SUNTRUST MORTGAGE TO PAY $320 MILLION SETTLEMENT

FROM:  U.S. JUSTICE DEPARTMENT 
Thursday, July 3, 2014
SunTrust Mortgage Agrees to $320 Million Settlement
Money Will Provide Relief to Harmed Borrowers and Establish Prevention Fund

The Department of Justice today announced an agreement with SunTrust Mortgage Inc. that resolves a criminal investigation of SunTrust’s administration of the Home Affordable Modification Program (HAMP).

As detailed in documents filed today, SunTrust misled numerous mortgage servicing customers who sought mortgage relief through HAMP.  Specifically, SunTrust made material misrepresentations and omissions to borrowers in HAMP solicitations, and failed to process HAMP applications in a timely fashion.  As a result of SunTrust’s mismanagement of HAMP, thousands of homeowners who applied for a HAMP modification with SunTrust suffered serious financial harms.

SunTrust has agreed to pay $320 million to resolve the criminal investigation into SunTrust’s HAMP Program.  The money is divided as follows:
Restitution – SunTrust will pay $179 million in restitution to compensate borrowers for damage caused by its mismanagement of HAMP.  That money will be distributed to borrowers in eight pre-determined categories of harm.  If more than $179 million is needed, the bank will also guarantee an additional $95 million for additional restitution.  SunTrust will also pay $10 million in restitution directly to Fannie Mae and Freddie Mac.
Forfeiture – SunTrust will pay $16 million in forfeiture.  This money will be available to law enforcement agencies working on mortgage fraud and other matters related to the misuse of TARP funds.
Prevention – SunTrust will pay $20 million to establish a fund for distribution to organizations providing counseling and other services to distressed homeowners. Specifically, SunTrust will pay this amount to a grant administrator selected by the government, which funds will in turn be awarded to housing counseling agencies and other non-profits devoted to consumer counseling and advocacy.

In addition to the significant payment, SunTrust has agreed to implement certain remedial measures aimed at preventing future problems like those that led to this investigation.  Specifically, it will increase loss mitigation staff, monitor their mortgage modification process, and provide semi-annual reports regarding compliance with the agreement.

This settlement makes clear the Department’s commitment to supplementing its enforcement work with support for prevention programs.  The grant fund established by this settlement will help distressed homeowners avoid the harms that befell SunTrust customers.  This is real relief for housing agencies, which will compete for grants to increase their counseling and other services to homeowners across the country.

“Instead of helping distressed homeowners, SunTrust’s mismanagement drove up foreclosures, disseminated individual credit and increased costs for hardworking men and women across our nation,” said Attorney General Eric Holder.  “This resolution will provide much-needed restitution for victims. It will make available substantial funds to help other homeowners avoid foreclosure. And it will result in the kinds of systemic changes needed to ensure that this will not happen again.  This outcome demonstrates yet again that the Justice Department will never waver in its ongoing pursuit of those whose reckless and willful actions harm the American people and undermine our financial markets.”

“The $320 million resolution of this long-running investigation requires SunTrust Mortgage to compensate its customers for the harm caused by the company’s false promises in administration of the Home Affordable Modification Program in 2009 and 2010 – conduct thoroughly described in the Statement of Facts that accompanies the settlement documents,”  U.S. Attorney Timothy J. Heaphy said today.  “Up to $284 million will be paid in restitution directly to the victims of SunTrust’s conduct.  SunTrust will also establish a $20 million grant fund which will be distributed to agencies working with distressed homeowners and provide $16 million in asset forfeiture funds that will be used by law enforcement for future mortgage fraud investigations.  The company has also agreed to make specific changes in its operations designed to prevent similar problems in the future.

“SunTrust has done the right thing by agreeing to this novel package of restitution, remediation, and prevention, which represents a significant victory not only for SunTrust customers, but also for Americans who will receive counseling and other assistance when faced with financial challenges,” U.S. Attorney Heaphy said.  “This settlement demonstrates the commitment of the Department of Justice and the Special Inspector General for the Troubled Asset Relief Program to hold financial institutions accountable and provide restitution to those harmed by their conduct.”

“Today’s agreement with SunTrust underlines the importance of holding accountable those individuals and companies who pledge to ensure that homeowners are protected at all times; especially during times when the homeowner is seeking to save their home through a loan modification.  SunTrust has conceded that their HAMP program had numerous deficiencies and has harmed a significant amount of homeowners.  This behavior will not be tolerated.  We are proud to have worked with our law enforcement partners on this case,” said Michael P. Stephens, Acting Inspector General of the Federal Housing Finance Agency Office of Inspector General.

“HAMP was designed to be a beacon of hope and opportunity for homeowners in dire straits, but TARP recipient SunTrust, rather than assist homeowners in need, financially ruined many through an utter dereliction of its HAMP program,” said Christy Romero, Special Inspector General for TARP (SIGTARP).  “This criminal investigation uncovered that SunTrust so bungled its administration of the program, that many homeowners would have been exponentially better off having never applied through the bank in the first place.  Unwilling to put resources into HAMP despite holding billions in TARP funds, SunTrust put piles of unopened homeowners’ HAMP applications in a room.  SunTrust’s floor actually buckled under the sheer weight of unopened document packages.  Documents and paperwork were lost.  Homeowners were improperly foreclosed upon.  Treasury was lied to.  The negligence with which SunTrust administered its HAMP program is appalling, miserable, inexcusable, and repulsive.  Real people lost their homes, and many others faced financial ruin.  Ending this behavior and, where necessary, forcing institutions to change their culture through law enforcement by SIGTARP and our partners will help begin the process of restoring faith in financial institutions and healing public trust.”

The investigation of the case was conducted by the United States Attorney’s Office for the Western District of Virginia, the Office of the Special Inspector General for the Troubled Asset Relief Program, and the Office of the Inspector General for the Federal Housing Finance Agency (FHFA) and the United States Postal Inspection Service.

SEC SETTLES CHARGES AGAINST ALLEGED PRIME BACK INVESTMENT SCHEME PROMOTER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Files Settled Charges Against Arizona Resident in Prime Bank Investment Scheme

On June 26, 2014, the Securities and Exchange Commission charged Cheryl L. Robinson with violating the antifraud and registration provisions of the federal securities laws in connection with an advance-fee high-yield investment scam perpetrated by Switzerland-based Malom Group AG ("Malom") and Las Vegas-based M.Y. Consultants, Inc. As alleged in the complaint, Robinson acted as a promoter who recruited investors for Malom Group AG and M.Y. Consultants, Inc. from approximately 2009 to 2011. In this role, Robinson made materially false and misleading statements to investors about, among other things, Malom's background, its financial resources, and history of success. She also failed to inform investors that none of her clients had received any profits from a transaction with Malom and that all had lost their entire investment. Finally, she omitted to tell any of the investors that she would be paid approximately 25% of the investors' advance fees regardless of whether a transaction produced profits. The complaint also alleged that Robinson acted as an unregistered broker dealer and sold unregistered Malom securities. By virtue of this conduct, the complaint alleges Robinson violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and aided and abetted violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5.

Without admitting or denying the SEC's allegations, Robinson agreed to settle the case against her. The settlement is pending final approval by the court. Specifically, Robinson consented to the entry of a final judgment that (1) permanently enjoins her from future violations of Securities Act Sections 5(a), 5(c), and 17(a), Exchange Act Sections 10(b), 15(a), and Rule 10b-5 thereunder, and from aiding and abetting violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5; (2) permanently enjoins her from directly or indirectly participating in the issuance, offer, or sale of any security, including but not limited to joint venture agreements, proofs of funds, bank guarantees, medium term notes, standby letters of credit, structured notes, and similar instruments, with the exception of the purchase or sale of securities listed on a national securities exchange; (3) orders that she is liable for disgorgement in the amount of $204,417 and $13,802 in prejudgment interest, for a total of $218,219, and waives that amount based on her demonstrated inability to pay. The Commission also decided to forego a civil penalty based on her demonstrated financial condition.

As part of the settlement, and following the entry of the proposed final judgment, Robinson, without admitting or denying the Commission's findings, has consented to the entry of a Commission order, pursuant to Exchange Act Section 15(b)(6), permanently barring her from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, or from participating in an offering of penny stock.

The SEC previously charged Malom Group AG, its principals, and agents with violating the antifraud and securities registration provisions of the federal securities laws in SEC v. Malom Group AG, et al, 2:13-cv-2280 (D. Nev. Dec. 16, 2013), SEC v. Erwin et al., 2:14-cv-623 (D. Nev. Apr. 23, 2014), and SEC v. Smith, 1:14-cv-192 (D.N.H. May 2, 2014). For additional information about these cases, see Litigation Release Number 22890 (Dec. 16, 2013); Litigation Release Number 22978 (Apr. 28, 2014); and Litigation Release Number 22984 (May 2, 2014).

Evaluating Pension Fund Investments Through The Lens Of Good Corporate Governance

Evaluating Pension Fund Investments Through The Lens Of Good Corporate Governance

SEC OBTAINS COURT ORDER HALTER FRAUDULENT BOND OFFERING BY CHICAGO SUBURB

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission obtained an emergency court order against a Chicago suburb and its comptroller to stop a fraudulent bond offering that the city has been marketing to potential investors.

The SEC has filed fraud charges in U.S. District Court for the Northern District of Illinois against the city of Harvey, Ill., and Joseph T. Letke alleging that they have been engaging in a scheme for the past several years to divert bond proceeds for improper, undisclosed uses.  The SEC’s complaint alleges that the purported purpose of prior bond offerings was to fund the development and construction of a Holiday Inn hotel in Harvey.  However without informing investors, Harvey officials diverted at least $1.7 million of bond proceeds from these offerings to pay the city’s operational costs such as its payroll, and Letke received approximately $269,000 in undisclosed payments derived from bond proceeds.  While investigating Harvey’s past bond offerings to investors, the SEC learned that the city is intending to issue new limited obligation bonds as early as this week, and draft offering documents make materially misleading statements about the purpose and risks of those bonds while omitting that past bond proceeds have been misused.

In response to the SEC’s request for emergency relief, the Hon. Judge Rebecca Pallmeyer conducted an emergency hearing today and issued a temporary restraining order preventing Harvey from offering or selling any bonds through July 14.  At the hearing, Harvey agreed to this restriction.  Additionally, to prevent dissipation of Letke’s ill-gotten gains, the court order prohibits Letke from incurring any extraordinary expenses beyond reasonable and customary personal and business expenses.  The court scheduled an additional hearing for July 8.

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

David Glockner, director of SEC’s Chicago Regional Office, added, “Harvey’s bond investors were misled into believing their money would go toward construction of a Holiday Inn when instead the bulk of it was diverted into Harvey’s general coffers and Letke’s pocket.  Our action has stopped their scheme in its tracks, and we will continue our investigation to determine additional facts surrounding the misconduct.”

According to the SEC’s complaint, instead of general obligations bonds that are repaid from the general coffers of a municipality, Harvey’s bond offerings in 2008, 2009, and 2010 were limited obligations bonds that were to be repaid from dedicated tax revenue streams such as Harvey’s hotel-motel tax, sales tax, or incremental tax from the Tax Increment Financing District that the city created for the development and construction of the Holiday Inn project.  Therefore, it was important to bond investors that the bond offerings were consistent with the stated purpose and the money raised was actually used to fund the hotel development, because the amount of funds available to repay the bonds derived from tax revenues would be materially affected by the funding and progress of the project.

However, the SEC alleges that Harvey’s bond investors were materially misled about the purpose and risks of the bonds they purchased from the city.  As Harvey and Letke perpetrated the scheme to divert bond-related proceeds, the hotel redevelopment project turned into a fiasco for bond investors and city residents. According to news reports, the proposed Holiday Inn hotel and conference center stands as a decrepit shell. The hotel’s façade has many holes in it, and the interior of the hotel appears gutted in places with dangling wires and exposed studs.

The SEC’s complaint alleges that Harvey and Letke violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC’s investigation, which is continuing, has been conducted by staff in the Chicago Regional Office and the Municipal Securities and Public Pensions Unit, including Eric A. Celauro, Sally J. Hewitt, and Scott Hlavacek.  The litigation will be led by Eric M. Phillips.  The case is being supervised by Peter K.M. Chan.

SEC ANNOUNCES FRAUD CHARGES IN LOAN FALSE CLASSIFICATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes.  As a result, the bank’s publicly-traded holding company overstated its income and earnings per share in its financial reporting.

The SEC also entered into a deferred prosecution agreement with Regions Financial Corp., which substantially cooperated with the agency’s investigation and undertook extensive remedial actions.  Regions will pay a total of $51 million to resolve parallel actions by the SEC, Federal Reserve Board, and Alabama Department of Banking.

According to the SEC’s orders instituting administrative proceedings against the three former managers, Thomas A. Neely Jr. was the principal architect of the scheme while serving as head of Regions Bank’s risk analytics group in 2009.  Along with the bank’s head of special assets Jeffrey C. Kuehr and chief credit officer Michael J. Willoughby, Neely took intentional steps to circumvent internal accounting controls and improperly classify $168 million in commercial loans as performing so Regions could avoid recording a higher allowance for loan and lease losses.

Kuehr and Willoughby agreed to settle the SEC’s charges by paying penalties of $70,000 apiece and consenting to bars from serving as officers or directors of public companies.  The SEC’s Division of Enforcement will continue to litigate its case against Neely.

“Our enforcement actions against three senior executives coupled with the deferred prosecution agreement with Regions demonstrate that we will aggressively pursue individual responsibility while rewarding extraordinary cooperation and remediation by companies,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “The bank helped us bring a case against culpable individuals while remediating the misconduct by restructuring its processes and putting new management in place, among other things.”

According to the SEC’s orders and the deferred prosecution agreement, Regions Bank tracked and recorded its non-performing loans (NPLs) for internal performance metrics and regular financial reporting.  NPLs typically were placed on non-accrual status when it was determined that payment of all contractual principal and interest was 90 days past due or otherwise in doubt.  Once a loan was placed in non-accrual status, uncollected interest accrued during that current year was reversed and Regions Bank’s interest income would be reduced.  Non-accrual status also served as a trigger for Regions Bank to consider whether the specific loan was impaired and to determine an allowance for loan and lease losses in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

The SEC’s Division of Enforcement alleges that when personnel within Regions Bank’s special asset department initiated procedures to place approximately $168 million in NPLs into non-accrual status during the first quarter of 2009, Neely arbitrarily and without supporting documentation required the loans to remain in accrual status.  By failing to classify the impaired loans in accordance with its policies, Regions’ financial statements for the quarter ended March 31, 2009, were materially misstated and not in conformity with GAAP.  In furtherance of the scheme, Neely and Willoughby knowingly provided understated NPL data for the quarter to the Regions’ CFO and other senior executives during a meeting in late March.

The SEC’s order against Neely charges him with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.  Kuehr and Willoughby consented to the entry of a cease-and-desist order finding that they violated or caused violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, Kuehr and Willoughby agreed to pay their respective $70,000 penalties plus be prohibited from serving as officers or directors of public companies for a period of five years.

The deferred prosecution agreement with Regions relates to the bank’s failure to maintain adequate accounting controls at the time.  The agreement credits the company’s extensive remedial efforts, including the creation of a new problem asset division with entirely new management and significantly enhanced procedures.  The agreement credits the substantial cooperation by Regions during the SEC’s investigation, and imposes a $26 million penalty that will be offset provided that the company pays a $46 million penalty assessed in the Federal Reserve’s action.  Regions also will pay a $5 million penalty to the Alabama Department of Banking.

The SEC’s investigation was conducted in its Atlanta Regional Office.  The SEC appreciates the assistance of the Federal Reserve.

FINAL JUDGEMENT ENTERED IN KICKBACK STOCK SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

District Court Enters Final Judgment Setting a Civil Penalty in the Amount of $28,000 Against Defendant Health Sciences Group, Inc.

The Commission announced that on March 10, 2014, the United States District Court for the Southern District of Florida entered a Final Judgment setting a civil penalty in the amount of $28,000 against Defendant Health Sciences Group, Inc. ("HESG"), pursuant to Section 20(d) of the Securities Act of 1933 ("Securities Act") and Section 21(d) of the Securities Exchange Act of 1934 ("Exchange Act").

The Final Judgment follows a previous order by United States District Judge Robert N. Scola, Jr. in which the Court entered a Judgment of Permanent Injunction and Other Relief against HESG, enjoining the company from violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a).

The Commission commenced this action by filing its Complaint on August 14, 2013, against HESG and co-defendant, Thomas Gaffney. The Complaint alleged the defendants engaged in a fraudulent scheme involving HESG's stock, illicit kickbacks, and phony agreements to mask those kickbacks. On November 20, 2013, the Court entered a Final Judgment of Permanent Injunction and Other Relief by consent against Gaffney, enjoining him from violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a), and permanently barring him from participating in an offering of penny stock, and from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.