This issue of the Credit Crunch Digest focuses on new fines and criminal charges in Libor-related cases; the staggering potential costs of resolving lawsuits filed by regulators against the major banks; a settlement in the Goldman Sachs mortgage-backed securities lawsuit; and approval of a $1.7 billion settlement in connection with the Madoff fraud.

Libor Scandal

Litigation and Regulation Investigations

Fraud and Ponzi Schemes Government and Regulatory Intervention

Government and Regulatory Intervention

Libor Scandal

RBS Must Pay an Additional $50 Million for Tokyo-Based Unit’s Involvement With Libor Rigging Scheme

U.S. District Court Judge Michael Shea for the District of Connecticut recently ordered RBS Securities Japan, Ltd., the Tokyo-based office for Royal Bank of Scotland, to pay a $50 million fine after it pleaded guilty to wire fraud claims related to the Libor rigging scheme.  This penalty is in addition to the $600 million RBS has already paid to settle with regulators from the United States and the United Kingdom. Within its plea agreement, RBS Securities Japan admitted its involvement in manipulating Libor, including misconduct by four of its Japan-based traders.  The trading unit’s head, Ryusuke Otani, left the company upon the bank filing the plea agreement.  (“Royal Bank of Scotland Japan Unit Sentenced in Libor Probe,” Bloomberg, January 6, 2014)

Justice Department Charges Three Former Rabobank Employees for Manipulating Libor

Shortly after Rabobank consented to a settlement agreement forcing it to pay more than $1 billion in penalties related to its involvement with the Libor scandal, the U.S. Justice Department filed criminal charges against three of its former traders.  Specifically, Paul Robson from London, Paul Thompson from Australia, and Tetsuya Motomura from Tokyo were all charged with wire fraud, conspiracy to commit wire fraud, and bank fraud for their part in manipulating Libor.  Some of the evidence against these individuals includes documented communications showing the intent to fix the rate.  For instance, in August 2008, Motomura requested that Robson “. . . set today’s 6mth LIBOR at 0.96” because Motomura had a “chunky fixing.”  Other communications between the two commented on the ridiculousness at which the rate was being set.  Although the defendants were also criminally charged in the United States, they will likely never be prosecuted and are unlikely to face extradition.  (“Three Former Rabobank Traders Charged in Libor Case,” The New York Times Deal Book, January 13, 2014)

Litigation and Regulation Investigations

Banks Anticipate $50 Billion Cost to Resolve Mortgage Suits

Major Wall Street banks could potentially pay a combined total of almost $50 billion to resolve claims by federal regulators in connection with the mortgage crisis, according to industry insiders. Separate deals by the major firms for this figure would represent approximately half of the 2012 profits for the banks and could include not only cash payments, but also assistance with mortgages to homeowners.

Senior banking executives and boards are basing their predictions on the $13 billion benchmark settlement JPMorgan Chase reached with regulators in November 2013, which resolved regulatory claims against the bank arising out of its mortgage abuses.  Other banks may be pursuing similar deals, using the JP Morgan settlement as a model.

The analysis predicts that Bank of America could settle for $11.7 billion in penalties and an additional $5 billion in relief to homeowners. Morgan Stanley’s payment is projected to be approximately $3 billion, with $1 billion for consumer relief. Goldman Sachs’ tab could approach $3.4 billion and Citigroup $1 billion. The analysis predicts that Royal Bank of Scotland’s settlement would be approximately $10 billion. Estimated potential penalties for other banks are all less than $1 billion. While the approach by the banks may vary in seeking resolutions, the banks have set aside significant reserves for litigation and settlement costs. (“Wall Street Predicts $50 Billion Bill to Settle U.S. Mortgage Suits,” New York Times Deal Book, January 9, 2014)

Goldman Settles Prudential Mortgage Case

Prudential Insurance Company agreed to voluntarily dismiss fraud and racketeering claims it brought against Goldman Sachs in exchange for an undisclosed settlement.  Prudential’s claims were related to the sale of $375 million in residential mortgage-back securities (RMBS). The claims were brought in the U.S. District Court of New Jersey.

Prudential and others had purchased RMBS in 16 different Goldman Sachs securitizations from 2004 to 2008. The plaintiffs, whose claims were based on New Jersey state law, alleged that Goldman Sachs made numerous misrepresentations regarding the quality of the underlying loans.  Goldman Sachs argued that under New York law, the statute of limitations had passed since Prudential and other plaintiffs were aware of the violations by 2009, more than three years before the lawsuit was filed in August 2012. Prior to the settlement, the District Court deferred a decision to determine which state’s law applied. 

Prudential also filed similar suits in New Jersey state court against RBS Financial and Nomura Securities International Inc. Those lawsuits appear to remain pending. (“Prudential, Goldman Settle $375M RMBS Fraud Suit,” Law360.com, January 6, 2014)

Fraud and Ponzi Schemes Government and Regulatory Intervention

District Judge Approves $1.7 billion Madoff Settlement

On January 8, 2014, U.S. District Court Judge Kevin Castel approved a $1.7 billion settlement agreement between JPMorgan Chase and federal prosecutors.  JPMorgan agreed to pay this amount to avoid the filing of criminal charges regarding the bank’s failure to warn regulatory officials about the Ponzi scheme orchestrated by Bernard Madoff. 

The bank admitted to violating the Bank Secrecy Act, which requires banks to maintain effective anti-money laundering programs and report suspicious banking activities.  From 1986 until his arrest in December 2008, Madoff had an open account with Chemical Bank, which became part of JPMorgan.  Throughout the years, Madoff deposited more than $150 billion into this account, with balances as high as $5.6 billion.  In the 1990s, certain Chemical Bank employees were troubled by the fact that Madoff had consistent financial returns, but this information was never forwarded to JPMorgan’s anti-money laundering department or governmental agencies.  Additionally, Madoff’s account triggered money laundering alerts in 2007 and 2008 that the bank failed to report to regulators.  JPMorgan will avoid any prosecution for these actions if it does not commit any similar violations over the next two years.

In addition to forfeiting the $1.7 billion to victims of Madoff’s Ponzi scheme, JPMorgan will also pay $350 million to the Office of the Comptroller of the Currency and $543 million to Irving Picard, the bankruptcy trustee for Madoff’s estate. (“JPMorgan’s $2B Madoff Deal Wins Judge’s OK,” Law360.com, January 8, 2014)

Government and Regulatory Intervention

SEC Contemplates Volcker Rule Enforcement Mechanisms

In December 2013, the Volcker rule – which prohibits banks from making speculative bets with their own money – was adopted by federal regulators.  Multiple regulators, including the U.S. Securities and Exchange Commission (SEC), share authority to enforce the rule.  According to reports, the SEC may seek the creation of new rules aimed at allowing it to punish banks and brokerages that do not properly maintain required documentation.  Currently, the SEC is concerned that it lacks the power to engage in such Volcker rule compliance monitoring.  According to John Ramsay, director of the Trading and Markets Division at the SEC, “[i]f we want to sanction a firm for not keeping the records or documents they are required to keep or provide reports to us in the form [that is] required, we need to take further action.” In being able to take action against firms that fail to comply with the record retention requirement, the SEC hopes to deter or prevent bad behavior in the future that may be harder to prosecute without the proper documentation being preserved. (“SEC may seek more power to enforce Volcker rule,” Reuters, January 16, 2014)

Topics:  Banks, Bernie Madoff, DOJ, Enforcement, Fraud, Goldman Sachs, JPMorgan Chase, Libor, Mortgage-Backed Securities, Ponzi Scheme, SEC, Volcker Rule

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