Orrick's Financial Industry Week In Review - May 29, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


Fed Releases Citi and HSBC Mortgage Servicing and Foreclosure Action Plans

On May 24, the Fed released action plans for Citigroup and HSBC to correct alleged deficiencies in residential mortgage loan servicing and foreclosure processing.  The Fed also released the engagement letter between Ally and the independent contractor retained to review foreclosures that were processed in 2009 and 2010.  Fed Release.

Rating Agency Developments


On May 24, S&P updated its methodology for applying its RMBS small pool adjustment factor. S&P Report.

On May 23, Moody’s updated its methodology for ABCP.  Moody’s Report.

On May 23, Fitch updated its criteria for multilateral development banks.  Fitch Report.

On May 22, Fitch detailed its rating considerations for passive funds.  Fitch Report.

On May 22, DBRS released its master U.S. ABS surveillance methodology.  DBRS Report.

On May 22, DBRS released its unified interest rate model for U.S. timeshare loan ABS transactions.  DBRS Report.

On May 22, DBRS released its operational risk assessment for U.S. ABS servicers.  DBRS Report.

On May 22, DBRS released its methodology for U.S. timeshare loan securitizations.  DBRS Report.

On May 21, Fitch published criteria for state revolving funds (SRFs) and leveraged municipal loan pools (MLPs).  Fitch Report.

On May 18, S&P updated its base-case default rate assumptions and benchmark pool for Japanese credit card and consumer loan securitizations.  S&P Report.

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

Recent Orrick Alerts


Orrick Restructuring Alert: Lessons for Lenders from Tousa Circuit Court Decision

This alert, written by Raniero D’AversaJonathan Guy and Amy Pasacreta, discusses the bankruptcy case of TOUSA, Inc. and its various subsidiaries. On March 15, 2012, the Eleventh Circuit reversed the District Court’s opinion and reinstated the Bankruptcy Court’s order, which had disgorged over $400 million from Tousa’s senior lenders and avoided certain guarantees and liens granted to them by the Conveying Subsidiaries.  Specifically, the Circuit Court found: (i) the Tousa Bankruptcy Court did not err when it found the Conveying Subsidiaries did not receive reasonably equivalent value in exchange for the new liens provided to the New Lenders; and (ii) the Transeastern Lenders were the direct beneficiaries of the new liens and as such subject to the avoidance powers of section 550(a).  Click here to read more. 

Summary of Required Financial Statements of Businesses Acquired or to Be Acquired

Rule 3-05 of Regulation S-X requires audited financial statements to be filed for a significant business (or a significant group of related businesses) that has been acquired or the acquisition of which is probable. This article, written by Bruce Czachor and Stephen Ashley, discusses the specific financial statements required, as well as the situations in which they need to be included.  Click here to read more.

RMBS Litigation


FDIC Brings Two RMBS Lawsuits Against Several Investment Banks and Related Entities

On May 18, 2012, the FDIC, in its capacity as receiver for two failed banks, filed two actions in the Southern District of New York arising out of the banks’ alleged purchase of RMBS.  In the first suit, the FDIC asserts claims on behalf of Citizens National Bank and Strategic Capital Bank that arise out of the banks’ investment in ten RMBS certificates worth $140.5 million issued and/or underwritten by the defendants, including Bear Stearns, Citigroup, Credit Suisse, Merrill Lynch and Deutsche Bank.  Complaint.  In the second suit, the FDIC asserts claims on behalf of Strategic Capital Bank arising out of the bank’s investment in five RMBS certificates worth $31 million underwritten by JP Morgan, Citigroup, Bank of America and Deustche Bank.  Complaint.  In both suits, the FDIC alleged that the defendant banks violated Sections 11 and 15 of the Securities Act of 1933 by making material misstatements and omissions in the certificates’ registration statements regarding, among other things, the loan to value ratios of the mortgages underlying the certificates, the appraisal standards used in connection with the appraisals of the underlying properties, whether the borrowers intended to occupy the properties as their primary residences, and whether the originators complied with their underwriting guidelines when originating the underlying mortgages.  The FDIC seeks a combined total of $77 million in damages, plus attorneys’ fees and costs.

Foreign Investors Bring $1.8 Billion RMBS Lawsuit Against Six Investment Banks

On May 22, 2012, Blue Heron Funding Ltd., Phoenix Light SF Limited, Silver Elms CDO PLC and Kleros Preferred Funding V PLC filed a summons with notice in the New York State Court against six investment banks and their related entities over $1.8 billion in RMBS certificates originally issued between 2005 and 2007.  The plaintiffs, which are incorporated in either the Cayman Islands or Ireland, alleged that the offering materials issued by the defendant banks in connection with their respective RMBS offerings contained material misstatements and omissions regarding the underwriting and appraisal standards used in connection with the underlying mortgage loans, the statistical characteristics of those loans and the credit ratings of the securities.  The plaintiffs assert claims under Sections 11, 12 and 15 of the Securities Act of 1933 and seek to recover a combined total of $1.8 billion, plus legal fees, interest, and punitive damages.  Summons.

Court Dismisses in Part AIG’s Claims Against Bank of America and Countrywide

On May 23, 2012, Judge Mariana R. Pfaelzer of the Central District of California dismissed with prejudice the majority of claims brought by AIG in a suit against Bank of America and Countrywide over the sale of RMBS certificates.  Judge Pfaelzer held that because AIG purchased the securities at issue more than three years before filing suit, its federal securities claims were time-barred under the three-year statute of repose for claims under the Securities Act of 1933.  Judge Pfaelzer determined that a majority of AIG’s common law claims, including negligent misrepresentation and fraud, were also time-barred under the relevant states’ statutes of limitation.  The court found that certain additional common law claims were part of a tolling agreement that tolled claims between January 13, 2011 and August 5, 2011, and were thus timely.  Order.

FINRA Fines Citigroup $35 Million for Violation of FINRA and SEC Rules

On May 22, 2012, the Financial Industry Regulatory Authority (“FINRA”) fined Citigroup $35 million for alleged rule violations, including providing investors with inaccurate information in connection with several RMBS offerings.  Citigroup consented to the $35 million fine, but neither admitted nor denied FINRA’s findings.  FINRA found that between January of 2006 and October of 2007, Citigroup posted inaccurate performance data and static pool information on its website after receiving information indicating that the data was incorrect.  The agency further found that the errors in the information were significant enough potentially to have affected prospective investors’ assessments of six subprime and Alt-A RMBS offerings.  Additionally, the organization found that Citigroup failed to maintain required books and records and failed to supervise the pricing of certain CDO securities, violating, among other things, SEC Rules 17(a)-3(a)(8) and 17a-4.  AWC Letter.

European Financial Industry Developments


Upper Tribunal upholds FSA decision to ban and fine former UBS advisers

The Upper Tribunal (Tax and Chancery Chamber) has upheld an FSA decision to ban and fine two former UBS advisers in relation to an unauthorised trading scheme.  The FSA were directed to fine Sachin Karpe £1.25 million and Laila Karan £75,000 and ban them for performing any role in regulated financial services for failing to act with integrity, in breach of Principle 1 of the FSA's Statements of Principles and Code of Conduct for Approved Persons and for not being fit and proper persons as they lacked honesty and integrity.

Mr. Karpe was Desk Head of the Asia II Desk at UBS AG's international wealth management business in London.  He had carried out substantial authorised trading and made unauthorised transfers and loans between client accounts to conceal the losses.  Mr. Karpe was Ms. Karan's line manager.  She assisted him in concealing the unauthorised activity and prepared false attendance notes.  UBS paid compensation of over US$42 million to 21 customers who had suffered substantial losses as a result of the scheme.  Decision for Mr. Karpe.  Decision for Ms. Karan.

Directive Amending Solvency II Transposition and Application Dates Published

On 21 May 2012, the European Commission published a legislative proposal for a directive to amend the Solvency II Directive.  The proposals extend the date by which Solvency II must be transposed by member states into national law from 31 October 2012 to 30 June 2013.  It also states that Solvency II will apply from 1 January 2014 (the application date) and Solvency I will no longer apply on this date.

The proposals were made as a result of delays in the adoption of the Omnibus II Directive and to allow a smooth transition into the new law under Solvency II.  The Commission has requested that the European Parliament and Council of the European Union adopt the proposed Directive urgently so that it can enter into force as soon as possible. Legislative Proposal.

European Parliament adopts legislative Resolution on Financial Transaction Tax

On 23 May 2012, the European Parliament approved an amended version of the European Commission’s proposal of 23 September 2011 for a Council Directive on a common system of financial transaction tax (FTT). The Resolution states that such a FTT should go ahead even if only some member states would opt for it.

The Resolution:

  • Retains the Commission proposal timetable: 31 December 2013 deadline for member states to adopt implementing laws and 31 December 2014 for entry into force of these laws.
  • Retains the original Commission proposal to exempt transactions made on the primary market, purchasing of securities from the issuer when such securities are first placed on the market.
  • Inserts an "issuance principle" to the Commission’s proposal, whereby financial institutions located outside the EU would also be obliged to pay the FTT if they traded securities originally issued within the EU.
  • Exempts pension funds from the FTT.

The resolution can be found here. 

Council of the EU Mandatory Rotation Rule for Credit Rating Agencies

On 21 May 2012, the Council of the European Union agreed on a draft proposal that would introduce a mandatory rotation rule requiring issuers who pay credit rating agencies to rate their structured finance products with underlying resecuritized assets to switch to a different credit rating agency every four years.  The proposal would also require issuers to engage at least two different credit rating agencies to rate structured finance products.  The mandatory rotation would not apply for structured finance products rated by small credit rating agencies, or to issuers employing at least four credit rating agencies each rating over 10% of the total number of outstanding rated structured finance products.  EU Release.

FSA Bans Introducer Appointed Representative Following Upper Tribunal’s Decision

On 22 May 2012, the FSA published a final notice issued to appointed representative Derek William Wright.  The notice prohibits Mr. Wright from performing any function in relation to any regulated activity on honesty, integrity and competence grounds.  Mr. Wright was the controller of Moorgate Insurance Agencies Ltd, a small insurance broker.  Mr. Wright had acted dishonestly, with a lack of integrity and was found to have a reckless attitude to compliance with regulation.  He had been disciplined by the Lloyd's Disciplinary Tribunal for conducting insurance business in a discreditable manner.  He had also performed controlled functions without approval, submitted inaccurate and misleading capital information to the FSA and failed to co-operate with the FSA.

Mr. Wright had referred the FSA's original decision notice to the Upper Tribunal (Tax and Chancery Chamber).  The Tribunal had dismissed the reference and directed the FSA to issue a prohibition notice against Mr Wright.  Final Notice.

FSA Investigating Mis-selling of Swaps to SMEs

On 23 May 2012, the Treasury Select Committee published a press release on correspondence between its chairman, Andrew Tyrie, and Lord Turner, chair of the FSA, and Sir Nicholas Montagu, Financial Ombudsman Service (FOS) chairman, on the potential mis-selling of interest rate swap products to small businesses by major banks.  In his letter, Lord Turner stated that the FSA is “doing more work to understand...the types of products that have been sold” and that if the FSA finds “widespread evidence” of breaches of its rules or mis-selling it “will take action”.  Press Release and Correspondence.



Global ABS 2012 Conference

Orrick is an exhibitor sponsor of Global ABS 2012 Conference, which will be hosted by Information Management Network (IMN) at Square Brussels Meeting Center in Brussels, Belgium on June 12-14. More than 3,500 structured finance professionals are expected to attend. The agenda will include, among others, topics such as global regulatory changes that impact securitization; restoring confidence in the ABS markets; and CMBS, RMBS, and real estate and market fundamentals.  For more information, please click here.


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.

© Orrick, Herrington & Sutcliffe LLP | Attorney Advertising

Written by:

Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.