by: Peter J. Gallagher
The SEC announced yesterday that JPMorgan Securities LLC agreed to pay $153.6 million to settle SEC charges that the company "misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet." Pursuant to the settlement, "harmed investors will receive all of their money back.” Just like it did with Goldman Sachs and its now infamous ABACUS 2007-1 deal, the SEC alleged that JPMorgan allowed a hedge fund manager to pick the assets that went into its (equally obscurely named) Squared CDO 2007-1 deal without disclosing that the hedge fund chose the worst assets it could find because it planned to short the offering. You know how this story ended – investors lost their shirts, the hedge fund got rich(er).
The settlement has been widely reported in the media, with some interesting takes on the meaning of the settlement to the overall prosecution (by the SEC, private investors, attorneys general, and the DOJ) of the banks for their role in the crisis. Among the more interesting pieces:
"Is JPMorgan's Settlement The End Of Subprime Claims?" (Reuters) (arguing that that the settlement was a win for JPMorgan but that it does not mark the end of the pain for the bank or its competitors who all face dozens of pending investor lawsuits)
"JPMorgan Settlement Suggests More Pain Ahead For Wall Street" (WSJ – Law Blog) (predicting increased pressure by the SEC on other banks for similar settlements and including the most bizarre and disturbing quote from an email that the JPMorgan employee in charge of selling the Squared CDO 2007-1 deal wrote to his sales team: “We are soooo pregnant with this deal, we need a wheel-barrow to move around . . . Let’s schedule the Cesarean please!”)
"JPMorgan Settlement With SEC Recalls Case Against Goldman Sachs" (providing more detailed reporting on the story and less commentary than the others)
by: Peter J. Gallagher
Several years after the start of the financial crisis, and the mortgage meltdown that caused it, only one individual, Fabrice Toure – a/k/a “Fabulous Fab,” his self-imposed moniker — has been sued by the SEC for selling the mortgage backed securities that created, or at the very least exacerbated, the crisis. According to a recent piece in the New York Times,"SEC Case Stands Out Because It Stands Alone," Toure was an obscure trader for Goldman Sachs who was thrust into the national spotlight in 2010 when the SEC sued him for his role in creating and marketing Abacus, one of the many mortgage backed securities created by Goldman during the irrational exuberance of the early to mid 2000s. (Abacus is interesting in its own right because it is one of the securities that was devised with the help of John Paulson, the hedge fund manager who famously made billions shorting mortgage backed securities like Abacus.) As the article notes, the question many have raised is why Toure and why only Toure?
According to at least one former co-worker, Toure was a “junior” and “insignificant” member of a larger team at Goldman responsible for developing mortgage backed securities. In their response to the SEC, Toure’s lawyers emphasized this point, identifying all of the other members of the team, and arguing that “singling Mr. Toure out for criticism regarding the content of this clearly collaborative effort is unreasonable.” For its part, the SEC has not explained why it focused on just one member of one team at one bank, and further on just one deal created by that bank. However, as the article notes, recent increased interest from other regulators, including New York’s attorney general, indicates that this may not be the case for long, and the banks may soon be called upon to answer for their role in the crisis.
Finally, as interesting as Toure’s story is, equally interesting is the story behind how many of the documents that tell the story – including Toure’s non-public response to the SEC lawsuit – came to light. The Times received them from an artist and filmmaker named Nancy Cohen who found the materials on a laptop given to her by a friend in 2006. The friend told her that he found the laptop in a garbage can downtown. Apparently, emails to Tourre continued “streaming into the device.” While Cohen ignored them for years, she began paying attention when she learned about the SEC’s lawsuit, and subsequently gave the documents to the Times.
by: Peter J. Gallagher and Steven P. Gouin
Our regular followers know that many of our pieces focus on the foreclosure industry, and with good reason, as over 2 million American homes are currently in foreclosure. Add to this troubling statistic the recent allegations of shoddy paperwork at many of the nation's largest mortgage companies and the law firms representing them, and you have the makings of a compelling story of a giant foreclosure-induced catastrophe. While homeowners have been feeling the pain from this crisis for years now, the catastrophe struck close to home recently for many of the banks and mortgage companies at the heart of the foreclosure crisis.
In an article entitled “Confidential Federal Audits Accuse Five Biggest Mortgage Firms Of Defrauding Taxpayers,” the Huffington Post is reporting that a recent federal audit conducted by the Department of Housing and Urban Development (HUD) revealed that five of the nation's largest foreclosure firms, including industry giants like CitiBank and Bank of America, are guilty of fraud under the Federal False Claims Act. Specifically, the audit concluded that the banks “filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.” According to the article, federal prosecutors are debating whether to use the audits as the basis for criminal and civil sanctions against the mortgage companies.
At the same time, the New York Times is reporting that New York Attorney General Eric Schneiderman has requested information and documents from three major banks – Goldman Sachs, Bank of America, and Morgan Stanley – about their mortgage-backed securities operations (“NY State Investigates Banks’ Role In Financial Crisis”). This suggests that Mr. Schneiderman may be launching an investigation into the banks' practices, which many believe led to billions in mortgage losses. One of the most interesting aspects of the article is the suggestion that, by requesting this information from the banks, Mr. Schneiderman is “operating independently of peers from other states who are negotiating a broad settlement with large banks over foreclosure practices.” The article notes that Mr. Schneiderman has been unwilling to join this proposed settlement because the banks are demanding that it include a clause whereby regulators agree not to conduct additional investigations into the banks’ activities during the mortgage crisis.