This issue of the Credit Crunch Digest focuses on recent developments in Libor and the Foreign Exchange market litigation; Credit Suisse’s $885 million mortgage settlement with the Federal Housing Finance Agency; Irving Picard’s new clawback attempts on Madoff funds; individuals found guilty of fraud for their role in the Madoff Ponzi scheme; and Dodd-Frank stress test guidelines for medium-sized banks.

Libor and Foreign Exchange Litigation

Litigation and Regulatory Investigations

Ponzi Schemes

Government and Regulatory Intervention

Libor and Foreign Exchange Litigation

Emails Main Evidence in First U.S. Dollar Libor Prosecution
The U.K.’s Serious Fraud Office noted that its prosecution of three former Barclays traders will heavily rely upon the individuals’ email communication.  Peter Johnson, Jonathan Mathew and Stylianos Contogoulas are facing criminal charges by U.K. and U.S. authorities in connection with their alleged attempt to manipulate Libor.  All three have been charged with one count of conspiracy to defraud.

While others in the U.K. have been prosecuted for Libor manipulation, Johnson, Mathew and Contogoulas are the first defendants facing criminal charges related to the rigging of the U.S. dollar Libor.  The U.S. dollar rate was one of the most relied upon rates of all 10 Libor currency calculations.  Previous charges brought by the U.K. and U.S. against individuals focused on the manipulation of Japanese Yen Libor.  (“UK Prosecutor Says Has ‘Vast Amounts’ of Documents in Libor Case,” Reuters, March 4, 2014)

Class Action Lawsuits Filed Against Major Banks Alleging Foreign Exchange Rigging
Multiple proposed class action lawsuits filed against several major banks alleging manipulation of the foreign exchange market have been consolidated in the U.S. District Court for the Southern District of New York.  This litigation alleges that employees at some of the world’s largest banks, including Barclays, Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, Royal Bank of Scotland and UBS, conspired to manipulate the approximately $5.3 trillion-a-day market.

Class action plaintiffs could include thousands of traders who used market information as a guide for their trading transactions.  The banks allegedly violated federal antitrust laws by allowing their traders to communicate in chat rooms, with names like “The Cartel” and “The Bandits Club,” for purposes of exchanging market information and conspiring to manipulate benchmark rates in the foreign exchange market.  Plaintiffs claim that this collusion influenced the market causing traders to lose value on their transactions that relied on these rates.

Plaintiffs began filing these lawsuits after the U.S. Department of Justice and other regulatory agencies around the world launched investigations probing the banks’ foreign exchange trading behavior.  As a result, many banks recently started to place certain foreign exchange traders on leave status.  Scott and Scott LLP has been appointed lead counsel in the consolidated foreign exchange benchmark rates antitrust litigation.  (“U.S. Court Appoints Law Firm to Lead Foreign Exchange Litigation,” Reuters, February 13, 2014)

Litigation and Regulatory Investigations

Credit Suisse Settles FHFA Lawsuits for $885 Million
On March 20, 2014, Credit Suisse, Switzerland’s second largest bank, announced that it had reached an $885 million settlement with the Federal Housing Finance Agency (FHFA) in connection with lawsuits filed against the bank concerning mortgages the bank sold to Fannie Mae and Freddie Mac.  In 2011, the FHFA sued multiple banks to recover on approximately $200 billion in mortgage-backed securities purchased shortly before the financial crisis.  The settlement will result in an after taxes charge of $312 million in the fourth quarter of 2013.  According to Credit Suisse, the FHFA settlement will resolve the largest mortgage-related litigation exposure to the bank.  Under the terms of the settlement agreement, Freddie Mac will receive $651 million and Fannie Mae will receive $234 million.  The bank will continue to face other claims involving mortgage-backed securities, including one filed by the state of New Jersey as recently as December 2013.  (“Credit Suisse to Pay $885 Million to Settle FHFA Lawsuits,” Bloomberg, March 21, 2014).

Ponzi Schemes

Court of Appeals Considers Clawback of Madoff Fictitious Profits
Irving Picard, the trustee liquidating Madoff’s assets, seeks to recoup fictitious profits paid to Madoff’s former customers up to six years before Madoff Investment Securities LLC went bankrupt in 2008.  Picard has already recouped approximately $9.8 billion of the estimated $17.3 billion lost from Madoff’s Ponzi scheme.

The U.S. Court of Appeals for the Second Circuit held a hearing on March 5, 2014, and intimated that it will likely limit the scope of Picard’s clawback because federal statutes only allow a trustee to recoup payments made up to two years before a bankruptcy.  Moreover, the law permits this clawback only after satisfying a fraudulent intent element.  Customers affected by Picard’s attempted clawback are challenging the length of the period and assert that they were unaware of Madoff’s fraudulent activity.

This hearing occurred at the same time as jurors heard closing arguments in the district court for a criminal action against five of Madoff’s former employees who allegedly assisted him in the Ponzi scheme.  (“With Billions at Stake, U.S. Court Weighs Madoff Clawback Claims,” Reuters, March 5, 2014)

Five Former Madoff Associates Guilty of Fraud
On March 24, 2014, a Manhattan jury found five former Madoff associates guilty of fraud for their roles in the Madoff Ponzi scheme.  Specifically, Daniel Bonventre, Annette Bongiorno, Joann Crupi, Jerome O’Hara and George Perez were convicted on 59 counts, which included securities fraud and conspiracy to defraud clients.  Bonventre was the back-office director, while Bongiorno and Crupi were portfolio managers at Madoff Investment Securities LLC.  O’Hara and Perez were employed as computer programmers.  Each individual faced anywhere from eight to 20 separate charges.

The trial lasted five months, and is the longest white-collar criminal trial in the history of the U.S. District Court for the Southern District of New York.  Witnesses at the trial included others who previously pleaded guilty for their role in the Ponzi scheme, which cost investors more than $17 billion in principal. (“Former Madoff associates found guilty of fraud,” Reuters, March 24, 2014)

Government and Regulatory Intervention

Financial Regulators Finalize Medium-Size Bank Stress Test Guidelines
The Federal Reserve Board, the Federal Deposit Insurance Company and the Office of the Comptroller of the Currency issued finalized guidelines explaining stress test expectations for medium-sized financial institutions.  In accordance with the Dodd-Frank financial reforms, any bank that holds between $10 billion and $50 billion in assets must conduct a stress test by March 31, 2014 and meet the regulatory guidelines.

The rules require medium-sized banks to evaluate three macroeconomic scenarios of baseline, adverse and seriously adverse events and their effect on consolidated losses, revenues, balance sheets and capital.  The banks pass the stress test by sustaining a sufficient loan-loss reserve under the various scenarios.  However, the stress-test guidelines do not require medium-sized banks to preserve a specific capital ratio or establish or submit capital action plans.  Banks with less than $10 billion in assets currently do not have to perform stress tests under the Dodd-Frank reforms.  (“Final Stress Test Guidance Issued for Medium-Sized Banks,” Compliance Week, March 6, 2014)

Topics:  Banks, Bernie Madoff, Clawbacks, Dodd-Frank, FHFA, Foreign Exchanges, Fraud, Libor, Mortgages, Ponzi Scheme, Settlement, Stress Tests

Published In: Business Torts Updates, Civil Procedure Updates, Criminal Law Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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