This issue of the Credit Crunch Digest focuses on the indictment of former ICAP employees for rate fixing of the yen Libor; a new lawsuit filed against global banks for their involvement in Libor manipulation schemes; a possible global settlement for JP Morgan with federal and state authorities regarding mortgage-related investigations; a lawsuit filed by New York against Wells Fargo for violations of a mortgage-servicing settlement; developments in the trial of the “Hustle” Bank of America/Countrywide matter; arguments to the Supreme Court arising out of the Stanford Ponzi Scheme; and a record-setting whistleblower payment by the SEC.
Litigation and Regulatory Investigations
Fraud and Ponzi Schemes
Government and Regulatory Intervention
Justice Department Indicts Former ICAP Employees
After a multiyear investigation, the Justice Department revealed on September 25, 2013, that it will file criminal charges against three ex-ICAP employees alleging their involvement in conspiring to manipulate Libor. The former employees are Darrell Read from New Zealand, as well as Daniel Wilkinson and Colin Goodman from the United Kingdom. These charges come in the wake of an $87 million settlement ICAP reached with the United Kingdom’s Financial Conduct Authority for violations in relation to rigging Libor.
The Justice Department alleges that these three individuals colluded with Tom Hayes, a former UBS trader, to rig Libor in connection with yen currency between 2006 and 2011. Specifically, they are accused of submitting deceptive financial information that banks used in order to create their Libor submissions while also lobbying other banks to submit faulty information in conformance with Hayes’ requests. Besides earning high commission fees, the individuals also allegedly received champagne and free meals for their manipulation tactics. The current CEO of ICAP, Michael Spenser, has already issued a statement apologizing for any manipulation of the yen Libor. (“Three ex-ICAP employees indicted in Libor scandal,” CNN Money, September 25, 2013).
National Credit Union Administration Sues 13 Global Banks Over Libor
On behalf of certain failed credit union banks, the United States’ credit union regulator, the National Credit Union Administration, filed suit against 13 global banks. The credit unions include U.S. Central, Western Corporate, Members United, Southwest, and Constitution. The lawsuit alleges that these banks’ Libor manipulation contributed to the credit unions’ failure to obtain the proper interest on the billions of dollars they invested. The global banks named in the lawsuit include JPMorgan Chase, Credit Suisse, UBS, Lloyds Banking Group, Westlb, Royal Bank of Scotland, Cooperatieve Centrale Raiffeisen Boerenfleenbank, The Norinchukin Bank, the Bank of Tokyo-Mitsubishi, HBOS, Societe Generale, and Royal Bank of Canada. The case has been filed in the U.S. District Court for the District of Kansas, adding to the Libor-related lawsuits these banks continue to face. (“U.S. credit union regulator sues global banks over LIBOR,” Reuters, September 24, 2013).
Litigation and Regulatory Investigations
JP Morgan in Talks for Global Settlement of Mortgage-Bond Matters
Although a deal is not yet finalized, JPMorgan is reportedly in negotiations with both federal and state regulators to resolve investigations related to mortgage-bond matters. The deal would involve a payment of $13 billion by the bank, up from the $11 billion reported last month. Additionally, it would include $4 billion for consumer related relief, as well as $9 million in payments and fines. The authorities negotiating the deal include the U.S. Justice Department, the Department of Housing and Urban Development and the New York Attorney General.
JPMorgan Chief Executive Officer Jamie Dimon has recently been in personal negotiations with U.S. Attorney Eric Holder. Federal officials rejected a bank proposal to pay $3 billion to $4 billion to end the investigations. The bank is apparently seeking to negotiate resolutions of a number of investigations, including mortgage-bond investigations by federal and state regulators, various probes by U.S. attorneys in a variety of jurisdictions, and a $6 billion claim by the Federal Housing Finance Agency. (“JPMorgan Said to Reach Record $13 Billion U.S. Settlement,” Bloomberg, October 20, 2013)
New York Sues Wells Fargo Over Mortgage-Servicing Settlement
The state of New York recently sued Wells Fargo, alleging that the bank did not comply with a $25 billion mortgage-servicing settlement agreement that focused on preventing homeowners from falling victim to foreclosure. New York Attorney General Eric Schneiderman alleges that Wells Fargo has been superfluously delaying applications of individuals who are attempting to modify their mortgage loan terms.
The settlement agreement arose from a 2012 alliance between 49 states and the federal government that aimed to force the country’s major mortgage servicers, including Wells Fargo, to stop predatory lending and vigorous foreclosure practices. Although the banks settled, Schneiderman alleges that Wells Fargo continually impedes its borrowers’ loan modification process. In reply, Wells Fargo stated that it has already executed 880,000 loan modifications nationwide in the past four years, which includes 26,000 mortgage loan modifications for New York homeowners. However, Schneiderman references a June report that listed Wells Fargo as one of the banks failing to abide by the settlement terms, specifically the mandated servicing standards. (“Wells Fargo Sued by New York Over Mortgage-Service Accord,” Bloomberg, October 2, 2013).
Bank of America Found Liable in Countrywide Mortgage Case
The U.S. Department of Justice won a jury trial against Bank of America (BofA) over allegations that BofA’s Countrywide division engaged in a program called “Hustle,” which approved substandard home loans that defrauded federal agencies, including Fannie Mae and Freddie Mac. The action was the Justice Department’s first financial crisis lawsuit against a major bank to go to trial.
The lawsuit, first brought in 2012, alleged that BofA caused more than $1 billion in losses to the mortgage guarantors as a result of deficient home loan underwriting and approval processes. The federal civil action arose out of a whistleblower matter brought by Countrywide executive Edward O’Donnell, in which he detailed the acceleration of the loan origination process by removing underwriting controls and compensating originators based on volume and not quality.
Judge Jed Rakoff, who dismissed claims under the False Claims Act, allowed the matter to proceed under the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). FIRREA was passed in 1989 after the 1980s savings and loan crisis. The use of FIRREA has been resurrected by government authorities seeking relief from recent credit crisis related wrongdoing. While prosecutors have asked that BofA pay a fine of $848 million after the jury verdict, Judge Rakoff will determine the penalty. (“Jury Finds Bank of America Liable in Mortgage Case,” New York Times, October 23, 2013).
Fraud and Ponzi Schemes
U.S. Supreme Court Hears SLUSA Arguments in Stanford Ponzi Scheme Case
On October 7, 2013, several law firms, insurance companies and financial services companies presented arguments to the U.S. Supreme Court asserting they should not be liable for investor losses in connection with the $7 billion Ponzi scheme run by Robert Allen Stanford. The arguments focused on the state law claims brought in federal court, and the application of the Securities Litigation Uniform Standards Act (SLUSA), which preempts state law class actions for fraud involving the sale of securities. The Supreme Court is expected to address a split on how SLUSA is applied. The plaintiffs allege that they should be able to pursue their state law claims for aiding and abetting Stanford’s fraud against the defendants, including prominent law firms Proskauer Rose LLP and Chadbourne & Parke LLP, as SLUSA does not extend to those claims. The defendants seek to prevent plaintiffs from asserting aiding and abetting allegations under state law. The defendants were joined in their arguments by the Obama Administration and the Securities & Exchange Commission.
In the multidistrict litigation overseeing lawsuits arising out of the Stanford scheme, the judge initially ruled that the state law claims were precluded by SLUSA. The Fifth Circuit Court of Appeals later overturned that ruling, holding that the aiding and abetting claims were “tangentially related” to the securities covered by SLUSA, and as such ruled the lawsuits could proceed. (“High Court Weighs Law Firms’ Liability in Stanford Ponzi,” Law360.com, October 7, 2013)
Government and Regulatory Intervention
SEC Announces $14 Million Whistleblower Award
The Securities & Exchange Commission’s (SEC) Office of the Whistleblower was established in 2011 under the Dodd-Frank financial reforms for purposes of encouraging whistleblowers to report corporate wrongdoing. In the past two years, only a handful of tipsters have been awarded under the whistleblower program, with the SEC paying out a total of only $170,000. Under the whistleblower program, a tipster can receive between 10 percent to 30 percent of the monetary sanctions (if exceeding $1 million) by providing a tip that proves vital in the SEC’s investigation and prosecution of a case.
On October 1, 2013, the SEC announced a $14 million award to an anonymous whistleblower whose information led to an SEC enforcement that recovered investor funds. This is the largest award under the whistleblower program to date, and SEC officials believe that large awards may become more commonplace in the coming years as the agency is being provided with more high-quality tips. According to SEC Whistleblower Office Director Sean McKessy, “[w]e have some very interesting ongoing investigations that, depending on how they play out, could, given our historical recovery in these kinds of cases, mean very big numbers.” The SEC did not provide details about the whistleblower who was awarded $14 million, or the company for whom the whistleblower worked, citing confidentiality concerns for the individual. (“Bigger payouts seen for U.S. financial market whistleblowers,” Reuters, October 1, 2013).