Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. were sued by New York Attorney General Eric Schneiderman over the use of a mortgage database that the state said led to improper foreclosures.
The banks’ use of the database, known as MERS, misled homeowners, undermined foreclosure proceedings and created uncertainty about ownership interests in properties, the state said in the complaint filed Feb. 3 in New York state Supreme Court in Brooklyn.
“The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages,” Schneiderman said in a statement. “Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions.”
The lawsuit comes three days before a Feb. 6 deadline for states to join a proposed multistate agreement over foreclosure practices said to be worth as much as $25 billion. Last week, he was selected by the Obama Administration to help lead a state- federal group probing misconduct in the packaging and sale of residential mortgage-backed securities.
MERS tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell loans without recording transfers with individual counties. The system was created by the mortgage industry to evade recording fees, avoid the need to publicly record mortgage transfers and facilitate the packaging of mortgage loans into securities, Schneiderman claimed in the complaint.
Janis Smith, a spokeswoman for Reston, Virginia-based Merscorp, which was also named as a defendant in the New York complaint, said in an e-mailed statement that the company rejects the attorney general’s allegations and will fight the suit.
Rick Simon, a spokesman for Charlotte, North Carolina-based Bank of America, and Tom Kelly, a spokesman for New York-based JPMorgan, declined to comment on the suit. Tom Goyda, a spokesman for San Francisco-based Wells Fargo, said the bank was reviewing the complaint.
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Citigroup, Discover Sued Over Student Loan Corp. Losses
The Oklahoma Firefighters Pension & Retirement System sued the companies and several Student Loan Corp. (STU) officials in federal court in Manhattan on Feb. 3, claiming it lost money when the company’s stock price dropped after information about the losses became public.
Student Loan Corp., formerly a unit of Citigroup, was sold to Riverwoods, Illinois-based Discover in September 2010. The pension fund seeks to represent all Student Loan Corp. investors from Jan. 15, 2008, to Sept. 23, 2010. The company originated and held student loans.
“At the same time STU was failing to properly account for its mounting risks and losses, defendants issued materially false and misleading statements regarding the company’s business and financial results, by telling the investing public that it was well positioned and performing well despite adverse market conditions,” the pension fund said in its complaint.
“The suit is baseless and we will seek its prompt dismissal,” Shannon Bell, a spokeswoman for New York-based Citigroup, said in an e-mail. Leslie Sutton, a spokeswoman for Discover, declined to comment.
The case is Oklahoma Firefighters Pension & Retirement System v. Student Loan Corp., 12-CV-895, U.S. District Court, Southern District of New York (Manhattan).
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Ex-UBS Trader Adoboli Denied Bail as Trades Prompt Enforcement
Kweku Adoboli, a former UBS AG trader, was denied bail at a London criminal court on the same day U.K. regulators formalized their enforcement action of the unauthorized trading for which the bank claims he’s responsible.
The bail application Feb. 3 was Adoboli’s first request to be released from prison since he was arrested by London police Sept. 15 for allegedly causing a $2.3 billion loss, the largest in British history. Adoboli, who holds a Ghanaian passport, was denied bail in part because of his links to the African country.
The 31-year-old pleaded not guilty to fraud and false accounting last week and is being held at Wandsworth prison in southwest London awaiting a trial in early September. The U.K. and Swiss finance regulators also said in a statement Feb. 3 that they have begun formal enforcement actions against UBS over the risk-management processes at its investment bank in London.
The U.K. Financial Services Authority and the Swiss Financial Market Supervisory Authority, known as Finma, are investigating the risk controls at UBS’s investment bank that didn’t prevent the unauthorized trades, the agencies said in statements Feb. 3. The regulators hired the accounting firm KPMG in September to handle an independent investigation into events surrounding the losses.
The move to a formal enforcement proceeding typically indicates the regulators have found sufficient evidence of financial rule violations. UBS said the regulators told them of their decision and they are cooperating.
“Immediately after the unauthorized trading incident, the Group Executive Board thoroughly investigated the incident and implemented measures to better protect our firm from unauthorized activities,” UBS spokeswoman Jenna Ward said in an e-mailed statement.
Adoboli’s lawyer, Tim Harris of Bark & Co., declined to comment on the bail refusal.
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California’s Solo Mortgage Probe May Be Hamstrung by 2008 Deal
California Attorney General Kamala Harris objects to giving banks broad releases of liability for predatory lending. At the same time, she may be locked into her predecessor’s 2008 settlement with the largest lender in the state during the mortgage boom that does exactly that.
Facing today’s deadline to join a proposed multistate agreement over foreclosure practices said to be worth as much as $25 billion if California joins, Harris has said she won’t sign onto a deal blocking her from investigating whether the five largest U.S. mortgage servicers misled homeowners about the terms of their loans, among other issues.
One of the five lenders involved in the talks, Bank of America Corp., reached an agreement in 2008 with Harris’s predecessor, Jerry Brown, who is now governor, that bars its Countrywide Financial unit’s mortgage holders from pursuing claims of the type that Harris wants to investigate.
Based on the “broad release” contained in the agreement, “it is unclear on what grounds Kamala Harris would pursue lending violations by Countrywide,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry publication.
Harris, 47, whose state is the most populous and leads the nation in foreclosure filings for housing units, has described as “inadequate” the proposed settlement state and federal officials have been negotiating for more than a year with Charlotte, North Carolina-based Bank of America, JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc.
The foreclosure probe, which had involved attorneys general from all 50 states, began in October 2010 following disclosures that banks were using faulty documents to seize homes.
Harris, through spokesman Shum Preston, declined to comment on the Countrywide settlement or the multistate negotiations.
Gil Duran, a spokesman for Brown, had no immediate comment.
Another person familiar with negotiations in the multistate deal said that while the 2008 agreement may present an obstacle to an investigation of origination claims by Harris, her lawyers have identified ways in which Countrywide may be violating the accord. The compliance failures may be grounds to terminate the settlement, said the person, who didn’t want to be identified because the negotiations aren’t public.
Bank of America has “adhered to the letter and spirit of our agreements with the attorneys general since 2008,” Richard Simon, a spokesman for the bank, said in an e-mail.
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Foreclosure Accord Said to Ensure Same Terms for All 50 States
Lenders including Bank of America Corp. and JPMorgan Chase & Co. and state attorneys general agreed to ensure that states signing a nationwide accord on foreclosures will be entitled to improved terms won later by states that opt out, two people familiar with the matter said.
California Attorney General Kamala Harris is one of the highest profile attorneys general to publicly balk at the settlement, saying she won’t sign a deal that blocks investigations into mortgage loans.
New York Attorney General Eric Schneiderman, who last week declined to say whether he would sign the deal, on Feb. 3 sued Bank of America, based in Charlotte, North Carolina, New York- based JPMorgan and Wells Fargo & Co. (WFC) in state court in Brooklyn over the use of a national mortgage database that the state claims led to improper foreclosures.
The agreement to grant so-called most-favored nation status comes in the endgame of a probe that began in 2010 following claims of widespread foreclosure wrongdoing by mortgage servicers. States have until today to accept the agreement with the five largest servicers, which also include San Francisco- based Wells Fargo, New York-based Citigroup Inc. (C) and Detroit- based Ally Financial Inc. The deal, said to be worth as much as $25 billion, will settle allegations the banks used faulty or forged documents to seize homes from borrowers.
Without California, the value of the deal may sink to $17 billion, said one of the people. Both declined to be identified because the negotiations aren’t public.
The most-favored nation provision would only kick in under certain thresholds, said a third person familiar with the matter who also didn’t want to be named because the talks aren’t public.
All 50 states announced an investigation into bank foreclosure practices in October 2010. A group of state attorneys general and federal officials have since negotiated terms of the settlement, which would set standards for how banks conduct foreclosures while providing mortgage relief to borrowers.
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Goldman Sachs Suit May Proceed as Class Action, Judge Rules
A suit against Goldman Sachs Group Inc. (GS) may go forward as a class action on behalf of all investors in a $698 million mortgage-backed securities offering, a federal judge in Manhattan ruled.
U.S. District Judge Harold Baer Jr. granted a request by the Public Employees’ Retirement System of Mississippi to let it represent more than 150 investors in the offering, according to an opinion Baer gave to the parties Feb. 2. The opinion hasn’t been released publicly, and a clerk in Baer’s chambers declined to provide a copy Feb. 3.
The plaintiffs say New Century Financial Corp., which originated the mortgages underlying the securities, failed to adhere to its underwriting standards and overstated the value of the collateral backing the loans. They say Goldman Sachs didn’t conduct proper due diligence when it bought the loans in 2005. The plaintiffs are seeking unspecified damages.
Michael Duvally, a spokesman for New York-based Goldman Sachs, didn’t immediately return a call seeking comment on the ruling.
The case is Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group Inc., 09-01110, U.S. District Court, Southern District of New York (Manhattan).
RBS Condoned Libor Conduct, Sought Scapegoats, Fired Trader Says
Royal Bank of Scotland Group Plc, which accused a fired Singapore trader of manipulating London interbank offered rates, had condoned such behavior and sought scapegoats in an internal probe, the former employee said.
RBS’s employees “were not at any time forbidden from communicating input or requests” to have the bank’s rate setters set rates at levels to maximize profits, Tan Chi Min, the former trader, said in court papers filed in Singapore’s High Court Feb. 2.
“Such requests and input were regularly made or given in order to maximize profit,” Tan said. RBS “was fully aware of this, condoned such conduct and waived any right to terminate employees on the basis of this.”
Patricia Choo, a Singapore-based RBS spokeswoman, declined to immediately comment on Tan’s claims.
Tan, the former head of delta trading for RBS’s global banking and markets division in Singapore, sued the bank in December over his dismissal and is seeking to recoup $1.5 million in bonuses and 3.3 million RBS shares that he claims he’s owed. RBS said Tan deserved to be fired because he was guilty of “gross misconduct,” according to its court filing last month.
Tan in his filing Feb. 2 said RBS, Britain’s biggest government-owned lender, started an internal probe after inquiries by European and U.S. authorities on the conduct of banks in setting Libor.
RBS, based in Edinburgh, is cooperating with investigations by the U.S. Commodity Futures Trading Commission, U.S. Department of Justice and European Commission into whether Libor, which acts as a benchmark for about $360 trillion of financial instruments worldwide, had been manipulated.
The case is Tan Chi Min v The Royal Bank of Scotland Plc S939/2011 in the Singapore High Court.
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Carlyle Drops Class-Action Lawsuit Ban as Opposition Mounts
Carlyle Group LP abandoned a plan to ban shareholders from filing class-action lawsuits, a proposal that could have delayed the private-equity firm’s long-awaited stock sale.
The Washington-based firm amended the documents for its initial public offering last month to include a provision that would have required future stockholders to resolve any claim against Carlyle through arbitration rather than in court. The move provoked controversy among lawmakers and shareholder rights advocates, who urged the U.S. Securities and Exchange Commission not to approve the arbitration clause.
“After consultations with the SEC, Carlyle investors and other interested parties, we have decided to withdraw the proposed arbitration provision,” Christopher Ullman, a Carlyle spokesman, said Feb. 3 in an e-mailed statement. “We first offered the provision because we believed that arbitrating claims would be more efficient, cost effective and beneficial to our unitholders.”
Carlyle is seeking to market its IPO to investors early in the second quarter through a road show, according to a person with direct knowledge of the plans, who asked not to be named because the information isn’t public. The road show is one of the final steps before a company goes public.
Democratic Senators Richard Blumenthal of Connecticut, Al Franken of Minnesota and Robert Menendez of New Jersey urged Feb. 3 SEC Chairman Mary Shapiro not to clear the IPO unless Carlyle drops the arbitration clause.
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Swiss Agree to Transfer Encrypted Documents to U.S. Authorities
Switzerland agreed to transfer about 20,000 encrypted documents to authorities in the U.S. as the two countries work toward settling a dispute over tax evasion.
Switzerland may help decode the names should the two nations find a comprehensive solution to the dispute, Roland Meier, a spokesman for the Swiss Finance Ministry, said in an e- mailed response to questions from Bloomberg News.
The U.S. Department of Justice is investigating 11 financial institutions in Switzerland, including Credit Suisse Group AG (CSGN), suspected of helping Americans hide money from the Internal Revenue Service. The U.S. and Switzerland are in talks to resolve the probe of offshore tax evasion.
Seven financial firms, including Swiss banks and the local units of foreign companies, handed over data, such as e-mails, travel plans and details of internal procedures, to the U.S. by the end of last month, Tages-Anzeiger reported Feb. 3, without saying where it got the information. Employee and customer names were blacked out, the Zurich-based newspaper said.
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Stanford Used ‘Slush Fund’ at SocGen for Bribes, Davis Testifies
R. Allen Stanford funneled millions of dollars siphoned from investor deposits through a “slush fund” at Societe Generale SA in Switzerland to cover bribes, personal expenses and private investments, his former finance chief told jurors at the ex-financier’s criminal fraud trial.
“It was a slush fund, just used for whatever the holder wanted to use it for,” James M. Davis, Stanford Financial Group Co.’s former chief financial officer, testified Feb. 3 about the SocGen account. “One purpose was to pull cash out to bribe the regulator in Antigua, Mr. Leroy King.”
Prosecutors contend Stanford diverted $2 billion from customer deposits at his Antigua-based Stanford International Bank to fund his luxurious lifestyle and money-losing ventures such as Caribbean airlines and real-estate developments. More than $40 million went to maintain Stanford’s yachts and as prize money for a cricket tournament, according to records introduced in the 10th day of Stanford’s trial in federal court in Houston.
Davis, 63, told jurors that by the end of 2007, $130 million had been transferred from the Antiguan bank to the Stanford account at SocGen. “These funds came from CD depositors,” he said.
When Assistant U.S. Attorney William Stellmach asked Davis how much of this money Stanford ultimately paid back, Davis replied, “I don’t believe he actually repaid any of the money.”
Stanford, 61, denies all wrongdoing in connection with what the government claims was a $7 billion investment fraud scheme built on bogus certificates of deposit at his Antiguan bank. King, former chief executive officer of Antigua and Barbuda’s Financial Services Regulatory Commission, is fighting extradition to the U.S., where he was indicted in 2009 on charges he accepted bribes from Stanford to mislead U.S. securities regulators.
The case is U.S. v. Stanford, 4:09-cr-00342, U.S. District Court, Southern District of Texas (Houston).
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Ex-Credit Bancorp Officials Will Pay $329 Million in SEC Lawsuit
Three former Credit Bancorp Ltd. officials convicted of operating an international Ponzi scheme must pay almost $329 million in a lawsuit brought by the U.S. Securities and Exchange Commission, a U.S. judge said.
U.S. District Judge Robert Sweet in New York ordered Feb. 3 the final judgment against Thomas Rittweger, manager of North American operations for the firm, Douglas Brandon, a Kentucky lawyer who represented the firm, and Richard Blech, who was Credit Bancorp’s chairman and chief executive officer.
Rittweger and Brandon were convicted at trial in 2003 of defrauding clients, including the chairman of Vintage Petroleum Inc., of $210 million, prosecutors said. Blech pleaded guilty before trial.
Unbeknownst to its clients, the firm operated as a Ponzi scheme, taking cash and other assets from new investors to make payments to earlier ones, creating the impression of sizable returns, prosecutors said.
In his order, Sweet, who was presiding over the SEC suit, directed that the three were liable for $218 million, representing profits from the scheme, with additional interest of $110.5 million.
According to court and U.S. Bureau of Prison records, Brandon was sentenced to 97 months in prison, Blech was sentenced to 72 months in prison and was released in 2007 and Rittweger was sentenced to serve 135 months in prison and ordered to pay more than $18 million in restitution. He is scheduled to be released from prison in 2015.
The cases are U.S. v. Blech, 02-CR-122, and SEC v. Credit Bancorp, 99-cv-11395, Southern District of New York (Manhattan).
Motorola Solutions Agrees to Pay $200 Million to Settle Suit
Motorola Solutions Inc. agreed to pay $200 million to settle a 2007 investor lawsuit accusing the company of overstating its sales prospects.
The agreement with the company, which was formerly known as Motorola Inc., must still be approved by U.S. District Judge Amy St. Eve, who was scheduled to preside over a trial starting April 9 in Chicago.
“We are pleased to have this behind us,” Nicholas Sweers, a spokesman for the Schaumburg, Illinois-based company, said Feb. 2 in a phone interview. “It removes the risk and distractions of this litigation and enables us to continue to focus on delivering mission-critical communications solutions.”
Stockholder Eric Silverman initially alleged that then- Motorola Inc. Chief Executive Officer Edward Zander and other officers had told investors to expect strong sales growth in the last quarter of 2006. The lead plaintiffs in the case are the Macomb County Employees’ Retirement System and the St. Clair Shores Police & Fire Pension System, both of Michigan.
When the suit was filed in August 2007 amid declining sales, Motorola had fallen from the world’s second-biggest mobile phone maker to third.
“The settlement represents an extraordinary recovery for investors in a case where there was no financial restatement” or an investigation by the U.S. Securities and Exchange Commission, the plaintiffs’ attorney, Samuel Rudman of San Diego-based Robbins Geller Rudman & Dowd LLP, said in a statement.
The case is Silverman v. Motorola, 07-cv-04507, U.S. District Court, Northern District of Illinois (Chicago).
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U.K. Court Upholds Damages Ruling Against 3M in MRSA Case
A U.K. judge upheld a decision that 3M Co., the maker of Post-It Notes, should pay $1.3 million to investors after it decided not to market BacLite, a product that detects hospital super-bug MRSA, the company said.
Porton Capital Ltd. and Ploughshare Innovations Ltd., a civilian unit of the U.K. Ministry of Defence, sued 3M over a 2007 deal that depended on sales of the product, claiming about $40 million in damages.
While a London judge ruled in November 3M had breached its obligations, he rejected the estimate of damages as optimistic. The High Court confirmed Feb. 3 that decision, 3M said.
“The court’s final order underscores a decisive victory for our company and the positions it took relative to this technology,” said Maureen Harms, 3M’s assistant general counsel.
Because the ruling of $1.3 million was less than what 3M had offered to settle the case, Porton and Ploughshare will have to pay some of the legal fees from the dispute, 3M said.
“We are delighted that the U.K. High Court judge today awarded Porton Group a proportion of its costs in respect of its contractual dispute with 3M,” Porton Group said in an e-mailed statement Feb. 3.
“For 3M to suggest they prevailed in this case when they breached their contract with Porton and Ploughshare, part of the U.K. MoD, and have to pay damages and costs is delusional in the extreme,” Porton Chief Executive Officer Harvey Boulter said in the statement.
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U.S. Antitrust Enforcers Add Litigators to Bolster Odds at Trial
U.S. antitrust enforcers are hiring litigators from major law firms, signaling a growing readiness for court battles to block mergers they view as anticompetitive.
The Justice Department’s antitrust division on Jan. 3 brought in Mark Ryan, a partner at Mayer Brown LLP, as director of litigation, a new position. He’ll work for Joseph Wayland, a former Simpson Thacher & Bartlett LLP antitrust litigator who joined as civil enforcement chief a year ago. The Federal Trade Commission intends to hire a trial attorney in coming months, Commissioner Tom Rosch said in an interview.
“If a case is worth bringing, then we should be prepared to litigate it,” Rosch said.
As an improving economy spurred a 24 percent jump in merger proposals last year from 2010, the Obama administration may be seeking to respond more forcefully to deals it considers anticompetitive, said Andrew Gavil, an antitrust professor at Howard University School of Law in Washington. Being prepared for trials sets up a credible threat that may also help regulators win more favorable settlements, he said.
Merger filings under antitrust regulations rose to 1,450 in fiscal 2011 from 1,166 filings the year before, Sharis Pozen, the acting head of the Justice Department’s antitrust division, said in a speech to the American Bar Association in November.
While most of the deals were approved or settled with conditions, a few faced court challenges, Pozen said.
“We have made a concerted effort to increase the division’s litigation resources,” Pozen said. “Bringing additional experienced trial attorneys to the antitrust division is a perfect complement to our team of experienced litigators and trial attorneys.”
William Baer, who leads the antitrust team for Arnold & Porter LLP in Washington, is being vetted by the White House to become the new antitrust chief when Pozen departs April 30, according to two people familiar with the process who asked not to be identified because of its confidential nature.
Rosch, who has more than 40 years of experience as a trial lawyer for business clients including Chrysler Corp., General Motors Corp. and Greyhound Lines Inc., said the FTC should bring more lawsuits to block deals. The agency reports publicly settling nine challenges to mergers last year while five were resolved before any action was taken. Three cases went to court.
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