June 29, 2011

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M

According to the SEC, FINRA, and state regulators, Morgan Keegan & Company and Morgan Asset Management have consented to pay $200 million to settle subprime mortgage-backed securities-related charges. Also agreeing to pay penalties over their alleged misconduct are Morgan Keegan comptroller Joseph Thompson Weller and ex- portfolio manager James C. Kelsoe Jr.

The two men were accused of causing the false valuation of subprime mortgage backed securities in five Morgan Asset Management-related funds. Per the SEC’s administrative order, Kelsoe directed the fund accounting department to arbitrarily execute price adjustments to the fair values of certain portfolio securities. These adjustments disregarded the lower values for the same securities that outside broker-dealers provided as part of the pricing process. Kelsoe’s directives and the actions that were taken as a result would sometimes cause Morgan Keegan to not price the bonds at current, fair value.

The SEC also says that Kelsoe screened and affected at least one broker-dealer’s price confirmations. That broker-dealer had to provide interim price confirmations that were below the value that the funds were valuing certain bonds at but greater than the initial confirmations that the broker-dealer meant to provide. The interim price confirmations allowed the funds to not mark down the securities’ value to reflect current fair value. Kelsoe is also accused of getting the broker-dealer to withhold price confirmations in certain instances where they would have been significantly lower than the funds’ current valuations of the relevant bonds. The SEC says that Kelsoe fraudulently kept the Navs of funds from being reduced when they should have gone down when the subprime securities market deteriorated in 2007.

Of the $200 million, Morgan Keegan must pay a $75 million penalty to the SEC, $25 million in disgorgement, and $100 million to a state fund that would then pay investors.

Morgan Keegan to Pay $200 Million to Settle Fraud Charges Related to Subprime Mortgage-Backed Securities, SEC, June 22, 2011

Morgan Keegan Entities to Pay $200M In Settlement Over Subprime MBS Valuations, Law 360, June 22, 2011


More Blog Posts:
Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011

Morgan Keegan & Co. Inc. Must Pay $250K to Couple that Lost Investments in Hedge Fund with Ties to Bernard L. Madoff Investment Securities, Stockbroker Fraud Blog, March 16, 2011

Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Fund, Stockbroker Fraud Blog, October 6, 2010

Continue reading "Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M" »

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Posted In: Financial Firms , Morgan Keegan , Mortgage Backed Securities , Subprime Mortgage

October 6, 2010

Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds

In a Texas securities case, FINRA arbitration panel has ordered Morgan Keegan & Co., a Regions Financial Corp., to pay 18 investors $9.2M for losses related to risky bond funds. The investors contend that the investment firm committed securities fraud when it convinced them to invest in certain funds that included high-risk “subprime” mortgage assets. Clients also claimed that they were persuaded to automatically reinvest dividends in the funds.

This is the biggest award that an arbitration panel has awarded in a Morgan Keegan case involving six bond funds that were heavily involved in mortgage-related holdings. The funds dropped in value significantly in 2007 and 2008. Hundreds of securities claims against the brokerage firm followed. Last July, Regions Financial announced that Morgan Keegan had recorded a $200M charge for probable costs of the bond fund lawsuits.

Arbitrators in Houston made the ruling in the Texas securities case. Included in the total sum was $1.1M in legal fees that, per state law, will be paid to investors. All of the investors involved were clients of Russell W. Stein, a Morgan Keegan broker. Stein is no longer with the broker-dealer. Regulatory filings indicate that he is currently employed with Raymond James Financial Inc. unit Raymond James & Associates Inc.

Stein and his wife were original claimants in this Texas securities fraud case. They too had invested in the bond funds. Their claims are now part of another case involving a group of other investors. Morgan Keegan is considering appealing the FINRA arbitration panel’s decision.

Related Web Resources:
Morgan Keegan to pay bond fund investors $9.2 mln, Reuters, October 6, 2010

Morgan Keegan Must Pay $9.2Mln To Investors - Panel, Wall Street Journal, October 6, 2010

Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses, Stockbroker Fraud Blog, February 23, 2010

Morgan Keegan Again Ordered by Arbitrators to Pay Bond Fund Losses to Investors, Stockbroker Fraud Blog, October 27, 2009

Financial Industry Regulatory Authority

Continue reading "Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds " »

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Posted In: Bond Funds , Financial Firms , Morgan Keegan , Regions Financial Corporation , Subprime Mortgage , Texas Securities Fraud

September 15, 2010

Whistleblower Sues Moody’s Investors Service for Defamation

Ilya Eric Kolchinsky, a former Moody’s Investors Service executive, is suing the credit ratings agency for defamation. This is one of the first lawsuits involving a Wall Street company and an ex-employer that blew the whistle on it. Kolchinsky is seeking $15 million in damages in addition to legal fees.

Kolchinsky claims that Moody’s tried to ruin his reputation after he publicly talked about problems with its ratings model. Kolchinsky, who supervised the ratings that were given to subprime mortgage collateralized debt obligations (many of these did not live up to their triple-A ratings), testified before Congressional panels about his concerns. He addressed the potential conflicts that can arise as a result of the issuer-pay ratings model, which lets banks and borrowers that sell debt securities pay for ratings. He alleged securities fraud and claimed that the ratings agency placed profits ahead of doing their job. He also claimed that Moody’s lacked the resources to enforce its rules.

Kolchinsky contends that Moody’s began attacking him through the media and that the statements that the credit ratings firm issued have caused him to become “blacklisted by the private sector financial industry.” Moody’s suspended him last year. In his civil suit, Kolchinsky notes that he was attacked by the credit ratings agency even though it went on to adopt some of his recommendations.

The recently passed financial reform bill provides greater protections for whistleblowers while offering financial rewards for those brave enough to tell regulators about their concerns. However, it is unclear whether Kolchinsky’s complaint will benefit from the new law because his case involves alleged actions that occurred prior to the bill's passing.

Related Web Resources:
Former Moody’s Executive Files Suit, New York Times, September 13, 2010

Exec who blew whistle on Moody’s ratings sues for defamation, Central Valley Business TImes, September 14, 2010

Wall Street Whistleblowers May Be Eligible to Collect 10 – 30% of Money that the Government Recovers, Stockbroker Fraud Blog, July 29, 2010

Continue reading "Whistleblower Sues Moody’s Investors Service for Defamation " »

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Posted In: Collateral Debt Obligation , Collateralized Mortgage Obligations , Credit Ratings , Credit Ratings Agencies , Moody's , Subprime Mortgage , Whistleblower Lawsuits

September 11, 2010

Goldman Sachs Permanently Exempted from Company Act Disqualification Provision, Says SEC

The Securities and Exchange Commission has decided to permanently exempt Goldman & Sachs Co. from a 1940 Investment Company Act provision that would have disqualified the financial firm from serving as a principal underwrite. Goldman and several of its affiliates applied for exemption from ICA Section 9(a) after settling for $550 million SEC securities fraud charges that it made material misrepresentations related to the 2007 structuring and sale of derivative product connected to subprime mortgages.

Under the provision, a person cannot act as a principal underwriter or investment adviser for an investment firm if, due to misconduct, the party in question is enjoined from taking part in any practice or conduct related to the purchase or sale of any security. Goldman, in its application, noted that since the district court had barred it and its affiliates from violating federal securities laws moving forward, the provision would apply to disqualify them from giving advisory services to investment companies.

After granting the broker-dealer a temporary exemption in July, the SEC issued Goldman a permanent one. The SEC noted that the applicants’ behavior did not make it against the “public interest or protection of investors” to grant the permanent exemption.

Regarding the $550 million securities fraud settlement, which is the largest penalty that the SEC has ordered a financial firm to pay, Goldman was accused of misleading investors about a synthetic collateralized debt obligation as the housing market was collapsing. Investors suffered more than $1 billion in financial losses. The brokerage firm admitted that it provided incomplete marketing information for the product and has agreed to reform its business practices.

Related Web Resources:
Investment Company Act of 1940

Goldman Sachs, SEC Reach $550 Million Settlement, PBS News, July 15, 2010


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Posted In: Collateral Debt Obligation , Financial Firms , Goldman Sachs , Securities Fraud , Subprime Mortgage

August 3, 2010

Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million

For $75 million, Citigroup will settle federal allegations that it failed to disclose that its subprime mortgage investments were failing while the market was collapsing. This is the first securities fraud case centered on whether investment banks fairly disclosed their own financial woes to shareholders.

Unlike the Goldman Sachs case, which resulted in a $550 settlement and involved allegations that the investment bank misled investors, Citigroup is accused of misleading its shareholders. This also marks the first time the SEC has filed securities fraud charges against very senior bank executives for their alleged roles in subprime mortgage bonds.

The SEC contends that Citigroup failed to reveal the true nature of its financial state until November 2007. Just that summer the investment bank told investors that it had about $13 billion of exposure to subprime mortgage related-assets that were declining in worth. However, Citigroup left out about $43 billion of exposure to similar assets that bank officials thought were very safe.

Key evidence against Citigroup centers on an announcement that it prepared for investors that cautioned that the quarter was likely going to be one of lower earnings in the fall of 2007. However, the investment bank did not reveal its full subprime exposure. Former Citigroup investor relations head Arthur Arthur Tildesley Jr., who has agreed to pay an $80,000 fine over allegations he omitted key information in the shareholder disclosures, is accused of preparing the statement. Former chief financial officer Gary L. Crittenden, who has settled the SEC case against him for $100,000, recorded the audio message to investors.

The government was eventually forced to bail out the investment bank. Citigroup is not admitting to or denying the charges by consenting to settle. Now, however, the investment bank has to defend itself from private shareholder complaints.

Related Web Resources:
SEC Charges Citigroup and Two Executives for Misleading Investors About Exposure to Subprime Mortgage Assets, SEC, July 29, 2010

Citigroup Pays $75 Million to Settle Subprime Claims, NY Times, July 29, 2010

Citigroup agrees $75m fraud fine, BBC News, July 29, 2010

Continue reading "Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million" »

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Posted In: Citigroup , Financial Firms , SEC Enforcement , Securities Fraud , Subprime Mortgage

July 12, 2010

Morgan Stanley Settles Massachusetts Lending Case for $102 Million

According to Massachusetts Attorney General Martha Coakley, Morgan Stanley has agreed to pay $102 million to settle allegations that it offered predatory subprime mortgage loan funding in the state. The investment firm filed its assurance of discontinuance in Massachusetts state court, agreeing to pay $19.5 million to the state, $58 million in relief to approximately 1,000 Massachusetts homeowners, $2 million to nonprofit groups that help subprime foreclosure victims, and $23.4 million to a state pension plan and a state trust for investment losses. By agreeing to settle, Morgan Stanley is not admitting to or denying the attorney general's allegations.

Coakley contends that the investment bank provided subprime lender New Century billions of dollars. The funds were used to target lower-income borrowers to get them into loans they would not be able to pay back. Coakley contends that even though Morgan Stanley “uncovered signals pretty early on” that New Century’s practices “were not sound” and the “bad loans were causing the lender to collapse" the investment bank went forward with funding and securitizing the loans. Coakley also says that Morgan Stanley was aware that New Century repeatedly violated Massachusetts banking standards between 2005 and 2007, used inaccurate and inflated appraisals, and improperly calculate debt-to-ratio from initial “teaser rates.”

The state says that Morgan Stanley packaged the loans and sold them to big investors. The investment bank has been ordered to revise some of its lending practices.

Bank of America/Countrywide, Goldman Sachs, Fremont Investment and Loan, and others have reached similar settlements with the state. The approximately $440 million in settlement money will provide borrowers, investors, homeowners, and the state with relief and recovery.


Related Web Resources:
Morgan Stanley Settles Massachusetts Subprime Loan Probe, ABC News, June 24, 2010

Morgan Stanley to Pay $102 Million in Subprime Accord, Bloomberg Businessweek, June 24, 2010

Massachusetts Attorney General Martha Coakley

Continue reading "Morgan Stanley Settles Massachusetts Lending Case for $102 Million" »

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Posted In: Financial Firms , Morgan Stanley , Subprime Mortgage

May 17, 2009

Goldman Sachs Reaches $60 Million Settlement with Massachusetts Over Subprime-Mortgage Loans

Massachusetts Attorney General Martha Coakley has announced a $60 million settlement with Goldman Sachs over the alleged role the investment bank played in the subprime mortgage crisis. While Goldman did not originate the loans, it played a role in their securitization. Coakley has been conducting a nationwide probe targeting investment banks that knew certain loans were high risk but still opted to write them, as well as underwrite securities from these loans. Coakley says that state courts are in agreement that a number of these loans were destined to fail from the start.

Massachusetts will use $50 million of the settlement to help 714 Massachusetts homeowners with mortgages that are either delinquent or still performing. The money, however, won’t go toward helping homeowners whose homes have already foreclosed. The other $10 million will go to the state.

Among the terms of the settlement:

• Goldman has consented to principal write-downs of 25% to 30% for first mortgages and upward of 50% for second mortgages if owners want to sell or refinance their homes.

• A homeowner who is significantly delinquent will have to make manageable payments toward mortgages until they are able to sell or refinance.

• If a homeowner cannot sell his or her home, Goldman will help qualified borrowers to refinance and provide other solutions so that they don’t have to foreclose.

• Homeowners that have loans with Goldman entities and those that Litton Loan Servicing LP has serviced will receive immediate help.

By agreeing to the settlement, Goldman is not admitting to or denying wrongdoing. This is the first settlement, however, where an investment bank has been held to task for its role in the subprime lending crisis. Up until this point, prosecutors were only targeting the sources of the subprime loans and not the parties that put together the loans and presented them to investors.

Related Web Resources:
Massachusetts settles with Goldman Sachs, UPI, May 11, 2009

Goldman Sachs, Massachusetts reach settlement on mortgage securities, LA Times, May 12, 2009

Attorney General Martha Coakley

Continue reading "Goldman Sachs Reaches $60 Million Settlement with Massachusetts Over Subprime-Mortgage Loans" »

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Posted In: Financial Firms , Goldman Sachs , Subprime Mortgage

February 2, 2009

Merrill Lynch Ends Investor and Employee Class Action Lawsuits with $550 Million Settlement

Last month, Merrill Lynch & Co. reached a $550 million settlement with investors and employees over losses related to investments in subprime mortgage-backed assets. A court must approve the proposed settlements.

In the securities class action case, the plaintiffs have accused Merrill Lynch of using statements on collateralized debt obligations and other assets to inflate the market price of its own shares. As a result, the plaintiffs contend, investors lost money.

The Ohio State Teachers Retirement System is the lead plaintiff in the class action lawsuit, which represents investors who bought preferred shares between October 17, 2007 and December 31, 2008. The agreed upon settlement is $475 million in cash.

Plaintiffs of the Employee Retirement Income Security Act class action have agreed to settle for $75 million in cash. Participants in the ERISA lawsuit are Merrill Lynch employees with Merrill Lynch stock in specific retirement plans. The plaintiffs have accused Merrill of failing to adequately reveal subprime-related losses that impacted its retirement accumulation plan, its savings and investment plan, and its employee stock ownership plan.

By agreeing to settle, Merrill Lynch says it is not admitting to any wrongdoing.

Fallout from the Subprime Mortgage Crisis
The subprime mortgage crisis has resulted in millions of dollars in losses for investors. If you believe that you were a victim of investor fraud or broker dealer misrepresentation and that these inappropriate actions caused you to sustain investor losses, you may be entitled to the recovery of those losses.

Related Web Resources:
Merrill Lynch settles subprime lawsuit, Business Insurance, January 20, 2009

Merrill settles employee class action for $75M, Investment News, January 19, 2009

Ohio announces $475M Merrill Lynch settlement, Forbes.com, January 16, 2009

Continue reading "Merrill Lynch Ends Investor and Employee Class Action Lawsuits with $550 Million Settlement" »

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Posted In: Financial Firms , Merrill Lynch , Subprime Mortgage

October 16, 2008

Securities and Exchange Commission Sues Five World Group Securities Brokers For Persuading Clients to Refinance Homes With Subprime Mortgages

This month, the US Securities and Exchange Commission filed a civil lawsuit against five World Group Securities brokers for allegedly pushing investors into refinancing their homes with subprime mortgages. The SEC is accusing the mortgage brokers of taking advantage of the clients’ lack of education, modest financial means, and poor fluency in English to fraudulently sell them unsuitable securities—primarily variable universal life policies.

Because most of the investors who were persuaded to purchase the securities lacked the funds or income to do so, the defendants allegedly persuaded them to come up with the money through the refinancing of their fixed-rate mortgages into subprime adjustable-rate negative amortization mortgages. The brokers received compensation from the securities sale and the mortgage refinancings.

The defendants in the case are Guillermo Haro, Jesus Gutierrez Kederio Ainsworth, Angel Romo, and Gabriel Paredes. The Commission says that the brokers violated the antifraud provisions of the securities laws.

The SEC says the men misrepresented the returns the investors would get back from the securities, the nature and liquidity of the variable universal life policies, and the new mortgages’ terms, as well as failed to reveal key facts to the investors. The Commision's complaint also accuses the brokers of falsifying customer account forms and placing inaccurate securities sales information on order tickets.

The SEC calls the men’s actions and their willingness to allow their clients to risk the potential loss of their homes “egregious” conduct that will not be tolerated. The Commission is seeking disgorgement, injunctions, and financial fines against the defendants.

If you are a victim of investor fraud, it is important that you find out about the legal remedies available to you.

Commission Charges Five Registered Representatives with Fraudulent Sales of Unsuitable Securities Funded Through Subprime Mortgage Refinancings, SEC, October 3, 2008

World Group Securities brokers charged with fraud, Bizjournals.com, October 13, 2008


Related Web Resource:

Subprime Mortgage, Investopedia

Continue reading "Securities and Exchange Commission Sues Five World Group Securities Brokers For Persuading Clients to Refinance Homes With Subprime Mortgages" »

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Posted In: SEC Enforcement , Subprime Mortgage , World Group Securities

April 1, 2008

Merrill Lynch Sues Insurer for Failing to Honor Claims Opening Door to Mysterious "Swaps" Market

Merrill Lynch & Co. has publicly opened the door to what many believe could be an even larger problem to the credit markets than the widely publicized sub-prime mortgage debacle - the little understood and sledom discussed "swaps" market.

Perhaps the world’s most high-profile financial firm, Merrill - itself a frequent complainer about lawsuits – has filed a monster of a suit in a New York court against bond insurer Security Capital Assurance Ltd. (SCA). Merrill Lynch sued the insurer alleging it failed to honor seven contracts promising to cover losses on $3.1 billion in "credit swaps," after which SCA filed a countersuit against Merrill for $28 million. .

Merrill claims SCA walked away from signed insurance contracts guaranteeing Merrill against losses. SCA counterclaims that Merrill broke a stipulation in one of the contracts which entitles SCA to terminate all the agreements and collect damages. (Perhaps Merrill is getting a taste of what many us have experienced: an insurance company happy to collect premiums but which later relies on a technicality to avoid payment.)

Under the contracts, SCA says it was granted "control rights" over the CDOs, meaning it had control over decisions affecting the investments. SCA alleges that "Merrill Lynch made the decision to blatantly ignore its prior commitments,” when, in a “rushed campaign” to dump risk from its books, Merrill Lynch promised such control rights to others.

Yet, some believe the greater importance of this suit is that it reveals the tip of the iceberg regarding the exposure of the world’s financial institutions to the multi-trillion dollar “swaps” market. The swap contracts in question were agreements to cover missed payments on collateralized-debt obligations, but an untold amount of “swaps” agreements outstanding cover more possibilities and circumstances than most of us can imagine!

Because the “swaps market” is almost totally unregulated and involves agreements eerily similar to those engineered at Enron, few publicly venture a guess as to the gravety of the exposure to the financial markets should such swap agreements simply began to unwind.

The law firm of Shepherd Smith Edwards & Kantas LTD LLP is committed to assisting investors to recover losses in their accounts at securities firms. If you or someone you know is a victim of securities fraud, contact us today to arrange a free confidential consultation with one of our attorneys.

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Posted In: Merrill Lynch , Subprime Mortgage

March 12, 2008

Countrywide Financial, Merrill Lynch, and Citigroup Executives Defend Their Hefty Compensations Following Subprime Mortgage Crisis

Appearing before the U.S. Congress last week, Countrywide Financial CEO and founder Angelo Mozilo, Ex-Citigroup CEO Charles Prince, and Ex-Merrill Lynch Chairman and CEO Stanley O’Neil gave their testimonies to the House Committee on Government and Oversight Reform.

The three men say that reports about their compensation are “grossly exaggerated” and that they too have lost millions of dollars from the mortgage debacle. On Thursday, the Congressional issued a report stating that the three men earned $460 million between 2002 and 2006.

All three men say their income from the firms are tied to the profits that the companies made in the years prior to the mortgage crisis and that their company stock has dropped dramatically since then.

Mozilo reportedly stood to earn $115 after Countrywide’s pending sale to Bank of America is completed. He now has agreed to forfeit $37.5 million.

O’Neal received $161 million after stepping down from Merrill Lynch. Prince left Citigroup last November with about $68 million.

Other Wall Street CEO’s that have generated media buzz for their generous compensations:

-Last year, Goldman Sachs Chairman and CEO Lloyd Blankenfein received $68 million—the largest bonus ever for an industry head.

-Robert Nardelli, Chrysler Chairman and CEO, took away $210 million in stock options, money, and retirement benefits after being asked to leave Home Depot.

In 2006, 386 Fortune 500 firm chiefs received $10.8 million in compensation.

Shepherd Smith and Edwards represents stockbroker fraud clients that have lost money because of the negligence or misconduct of a member of a securities industry. One of our securities fraud lawyers can discuss your case during a free consultation.


Related Web Resources:

Mortgage mess CEOs defend pay, CNN Money.com, March 7, 2008

Congress quizzes financial execs on CEO pay 'lottery', USA Today, March 7, 2008

Committee Holds Hearing on CEO Pay and the Mortgage Crisis, House Committee on Government and Oversight Reform

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Citigroup , Countrywide Financial , Morgan Stanley , Subprime Mortgage

February 22, 2008

SEC Involved in 36 Subprime Mortgage Industry Probes

The Securities and Exchange Commission is conducting three dozen open investigations into misconduct in the subprime mortgage industry. The probe is taking a look at possible misconduct involving:

• The origination process
• Insider trading
• Securitization and sales of mortgage-backed securities

According to SEC Division of Enforcement Associate Director Cheryl Scarboro, the SEC wants to know who may have been involved, who knew about any misconduct, and who acted inappropriately. Scarboro also directs the SEC Subprime Working Group, which coordinates these probes with other SEC divisions.

In SEC v. Doral Financial Corp., Doral settled claims that it overstated income on nonconforming loans for $25 million. The primary issues pertaining to this case included valuation of the future income stream, valuation of interest-only STRP’s, and applying a flat rate to value investments.

These issues are of major significance in pending cases involving the subprime mortgage industry. Other issues of focus in the SEC investigations include ownership transfer and booking the gain on sale.

The SEC has met with the companies it is investigating is helping to streamline the process.

In a recent TIME.com article, Keefe, Bruyette & Woods Inc. Bose George estimated potential losses from the subprime mortgage crisis at around $250 billion. Columbia University professor Charles Calomiris estimates the losses at over $300 billion but under $400 billion. $1 trillion outstanding subprime mortgages currently exist.

Please contact Shepherd Smith and Edwards to discuss your case. We have helped thousands of investors recoup their losses.

Related Web Resources:

How Bad Will the Mortgage Crisis Get?, TIME.com, February 19, 2008

SEC probing three dozen subprime cases, Reuters, December 21, 2007

Why a U.S. Subprime Mortgage Crisis Is Felt Around the World, New York Times, August 21, 2007

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Posted In: SEC , Subprime Mortgage

February 11, 2008

Pondering the SEC’s Role in the Subprime Mortgage Crisis

What was the role of the Securities and Exchange Commission in the collapse of the subprime mortgage bubble? Although mortgage brokers, investment banks, and ratings agencies are frequently held responsible for the demise, little is said about the roles of the Financial Industry Regulatory Industry (FINRA) and the SEC—both watchdog agencies that are responsible for monitoring complex credit derivatives and their suitability requirements for investors.

Yet where was the SEC when it was time to oversee investment banks and determine whether they had sufficient capital for their balance sheets, trading positions, and the appropriate risk management systems so that major losses could be avoided?

One notable problem is that there is not enough clear data available about the credit derivatives market. Structured finance products, including collateralized debt obligations (CDOs) are traded over-the-counter in the United States. This means that price information for these products is not easily accessible.

It wasn’t until 2007 that the SEC, the Commodities Futures Trading Commission (CFTC), and other members of the President’s Working Group recommended that stricter oversight of the over-the-counter market be implemented.

While regulators are now examining the way banks structured, priced, and sold mortgage-laden securities, some industry insiders feel that these steps were taken too late. Should the SEC have noticed the warning signs?

In 2006, Merrill Lynch senior executive Jeff Kronthal was fired when he responded reluctantly to former Chief Executive Stanley O’Neal’s mandate that firms be more aggressive about taking risks with mortgage securities. Morgan Stanley’s new Chief Executive John Thain rehired Kronthal last December.

In 2005, Bear Stearns reported in its 2005 financial disclosure that it was threatened by a possible civil enforcement action related to pricing, analysis, and valuation of $63 billion in CDOs. Bear Stearns also reported that then-New York Attorney General Eliot Spitzer had contacted the firm about $16 billion in CDOs it had sold to an undisclosed client.

Former SEC attorney Gary Aguirre says that while aggressively pursuing Pequote Capital and its alleged involvement in an insider trading case in 2005, he was fired when he tried to interview Morgan Stanley Chief Executive John Mack. Aguirre claims that the SEC is too closely associated with the industry it regulates.

Earlier this month, securities regulators in Massachusetts filed a civil fraud lawsuit against Merrill Lynch over $14 million in CDOs that the firm sold to the town of Springfield. Regulators say they were unsuitable for and sold without the town’s permission. Merrill has admitted to the town’s lack of consent and paid its investment back in full—although it now has little value.

The Federal Bureau of Investigation says it is conducting criminal investigations into 14 firms regarding their involvement in mortgage securitization activities.

Morgan Stanley, Merrill Lynch, Bear Stearns, and Goldman Sachs all admit that different regulators have asked them about their handling of subprime mortgage securities.

If you are an investor who has lost money because of the misconduct or negligence of someone in the securities industry, please contact Shepherd Smith and Edwards today. Your first consultation with one of our stockbroker fraud lawyers is free.

Related Web Resources:

SEC

Collateralized Debt Obligation (CDO), Investopedia

Subprime Mortgage, Investopedia

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Bear Stearns , Collateral Debt Obligation , Goldman Sachs , Morgan Stanley , SEC , Subprime Mortgage

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