Wells Fargo, SAC, Pimco, Third Point Re, Dell: Compliance

Wells Fargo & Co. didn’t misrepresent its securities-lending program to Blue Cross Blue Shield of Minnesota and 11 other institutional investors and isn’t liable for any losses, a federal jury found.

The St. Paul, Minnesota, jury yesterday cleared the bank of all allegations the investors made in their 2011 lawsuit. The plaintiffs claimed the bank marketed a risky program as safe and was responsible for $8.2 million in losses. Wells Fargo blamed any losses on the financial crisis and denied it provided any misleading information.

Under the program, Wells Fargo held its clients’ securities in custodial accounts and would make temporary loans of these securities to brokers. The brokers would use these securities to support their trading activities, such as short sales and option contracts. Securities lending has been traditionally viewed by pension funds and foundations as a low-risk investment.

The suit was one of at least five against Wells Fargo over securities lending in Minnesota, where the program was based. The San Francisco-based bank lost the first case to go to trial in 2010, when a state court jury awarded Minnesota Workers’ Compensation Reinsurance Association and three foundations about $30 million. That judgment was upheld on appeal.

The current trial before U.S. District Judge Donovan W. Frank involved allegations by Blue Cross Blue Shield of Minnesota, the El Paso County Retirement Plan and 10 other nonprofit groups seeking reimbursement of losses and punitive damages.

The Minnesota case is Blue Cross Blue Shield of Minnesota v. Wells Fargo Bank, 11-cv-02529, U.S. District Court, District of Minnesota (St. Paul).

Wells Fargo Mortgage Modification Lawsuits Revived by Court

In a separate action involving Wells Fargo, a U.S. Court of Appeals yesterday held that the bank must face lawsuits by home loan borrowers for refusing to offer them permanent mortgage modifications.

The federal government’s 2009 Home Affordable Modification Program requires the bank to offer permanent adjustments to homeowners who met the terms of a trial-period modification, a three-judge panel of the U.S. Court of Appeals in San Francisco ruled.

“The program seems to have created more litigation than it has happy homeowners,” the judges said in yesterday’s decision.

Reversing a lower-court dismissal of two separate lawsuits, the panel rejected the conclusion Wells Fargo was only bound if it had actually offered the borrowers a fully executed copy of a modification agreement.

A Chicago-based federal appeals court reached a similar conclusion last year, the judges said.

Wells Fargo claimed the borrowers hadn’t met all the temporary plan qualifications and that it was within its rights to not offer them permanent adjustments, according to the unanimous ruling.

The appeals court “did not rule on the merits the underlying case and found only that the district court should consider the arguments put forth by the plaintiffs,” Tom Goyda, a spokesman for the bank, said in an e-mail. “Wells Fargo has strong defenses to those arguments and is prepared to present its case.”

The cases are Corvello v. Wells Fargo Bank NA, 11-16234 and Lucia v. Wells Fargo Bank NA, 11-16242, U.S. Court of Appeals for the Ninth Circuit (San Francisco).

Compliance Action

JPMorgan Said to Be Near SEC Settlement on London Whale Losses

JPMorgan Chase & Co. is negotiating final terms of a deal with U.S. securities regulators to end a yearlong probe of derivatives bets that led to the bank’s biggest trading loss, two people briefed on the talks said.

While JPMorgan is prepared to say it erred in how it oversaw a unit and London-based traders, executives aren’t likely to admit mistakes beyond what they already disclosed, one of the people said, requesting anonymity because the talks with the Securities and Exchange Commission aren’t public. How much the bank pays hasn’t been settled, the people said.

JPMorgan, led by Chief Executive Officer Jamie Dimon, is seeking to resolve U.S. and U.K. probes after botched trades by its chief investment office fueled more than $6.2 billion of losses last year. Senate investigators concluded in March that the bank dodged regulators and misled investors amid souring bets by Bruno Iksil, a trader dubbed the London Whale because his positions were so big.

While the SEC may target some people involved in the trades, top executives at the New York-based company probably won’t face claims they lied or misled the public, the people said. Iksil won’t be charged, Reuters reported yesterday, citing a person familiar with the matter.

John Nester, a spokesman for the SEC, declined to comment. Attorneys for Iksil and three other traders either didn’t immediately respond to messages seeking comment or declined to comment. The New York Times reported yesterday that JPMorgan may make some admissions in an SEC deal.

For more, click here.

SEC Judge Grants Motion to Stay Cohen Administrative Case

The U.S. Securities and Exchange Commission’s proceeding against Steven A. Cohen, billionaire founder of hedge fund firm SAC Capital Advisors LP, has been stayed pending the resolution of related criminal matters.

Brenda P. Murray, the SEC’s chief administrative law judge, denied Cohen’s request to have access to the agency’s full investigative file during the stay, saying his argument to obtain the documents was “unpersuasive,” according to an order in administrative court in Washington.

Manhattan U.S. Attorney Preet Bharara asked Murray on July 26 to delay the administrative proceeding against Cohen until criminal cases against SAC Capital and two former portfolio managers had been resolved. Cohen, who didn’t object to the delay, asked that he still be allowed prompt access to the SEC’s investigative records.

The SEC accused Cohen on July 19 of failing to supervise two employees who face criminal charges that they illegally traded stocks based on confidential information. The regulator is seeking to bar Cohen from overseeing investor funds.

PNC Gets Subpoena on Foreclosures as DOJ Pursues Mortgage Loans

PNC Financial Services Group Inc. got a U.S. subpoena tied to foreclosure expenses on federally backed home loans and said two agencies are investigating whether its mortgages were unfairly priced.

The Department of Justice told PNC in June it may file a civil complaint tied to an investigation into “whether mortgage loan pricing by National City and PNC had a disparate impact on protected classes,” according to a regulatory filing. The Consumer Financial Protection Bureau has authorized settlement talks, the Pittsburgh-based bank said. PNC purchased National City Corp., one of the nation’s biggest subprime home lenders, in 2009.

Additionally, the U.S. Attorney’s Office for the Southern District of New York wants information about expenses tied to foreclosures of loans insured or guaranteed by the Federal Housing Administration, Fannie Mae or Freddie Mac, according to the filing. PNC said it’s cooperating with the investigation, which is in its early stages.

Compliance Policy

Loeb’s Reinsurer With No U.S. Staff Gains From Obama’s Jobs Act

Billionaire hedge-fund manager Daniel Loeb’s Third Point Reinsurance Ltd., which has no staff in the U.S., said it can limit financial disclosure after a public offering because of rules promoting domestic job creation.

Third Point Re is an “emerging growth company” under the Jumpstart Our Business Startups -- or JOBS -- Act, according to filings for the planned initial public offering. Under the act, companies with less than $1 billion in annual revenue can qualify, allowing reduced disclosure about executive pay and waiving requirements for auditors to attest to a company’s financial controls.

President Barack Obama has said the JOBS Act, which became law last year, would make it easier for companies to raise money, leading to employment growth. Bermuda-based Third Point Re shows how the benefits aren’t exclusive to companies adding U.S. jobs, said Barry Ritholtz, chief executive officer of FusionIQ, the provider of equity-analysis software.

“This was all about small companies and startups, not wealthy hedge-fund managers,” Ritholtz said in a telephone interview. “Was this anticipated by the JOBS Act? Well, not if you paid attention to the rhetoric we heard.”

Rob Bredahl, the reinsurer’s chief financial officer, didn’t respond to messages by phone and e-mail seeking comment about plans for hiring or financial disclosure. Elissa Doyle, a managing director at Loeb’s Third Point LLC hedge fund, declined to comment.

Third Point Re plans to raise as much as $322.2 million in an IPO, according to an Aug. 5 filing. The company said Loeb’s Third Point LLC manages almost all the reinsurer’s investment portfolio of more than $900 million. New York-based Third Point LLC managed $13.2 billion in assets as of June 30.

Loeb’s reinsurer doesn’t plan to use all the special treatment available in the JOBS Act. It opted out of the ability to be exempt from future revisions of public-company accounting standards, according to filings.

Third Point Re kept its initial draft IPO prospectus confidential in May while the U.S. Securities and Exchange Commission reviewed it. Such confidentiality is permitted for emerging growth companies under the JOBS Act, and contrasts with the usual approach of larger U.S. IPOs. A revised Third Point Re filing and the first draft were made public in July.

For more, click here.

In the Courts

Pimco, Bank of New York Seek to Block Richmond Mortgage Plan

Pacific Investment Management Co., BlackRock Inc. and Bank of New York Mellon Corp. are seeking a court order blocking Richmond, California, and Mortgage Resolution Partners LLC from seizing mortgages through eminent domain, saying the initiative would hurt savers and retirees.

The city’s plan is unconstitutional, according to complaints filed Aug. 7 by mortgage-bond trustees in federal court in San Francisco. The trustees, Wells Fargo & Co. and Deutsche Bank AG, were directed to take the action by the investors in the debt that also include Jeffrey Gundlach’s DoubleLine Capital LP, said John Ertman, a partner at Ropes & Gray LLP. Bank of New York said in a separate complaint the beneficiaries of trusts it oversees include pension funds and mutual funds.

“Mortgage Resolution Partners is threatening to seriously harm average Americans, including public pension members, other retirees and individual savers through a brazen scheme to abuse government powers for its own profit,” Ertman said in an e-mailed statement on behalf of investors.

The Federal Housing Finance Agency said yesterday in a statement that it may direct Fannie Mae, Freddie Mac and the Federal Home Loan Banks “to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.”

Andrew Wilson, a spokesman for Fannie Mae, and Thomas Fitzgerald, a spokesman for Freddie Mac, said the companies were among the investors authorizing Wells Fargo and Deutsche Bank to sue. The government-controlled firms guarantee almost 70 percent of new mortgages.

The program would harm owners of mortgage bonds by paying them too little for loans, as well as damage communities by drying up lending, trade groups representing asset managers, bankers, real-estate firms and builders have said in past statements. Costs to investors could exceed $200 million just on loans in Richmond, according to the Wells Fargo complaint.

Proponents of the plan including Cornell University law professor Robert Hockett and Steven Gluckstern’s Mortgage Resolution Partners, which is advising municipalities and lining up private funds that would profit as the buyer of the loans, dispute those claims. They have said that the plan will survive court scrutiny.

Under the program that Mortgage Resolution Partners has pitched, a private investment fund would buy loans from bond trusts for amounts less than current property values. The prices would be based on financial models or comparable trades and sanctioned by courts.

The mortgages would then be reduced and homeowners refinanced into new debt insured by the Federal Housing Administration.

The cases are Wells Fargo Bank v. City of Richmond, 13-3663, and Bank of New York Mellon v City of Richmond, 13-3664, U.S. District Court, Northern District of California (San Francisco).

For more, click here.

Dell Founder Accuses Investor Icahn of Legal ‘Grandstanding’

Dell Inc. founder Michael Dell accused investor Carl Icahn in court papers of “grandstanding” in efforts to expedite litigation aimed at thwarting a leveraged buyout of the company.

Icahn sued Dell and his company Aug. 1 in Delaware Chancery Court, contending the founder’s offering price of $13.65 a share, now as much as $13.96 with dividends, was too low.

Now “plaintiffs appear to seek a hurry-up hearing at the end of which they will ask the court to order Dell to hold the vote on the proposed merger simultaneously with the annual meeting -- which would require a delay in the vote,” Dell’s lawyers said in a filing made public yesterday.

Michael Dell contends in court papers that Icahn is seeking “undefined” proceedings as “just another soapbox for Mr. Icahn’s public spat” with Dell board members. The vote is tentatively set for Sept. 12.

In his motion for expedited handling of the case, Icahn contends the board “has gone far beyond its lawful role,” has “ignored the express will of the stockholders,” and is trying to “force through a merger that those stockholders have repeatedly voted against.”

Icahn lawyers said directors are working “to rig the vote in favor” of Dell’s “grossly underpriced” offer, and the case needs a quick resolution because an opportunity for recapitalization financing expires Sept. 30.

The case is High River v. Dell Inc., CA8762, Delaware Chancery Court (Wilmington).

CommonWealth Rises After Arbitrators Remove Investor Hurdle

CommonWealth REIT rose the most since February after an arbitration panel struck down a provision making it more difficult for stockholders to remove the company’s board of trustees.

A bylaw adopted in March requiring shareholders to own at least 3 percent of the stock for a minimum of three years before trying to remove the board is invalid, the panel found. Corvex Management LP and Related Cos., which began buying shares earlier this year and own about 9.6 percent of the company, sought to void that rule as they began a campaign to remove the trustees, claiming conflicts of interest and mismanagement.

While the arbitrators also denied a request by the investors to set an expedited shareholder meeting to elect a new board, the decision on the bylaw is perceived as “very favorable” to Corvex and Related, John Guinee, an analyst with Stifel Nicolaus & Co., wrote yesterday. The companies began seeking votes in April to oust the trustees and said they gained support from holders of more than 70 percent of the shares. CommonWealth, based in Newton, Massachusetts, has said the effort was invalid under its bylaws.

The three-member panel ruled that the trustees “may not adopt either a minimum ownership threshold or a minimum holding period which operating either separately or together substantially impairs the right of shareholders to proceed with a consent solicitation by making the obtaining of a record date on a consent solicitation unreasonably difficult to achieve,” according to a filing from Corvex.

Previous bylaws requiring that holders own at least $2,000 of stock for at least one year remain in effect pending a further order, CommonWealth said. The panel made no determination on whether those limits were valid or not, according to the filing.

“We look forward to continuing through the arbitration process and to a full hearing on these matters,” CommonWealth said in a statement yesterday.

For more, click here.

Before it's here, it's on the Bloomberg Terminal.