Financial Crisis News Center

Court Approves Bank of America Settlement with SEC

This story appeared in Bank Digest.

The U.S. District Court for the Southern District of New York has approved a $150 million Bank of America settlement with the Securities and Exchange Commission. The settlement stems from Bank of America's failure to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies. The court determined that the bank failed to adequately disclose bonuses and losses, but that it was unclear whether the lack of disclosure resulted from negligence or intentional fraud.

White Paper on Mortgage Fraud Updated

This story appeared in Bank Digest.

The Federal Financial Institutions Examination Council has released an updated edition of its white paper on mortgage fraud detection and deterrence. The primary objective is to help examiners understand, identify, and detect mortgage fraud schemes and elements. The white paper defines various types of fraud, gives examples of how individuals commit fraud, provides a list of red flags, and outlines best practices.

Fraud Charges Filed Against Bank of America, Former Executives

This story appeared in Bank Digest.

The New York Attorney General has filed a civil suit alleging that Bank of American, its former CEO Kenneth Lewis and its former CFO Joseph Price, misled shareholders and the federal government in order to complete a merger with Merrill Lynch. According to the suit, Bank of America's management intentionally failed to disclose massive losses at Merrill so that shareholders would vote to approve the merger and, once the deal was approved, manipulated the government into saving the deal with billions in taxpayer funds by falsely claiming that Bank of America otherwise would back out. Special Inspector General for the Troubled Asset Relief Program Neil Barofsky has assisted in the suit. House Oversight and Government Reform Committee Domestic Policy Subcommittee Chairman Dennis Kucinich, D-Ohio, whose subcommittee held five hearings investigating the merger, called the suit “a critical step towards ending the culture of corruption on Wall Street.”

State Street Bank to Settle Charges of Misleading Subprime Mortgage Investors

This story appeared in Bank Digest.

State Street Bank and Trust has agreed to settle SEC charges that it misled investors about their exposure to subprime investments while selectively disclosing more complete information to specific investors. The company has agreed to pay more than $300 million that will be distributed to investors who lost money during the subprime market meltdown in 2007, in addition to nearly $350 million it previously agreed to pay to investors to settle private claims. The SEC said the suit arose from joint efforts with the Massachusetts Securities Division and the Massachusetts Attorney General's office.

FTC Proposes to Regulate Mortgage Foreclosure Assistance Services

This story appeared in Bank Digest.

In an effort to protect consumers from bogus foreclosure rescue and mortgage modification services, the FTC has proposed a rule that would prevent companies from charging up-front for these services. Instead, a company could only collect payment after it has a documented offer from a mortgage lender or servicer that lives up to the promises the company has made. The proposed rule would bar service providers from telling consumers to stop communicating with their lenders or mortgage servicers and ban certain misrepresentations about the services and costs. It also would impose disclosure requirements.

The proposed rule would apply to for-profit companies that, in exchange for a fee, offer to work with lenders and servicers on behalf of consumers to modify the terms of mortgage loans or to take other steps to avoid foreclosure on those loans. Attorneys representing consumers in bankruptcy or other legal proceedings would be exempt from the advance-fee ban but not from the rest of the rule.

SEC Files Fraud Case Against Escrow Agent

This story appeared in Bank Digest.

The SEC has announced that the filing of a civil action in a federal district court against David W. Wehrs and Maryland Title and Escrow Co., Inc., which is owned and operated by Wehrs. According to the SEC’s Litigation Release, the agency  alleges that through at least July 2009, Wehrs acted as an investment adviser and fraudulently induced at least 13 investors to provide him with at least $1.96 million for investment into a purported FDIC-insured money market fund that Wehrs “guaranteed” would pay 10.85 percent interest annually. Instead, according to the SEC’s complaint, Wehrs misappropriated and used the investment principal for personal and business reasons.

SEC Reorganizes Enforcement Division, Revises Manual on Cooperation

This story appeared in Jim Hamilton's World of Securities Regulation.

The SEC's Enforcement Division named leaders of national specialized units it has established in five priority areas dedicated to particular highly specialized and complex areas of securities law. The division also created a new Office of Market Intelligence that will be responsible for the collection, analysis, and monitoring of the tips, complaints and referrals received by the agency. In addition, the Commission announced a series of measures to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency's investigations and enforcement actions.

Further Charge Sought Against BofA Regarding Merrill Lynch Merger

By J. Preston Carter, J.D., LL.M., Editor, the CCH Federal Banking Law Reporter, CCH Financial Privacy Law Guide, CCH State Banking Law Reporter and Bank Digest.

The SEC announced that it plans to charge Bank of America with failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies. The SEC asked the U.S. District Court for the Southern District of New York for permission to amend its pending complaint against Bank of America to include the new charges. The agency earlier charged the bank with misleading investors about billions of dollars in bonuses that were being paid to Merrill executives. That complaint was also amended in October to add a charge for Bank of America's failure to comply with certain affirmative disclosure obligations under the federal proxy rules.

The SEC's proposed second amended complaint alleges that Bank of America learned prior to the Dec. 5, 2008, shareholder meeting vote that Merrill Lynch experienced a net loss of $4.5 billion in October and estimated that it had experienced billions of dollars of additional losses in November. The actual and estimated losses together represented approximately one-third of the value of the merger at the time of the shareholder meeting and more than 60 percent of the aggregate losses Merrill Lynch sustained in the preceding three quarters combined.

Court Rejects Media Defense in Bank of America Case

This story appeared in Jim Hamilton's World of Securities Regulation.

 

U.S. District Judge Jed Rakoff of the Southern District of New York excluded expert testimony submitted by the Bank of America in its defense to civil charges brought by the SEC. (SEC v. Bank of America Corp.) The Commission charged that the bank falsely stated in the proxy materials that solicited approval of its purchase of Merrill Lynch that the firm was prohibited from paying bonuses without the bank’s subsequent consent. As alleged, the bank had already consented in writing to Merrill’s paying up to $5.8 billion in such bonuses.

Initial CDS Insider Trading Case Survives Challenge

This story appeared in Jim Hamilton's World of Securities Regulation.

The first insider trading action filed by the SEC alleging misconduct in the credit default swaps market (SEC v. Rorech) survived a motion for judgment on the pleadings. The complaint, filed in the U.S. District Court for the Southern District of New York, alleged Renato Negrin, a former portfolio manager at hedge fund investment adviser Millennium Partners, L.P., and Jon-Paul Rorech, a salesman at Deutsche Bank Securities Inc., engaged in insider trading in the credit default swaps of VNU N.V., an international holding company.