Bank of America Corp. may face billions of dollars more in liability for faulty mortgages if a judge agrees with insurer MBIA Inc. (MBI) that the lender must buy back loans even if the errors didn’t cause a borrower’s default.
If New York Supreme Court Justice Eileen Bransten and judges in similar cases across the country rule that the issue of “causation” doesn’t apply -- meaning it’s enough to show that the loan was improperly made -- it “could significantly impact” Bank of America’s potential costs, the bank said in a regulatory filing this month.
Such court defeats may add as much as $9 billion to what Bank of America owes bond insurers, according to hedge fund Branch Hill Capital, which is betting against its stock and has invested in MBIA. A victory for Armonk, New York-based MBIA may also strengthen claims by mortgage-securities investors that want the Charlotte, North Carolina-based bank to pay more than the $8.5 billion it’s offered them as a settlement.
“You don’t have to wait until you’re in a severe accident before you return the car with bad brakes,” said David Grais, a partner in New York at Grais & Ellsworth LLP who represents investors objecting to the bank’s proposed settlement with Countrywide Financial Corp. mortgage-bond holders.
Any ruling on the issue, which was to be the subject of a hearing today in state court in Manhattan, may come later than anticipated because the proceeding was postponed until October. The decision may intensify settlement talks between bond insurers like MBIA and other banks that issued securities based on faulty mortgages, according to the head of insurer Assured Guaranty Ltd. (AGO), which is demanding money from lenders including UBS AG (UBSN) and Credit Suisse Group AG. (CSGN)
“If they lose that case, then our certainty of getting reimbursed becomes a lot higher,” Dominic Frederico, Assured’s chief executive officer, said in an interview. Bank of America agreed in April to a deal it valued at $1.6 billion with Hamilton, Bermuda-based Assured Guaranty to settle its mortgage claims.
“It could change the playing field,” MBIA Chief Executive Officer Jay Brown said on an Aug. 10 conference call with analysts and investors when asked about the causation issue. It could “have a very significant effect on the ability to rescind or obtain recessionary damages,” he said. “So, it can affect the view of both parties as to the likely outcome of the trial.”
Lawrence Grayson, a spokesman for Bank of America, said in an e-mail that Branch Hill Capital “consistently has overstated Bank of America’s representation and warranty repurchase exposure.”
“Their motives are not nuanced,” he said. “Less than a year ago, they had estimated repurchase losses for Bank of America of approximately $74 billion. They were wrong then, and we believe that they are wrong now.”
The case is MBIA Insurance v. Countrywide Home Loans, 602825-08, New York State Supreme Court (New York County).
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CIFG Sues Goldman Sachs Over $275 Million in Securities
CIFG Assurance North America Inc. sued Goldman Sachs Group Inc. (GS) for fraud over $275 million in residential mortgage-backed securities.
Goldman Sachs made misrepresentations in connection with the securitization of a portfolio of 6,204 mortgage loans, according to the lawsuit filed Aug. 16 in New York State Supreme Court in Manhattan. CIFG insured about $275 million of securities from the portfolio.
The investment bank duped investors and insurers into assuming its market risk, even as Goldman Sachs profited from underwriting fees, trading opportunities and bets on a decline in the subprime market, New York-based CIFG said.
While Goldman Sachs aggressively sought to liquidate its position in residential mortgage-backed securities, “it also sought to exploit the crisis,” according to the complaint.
Michael Duvally, a spokesman for New York-based Goldman Sachs, declined to comment on the lawsuit.
The case is CIFG Assurance North America Inc. v. Goldman, Sachs & Co., 652286/2011, New York Supreme Court, New York County (Manhattan).
Apple Sued by South Korean IPhone Users Over Location Data
A group of South Korean users of Apple Inc. (AAPL)’s iPhone sued the company in a local court, claiming it invaded their privacy by allowing the smartphone to collect location data without their consent.
About 27,000 people joined a class-action lawsuit against Apple’s South Korean unit and headquarters, seeking 1 million won per person ($930) in damages, according to a notice posted online by Mirae Law, which represents the plaintiffs. The suit was filed in Changwon, south of Seoul, where the law firm is located.
Apple was fined by South Korea’s telecommunications regulator on Aug. 3 and ordered to encrypt location data of people using iPhones to address privacy concerns. The company also came under scrutiny from regulators around the world after an April report by publisher O’Reilly Radar said iPhones record information about users’ whereabouts, adding to legal disputes the company is involved in over patent infringements.
Apple was fined 3 million won for collecting such data even when some users turned off location-recognition features on their iPhones, the Korea Communications Commission said Aug. 3. Google Inc., which didn’t gather data in the same way, wasn’t fined and was only ordered to make the information unreadable, it said.
Earlier this year, Apple was sued in the U.S. by two iPhone and iPad users who claimed the devices secretly collected information on their movements.
Steve Park, a Seoul-based spokesman for Apple, declined to comment on the case.
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Madoff Trustee Amends UBS Case, Says Bank Misled Regulators
The trustee liquidating Bernard Madoff’s firm amended his lawsuit seeking $2 billion from UBS AG, claiming the Swiss bank misled regulators in the U.S. and Luxembourg to help hide Madoff’s Ponzi scheme.
UBS misled the U.S. Securities and Exchange Commission and the Commission de Surveillance du Secteur Financier in Luxembourg about Madoff, the trustee, Irving Picard, said yesterday in a filing in Manhattan federal court, according to a copy of the complaint posted on his website. The filing couldn’t immediately be confirmed in court records.
UBS, based in Zurich, hid Madoff’s role as the true custodian of two so-called feeder funds that attracted investors to Bernard L. Madoff Investment Securities before his arrest in December 2008, according to the complaint. Madoff pleaded guilty to running a Ponzi scheme and is serving 150 years in federal prison.
“Madoff’s scheme could not have been accomplished unless the UBS defendants had agreed to look the other way and to pretend that they were truly ensuring the existence of assets and trades when in fact they were not and never did,” according to the amended complaint.
Peter McKillop, a spokesman for UBS, said the bank denies the trustee’s allegations.
“UBS was not aware of any wrongdoing by Mr. Madoff and will take all appropriate steps to demonstrate that the allegations are false and unfounded,” he said in an e-mail.
The case is Picard v. UBS AG, 11-cv-04212, U.S. District Court, Southern District of New York (Manhattan).
Facebook Says Ceglia E-Mailed ‘Authentic Contract’ to Lawyer
Paul Ceglia, the western New York man claiming part-ownership of Facebook Inc. (FB), e-mailed the “authentic contract” disproving his claim to a law firm in 2004, a lawyer for the company told a judge.
Orin Snyder told U.S. Magistrate Judge Leslie Foschio at a hearing in Buffalo, New York, yesterday that Ceglia sent the contract, which made no mention of Facebook, to a lawyer at the firm Sidley Austin LLP the year after Ceglia claims he signed a contract with Facebook co-founder Mark Zuckerberg giving him an equal share in the company.
The contract Facebook says is genuine was found both on Ceglia’s computer and Sidley Austin’s e-mail server, Snyder told Foschio. Snyder said the evidence proves Ceglia fabricated the contract on which he bases his claim.
“The noose is tightening around the neck of the plaintiff in this case and he knows it,” Snyder told Foschio.
Foschio said Ceglia must allow Facebook’s experts to examine his Web-based e-mail accounts, which he said he used to communicate with Zuckerberg in 2003 and 2004, before Zuckerberg will be required to turn over 175 e-mails from his Harvard University account. Ceglia claimed he copied e-mails with Zuckerberg from his Web-based accounts into word-processing documents he saved on floppy disks.
Facebook said the Harvard e-mails involve Zuckerberg and Ceglia and others at StreetFax.com, Ceglia’s former company.
Ceglia’s lawyer, Jeffrey Lake, said the contract attached to Ceglia’s complaint is the genuine one. Ceglia’s version of the contract includes terms giving him a share of “The Face Book” in exchange for a $1,000 investment, in addition to terms referring to Zuckerberg’s StreetFax work.
After yesterday’s hearing, Lake said he plans to demand computers, e-mails and instant messages from Zuckerberg, in addition to early source code for the site. Ceglia claims Zuckerberg used code from StreetFax in building Facebook.
The case is Ceglia v. Zuckerberg, 1:10-cv-00569, U.S. District Court, Western District of New York (Buffalo).
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BNY Mellon Opposes N.Y. Move to Intervene in BofA Accord
Bank of New York Mellon Corp. asked a judge to reject a bid by New York Attorney General Eric Schneiderman to intervene in a proposed $8.5 billion mortgage-bond settlement involving Bank of America Corp. (BAC)
Schneiderman this month asked the New York state-court judge overseeing the case to reject the deal, calling it unfair to investors. Bank of New York, the trustee for the mortgage-securitization trusts covered by the settlement, violated New York law, Schneiderman said.
The settlement calls for Bank of America to pay $8.5 billion to resolve claims from investors in Countrywide Financial Corp. mortgage bonds. Charlotte, North Carolina-based Bank of America acquired Countrywide in 2008. Bank of New York, along with 22 institutional investors, claim Schneiderman has no standing to intervene in the case.
“The current settlement process allows for all investors - -supporters and objectors -- to make their case before the court, including those with even the smallest economic interests,” Kevin Heine, a Bank of New York spokesman, said in an e-mailed statement.
The attorney general’s claims about whether Bank of New York acted in good faith “would hijack what should be an expedited proceeding,” the bank said. Those claims could take years to resolve, the bank said.
“No intervenor has demonstrated that the trustee was presented with -- or could have achieved -- a better outcome than the settlement the trustee obtained,” the investors said. “That is precisely why all 22 of institutional investors chose to support it.”
The bank, and the institutional investors, said the proposed settlement proceeding isn’t the appropriate forum to address the attorney general’s claims.
“Given that those who stand to be significantly affected include New York State investors and pensioners, as well as distressed homeowners residing throughout the state and country, the state of New York has a broad and crucial interest in these proceedings,” Danny Kanner, a Schneiderman spokesman, said in an e-mailed statement responding to the opposition to his motion to intervene.
The case is In the matter of Bank of New York Mellon, 651786/2011, New York State Supreme Court, New York County (Manhattan).
Computer Hacking to Become News Corp. ‘Scandal,’ Watson Says
Revelations that U.K. tabloid journalists may have graduated to hacking computers in addition to mobile phones may form the next scandal facing Rupert Murdoch’s News Corp., a U.K. lawmaker investigating privacy violations by the now-defunct News of the World said.
Police and parliament have mostly focused their probes on how journalists illegally accessed the voice mails of celebrities, politicians, and crime victims, and who at the company knew about it. More revelations of computer hacking and other forms of spying could emerge, Tom Watson, a Labour Party lawmaker, said yesterday.
“My own concerns are that this will lead to other forms of covert surveillance and I think the next scandal will be computer hacking and we’re going to be living with this for weeks and months to come,” said Watson, a member of the Culture, Media and Sport Committee that is investigating phone hacking. Watson made the comments after the committee published additional statements from News Corp. deputy chief operating officer James Murdoch and others beyond what they offered in their initial testimony July.
London’s Metropolitan Police opened a third investigation into reporting tactics at the end of July which focuses on computer hacking, while not specifically targeting News Corp. The probe, dubbed Operation Tuleta, is considering “a number of allegations regarding breach of privacy” and computer hacking that they have received since January, police said.
The allegations are outside the scope of the two other police probes opened earlier this year into phone hacking and police bribery.
Tuleta began following allegations by Ian Hurst, a former British Army intelligence officer. Hurst on Aug. 1 sued News Group, the unit of the New York-based company that publishes the Sun and formerly the News of the World, claiming it hired a computer expert to hack into his e-mail, according to his lawyer, Mark Lewis.
News International declined to comment via e-mail when asked about computer hacking. Regarding the statements to parliament, the company said, “We recognize the seriousness of materials disclosed to the police and parliament and are committed to working in a constructive and open way with all the relevant authorities.”
In the U.S., Manhattan federal prosecutors have joined the inquiry into allegations that News Corp.’s American marketing arm hacked a password-protected website at Floorgraphics Inc., an attorney for Floorgraphics has said.
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BofA Said to Weigh Foreclosure Accord Allowing New York Probe
Bank of America Corp. may settle a state and federal probe of foreclosure practices in a deal that lets New York proceed with an inquiry into securitizations, according to two people with direct knowledge of the talks.
The firm may pursue an accord with most of the 50 state attorneys general, even if it omits New York’s Eric Schneiderman and at least two other states that are opposed because a deal would impede related inquiries, said one of the people. Negotiations on a broad settlement stalled after Schneiderman indicated he wouldn’t let it block his probe into the bundling and sale of mortgages, said the people, who declined to be identified because talks are private.
Chief Executive Officer Brian T. Moynihan, seeking to reverse a 44 percent stock slide this year, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since the start of 2010. One of the largest legal matters still pending is the multi-state probe into whether firms servicing mortgages used bogus documents to justify foreclosures.
“They need to resolve this because it’s looming out there as an unknown liability,” said Brian Chappelle, a partner at mortgage-finance consultancy Potomac Partners LLC in Washington and former executive at the Mortgage Bankers Association. “It’s harming the housing recovery because the large institutions are reluctant to originate new loans because of the uncertainty.”
Bank of America executives, concerned that a delay in resolving the case is hurting the firm’s stock, are open to a deal that would resolve most of it, even if some mortgage investigations continue, said one of the people. The bank has been pushing for liability releases for loan activities besides servicing, such as securitization and lending.
Attorneys general from Delaware, Massachusetts and Nevada have also voiced concern that a proposed settlement would protect banks from mortgage investigations that aren’t yet finished. Nevada Attorney General Catherine Cortez Masto, whose office sued Bank of America and is conducting civil and criminal foreclosure probes, said in an interview this week that she will be “very cautious” about agreeing to a settlement that hinders those inquiries.
Danny Kanner, a spokesman for Schneiderman, and Melissa Karpinsky, a spokeswoman for Massachusetts Attorney General Martha Coakley, declined to comment on Bank of America’s settlement talks. Edie Cartwright, a spokeswoman for Masto, didn’t comment. Jason Miller, a spokesman for Delaware Attorney General Beau Biden, didn’t respond to an e-mail.
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Judge to Review Madoff Trustee’s Anti-Class Action Lawsuit
U.S. District Judge Jed Rakoff said he will decide if the liquidator of Bernard Madoff’s firm may stop a class-action lawsuit against directors and advisers of so-called feeder fund Thema International Fund Plc, according to a court filing Aug. 16 in Manhattan.
Trustee Irving Picard sued the class-action plaintiffs in April, claiming they were undermining the U.S. bankruptcy court’s jurisdiction over Madoff’s estate. They said Picard was trying to “commandeer” their claims by suing some of the same defendants and wouldn’t share any recoveries with them.
The case is Picard v. Repex, 11-cv-03477, U.S. District Court, Southern District of New York (Manhattan).
Mining Executive Kuhn Declared Fugitive by EPA over Dumping
Former mining-company executive Peter Kuhn was declared a fugitive by the Environmental Protection Agency after he failed to turn himself in for his role in a conspiracy to illegally dispose of arsenic and lead.
Kuhn, former president of Reno, Nevada-based French Gulch Nevada Mining Corp. and Bullion River Gold Corp., engaged in a conspiracy to dump mining wastes on a hillside, county road and stream near a company mine, the EPA said yesterday in a statement. If convicted, Kuhn faces a possible prison term of 20 years.
On July 1, 2010, a U.S. District Court grand jury in the Eastern District of California returned an indictment charging Kuhn with one count of conspiracy and other crimes. Kuhn, 56, becomes the 18th fugitive listed by the agency, according to the EPA’s website.
A telephone message left with French Gulch Nevada Mining wasn’t immediately returned. A telephone number on file for Kuhn was disconnected.
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Gundlach Denies DoubleLine Fund Is ‘Turbo-Charged’ With Risk
DoubleLine Capital LP’s Jeffrey Gundlach denied that his total-return fund is “turbo-charged” with risky securities, saying his management strategy is similar to what he used at TCW Group Inc. before he was fired in 2009.
Under questioning by TCW’s lawyer in his fourth day of testimony at a jury trial in Los Angeles, the money manager said yesterday the way the different kinds of securities are put together in the bond fund determines what risk there is rather than the type of security by itself.
“With respect sir, you don’t know what you’re talking about,” Gundlach told lawyer John Quinn.
Los Angeles-based TCW fired Gundlach, 51, in December 2009 and sued him the following month after more than half of its fixed-income professionals joined his new firm. TCW, a unit of Paris-based Societe Generale SA, seeks $375 million in damages, claiming Gundlach stole its trade secrets, including client portfolio data, to start DoubleLine.
Gundlach, who had worked at TCW for 25 years and who was named Morningstar’s Fixed Income Manager of the Year in 2006, countersued, saying TCW fired him to avoid having to pay management and performance fees for the distressed-asset funds his group managed and that went “through the roof.” Gundlach seeks about $500 million.
The case is Trust Co. of the West v. Gundlach, BC429385, California Superior Court, Los Angeles County.
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Wells Fargo Reaches Accord With Connecticut Over Home Loans
Wells Fargo & Co. (WFC) will consider about 1,535 Connecticut mortgages for modification as part of an agreement with the state on adjustable-rate loans, the state’s attorney general said.
The accord resolves claims that Wachovia Corp. and Golden West Financial Corp. violated state consumer protection laws, Attorney General George Jepsen said yesterday in a statement. The banks failed to adequately inform borrowers that minimum payments on “pick-a-payment“-type mortgages wouldn’t cover interest due, causing the balance to grow, Jepsen said.
“I want to stress that Wells Fargo inherited this problem when it acquired Wachovia and Golden West,” Jepsen said. San Francisco-based Wells Fargo bought Wachovia and its Golden West unit in 2008.
To resolve the investigation, the bank also agreed to pay Connecticut $741,465 to support the state’s foreclosure-prevention efforts, Jepsen said.
The Connecticut accord is the 11th such agreement by the lender, which has also settled with California, Texas, Florida, Illinois, New Jersey and five other states.
Jiau Loses Bid to Reverse Conviction in Insider-Trading Case
Winifred Jiau, a former consultant with expert networking firm Primary Global Research LLC, lost a post-trial bid to overturn her convictions on charges related to insider-trading.
U.S. District Judge Jed Rakoff denied Jiau’s motion for an acquittal or a new trial in federal court in Manhattan, where she was convicted June 20 of conspiracy and securities fraud.
The jury found her guilty of passing information regarding earnings and other matters on Nvidia Corp. (NVDA) and Marvell Technology Group Ltd. (MRVL) to hedge fund managers Noah Freeman, a former SAC Capital Advisors LP portfolio manager, and Samir Barai, founder of New York-based Barai Capital Management LP.
Jiau, of Fremont, California, faces as long as 25 years in prison when she is sentenced by Rakoff.
The case is U.S. v. Jiau, 11-cr-00161, U.S. District Court, Southern District of New York (Manhattan).
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