New York Mellon Corp. (BK), Federated Investors Inc. (FII), and Charles Schwab Corp.,(SCHW), started disclosing the market-based net asset values of these funds last month. Reasons given for these disclosures included offering greater transparency and giving investors more information about the market. However, some believe there are firms are issuing these disclosures because that is what their competitors are doing.

Currently, money market funds have a $1/share stable net asset value for all investor transactions. The underlying assets of the funds, which are debt securities with high ratings, however, can undergo periodic, small value changes that may slightly affect a fund’s per share market value. This is also called the shadow price, which are reasonable estimates/fair valuations of the price that an instrument could be sold at in a current trade.

A few years ago, the Securities and Exchange Commission approved modifications to its Rule 2a-7 and other rules about money market funds mandating that managers of the funds reveal changes to portfolio holdings and give the regulator the market-based net asset values of the funds. Fund information for each month has to be given to the SEC at a succeeding month. The Commission then makes the information available to the public 60 days after the month to which the data pertains has concluded. These Daily disclosures would make the data more immediate (and relevant) for investors.

Corporate Reform Coalition Praises SEC for Considering Political Spending Mandate Disclosure Rule

Published on: February 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Corporate Reform Coalition is pleased that the SEC has indicated that its staff is looking at whether to proceed with a rule that mandates disclosing corporate political spending. The group says that by including this possible rulemaking in its semi-yearly regulatory agenda, the Commission has made a critical move to protect investors, tackle the influx of secret corporate spending that has occurred since the US Supreme Court’s ruling in Citizens United, and help in the disclosure of key political spending information.

The CRC is comprised of over 80 pension funds, socially conscious investors, and consumer associations that seek greater accountability and transparency in corporate political spending. According to CRC co-chair Lisa Gilbert, that the regulatory agency has indicated that it intends to put out a notice of proposed rulemaking by April is “one step further” toward its commitment to a rule. However, some disclosure attorneys are reportedly skeptical that the SEC will actually take on this rulemaking.

Following the US Supreme Court’s ruling in Citizens United v. Federal Elections Commission in 2010, shareholders have been wanting more transparency related to how companies spend their lobbying money. In 2011, the Committee on Disclosure of Corporate Political Spending turned in a rulemaking petition to the SEC seeking regulations that would mandate disclosures. 322,000 comment letters have since followed—most from investors supporting mandated disclosure.

Texas Securities Criminal Case Against Oil and Gas Company Executive Can Proceed, Rules Fifth Circuit

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

The U.S. Court of Appeals for the Fifth Circuit says it will not dismiss the Texas investment fraud case filed by the US Department of Justice against Joshua Wayne Bevill on the grounds of collateral estoppel and double jeopardy. The court held that although the Texas man previously pleaded guilty to securities fraud in a case that was related, he has not succeeded in showing collateral estoppel, or how, for double jeopardy purposes, the two cases’ respective “offenses are in law and in fact the same offense.'”

In this criminal case, Bevill is accused of committing financial fraud through a third company, Progressive Investment Partners. He allegedly took on a false identity and stole investor money (to pay for his expensive lifestyle) under the guise of getting them to invest in a supposed oil and gas venture. According to the government, he pleaded guilty to effecting a monetary transaction involving funds that were criminally derived.

Meantime, in the other Texas securities case to which Bevill already has pleaded guilty, he used his two companies, North Texas Partners and United Star Petroleum, which are based in Dallas, to bring in millions of dollars from investors by claiming to sell interests in purported oil and gas development projects.The government says that the defendant was actually just stealing their money.

Bevill has since tried to argue that the securities fraud charges from the two criminal cases are for the same offense. The Fifth Circuit, however, disagrees. The court determined that while Bevill committed the same type of investment scam on the two occasions, the actual acts involved are different and precludes the Double Jeopardy clause from being applied. Also, the court said that since the government has to now show that Bevill made statements to the victims that were fraudulent and this was not shown in the other case, he therefore did not show collateral estoppel.

Related Web Resources:
Northern District of Texas Successfully Prosecuted Numerous Individuals for Fraud in Connection with Oil and Gas Investments in Recent Years, US Department of Justice, January 12, 2012

5th Cir. Rejects Double Jeopardy Bid for Dismissal, Bloomberg/BNA, January 24, 2013

Double Jeopardy Clause, Cornell University Law School

More Blog Posts:
Alleged Houston, Texas Affinity Fraud Scam Targeting Druze and Lebanese Communities Leads to SEC Charges Against Day Trader, Stockbroker Fraud Blog, January 28, 2013
District Court in Texas Dismisses Securities Fraud Case Against Sports Franchisor, Stockbroker Fraud Blog, December 15, 2012

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials, Institutional Investor Securities Fraud, December 22, 2012 Continue Reading ›

US Justice Department Sues Standard and Poor’s Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations

Published on: February 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The US Department of Justice and has filed civil fraud charges against Standard & Poor’s Ratings Service, contending that credit rating agency’s fraudulent ratings of mortgage bonds played a role in causing the economic crisis. Settlement talks with Justice Department reportedly broke down after the latter indicated that it wanted at least $1 billion. S & P was hoping to pay around $100 million. Also, there was disagreement between both sides as to whether or not the credit rater could agree to settle without having to admit to any wrongdoing.

The securities case against S & P involves over 30 collateralized debt obligations, which were created in 2007 when the housing market was at its height. The government believes that between September 2004 and October 2007 the credit rater disregarded the risks that came along with the investments, giving them too high ratings in the interest of profit and gaining market share. The ratings agency allegedly wanted the large financial firms and others to select it to rate financial instruments. Meantime, S & P continued to tout its ratings as objective, misleading investors as a result. S & P would go on to make record profits, and the complex home loan bundles eventually failed.

Although there have been questions for some time now about the credit ratings agencies’ role in creating a housing bubble, this is the first securities lawsuit brought by the government against one of these firms over the financial crisis. It was in 2010 that a Senate probe revealed that from 2004 to 2007 S & P and Moody’s Investors Service (MC) both applied rating models that were inaccurate, which caused them to fail to predict exactly how well the risky mortgages would do. The lawmakers believed that the credit rating agencies let competition between each other affect how well they did their jobs.

Federal Records Act Lawsuit Seeking to Make the SEC Reconstruct About 9,000 Enforcement-Related Documents is Dismissed

Published on: February 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Columbia has decided to dismiss the last two counts in the Citizens for Responsibility and Ethics in Washington’s Federal Records Act lawsuit against the Securities and Exchange Commission. The public interest group wants to make the SEC reconstruct about 9,000 documents related to certain enforcement probes.

Judge James E. Boasberg said that to the degree that the act’s section 3106 mandates an affirmative duty to act when I comes to destroying records, the Commission has not taken advantage of its discretion in taking internal remedial steps and, as a result, has satisfied any “duty to imposed.”

It was in August 2011 when allegations surfaced that the SEC may have improperly destroyed files related to MUIs—matters under inquiry. Sen. Chuck Grassley (R-Iowa) began questioning the agency after a whistleblower drew the matter to his attention. SEC General Counsel Mark Cahn then proceeded to order the Enforcement Division to cease from destroying documents from closed cases until notice was given to do otherwise. Then, after a probe, then-SEC Inspector General H. David Kotzlater determined that the division did not behave improperly when it got rid of such files. CREW, however, went on to file its Federal Records Act case in the hopes of obtaining a declaratory judgment noting that the destruction of the documents had violated the FRA.

Goldman Sachs Cleared in Securities Fraud Case Against Dragon Systems for Losses Related to $250M Loss in Sale to Lernout & Haspie

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

In US District Court in Boston, a federal jury has decided that Goldman Sachs (GS) isn’t at fault for the $250M sustained by the owners of Dragon Systems Inc. after they sold their speech recognition company to Lernout & Hauspie Speech Products for $580M. Goldman had served as adviser to Dragon over the deal.

L & H, which is based in Belgium, went bankrupt after the acquisition amidst reports that it was inflating its sales figures and revenue and fabricating customers. The company’s top executives went to jail.

Plaintiffs Janet and James Baker, who own Dragon, had accused Goldman of negligence for failing to detect the fraud that was taking place L & H. Their lawyer claims that the financial firm took the job despite lacking the experience needed to properly sell this type of technology company. Dragon paid Goldman $5 million for its services. (The Bakers have already settled other cases related to the L & H acquisition of Dragon for $70M.

UBS & Citi Do Have to Arbitrate Auction-Rate Securities Case Filed by Health Care Nonprofit Carilion Clinic

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

According to the U.S. Court of Appeals for the Fourth Circuit, a district court was right when it decided not to stop Carilion Clinic’s arbitration proceeding against Citigroup Global Markets (C) and UBS Financial Services (UBS) for an ARS issuance that proved unsuccessful. The financial firms had served the healthcare nonprofit in a number of capacities, including providing underwriting services.

Carilion had retained UBS and Citi in 2005 to raise over $308M so that it could redo its medical facilities. They are accused of recommending that Carilion put out over $72M of bonds in the form of variable demand rate obligations and $234 million in ARS.

When the auction-rate securities market took a huge dive in February 2008, Citi and UBS ended their policy of supporting the market and the auctions started to fail. As a result, result, Carilion allegedly was forced to refinance what it owed to avoid higher interest rates and it sustained losses in the millions of dollars. The nonprofit later began auction-rate securities arbitration proceedings with FINRA against both firms.