Orrick's Financial Industry Week In Review - February 11, 2013

by Orrick, Herrington & Sutcliffe LLP
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RMBS Litigation
 

Assured Wins $90 Million in Damages in RMBS Breach of Contract Trial

On February 6, Judge Rakoff of the Southern District of New York ruled in favor of monoline insurer Assured Guarantee Municipal Corp. against Flagstar Bank FSB after presiding over a bench trial seeking damages for breach of loan-level representations and warranties.  Flagstar, a loan originator and RMBS sponsor, contracted for Assured to provide bond insurance on two securitizations of home equity loans totaling approximately $900 million.  Flagstar represented to Assured that at the time of origination the loans complied with Flagstar’s underwriting guidelines, but Judge Rakoff concluded in his findings of fact and conclusions of law, based in large part on expert testimony describing the re-underwriting of loan samples, that Flagstar breached certain of its representations.  Judge Rakoff awarded Assured $90 million in damages.  Findings & Conclusions.

DOJ Brings Civil Fraud Action Against S&P

On February 4, the Department of Justice filed a complaint in the Central District of California against two Standard & Poor’s entities in connection with credit ratings S&P provided for certain RMBS and CDOs.  The government asserts claims under the 1989 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which allows the government to bring civil claims for mail fraud, wire fraud, and “financial institution fraud” for alleged frauds perpetrated against federally insured financial institutions.  The complaint alleges that from September 2004 through October 2007, S&P knowingly issued inflated ratings of non-prime RMBS and CDOs, delayed downgrading those products, and knowingly used faulty ratings methodology.  The government seeks statutory civil penalties totaling over $5 billion.  Complaint.

S&P Seeks Declaration That Credit Ratings Are Immune From Liability

On February 5, two Standard & Poor’s entities filed a declaratory judgment action in the Southern District of South Carolina seeking to bar the South Carolina Attorney General from suing S&P under South Carolina’s Unfair Trade Practices Act in connection with S&P’s ratings of RMBS and CDOs.  S&P filed the action in response to a December 20, 2012 letter from the Attorney General that threatened litigation.  S&P alleges that its credit ratings are predictive and subjective opinions that constitute protected speech under the First Amendment.  It seeks a declaration that South Carolina’s Unfair Trade Practices Act may not constitutionally be applied to S&P’s credit rating activities and an injunction prohibiting the Attorney General from pursuing any lawsuit that is inconsistent with S&P’s First Amendment rights.  Complaint.

European Financial Industry Developments

Legal Uncertainty in Proposed Ring-Fencing Provisions

On February 5, the Financial Markets Law Committee published a paper highlighting uncertainties identified in relation to the ring-fencing provisions contained in the draft Financial Services (Banking Reform) Bill 2012 – 2013.  Three key areas were identified as being problematic, as follows:

    • Compatibility with EU law: the operation of the depositor preference and group support provisions may conflict with the proposed Recovery and Resolution Directive and certain provisions, as drafted, may also indirectly discriminate against nationals of other member states.
    • Drafting uncertainty: the current definition of “core services” is very unclear and the proposed transitional provisions create uncertainty as to the enforceability of existing arrangements between banks and customers.
    • Scope of the ring-fence: as drafted, the legal, economic and operational independence of the ring-fenced bank is uncertain due to a lack of clarity in the provisions setting out the height and location of the ring fence. 

RBS Fined £87.5 Million over LIBOR Rates

On February 6, the FSA issued a final notice to RBS imposing a fine of £87.5 million for misconduct in submitting rates for the calculation of LIBOR.  RBS’ misconduct included the manipulation of submissions and several failings in respect of risk management systems and controls (including ongoing failings to identify inappropriate LIBOR submissions), as well as RBS’ collusion with other LIBOR panel banks and brokers in setting rates.

The FSA stated that the significant financial penalty of £87.5 million is intended to reflect both the widespread nature of the misconduct, as well as the harm caused to market participants and the integrity of the UK financial system.  In related actions, RBS has agreed to pay $324 million to the US Commodities and Futures Commission and $150 million to the US Department of Justice. 

European Commission: Anti-Money Laundering

On February 5, the European Commission published two legislative proposals designed to reinforce the European Union’s existing rules on anti-money laundering and fund transfers.  The legislative proposals comprise a directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, which is complemented by a regulation on information accompanying transfers of funds, designed to ensure the "due traceability" of these transfers.  Both proposals take into account the latest recommendations of the Financial Action Task Force.  The aims of the proposed directive include:

    • The provision of a clear mechanism for the identification of beneficial owners of funds.
    • Achieving greater clarity and transparency of the rules on customer due diligence in order to ensure that firms have adequate controls and procedures in place.
    • An expansion of the provisions dealing with politically exposed persons.

The legislative proposals are accompanied by an impact assessment and executive summary of the impact assessment, along with a set of frequently asked questions.

Rating Agency Developments

On February 7, Fitch updated its criteria for asset related risks of commercial real estate loans used as collateral for covered bonds.  Fitch Report.  

On February 6, Moody’s released methodology for U.S. Housing Finance Agency single family programsMoody’s Report.  

Note: Free registration is required for rating agency releases and reports.

 

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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