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.

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.”

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.

N.Y. Fed Subpoenaed for AIG Counterparty Documents

This story appeared in Bank Digest.

House Oversight and Government Reform Committee Chairman Edolphus "Ed" Towns, D-N.Y., has released a copy of the subpoena issued to the Federal Reserve Bank of New York for documents related to AIG counterparty payments. According to Towns, the subpoena will “provide the Committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout.”

Cuomo Seeks Bonus Information from TARP Banks

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.

New York Attorney General Andrew M. Cuomo sent letters to eight of the nation's largest financial institutions seeking detailed information regarding bonus allocations. Among the information requested is: a description of all bonus pools for 2009, including a description of the process by which the pools were or will be established; for the years 2007, 2008 and 2009, a description of bonuses awarded to employees receiving more than $250,000 in compensation; and a description of how the institution's bonus pool would have been impacted had it not received TARP funding. The information is requested to be provided by Feb. 8, 2010.

Cuomo Letter to:

• Bank of America
• New York Mellon
• Citigroup
• Goldman Sachs
• J.P. Morgan Chase
• Morgan Stanley
• State Street
• Wells Fargo

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.

Supreme Court Oral Argument in PCAOB Case Centers on SEC Control of the Board and Presidential Removal Powers

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Supreme Court oral arguments in the case deciding the PCAOB’s constitutionality focused on the SEC’s pervasive control over the Board and the President’s control over the SEC. The case, brought by an audit firm, is before the Court on a grant of certiorari of a split panel ruling of the DC Circuit Court of Appeals that the PCAOB’s creation was constitutional because, under the Appointments Clause of the Constitution, Board Members are inferior officers of the United States who do not have to be appointed by the President and can be appointed by the SEC, as is currently required by Sarbanes-Oxley. (Free Enterprise Fund and Beckstead & Watts v. PCAOB, Dkt. No. 08-861).

Firm and CEO Charged with Fraudulent MBS Sales

This story appeared in Bank Digest.

The Securities and Exchange Commission has announced that it has filed charges against Brookstreet Securities Corp., Irvine, Calif., and its President and CEO Stanley C. Brooks with fraud for allegedly systematically selling risky mortgage-backed securities to customers with conservative investment goals. The alleged fraud cost many Brookstreet investors their savings, homes, or retirement cushions, and eventually caused the firm to collapse.

The SEC alleges that Brookstreet and Brooks developed an internal program through which the firm's registered representatives sold particularly risky and illiquid types of collateralized mortgage obligations (CMOs) to more than 1,000 seniors, retirees, and others for whom they were unsuitable. The SEC further alleges that Brookstreet continued to promote and sell risky CMOs to retail investors even after Brooks received numerous indications and personal warnings that these were “dangerous” investments that could become worthless overnight. One trader even called Brookstreet's program a “scam.” Finally, in a last-ditch effort to save Brookstreet from failing during the financial crisis, Brooks allegedly directed the unauthorized sale of CMOs from Brookstreet customers' cash-only accounts, causing substantial investor losses.

SEC Charges Former Officers of Subprime Lender with Fraud

This story appeared in Bank Digest.

The SEC has announced that three former top officers of New Century Financial Corporation are being charged with securities fraud for misleading investors as New Century's subprime mortgage business was collapsing in 2006. At the time of the fraud, New Century was one of the largest subprime lenders in the nation. In its complaint, the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was performing better than its peers. It alleges that New Century failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests, and that it knew this negative information from numerous internal reports it regularly received. The complaint further alleges that the fraud caused investors substantial losses. The complaint seeks a final judgment permanently enjoining defendants from future violations of the federal securities laws, disgorgement with prejudgment interest, officer and director bars, civil penalties and reimbursement of bonuses and incentive or equity-based compensation.