Civil liberties group sues Morgan Stanley over discrimination

NEW YORK, Mon Oct 15, 2012 – The American Civil Liberties Union is filing what it says is the first lawsuit against an investment bank, Morgan Stanley, alleging discrimination for packaging subprime mortgage loans into securities.

The ACLU and other plaintiffs will file the case on behalf of five Detroit residents and its Michigan affiliate, claiming the investment bank encouraged a mortgage lender to make loans with justifiably high costs and a strong possibility of foreclosure to enrich its business of selling securities to institutional investors.

“With this lawsuit, real victims of the subprime lending scandal are stepping forward to hold investment banks like Morgan Stanley accountable for the devastation the banks wrought in their lives and in our economy,” ACLU Executive Director Anthony Romero said in a prepared statement.

The civil liberties group will file the lawsuit in U.S. District Court in New York, and asked the court to certify it as a class action. It said as many as 6,000 black homeowners in the Detroit area may have suffered similar discrimination.

Until now, discrimination lawsuits have been brought directly against the original mortgage lenders rather than investment banks that packaged the loans into securities, the ACLU said.

Foreigners trim long-term U.S. security buys in April

NEW YORK, Fri Jun 15, 2012 – Overseas investors cut back on purchases of long-term U.S. securities in April, the U.S. Treasury said on Friday, as both public and private accounts unloaded mortgage-backed debt.

The United States attracted a net long-term capital inflow of $25.6 billion in April after drawing $36 billion in March.

Foreigners stepped up Treasury purchases to $37.3 billion from $20.1 billion in March but were net sellers of securities guaranteed by the biggest U.S. mortgage financing agencies to the tune of $14.1 billion. That was more than double the outflow seen from that sector in March.

As for Treasuries, private investors were more avid buyers in April, accounting for 23.4 billion of the total inflow.

China, the largest foreign U.S. creditor, raised its Treasury holdings slightly to $1.146 trillion from $1.144 trillion, while No. 2 Treasury holder Japan cut holdings by $10.2 billion to $1.066 trillion.

Including short-dated assets such as bills, foreigners sold a net $20.5 billion in April, compared with March’s downwardly revised net outflow of $48.6 billion.

Wells Fargo’s play for prime brokerage prompts skepticism

As Wells Fargo becomes a bigger player in the investment banking game, not everyone is a fan.

Moody’s Investors Service, the rating agency, raised concerns on Monday about the bank’s recent move outside its comfort zone of consumer lending. Moody’s directed criticism at the bank for stepping into prime brokerage, calling the bank’s recent acquisition of the midsize company Merlin Securities “credit negative.”

Wells Fargo agreed to buy Merlin last month for an undisclosed sum, making it the last of the nation’s biggest banks to enter prime brokerage, the lucrative business that caters to hedge funds and other big investors. Prime brokers provide a broad array of services, including cash management, execution of leveraged trades and securities lending.

Moody’s expressed concern the Merlin takeover “signals that Wells Fargo intends to expand its” investment banking business. “Though Merlin is small and has a limited balance sheet, we expect that Wells Fargo will build this business and seek to expand its products and services,” Moody’s said in the report.

Fitch, one of Moody’s top competitors, offered a softer interpretation of the deal. While Wells Fargo “may use Merlin as a platform for further expansion, the transaction is still viewed as relatively small in nature,” Fitch said last week.

In a statement, Wells Fargo defended the deal and challenged the Moody’s assessment.

Goldman to pay $22 million to settle SEC, FINRA charges

WASHINGTON, Thu Apr 12, 2012 – Securities regulators said on Thursday that Goldman Sachs Group Inc. will pay $22 million to settle civil charges that the investment bank lacked adequate policies to prevent firm analysts from sharing non-public information that could be passed to clients.

The joint settlement with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority was previously reported by Reuters on Wednesday.

The case stems from a practice at Goldman that came to light several years ago known as “huddles,” where stock research analysts met with the firm’s traders to share their best trading ideas. Those ideas were then passed along to preferred clients.

Navigating a new era of securities litigation and enforcement

John Cannon, Securities Litigation, Enforcement Defense Attorney, Stradling Yocca Carlson & Rauth

The realm of securities litigation and enforcement is shifting. Federal enforcement investigations are on the rise, prompting the need for more robust compliance and training programs for businesses, says John Cannon, a securities litigation and enforcement defense attorney with Stradling Yocca Carlson & Rauth.

“When I first started practicing, it was often the rule that securities litigation would be something that would occur first, and following that, maybe an enforcement action, which didn’t always have teeth,” Cannon says. “That’s changed; it’s actually flipped. The risk associated to a company’s bottom line could be much more material today with the government taking a more focused look at these issues.”

Smart Business spoke to Cannon about the changing landscape and how businesses can prepare and protect themselves.

What trends should companies pay attention to?

Nowadays, the real threat to companies — public companies, in particular — is the potential for an enforcement action by an agency or department of the government. That could range from a Foreign Corrupt Practices Act issue, an Exchange Act issue, a False Claims Act issue and an FDA issue, as well as other agencies and departments.

The government is taking a much more active role, and the risks and the penalties associated with that process are very different than in typical securities litigation.

Enforcement defense raises different issues relating to insurance coverage. Often, private securities litigation tended to be covered by a directors’ and officers’ insurance policy. But coverage for a government investigation might be much more limited — in fact, it’s nearly nonexistent under some policies.

What types of securities fraud class action filings should be of concern?

Taking the place of the classic ‘stock-drop’ lawsuit in terms of the volume of cases that a company should be worried about are cases related to the mergers. If you’re involved in a public company merger or going private transaction, the chances of being sued in your home state and Delaware are fairly high. Those cases tend to be manageable, and they tend to be dealt with in a way that preserves the transaction.

The other issue that you’re seeing is ‘circumstance cases,’ where you’ll have an event happen, like the Gulf explosion, or a matter such as options backdating, which will then trigger a whole series of cases. Or you’ll have the financial downturn, which will trigger a series of cases involving the institutions that are most affected. What you get is a kind of localized action surrounding a particular event, as opposed to an across-the-board risk.

What can businesses expect going forward in regard to enforcement?

Any enterprise that is in one way or another connected to or regulated by the federal government should be looking at itself immediately to determine whether or not it has appropriate compliance policies and procedures in place to prevent violations of law. And they should also anticipate that it’s as likely to get a knock on the door from the FBI as it is to get served with a lawsuit.

The reality is that the federal government in particular is looking toward the various statutory mechanisms it has in place on the enforcement side to mold, form and direct business as it’s done in the United States. It’s also a revenue source for the government. If you start totaling up these numbers in terms of fines and penalties that companies have to pay, they’re not small.

Who is impacted the most by the current environment?

Prime examples of entities that are particularly at risk on a regular basis:

  • Small and medium-sized public companies
  • State and local agencies
  • Private equity/hedge funds/investors/investment advisors
  • Direct and indirect payees of funds from federal programs and contracts
  • Pharmaceutical and medical device companies
  • Companies doing business internationally

How can businesses prepare?

Fortune 100 companies, and some Fortune 500 companies, have been somewhat proactive in establishing programs that ensure that they are in compliance. That can range from everything from an insider trading policy to a policy regarding anti-trust laws to a policy regarding the False Claims Act.

For mid-size, emerging public and private companies, I don’t think they have been as effective or have prioritized compliance as much as their larger brethren. Because larger companies have focused more on compliance, there is an expectation in the enforcement process that policies should be in place to protect against violations. Emerging companies tend to focus on revenue and the bottom line.

Quite frankly, that needs to change, because they are as susceptible to a knock on the door by the FBI today as larger companies, and the expectations about what should be in place are fairly high from a government standpoint.

John Cannon is a securities litigation and enforcement defense attorney with Stradling Yocca Carlson & Rauth. Reach him at [email protected]

Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth

U.S. Treasury sells MBS portfolio for $25 billion profit

WASHINGTON, Mon Mar 19, 2012 – The Treasury Department said on Monday it has completed the sale of a $225-billion portfolio of mortgage-backed securities it bought in 2008 and 2009 amid the financial crisis and made a $25 billion profit.

“The successful sale of these securities marks another important milestone in the wind down of the government’s emergency financial crisis response efforts,” Treasury’s assistant secretary for financial markets, Mary Miller, said in a statement.

Treasury began selling the securities, which it had bought when the markets were under severe stress, last year and said it took in $250 billion in total for them in sales, principal and interest.

MF Global sold assets to Goldman before collapse: sources

NEW YORK ― MF Global unloaded hundreds of millions of dollars’ worth of securities to Goldman Sachs in the days leading up to its collapse, according to two former MF Global employees with direct knowledge of the transactions. But it did not immediately receive payment from its clearing firm and lender, JPMorgan Chase & Co., one of the sources said.

The sale of securities to Goldman occurred on October 27, just days before MF Global Holdings Ltd. filed for bankruptcy on Oct. 31, the ex-employees said. One of the employees said the transaction was cleared with JPMorgan Chase.

At the same time MF Global, which was run by former Goldman Sachs head Jon Corzine, was selling securities to Goldman to raise badly needed cash, the futures firm was also drawing down a $1.2 billion revolving line of credit it had with JPMorgan, according to one of the former MF Global employees.

JPMorgan spokeswoman Mary Sedarat said the bank did not withhold money because of the line of credit. She declined further comment on details of the transactions.

JPMorgan has fought aggressively in bankruptcy court to protect its interests, and received a lien on some of MF Global’s assets in exchange for granting the firm $8 million to fund its bankruptcy costs. The lien puts JPMorgan’s interests ahead of MF Global customers who have not yet received an estimated $900 million worth of money from their accounts, which remain frozen as regulators search for missing funds.

The hastily crafted transactions and the seeming inability of MF Global to recoup some of the money in the sale to Goldman may start to explain why so much money remains unaccounted for at the futures firm.

It is unclear what type of assets Goldman bought from MF Global, but the securities were worth hundreds of millions of dollars, the former employees said. The sources spoke on the condition of anonymity.

The Wall Street Journal previously reported that George Soros’ fund was a buyer of securities sold by MF Global, scooping-up some of its European sovereign debt at a deep discount. Panic among investors and clients about MF Global’s $6.3 billion bet on European sovereign bonds led to its demise.

Corzine, who was CEO of MF Global at the time of the collapse, headed Goldman Sachs from 1994 to 1999 before being ousted after a power struggle with co-CEO Henry Paulson.