This issue of the Credit Crunch Digest focuses on developments in a major Barclays Libor-related case; a multibillion-dollar Bank of America settlement with mortgage securities investors; Morgan Stanley’s settlement with the Federal Housing Finance Agency; a jury verdict against Radius Capital’s CEO; a survey of Ponzi Schemes During the “Madoff Era”; and the continuing implementation of Dodd-Frank financial reforms.

Libor Scandal

Litigation and Regulatory Investigations

Fraud and Ponzi Schemes

Government and Regulatory Intervention

Libor Scandal

London’s High Court Demands More Documents From Barclays in Bellwether Case
On January 31, 2014, Judge Julian Flaux of London’s High Court ordered that Barclays must provide thousands of documents and electronic discovery from former directors and officers in a high-profile Libor manipulation case.  Guardian Care Homes, a U.K. residential care home operator, accuses Barclays of selling products based on manipulated Libor rates.  Guardian claims damages in the amount of £70 million ($115.5 million), alleging that the bank’s rate-rigging left hedging products sold by the bank invalid.  Primarily, the case focuses on Barclays’ Ricardo Master Fund, which invested $4 billion in securities and used Libor to make investment strategy determinations.  This lawsuit is the bellwether case to determine whether banks that have already admitted to Libor manipulation and paid fines will also be liable for other products related to Libor, such as Barclays’ Ricardo Master Fund.

Judge Flaux is requiring Barclays to turn over approximately 38,000 additional documents and emails from executives and former directors, including former CEO Bob Diamond.  Barclays has already produced about 220,000 documents and agreed to hand over this new information. Judge Flaux denied Guardian’s demand for documents related to Euribor manipulation.  (“Barclays Must Hand Over More Ex-Boss Emails In Libor Case,” Reuters, January 31, 2014)

Litigation and Regulatory Investigations

N.Y. State Court Approves $8.5 billion Bank of America Settlement
A New York state court approved a 2011 settlement between Bank of America and mortgage securities investors. The settlement, which involves mortgages issued by Countrywide Financial, covers some, but not all of the investors’ mortgages losses. Excluded from the settlement are several billions in losses incurred by investors related to mortgages that were modified to assist borrowers to remain in their homes.  Analysts suggest that Bank of America may have to eventually pay additional amounts to settle those claims. The settlement also included claims against Bank of New York Mellon, which served as trustee for 530 mortgage-backed bonds issued by Countrywide.

The settlement was approved over objections by large investors, including AIG, which alleged that Bank of New York Mellon, in its role as trustee, did not push Bank of America for a greater recovery. Analysts expect Bank of America to seek a negotiated settlement on the loan modification claims, but further analysis regarding those claims are expected to take more time. (“Bank of America Settlement on Bonds That Soured Is Approved,” New York Times DealBook, January 31, 2014)

Morgan Stanley Settles With Fannie and Freddie for $1.25 Billion
On February 4, 2014, Morgan Stanley submitted a securities filing stating that it had reached a settlement with the Federal Housing Finance Agency in connection with claims brought against the bank regarding mortgage securities it sold to Fannie Mae and Freddie Mac.  The “in principle” agreement states that Morgan Stanley will pay $1.25 billion in exchange for a release of all claims against it related to the sale of approximately $10.58 billion in mortgage-backed securities sold between September 12, 2005 through September 27, 2007.  Morgan Stanley reportedly set aside $1.2 billion for litigation costs in the fourth quarter of 2013, forcing it to take a $1.1 billion pretax loss.

This settlement follows additional agreements made with the Federal Housing Finance Agency, which sued 18 financial institutions in 2011, including a $4 billion settlement by JPMorgan Chase as well as a $1.92 billion settlement by Deutsche Bank. Bank of America has yet to resolve similar claims pending against it. (“Morgan Stanley Reaches $1.25 Billion Mortgage Settlement,” New York Times DealBook, February 4, 2014)

Jury Finds CEO Liable for Mortgage Manipulation
A Florida jury found Radius Capital Corp. CEO Robert A. DiGiorgio liable for civil fraud as a result of false and misleading statements he made in connection with Radius’ issuance of $23 million in mortgage-backed securities guaranteed by Ginnie Mae. The federal jury found in favor of the Securities and Exchange Commission, which alleged that DiGiorgio falsely represented to Ginnie Mae that the underlying loans were guaranteed by the Federal Housing Authority (FHA).  In fact, 70 percent of the loans were not guaranteed, falling well below FHA insurance standards.

According to the SEC, the underlying loans were deficient under FHA standards in several ways, including deficient appraisals, altered employment documents, and incorrect Social Security numbers. DiGiorgio himself originated many deficient loans. He was previously successful in obtaining a dismissal of claims related to five mortgage-backed securities issued prior to March 2006 on the grounds they were outside the statute of limitations. (“Fla. Jury Finds Radius CEO Liable for MBS Fraud,” Law360.com, February 6, 2014)

Fraud and Ponzi Schemes

Survey of Ponzi Schemes From 2008 to 2013
A recent survey shows that from 2008 to 2013, collective investor losses from Ponzi schemes totaled an estimated $50 billion.  Bernie Madoff’s scheme was the largest, with an estimated $17 billion in investor losses, with other notable Ponzi schemes perpetrated by R. Allen Stanford (estimated $7 billion) and Thomas Petters (estimated $3.6 billion). In addition to these well-publicized matters, there were approximately 500 smaller schemes uncovered during this period, causing losses in excess of $1 million. The average scheme size was approximately $98 million and the median was $10 million, indicating that a number of the schemes were relatively small in scale.  The survey also noted that Ponzi schemes were uncovered in 42 U.S. states.

The high water mark for collapses took place in 2008 and 2009, when more than 157 Ponzi schemes fell apart. These failures constituted more than $40 billion in investor funds.  From 2010 to 2013, approximately 100 additional schemes have been uncovered annually, although investor losses were lower than in previous years.  These Ponzi schemes have resulted in approximately 400 prison sentences handed out to the perpetrators. (“A Ponzi Pandemic: 500+ Ponzi Schemes Totaling $50+ Billion in ‘Madoff Era’” Forbes, February 12, 2014)

Government and Regulatory Intervention

EU Swap-Trading Platforms Almost Exempt From Dodd-Frank
The Commodities Futures Trading Commission (CFTC) and European Union (EU) authorities are reportedly close to finalizing a deal that would exempt EU swaps-trading platforms from Dodd-Frank regulations.  These negotiations came after a lawsuit was filed by the International Swaps and Derivatives Association in the U.S. District Court for the District of Columbia.  The lawsuit alleged that the CFTC has overextended its international reach in implementing Dodd-Frank, which has reportedly led to international traders avoiding trading with U.S. based firms.  This new agreement would supplement a deal the CFTC and EU Commission approved last year regarding swap trades called the Common Path Forward.  These two agencies are attempting to work together to enhance their regulations over derivatives, with swaps trading being a major component.  (“U.S. Said Near Deal With EU on Reprieve for Swap-Trade Rules,” Bloomberg, February 6, 2014).

Topics:  Bank of America, Banks, Barclays, Dodd-Frank, FHFA, Fraud, Libor, Morgan Stanley, Mortgage-Backed Securities, Ponzi Scheme

Published In: Business Torts Updates, Finance & Banking Updates, International Trade Updates, Residential Real Estate 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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