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.

COMPANY CHARGED WITH USING DUMMY ASSETS

FROM: U.S. SECURITES AND EXCHANGE COMMISSION
Firm to Pay $127.5 Million to Settle ChargesWashington, D.C., July 18, 2012
— The Securities and Exchange Commission today charged the U.S. investment banking subsidiary of Japan-based Mizuho Financial Group and three former employees with misleading investors in a collateralized debt obligation (CDO) by using "dummy assets" to inflate the deal’s credit ratings. The SEC also charged the firm that served as the deal’s collateral manager and the person who was its portfolio manager.

According to the SEC’s complaint against Mizuho Securities USA Inc., the firm made approximately $10 million in structuring and marketing fees in the deal. Mizuho agreed to pay $127.5 million to settle the SEC’s charges, and the others charged also agreed to settle the SEC’s actions against them.

The SEC alleges that Mizuho structured and marketed Delphinus CDO 2007-1, a CDO that was backed by subprime bonds at a time when the housing market was showing signs of severe distress. The deal was contingent upon Mizuho obtaining credit ratings it used to market the notes to investors. When its employees realized that Delphinus could not meet one rating agency’s newly announced criteria intended to protect CDO investors from the uncertainty of ratings downgrades, they submitted to the rating firm a portfolio containing millions of dollars in dummy assets that inaccurately reflected the collateral held by Delphinus. Once the firm rated the inaccurate portfolio, Mizuho closed the transaction and sold the notes to investors using the misleading ratings. Delphinus defaulted in 2008 and eventually was liquidated in 2010. Mizuho sustained substantial losses from Delphinus.

"This case demonstrates once again that bankers and market participants who embrace a ‘get the deal done at all costs’ strategy will be identified, charged, and punished," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "This is a constant theme throughout the many SEC enforcement actions arising out of the financial crisis, and is one that everyone involved in securities transactions and our financial markets would be well-advised to respect."

Kenneth Lench, Chief of the SEC’s Enforcement Division’s Structured and New Products Unit, added, "Mizuho and its employees undermined the integrity of the rating process by furnishing inaccurate information about the Delphinus portfolio. Investors expect and are entitled to receive legitimate ratings in order to help them assess their investments."

According to the SEC’s settled administrative proceedings against the three former Mizuho employees responsible for the Delphinus deal, Alexander Rekeda headed the group that structured the $1.6 billion CDO, Xavier Capdepon modeled the transaction for the rating agencies, and Gwen Snorteland was the transaction manager responsible for structuring and closing Delphinus. Delaware Asset Advisers (DAA) served as Delphinus’s collateral manager and the DAA portfolio manager was Wei (Alex) Wei.

According to the SEC’s complaint against Mizuho filed in federal court in Manhattan, all of the collateral assets for Delphinus had been purchased by July 17, 2007, and the transaction was scheduled to close on July 19. However, around noon on July 18, Standard & Poor’s (S&P) issued a press release announcing changes to its CDO rating criteria requiring certain categories of subprime residential mortgage-backed securities (RMBS) to be adjusted downward for purposes of calculating their default probability. The Mizuho employees knew that Delphinus’s actual portfolio contained a substantial amount of RMBS that were subject to the downward ratings, and that Delphinus, as constructed, could not meet its rating targets under these tougher standards. To enable Delphinus to close anyway, the Mizuho employees e-mailed multiple alternative portfolios to S&P that contained dummy assets that were superior in credit quality to the assets that had been actually acquired for the CDO. Once the necessary ratings were secured by the use of dummy assets, the Delphinus transaction closed by mid-afternoon on July 19 and securities were sold based upon these higher ratings. Investors were thus misled to believe that the Delphinus notes had achieved the advertised ratings that the actual closing portfolio would not support.

According to the SEC’s complaint, in connection with Delphinus’s subsequent request for a required rating confirmation from S&P, Mizuho employees provided and arranged for others to provide further inaccurate information about the composition of Delphinus’s assets. Primarily, they misrepresented that Delphinus’s effective date was August 6 rather than July 19. S&P then provided Delphinus with the ratings confirmation using the improper effective date of August 6.

Everyone charged by the SEC agreed to settlements without admitting or denying the charges. Mizuho consented to the entry of a final judgment requiring payment of $10 million in disgorgement, $2.5 million in prejudgment interest, and a $115 million penalty. The settlement, which requires court approval, also permanently enjoins Mizuho from violating Sections 17(a)(2) and (3) of the Securities Act.

In the related administrative proceedings against Rekeda, Capdepon, and Snorteland, the SEC found that Rekeda violated Sections 17(a)(2) and (3) of the Securities Act, and Capdepon and Snorteland violated Section 17(a). Rekeda and Capdepon each agreed to pay a $125,000 penalty while the decision on whether there will be a penalty for Snorteland will be decided at a later date. Rekeda agreed to be suspended from the securities industry for 12 months, Capdepon and Snorteland each agreed to be barred from the securities industry for one year, and all three agreed to cease and desist from further violations of the respective sections of the Securities Act they violated.

The SEC instituted settled administrative proceedings against DAA and Wei based on their post-closing conduct. DAA consented to the entry of an order requiring the firm to pay disgorgement of $2,228,372, prejudgment interest of $357,776, and a penalty of $2,228,372. Wei consented to the entry of an order requiring him to pay a $50,000 penalty and suspending him from associating with any investment adviser for six months. Both DAA and Wei consented to cease and desist from violating Section 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Advisers Act.

The SEC investigation into the Delphinus transaction, which is continuing, was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The investigative attorneys were Robert Leidenheimer, Lawrence Renbaum, and James Murtha, and the trial attorneys were Jan Folena, Suzanne Romajas, and Alan Lieberman.

SEC SUES FOR FEES CHARGED IN BREACH OF DUTY

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Sues Fund Adviser for Fees Charged in Breach of Duty Under the Investment Company Act
Washington, D.C., June 26, 2012 — The Securities and Exchange Commission today sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment adviser, alleging that for more than a decade, AMC charged a U.S. registered fund for advisory services that AMC did not provide. The SEC alleges that by doing so, AMC breached its fiduciary duty with respect to compensation under the Investment Company Act of 1940.

Kuala Lumpur-based AMC served as a sub-adviser to the Malaysia Fund, Inc., a closed-end fund that invests in Malaysian companies, whose principal investment adviser is Morgan Stanley Investment Management, Inc. (MSIM). The SEC alleges that AMC misrepresented its services during the fund’s annual advisory agreement review process for each year for more than 10 years, and AMC collected fees for advisory services that it did not provide.

AMC, a unit of AMMB Holdings Berhad, one of Malaysia’s largest banking groups, agreed to pay $1.6 million to settle the SEC’s charges, without admitting or denying the allegations. The case follows the SEC’s recent related action against the Malaysia Fund’s primary adviser, MSIM, and is part of an inquiry into the investment advisory contract renewal process by the SEC Enforcement Division’s Asset Management Unit.
“We are committed to ensuring that advisers to registered funds adhere to their fiduciary duty with respect to the receipt of compensation. Here, AMC breached that duty by charging fees for services that were not rendered,” said Bruce Karpati, Chief of the Asset Management Unit in the SEC’s Division of Enforcement.

AMC’s advisory fees were approved each year from 1996 to 2007 as part of the “15(c) process,” a reference to Section 15(c) of the Investment Company Act of 1940, which requires a registered fund’s board to annually evaluate the fund’s advisory agreements, and advisers to provide the board with information reasonably necessary to make that evaluation.

According to the SEC, AMC submitted a report to the Malaysia Fund’s board of directors each year that falsely claimed that AMC was providing specific advice, research, and assistance to MSIM for the benefit of the fund. In reality, the SEC’s complaint said AMC’s services were limited to providing two monthly reports based on publicly available information that MSIM did not request or use. Moreover, the SEC alleged that AMC failed to adopt and implement adequate policies, procedures, and controls over its advisory business, contrary to certifications provided to the fund’s directors in 2006 and 2007. AMC’s advisory agreement with the fund was terminated in early 2008 after the SEC’s examination staff inquired about the services AMC was purportedly providing to the fund.

The SEC’s complaint, filed in the U.S. District Court for the District of Columbia, alleges that AMC breached its fiduciary duty with respect to the receipt of compensation within the meaning of Section 36(b) of the Investment Company Act of 1940. The SEC also alleges that AMC violated Sections 206(2) and (4) of the Investment Advisers Act of 1940, and Rule 206(4)-7 thereunder, and Section 15(c) of the Investment Company Act of 1940. AMC consented to a judgment that bars it from violating these provisions in the future. AMC has also agreed to disgorge $1.3 million of its advisory fees paid by the fund and pay a $250,000 penalty.

Chad Alan Earnst, Christine Lynch, and Jessica Weiner, of the Enforcement Division’s Asset Management Unit staff, conducted the investigation along with Tonya Tullis and Edward D. McCutcheon. Karen Stevenson, Susan Schneider, and Dennis Delaney conducted the related examinations.

The SEC acknowledges the assistance of the Securities Commission of Malaysia and the Monetary Authority of Singapore.

LONG ISLAND SOFTWARE COMPANY CHARGED WITH BRIBERY BY SEC

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Charges Long Island Software Company in Connection with Bribery Scheme
On June 27, 2012, the Securities and Exchange Commission (“Commission”) charged that FalconStor Software, Inc., a Long Island, N.Y., data storage company, misled investors about bribes it paid to obtain business with a subsidiary of J.P. Morgan Chase & Co. FalconStor has agreed to pay a $2.9 million civil penalty to settle the Commission’s case.

The Commission’s complaint, filed in federal district court in the Eastern District of New York, alleges that from October 2007 through July 2010, the Company’s co-founder and then-chief executive officer, president and chairman, who is now deceased (the “CEO’), ordered the bribes, which were paid to three executives of the subsidiary, JPMorgan Chase Bank, National Association, and their relatives. The bribes given and offered, which totaled approximately $430,000, included grants of FalconStor options and restricted stock, direct cash payments, gift cards, payment of golf club fees, and lavish entertainment, including gambling in Macau and Las Vegas casinos. The CEO resigned in September 2010, after admitting that he had been involved in improper payments to a customer.

The complaint further alleges that shortly after the bribes began, FalconStor secured a direct, multi-million dollar, contract with JPMC, which then became one of FalconStor’s largest customers and a major source of FalconStor’s revenue during the relevant period. Thereafter, on several quarterly earnings calls and in two earnings releases filed with the Commission on Forms 8-K in April 2008 and February 2009, the CEO touted FalconStor’s large, direct contract with JPMC as a vindication of the quality and desirability of FalconStor’s products and proof of its strides in moving to direct sales rather than relying on third-party distributors. FalconStor never disclosed that JPMC’s business resulted, in whole or in part, from the inducements that it was lavishing on JPMC’s employees.

The complaint also alleges that the Company also granted restricted stock and options to relatives of two of the executives even though the recipients provided no bona fide services to the Company and the grants were thus not covered by the Company’s registered Incentive Stock Plan. In addition, the Company failed to accurately record the expenses associated with the bribes on its books and records, and failed to devise or implement a system of effective internal accounting controls to detect or prevent the bribes, which violated state law and were inconsistent with the Company’s policies.

The complaint charges FalconStor with violating the books-and-records and internal controls provisions of the Securities Exchange Act of 1934, Sections 13(b)(2)(A) and 13(b)(2)(B), and the offering registration provisions and certain antifraud provisions of the Securities Act of 1933, Sections 5(a), 5(c), and 17(a)(2) and (3).

FalconStor has agreed to settle this matter by consenting to a court order permanently enjoining it from violating Sections 5(a), 5(c), and 17(a)(2) and (3) of the Securities Act and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; ordering it to pay a civil monetary penalty of $2.9 million; and ordering it to comply with certain undertakings. The proposed settlement is subject to court approval.

FalconStor is a Delaware corporation headquartered in Melville, New York. The Company also maintains offices in California, and throughout Europe, Asia and Australia. FalconStor’s common stock trades on NASDAQ under the symbol FALC.

The Commission thanks the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation, and acknowledges to cooperation of the New York County District Attorney’s Office in this investigation.