FORMER HEAD RMBS TRADER AT GOLDMAN SACHS SETTLES FRAUD CHARGES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Former Goldman Sachs Trader Settles Fraud Charges

FOR IMMEDIATE RELEASE

2016-163

Washington D.C., Aug. 16, 2016 — The Securities and Exchange Commission today announced that the former head trader in residential mortgage-backed securities (RMBS) at Goldman Sachs has agreed to be barred from the securities industry and pay $400,000 to settle charges that he repeatedly misled customers and caused them to pay higher prices.

An SEC investigation found that Edwin Chin generated extra revenue for Goldman by concealing the prices at which the firm had bought various RMBS, then re-selling them at higher prices to the buying customer with Goldman keeping the difference.  On other occasions, Chin misled purchasers by suggesting he was actively negotiating a transaction between customers when he was merely selling RMBS out of Goldman’s inventory.

“With no public exchange showing the price for each RMBS trade as it occurs, investors purchasing these securities rely on dealers to be honest about the purchase price they paid,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “Chin repeatedly abused his fundamental duty to serve as an honest transmitter of market information so he could increase Goldman’s trading profits and, indirectly, his own compensation.”

The SEC’s order finds that Chin’s misconduct began in 2010 and continued until he left Goldman in 2012.  Without admitting or denying the findings, Chin agreed to the entry of the order finding that he violated Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5.  He agreed to pay $200,000 in disgorgement, $50,000 in prejudgment interest, and a $150,000 penalty.

The SEC’s continuing investigation has been conducted by Andrew Feller, David London, and Heidi Mitza, and the case has been supervised by Celia Moore and Michael Osnato.

DOJ ANNOUNCES $7 BILLION TOXIC MORTGAGES SETTLEMENT WITH CITIGROUP

FROM:  U.S. JUSTICE DEPARTMENT 

Monday, July 14, 2014

Justice Department, Federal and State Partners Secure Record $7 Billion Global Settlement with Citigroup for Misleading Investors About Securities Containing Toxic Mortgages

Citigroup to Pay the Largest Penalty of Its Kind - $4 Billion

The Justice Department, along with federal and state partners, today announced a $7 billion settlement with Citigroup Inc. to resolve federal and state civil claims related to Citigroup’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) prior to Jan. 1, 2009.  The resolution includes a $4 billion civil penalty – the largest penalty to date under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).  As part of the settlement, Citigroup acknowledged it made serious misrepresentations to the public – including the investing public – about the mortgage loans it securitized in RMBS.  The resolution also requires Citigroup to provide relief to underwater homeowners, distressed borrowers and affected communities through a variety of means including financing affordable rental housing developments for low-income families in high-cost areas.  The settlement does not absolve Citigroup or its employees from facing any possible criminal charges.

This settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group, which has recovered $20 billion to date for American consumers and investors.

“This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” said Attorney General Eric Holder.  “The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008.  Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business.  Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”

The settlement includes an agreed upon statement of facts that describes how Citigroup made representations to RMBS investors about the quality of the mortgage loans it securitized and sold to investors.  Contrary to those representations, Citigroup securitized and sold RMBS with underlying mortgage loans that it knew had material defects.  As the statement of facts explains, on a number of occasions, Citigroup employees learned that significant percentages of the mortgage loans reviewed in due diligence had material defects.  In one instance, a Citigroup trader stated in an internal email that he “went through the Diligence Reports and think[s] [they] should start praying . . . [he] would not be surprised if half of these loans went down. . . It’s amazing that some of these loans were closed at all.”  Citigroup nevertheless securitized the loan pools containing defective loans and sold the resulting RMBS to investors for billions of dollars.  This conduct, along with similar conduct by other banks that bundled defective and toxic loans into securities and misled investors who purchased those securities, contributed to the financial crisis.
                                 
“Today, we hold Citi accountable for its contributing role in creating the financial crisis, not only by demanding the largest civil penalty in history, but also by requiring innovative consumer relief that will help rectify the harm caused by Citi's conduct,” said Associate Attorney General Tony West.  “In addition to the principal reductions and loan modifications we've built into previous resolutions, this consumer relief menu includes new measures such as $200 million in typically hard-to-obtain financing that will facilitate the construction of affordable rental housing, bringing relief to families pushed into the rental market in the wake of the financial crisis.”

Of the $7 billion resolution, $4.5 billion will be paid to settle federal and state civil claims by various entities related to RMBS: Citigroup will pay $4 billion as a civil penalty to settle the Justice Department claims under FIRREA, $208.25 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC), $102.7 million to settle claims by the state of California, $92 million to settle claims by the state of New York, $44 million to settle claims by the state of Illinois, $45.7  million to settle claims by the Commonwealth of Massachusetts, and $7.35 to settle claims by the state of Delaware.

Citigroup will pay out the remaining $2.5 billion in the form of relief to aid consumers harmed by the unlawful conduct of Citigroup.  That relief will take various forms, including loan modification for underwater homeowners, refinancing for distressed borrowers, down payment and closing cost assistance to homebuyers, donations to organizations assisting communities in redevelopment and affordable rental housing for low-income families in high-cost areas.  An independent monitor will be appointed to determine whether Citigroup is satisfying its obligations.  If Citigroup fails to live up to its agreement by the end of 2018,  it must pay liquidated damages in the amount of the shortfall to NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development.

The U.S. Attorney’s Offices for the Eastern District of New York and the District of Colorado conducted investigations into Citigroup’s practices related to the sale and issuance of RMBS between 2006 and 2007.

“The strength of our financial markets depends on the truth of the representations that banks provide to investors and the public every day,” said U.S. Attorney John Walsh for the District of Colorado, Co-Chair of the RMBS Working Group.  “Today's $7 billion settlement is a major step toward restoring public confidence in those markets.  Due to the tireless work by the Department of Justice, Citigroup is being forced to take responsibility for its home mortgage securitization misconduct in the years leading up to the financial crisis.  As important a step as this settlement is, however, the work of the RMBS working group is far from done, we will continue to pursue our investigations and cases vigorously because many other banks have not yet taken responsibility for their misconduct in packaging and selling RMBS securities.”

“After nearly 50 subpoenas to Citigroup, Trustees, Servicers, Due Diligence providers and their employees, and after collecting nearly 25 million documents relating to every residential mortgage backed security issued or underwritten by Citigroup in 2006 and 2007, our teams found that the misconduct in Citigroup’s deals devastated the nation and the world’s economies, touching everyone,” said U.S. Attorney of the Eastern District of New York Loretta Lynch.  “The investors in Citigroup RMBS included federally-insured financial institutions, as well as a host of states, cities, public and union pension and benefit funds, universities, religious charities, and hospitals, among others.  These are our neighbors in Colorado, New York and around the country, hard-working people who saved and put away for retirement, only to see their savings decimated.”

This settlement resolves civil claims against Citigroup arising out of certain securities packaged, securitized, structured, marketed, and sold by Citigroup.  The agreement does not release individuals from civil charges, nor does it release Citigroup or any individuals from potential criminal prosecution. In addition, as part of the settlement, Citigroup has pledged to fully cooperate in investigations related to the conduct covered by the agreement.

Michael Stephens, Acting Inspector General for the Federal Housing Finance Agency said, “Citigroup securitized billions of dollars of defective mortgages, after which investors suffered enormous losses by purchasing RMBS from Citi not knowing about those defects. Today’s settlement is another significant step by FHFA-OIG and its law enforcement partners to hold accountable those who committed acts of fraud and deceit in the lead up to the financial crisis, and is a necessary step toward reviving a sound RMBS market that is crucial to the housing industry and the American economy.  We are proud to have worked with the Department of Justice, the U.S. Attorneys’ Offices in the Eastern District of New York and the District of Colorado. They have been great partners and we look forward to our continued work together.”

The underlying investigation was led by Assistant U.S. Attorneys Richard K. Hayes, Kevin Traskos, Lila Bateman, John Vagelatos, J. Chris Larson and Edward K. Newman, with the support of agents from the Office of the Inspector General for the Federal Housing Finance Agency, in conjunction with the President’s Financial Fraud Enforcement Task Force’s RMBS Working Group.

The RMBS Working Group is a federal and state law enforcement effort focused on investigating fraud and abuse in the RMBS market that helped lead to the 2008 financial crisis.  The RMBS Working Group brings together more than 200 attorneys, investigators, analysts and staff from dozens of state and federal agencies including the Department of Justice, 10 U.S. Attorneys’ Offices, the FBI, the Securities and Exchange Commission (SEC), the Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the FHFA-OIG, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board’s Office of Inspector General, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network, and more than 10 state Attorneys General offices around the country.

The RMBS Working Group is led by its Director Geoffrey Graber and its five co-chairs: Assistant Attorney General for the Civil Division Stuart Delery, Assistant Attorney General for the Criminal Division Leslie Caldwell, Director of the SEC’s Division of Enforcement Andrew Ceresney, U.S. Attorney for the District of Colorado John Walsh and New York Attorney General Eric Schneiderman.

FDIC ANNOUNCES SETTLEMENT WITH JP MORGAN CHASE & CO. IN RESIDENTIAL MORTGAGE-BACKED SECURITIES CASE

FROM:  U.S. FEDERAL DEPOSIT INSURANCE CORPORATION

The Federal Deposit Insurance Corporation (FDIC) as Receiver for six failed banks has announced a $515.4 million settlement with JPMorgan Chase & Co. and its affiliates (JPMorgan) of the receiverships' federal and state securities law claims based on misrepresentations in the offering documents for 40 residential mortgage-backed securities (RMBS) purchased by the failed banks. The settlement funds will be distributed among the receiverships for the failed Citizens National Bank, Strategic Capital Bank, Colonial Bank, Guaranty Bank, Irwin Union Bank and Trust Company, and United Western Bank. As part of the settlement, JPMorgan has agreed to waive any claims for indemnification from the FDIC in its corporate capacity or its capacity as Receiver for the failed Washington Mutual Bank based on any part of JPMorgan's $13 billion settlement with the United States Department of Justice and other government entities of claims relating to the sale of RMBS, including the $515.4 million settlement with the FDIC.

FDIC Chairman Martin J. Gruenberg said, "The settlement announced today will provide a significant recovery for the six FDIC receiverships. It also fully protects the FDIC from indemnification claims out of this settlement. The FDIC will continue to pursue litigation where necessary in order to recover as much as possible for FDIC receiverships, money that is ultimately returned to the Deposit Insurance Fund, uninsured depositors and creditors of failed banks."

As receiver for failed financial institutions, the FDIC may sue professionals and entities whose conduct resulted in losses to those institutions in order to maximize recoveries. From May 2012 to September 2012, the FDIC as Receiver for five of the failed banks filed ten lawsuits against JPMorgan, its affiliates, and other defendants for violations of federal and state securities laws in connection with the sale of RMBS. As of October 30, 2013, the FDIC has authorized lawsuits based on the sale of RMBS to a total of eight failed institutions and has filed 18 lawsuits seeking damages for violations of federal and state securities laws.

Citizens National Bank and Strategic Capital Bank were each placed into receivership on May 22, 2009; Colonial Bank was placed into receivership on August 14, 2009; Guaranty Bank was placed into receivership on August 21, 2009; Irwin Union Bank and Trust Company was placed into receivership on September 18, 2009; and United Western Bank was placed into receivership on January 21, 2011.

U.S. SEC CHARGES J.P. MORGAN SECURITIES LLC AND CREDIT SUISSE SECURITIES WITH MISLEADING INVESTORS IN OFFERINGS OF RMBS

FROM: U.S. SECURITES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 16, 2012 — In coordination with the federal-state Residential Mortgage-Backed Securities Working Group, the Securities and Exchange Commission today charged J.P. Morgan Securities LLC and Credit Suisse Securities (USA) with misleading investors in offerings of residential mortgage-backed securities (RMBS). The firms agreed to settlements in which they will pay more than $400 million combined, and the SEC plans to distribute the money to harmed investors.

The SEC alleges that J.P. Morgan misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter. J.P. Morgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans. J.P. Morgan also is charged for Bear Stearns' failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million.

J.P. Morgan has agreed to pay $296.9 million to settle the SEC's charges.

According to the SEC's order against Credit Suisse, the firm similarly failed to accurately disclose its practice of retaining cash for itself from the settlement of claims against mortgage loan originators for problems with loans that Credit Suisse had sold into RMBS trusts and no longer owned. Credit Suisse also made misstatements in SEC filings about when it would repurchase mortgage loans from trusts if borrowers missed the first payment due. The firm made $55.7 million in profits and losses avoided from its bulk settlement practice, and its investors lost more than $10 million due to Credit Suisse's practices concerning first payment defaults.

Credit Suisse has agreed to pay $120 million to settle the SEC's charges.

"In many ways, mortgage products such as RMBS were ground zero in the financial crisis," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Misrepresentations in connection with the creation and sale of mortgage securities contributed greatly to the tremendous losses suffered by investors once the U.S. housing market collapsed. Today's actions involving RMBS securities are a continuation of the SEC's strong efforts to pursue wrongdoing committed in connection with the financial crisis."

Mr. Khuzami is a co-chair of the RMBS Working Group, which brings together federal and state agencies to investigate those responsible for misconduct that contributed to the financial crisis through the pooling and sale of RMBS.

RMBS Working Group Co-Chair and U.S. Attorney for the District of Colorado John Walsh said, "Today's filings represent significant steps towards the accomplishment of the Working Group's mission - to investigate and confront the abuses in the residential mortgage-backed securities market that significantly contributed to the Financial Crisis. The Working Group model allows the Department of Justice to lend a hand to other enforcement partners around the country who, in turn, have their own unique resources, talents, and legal tools to contribute to the effort. And the Justice Department's efforts in this area have benefited from SEC's work on its own cases."

RMBS Working Group Co-Chair and New York State Attorney General Eric Schneiderman said, "Today's actions are another step forward in the process of bringing accountability for the misconduct that led to the collapse of the housing market. We will continue to work together on behalf of consumers and investors to ensure that it never happens again."

According to the SEC's complaint against J.P. Morgan filed in federal court in Washington D.C., federal regulations under the securities laws require the disclosure of delinquency information related to assets that provide collateral for an asset-backed securities offering. Information about the delinquency status of mortgage loans in an RMBS transaction is important to investors because those loans are the primary source of funds by which investors can earn interest and obtain repayment of their principal.

The SEC alleges that in the prospectus supplement for the $1.8 billion RMBS offering that occurred in December 2006, J.P. Morgan made materially false and misleading statements about the loans that provided collateral for the transaction. The firm represented that only four loans (.04 percent of the total loans collateralizing the transaction) were delinquent by 30 to 59 days, and that those four were the only loans that had had an instance of delinquency of 30 or more days in the 12 months prior to the "cut-off date" for the transaction. However, at the time J.P. Morgan made these representations, the firm actually had information showing that more than 620 loans (above 7 percent of the total loans collateralizing the transaction) were, and had been, 30 to 59 days delinquent, and the four loans represented as being 30 to 59 days delinquent were in fact 60 to 89 days delinquent.

The SEC's complaint also alleges that Bear Stearns' bulk settlements covered loans collateralizing 156 different RMBS transactions issued from 2005 to 2007. Loan originators were usually required by contract to buy back loans that suffered early payment defaults or had other defects. However, Bear Stearns frequently negotiated discounted cash settlements with these loan originators in lieu of a buy-back on loans that were owned by the RMBS trusts. The firm - both before and after the merger with J.P. Morgan - then kept most of the bulk settlement proceeds. The firm failed to disclose the practice to investors who owned the loans. Bear Stearns repurchased only about 13 percent of these defective bulk settlement loans from the trusts, compared to a nearly 100 percent repurchase rate when loan originators agreed to buy back the defective loans. For most loans covered by bulk settlements, the firm collected money from originators without paying anything to the trusts.

J.P. Morgan settled the SEC's charges by consenting to pay $50.5 million in disgorgement and prejudgment interest and a $24 million penalty for the delinquency misstatements, which the SEC will seek to distribute to harmed investors in the transaction through a Fair Fund. J.P. Morgan agreed to pay $162,065,536 in disgorgement and prejudgment interest and a $60.35 million penalty for the bulk settlement practice misconduct, and the SEC will seek to distribute these funds to harmed investors through a separate Fair Fund. J.P. Morgan consented, without admitting or denying the allegations, to the entry of a final judgment permanently enjoining them from violating Section 17(a)(2) and (3) of the Securities Act of 1933. The settlement is subject to court approval.

According to the SEC's order instituting a settled administrative proceeding against Credit Suisse, the firm and its affiliated entities misled investors in 75 different RMBS transactions through the bulk settlement practice. From 2005 to 2010, Credit Suisse frequently negotiated bulk settlements with loan originators in lieu of a buy-back of loans that were owned by the RMBS trusts. Credit Suisse kept the bulk settlement proceeds for itself and failed to disclose the practice to investors who owned the loans. In nine of the 75 RMBS trusts, Credit Suisse failed to comply with offering document provisions that required it to repurchase certain early defaulting loans. Credit Suisse also applied different quality review procedures for loans that it sought to put back to originators, instituted a practice of not repurchasing such loans from trusts unless the originators had agreed to repurchase them, and failed to disclose the bulk settlement practice when answering investor questions about early payment defaults.

The SEC's order also found that Credit Suisse made misleading statements about a key investor protection known as the First Payment Default (FPD) provision in two RMBS offerings. The FPD provision required the mortgage loan originator to repurchase or substitute loans that missed payments shortly before or after they were securitized. Credit Suisse misled investors by falsely claiming that "all First Payment Default Risk" was removed from its RMBS, and at the same time limiting the number of FPD loans that were put back to the originator.

Credit Suisse settled the SEC's charges by consenting to pay $68,747,769 in disgorgement and prejudgment interest and a $33 million penalty, which the SEC will seek to distribute through a Fair Fund to harmed investors in the 75 RMBS transactions affected by the bulk settlement practice. Credit Suisse agreed to pay $12,256,651 in disgorgement and prejudgment interest and a $6 million penalty, which the SEC will seek to distribute through a separate Fair Fund to harmed investors in the two transactions affected by the FPD misstatements. Credit Suisse agreed to an order, without admitting or denying the allegations, requiring them to cease and desist from violations of Section 17(a)(2) and (3) of the Securities Act and Section 15(d) of the Securities Exchange Act of 1934.

These investigations were conducted by members of the SEC Enforcement Division's Structured and New Products Unit in both the Denver and Washington, D.C. offices, including Zachary Carlyle, Mark Cave, Sarra Cho, Allison Herren Lee, Laura Metcalfe, Colin Rand, Thomas Silverstein, John Smith, Andrew Sporkin, Amy Sumner, and Jeffrey Weiss. The trial unit members assigned to this matter were Dugan Bliss, Kyle DeYoung, Jan Folena, and Christian Schultz. The Enforcement Division was assisted by Eugene Canjels and Vance Anthony in the Division of Risk, Strategy and Financial Innovation. The SEC thanks the other agencies who are members of the RMBS Working Group for their assistance and cooperation regarding these enforcement actions.

"These actions demonstrate that we intend to hold accountable those who misled investors through poor disclosures in the sale of RMBS and other financial products commonly marketed and sold during the financial crisis. Our efforts in that regard continue," said Kenneth Lench, Chief of the SEC Enforcement Division's Structured and New Products Unit.