SEC ANNOUNCES $17 MILLION WHISTLEBLOWER AWARD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Washington D.C., June 9, 2016 — The Securities and Exchange Commission today announced a whistleblower award of more than $17 million to a former company employee whose detailed tip substantially advanced the agency’s investigation and ultimate enforcement action.

The award is the second-largest issued by the SEC since its whistleblower program began nearly five years ago.  The SEC issued a $30 million award in September 2014 and a $14 million award in October 2013.

“Company insiders are uniquely positioned to protect investors and blow the whistle on a company’s wrongdoing by providing key information to the SEC so we can investigate the full extent of the violations,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “The information and assistance provided by this whistleblower enabled our enforcement staff to conserve time and resources and gather strong evidence supporting our case.”

Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, added, “In the past month, five whistleblowers have received a total of more than $26 million, and we hope these substantial awards encourage other individuals with knowledge of potential federal securities law violations to make the right choice to come forward and report the wrongdoing to the SEC.”

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

The SEC’s whistleblower program has now awarded more than $85 million to 32 whistleblowers since the program’s inception in 2011.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with unique and useful information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

WALL STREET FIRM CHARGED WITH NOT MONITORING SUSPICIOUS ACTIVITY

FROM:  U.S. JUSTICE DEPARTMENT 

Brokerage Firm Charged With Anti-Money Laundering Failures

FOR IMMEDIATE RELEASE

2016-102

Washington D.C., June 1, 2016 — The Securities and Exchange Commission today charged a Wall Street-based brokerage firm with failing to sufficiently evaluate or monitor customers’ trading for suspicious activity as required under the federal securities laws.

An SEC investigation found that Albert Fried & Company failed to file Suspicious Activity Reports (SARs) with bank regulators for more than five years despite red flags tied to its customers’ high-volume liquidations of low-priced securities.  On more than one occasion, an AF&Co customer’s trading in a security on a given day exceeded 80 percent of the overall market volume.  In other instances, customers were trading in stocks issued by companies that were delinquent in their regulatory filings or involved in questionable penny stock promotional campaigns.  Certain customers also were the subject of grand jury subpoenas received by AF&Co.

AF&Co agreed to pay a $300,000 penalty to settle the charges.

“Albert Fried & Company ignored numerous instances when customer trading activity should have triggered the firm to file SARs.  Brokerage firms must take their anti-money laundering responsibilities seriously so they can serve as a line of defense against misconduct and market risks,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.

The SEC’s order finds that AF&Co violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8.  AF&Co agreed to be censured and pay the $300,000 penalty without admitting or denying the findings in the order, which credits the firm for its cooperation and the remedial measures already undertaken.

While the SEC has charged other firms with anti-money laundering failures under the federal securities laws, this is the first case against a firm solely for failing to file SARs when appropriate.

The case stemmed from the work of the Enforcement Division’s Broker-Dealer Task Force, led by Associate Director Antonia Chion and New York Regional Office Director Andrew M. Calamari.  The task force focuses on current issues and practices within the broker-dealer community and develops national initiatives for potential investigations.

The SEC’s investigation was conducted by Matt Reilly and supervised by Melissa Hodgman with assistance from Eric Kringel, Daniel Goldberg, Damon Reed, and Andrae Eccles of the Enforcement Division’s Bank Secrecy Act Review Group.

GOLDMAN SACHS TO PAY $5 BILLION SETTLEMENT RELATED TO MORTGAGE BUSINESS

FROM:  U.S. JUSTICE DEPARTMENT  

Monday, April 11, 2016

Goldman Sachs Agrees to Pay More than $5 Billion in Connection with Its Sale of Residential Mortgage Backed Securities

The Justice Department, along with federal and state partners, announced today a $5.06 billion settlement with Goldman Sachs related to Goldman’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007.  The resolution announced today requires Goldman to pay $2.385 billion in a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and also requires the bank to provide $1.8 billion in other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing.  Goldman will also pay $875 million to resolve claims by other federal entities and state claims.  Investors, including federally-insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued and underwritten by Goldman between 2005 and 2007.

“This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” said Acting Associate Attorney General Stuart F. Delery.  “This $5 billion settlement includes a $1.8 billion commitment to help repair the damage to homeowners and communities that Goldman acknowledges resulted from its conduct, and it makes clear that no institution may inflict this type of harm on investors and the American public without serious consequences.”

“Today’s settlement is another example of the department’s resolve to hold accountable those whose illegal conduct resulted in the financial crisis of 2008,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.  “Viewed in conjunction with the previous multibillion-dollar recoveries that the department has obtained for similar conduct, this settlement demonstrates the pervasiveness of the banking industry’s fraudulent practices in selling RMBS, and the power of the Financial Institutions Reform, Recovery and Enforcement Act as a tool for combatting this type of wrongdoing.”

“Today’s settlement is yet another acknowledgment by one of our leading financial institutions that it did not live up to the representations it made to investors about the products it was selling,” said U.S. Attorney Benjamin B. Wagner of the Eastern District of California.  “Goldman’s conduct in exploiting the RMBS market contributed to an international financial crisis that people across the country, including many in the Eastern District of California, continue to struggle to recover from.  I am gratified that this office has developed investigations, first against JPMorgan Chase and now against Goldman Sachs, that have led to significant civil settlements that hold bad actors in this market accountable.  The results obtained by this office and other members of the RMBS Working Group continue to send a message to Wall Street that we remain committed to pursuing those responsible for the financial crisis.”

The $2.385 billion civil monetary penalty resolves claims under FIRREA, which authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud.  The settlement expressly preserves the government’s ability to bring criminal charges against Goldman, and does not release any individuals from potential criminal or civil liability.  In addition, as part of the settlement, Goldman agreed to fully cooperate with any ongoing investigations related to the conduct covered by the agreement.

Of the $875 million Goldman has agreed to pay to settle claims by various other federal and state entities: Goldman will pay $575 million to settle claims by the National Credit Union Administration, $37.5 million to settle claims by the Federal Home Loan Bank of Des Moines as successor to the Federal Home Loan Bank of Seattle, $37.5 million to settle claims by the Federal Home Loan Bank of Chicago, $190 million to settle claims by the state of New York, $25 million to settle claims by the state of Illinois and $10 million to settle claims by the state of California.

Goldman will pay out the remaining $1.8 billion in the form of relief to aid consumers harmed by its unlawful conduct.  $1.52 billion of that relief will be paid out pursuant to an agreement with the United States that Goldman will provide loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country, as well as financing for affordable rental and for-sale housing throughout the country.  This agreement represents the largest commitment in any RMBS agreement to provide financing for affordable housing—a crucial need following the turmoil of the financial crisis.  $280 million will be paid out by Goldman pursuant to an agreement separately negotiated with the state of New York.

The settlement includes a statement of facts to which Goldman has agreed.  That statement of facts describes how Goldman made false and misleading representations to prospective investors about the characteristics of the loans it securitized and the ways in which Goldman would protect investors in its RMBS from harm (the quotes in the following paragraphs are from that agreed-upon statement of facts, unless otherwise noted):

Goldman told investors in offering documents that “[l]oans in the securitized pools were originated generally in accordance with the loan originator’s underwriting guidelines,” other than possible situations where “when the originator identified ‘compensating factors’ at the time of origination.”  But Goldman has today acknowledged that, “Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized.”
Specifically, Goldman has now acknowledged that, even when the results of its due diligence on samples of loans from those pools “indicated that the unsampled portions of the pools likely contained additional loans with credit exceptions, Goldman typically did not . . . identify and eliminate any additional loans with credit exceptions.”  Goldman has acknowledged that it “failed to do this even when the samples included significant numbers of loans with credit exceptions.”
Goldman’s Mortgage Capital Committee, which included senior mortgage department personnel and employees from Goldman’s credit and legal departments, was required to approve every RMBS issued by Goldman.  Goldman has now acknowledged that “[t]he Mortgage Capital Committee typically received . . . summaries of Goldman’s due diligence results for certain of the loan pools backing the securitization,” but that “[d]espite the high numbers of loans that Goldman had dropped from the loan pools, the Mortgage Capital Committee approved every RMBS that was presented to it between December 2005 and 2007.”  As one example, in early 2007, Goldman approved and issued a subprime RMBS backed by loans originated by New Century Mortgage Corporation, after Goldman’s due diligence process found that one of the loan pools to be securitized included loans originated with “[e]xtremely aggressive underwriting,” and where Goldman dropped 25 percent of the loans from the due diligence sample on that pool without reviewing the unsampled 70 percent of the pool to determine whether those loans had similar problems.
Goldman has acknowledged that, for one August 2006 RMBS, the due diligence results for some of the loan pools resulted in an “unusually high” percentage of loans with credit and compliance defects.  The Mortgage Capital Committee was presented with a summary of these results and asked “How do we know that we caught everything?”  One transaction manager responded “we don’t.”  Another transaction manager responded, “Depends on what you mean by everything?  Because of the limited sampling . . . we don’t catch everything . . .”  Goldman has now acknowledged that the Mortgage Capital Committee approved this RMBS for securitization without requiring any further due diligence.  
Goldman made detailed representations to investors about its “counterparty qualification process” for vetting loan originators, and told investors and one rating agency that Goldman would engage in ongoing monitoring of loan sellers.  Goldman has now acknowledged, however, that it “received certain negative information regarding the originators’ business practices” and that much of this information was not disclosed to investors.
For example, Goldman has now acknowledged that in late 2006 it conducted an internal analysis of the underwriting guidelines of Fremont Investment & Loan (an originator), which found many of Fremont’s guidelines to be “off market” or “at the aggressive end of market standards.”  Instead of disclosing its view of Fremont’s underwriting, Goldman has acknowledged that it “[u]ndertook a significant marketing effort” to tell investors about what Goldman called Fremont’s “commitment to loan quality over volume” and “significant enhancements to Fremont underwriting guidelines.”  Fremont was shut down by federal regulators within several months of these statements.
In another example, Goldman was aware in early-mid 2006 of certain issues with Countrywide Financial Corporation’s origination process, including a pattern of non-responsiveness and inability to provide sufficient staff to handle the numerous loan pools Countrywide was selling.  In April 2006, while Goldman was preparing an RMBS backed by Countrywide loans for securitization, a Goldman mortgage department manager circulated a “very bullish” equity research report that recommended the purchase of Countrywide stock.  Goldman’s head of due diligence, who had just overseen the due diligence on six Countrywide pools, responded “If they only knew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .”
Meanwhile, as Goldman has acknowledged in this statement of facts, “[Around the end of 2006], Goldman employees observed signs of uncertainty in the residential mortgage market [and] by March 2007, Goldman had largely halted new purchases of subprime loan pools.”
Assistant U.S. Attorneys Colleen Kennedy and Kelli Taylor of the Eastern District of California investigated Goldman’s conduct in connection with RMBS, with the support of the Federal Housing Finance Agency’s Office of the Inspector General (FHFA-OIG) and the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

“Goldman Sachs had a fiduciary responsibility to investors, which they blatantly side stepped,” said Deputy Inspector General for Investigation Rene Febles of FHFA-OIG.  “They knowingly put investors at risk and in so doing contributed significantly to the financial crisis.  The losses caused by this irresponsible behavior deeply affected not only financial institutions but also taxpayers and one can only hope that Goldman Sachs has learned the difference between risk and deceit.  Two Federal Home Loan Banks suffered significant losses so we are pleased to see both entities receive a portion of this settlement.  We will continue to work with our law enforcement partners to hold those accountable who have engaged in misconduct.”

“Goldman took $10 billion in TARP bailout funds knowing that it had fraudulently misrepresented to investors the quality of residential mortgages bundled into mortgage backed securities,” said Special Inspector General Christy Goldsmith Romero for TARP.  “Many of these toxic securities were traded in a taxpayer funded bailout program that was designed to unlock frozen credit markets during the crisis.  While crisis investigations take time, SIGTARP is committed to working with our law enforcement partners to protect taxpayers and bring accountability and justice.”

The settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group, which has recovered tens of billions of dollars on behalf of American consumers and investors for claims against large financial institutions arising from misconduct related to the financial crisis.  The RMBS Working Group brings together attorneys, investigators, analysts and staff from multiple state and federal agencies, including the Department of Justice, U.S. Attorneys’ Offices, the FBI, the U.S. Securities and Exchange Commission (SEC), the Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the FHFA-OIG, SIGTARP, the Federal Reserve Board’s OIG, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network and multiple state Attorneys General offices around the country.  The RMBS Working Group is led by Director Joshua Wilkenfeld and five co-chairs: Principal Deputy Assistant Attorney General Mizer, Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, Director Andrew Ceresney of the SEC’s Division of Enforcement, U.S. Attorney John Walsh of the District of Colorado and New York Attorney General Eric Schneiderman.  This settlement is the fifth multibillion-dollar RMBS settlement announced by the working group.

MAN WHO RAN OFFSHORE BROKERAGE SENTENCED FOR ROLE IN INTERNATIONAL STOCK FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 

Friday, March 18, 2016

Former Head of Offshore Brokerage Sentenced to 18 Years for Conspiracy to Commit International Stock Fraud and Money Laundering

A California man was sentenced to 216 months in prison today for two counts of conspiracy to commit wire fraud and one count of conspiracy to commit international money laundering in connection with an international “pump and dump” scheme involving stocks traded on the over-the-counter (OTC) market.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Dana J. Boente of the Eastern District of Virginia and Assistant Director in Charge Paul M. Abbate of the FBI’s Washington Field Office made the announcement.

Harold Bailey Gallison II, 58, of Valley Center, California, pleaded guilty on Dec. 10, 2015, and was sentenced by U.S. District Judge Anthony J. Trenga of the Eastern District of Virginia, who also ordered Gallison to pay $1,724,770 in restitution.  Gallison was charged in an indictment unsealed on July 14, 2015, along with eight other individuals for their roles in complex international stock manipulation and money laundering schemes.

In his guilty plea, Gallison admitted that he conspired to artificially “pump” or inflate the trading volume and price of the shares of Warrior Girl Corp., quoted on the OTC market under the ticker symbol WRGL, and Everock Inc., quoted on the OTC market under the ticker symbol EVRN, by touting business activities and deceptive revenue forecasts and by engaging in coordinated trading activity to create the appearance of increasing market demand.  Gallison also admitted that he and others then “dumped” or sold the shares at the inflated prices and laundered proceeds through bank accounts in the United States and overseas.  Gallison facilitated the schemes through an offshore brokerage and money laundering platform that went by various names, including Sandias Azucaradas, Moneyline Brokers and Trinity Asset Services (collectively Moneyline), he admitted.  According to the plea, through Moneyline, Gallison created nominee accounts in the names of shell companies to conceal both the true source and ownership of the securities and the flow of funds.  In addition, Gallison pleaded guilty to one count of conspiring to launder the proceeds of a number of securities fraud schemes, including Warrior Girl and Everock, totaling more than $25 million.

The FBI’s Washington Field Office is investigating the case.  Senior Trial Attorney N. Nathan Dimock and Trial Attorney Michael O’Neill of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Kosta S. Stojilkovic of the Eastern District of Virginia are prosecuting the case.  The Securities and Exchange Commission, the Financial Industry Regulatory Authority and the Criminal Division’s Office of International Affairs also provided significant assistance.

MORGAN STANLEY RESOLVES CLAIMS RELATED TO IT'S RESIDENTIAL BACKED SECURITIES SALES

FROM:  U.S. JUSTICE DEPARTMENT 

Thursday, February 11, 2016

Morgan Stanley Agrees to Pay $2.6 Billion Penalty in Connection with Its Sale of Residential Mortgage Backed Securities

The Justice Department today announced that Morgan Stanley will pay a $2.6 billion penalty to resolve claims related to Morgan Stanley’s marketing, sale and issuance of residential mortgage-backed securities (RMBS).  This settlement constitutes the largest component of the set of resolutions with Morgan Stanley entered by members of the RMBS Working Group, which have totaled approximately $5 billion.  As part of the agreement, Morgan Stanley acknowledged in writing that it failed to disclose critical information to prospective investors about the quality of the mortgage loans underlying its RMBS and about its due diligence practices.  Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued by Morgan Stanley in 2006 and 2007.

“Today’s settlement holds Morgan Stanley appropriately accountable for misleading investors about the subprime mortgage loans underlying the securities it sold,” said Acting Associate Attorney General Stuart F. Delery.  “The Department of Justice will not tolerate those who seek financial gain through deceptive or unfair means, and we will take appropriately aggressive action against financial institutions that knowingly engage in improper investment practices.”

“Those who contributed to the financial crisis of 2008 cannot evade responsibility for their misconduct,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.  “This resolution demonstrates once again that the Financial Institutions Reform, Recovery and Enforcement Act is a powerful weapon for combatting financial fraud and that the department will not hesitate to use it to hold accountable those who violate the law.”

An RMBS is a type of security comprised of a pool of mortgage loans created by banks and other financial institutions.  The expected performance and price of an RMBS is determined by a number of factors, including the characteristics of the borrowers and the value of the properties underlying the RMBS.  Morgan Stanley was one of the institutions that issued RMBS during the period leading up to the economic crisis in 2007 and 2008.

As acknowledged by Morgan Stanley in a detailed statement of facts that is a part of this agreement (and is quoted below), the company made representations to prospective investors about the characteristics of the subprime mortgage loans underlying its RMBS – representations with which it did not comply:

In particular, Morgan Stanley told investors that it did not securitize underwater loans (loans that exceeded the value of the property).  However, Morgan Stanley did not disclose to investors that in April 2006 it had expanded its “risk tolerance” in evaluating loans in order to purchase and securitize “everything possible.”  As Morgan Stanley’s manager of valuation due diligence told an employee in 2006, “please do not mention the ‘slightly higher risk tolerance’ in these communications.  We are running under the radar and do not want to document these types of things.”  As a result, Morgan Stanley ignored information – including broker’s price opinions (BPOs), which are estimates of a property’s value from an independent real estate broker – indicating that thousands of securitized loans were underwater, with combined-loan-to-value ratios over 100 percent.  From January 2006 through mid-2007, Morgan Stanley acknowledged that “Morgan Stanley securitized nearly 9,000 loans with BPO values resulting in [combined loan to value] ratios over 100 percent.”
Morgan Stanley also told investors that it did not securitize loans that failed to meet originators’ guidelines unless those loans had compensating factors.  Morgan Stanley’s offering documents “represented that ‘[the mortgage loans originated or acquired by [the originator] were done so in accordance with the underwriting guidelines established by [the originator]’ but that ‘on a case-by-case-basis, exceptions to the [underwriting guidelines] are made where compensating factors exist.’”  Morgan Stanley has now acknowledged, however, that “Morgan Stanley did not disclose to securitization investors that employees of Morgan Stanley received information that, in certain instances, loans that did not comply with underwriting guidelines and lacked adequate compensating factors . . . were included in the RMBS sold and marketed to investors.”  So, in fact, “Morgan Stanley . . . securitized certain loans that neither comported with the originators’ underwriting guidelines nor had adequate compensating factors.”
Likewise, “Morgan Stanley also prepared presentation materials . . . that it used in discussions with potential investors that described the due diligence process for reviewing pools of loans prior to securitization,” but “certain of Morgan Stanley’s actual due diligence practices did not conform to the description of the process set forth” in those materials.
For example, Morgan Stanley obtained BPOs for a percentage of loans in a pool.  Morgan Stanley stated in these presentation materials that it excluded any loan with a BPO value exhibiting an “unacceptable negative variance from the original appraisal,” when in fact “Morgan Stanley never rejected a loan based solely on the BPO results.”
Through these undisclosed practices, Morgan Stanley increased the percentage of mortgage loans it purchased for its RMBS, notwithstanding its awareness about “deteriorating appraisal quality” and “sloppy underwriting” by the sellers of these loans.  The bank has now acknowledged that “Morgan Stanley was aware of problematic lending practices of the subprime originators from which it purchased mortgage loans.”  However, it “did not increase its credit-and-compliance due diligence samples, in part, because it did not want to harm its relationship with its largest subprime originators.” Indeed, Morgan Stanley’s manager of credit-and-compliance due diligence was admonished to “stop fighting and begin recognizing the point that we need monthly volume from our biggest trading partners and that . . . the client [an originator] does not have to sell to Morgan Stanley.”
“In today’s agreement, Morgan Stanley acknowledges it sold billions of dollars in subprime RMBS certificates in 2006 and 2007 while making false promises about the mortgage loans backing those certificates,” said Acting U.S. Attorney Brian J. Stretch of the Northern District of California.  “Morgan Stanley touted the quality of the lenders with which it did business and the due diligence process it used to screen out bad loans.  All the while, Morgan Stanley knew that in reality, many of the loans backing its securities were toxic.  Abuses in the mortgage-backed securities industry such as these helped bring about the most devastating financial crisis in our lifetime.  Our office is committed to dedicating the resources necessary to hold those who engage in such reckless actions responsible for their conduct.”

The $2.6 billion civil monetary penalty resolves claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).  FIRREA authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud.  The settlement expressly preserves the government’s ability to bring criminal charges against Morgan Stanley, and likewise does not release any individuals from potential criminal or civil liability.  In addition, as part of the settlement, Morgan Stanley promised to cooperate fully with any ongoing investigations related to the conduct covered by the agreement.

In conjunction with today’s announcement of the federal government’s settlement with Morgan Stanley, the states of New York and Illinois – also members of the RMBS Working Group – have announced settlements with Morgan Stanley for $550 million and $22.5 million, respectively, arising from its sale of RMBS.  Among other resolutions, Morgan Stanley previously paid $225 million to  resolve claims brought by the National Credit Union Administration arising from losses related to corporate credit unions’ purchases of RMBS; $1.25 billion to resolve claims by Federal Housing Finance Agency (FHFA) for Morgan Stanley’s alleged violations of federal and state securities laws and common law fraud in connection with RMBS purchased by Fannie Mae and Freddie Mac; and $86.95 million to resolve federal and state securities laws claims brought by the Federal Deposit Insurance Corporation as receiver on behalf of failed financial institutions.  Morgan Stanley also previously entered into a consent decree with the U.S. Securities and Exchange Commission (SEC) to pay $275 million to resolve certain RMBS claims.  With today’s announcement, Morgan Stanley will have paid nearly $5 billion to members of the RMBS Working Group in connection with its sale of RMBS.  

Today’s settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group, which has recovered billions of dollars arising from misconduct related to the financial crisis.  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 attorneys, investigators, analysts and staff from multiple state and federal agencies, including the Department of Justice, U.S. Attorneys’ Offices, the FBI, the SEC, the Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the FHFA Office of Inspector General (OIG), the Office of the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board’s OIG, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network and multiple state Attorneys General offices around the country.  The RMBS Working Group is led by Director Joshua Wilkenfeld and five co-chairs: Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division, Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, Director Andrew Ceresney of the SEC’s Division of Enforcement, U.S. Attorney John Walsh of the District of Colorado and New York Attorney General Eric Schneiderman.

“The securitization of defective mortgages and the billions of dollars that were lost as a result caused such a hardship to our economy, the housing industry and our nation as a whole that we are still feeling the effects years after,” said Deputy Inspector General for Investigations Rene Febles of FHFA-OIG.  “Morgan Stanley is responsible for their role, which caused enormous losses to investors.  This settlement is one step in recovering from those losses.  We are proud to work with the RMBS Working Group and the U.S. Department of Justice on this and all RMBS matters.”

The settlement was the result of a coordinated effort between the Civil Division’s Commercial Litigation Branch and the U.S. Attorney’s Office of the Northern District of California, with investigative support from FHFA-OIG and the Special Inspector General for the Troubled Asset Relief Program.

JPMORGAN CHASE ORDERED TO PAY $100 MILLION FOR DISCLOSURE FAILURES

FROM:  U.S. COMMODITY FUTURES 

CFTC Orders JPMorgan Chase Bank, N.A. to Pay $100 Million for Failure to Disclose Conflicts of Interest

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against JPMorgan Chase Bank, N.A. (JPMCB). The Order finds that JPMCB failed to disclose certain conflicts of interest to clients of its U.S.-based wealth management business, J.P. Morgan Private Bank. Specifically, JPMCB failed to fully disclose its preference for investing its client funds in certain commodity pools or exempt pools, namely hedge funds and mutual funds managed and operated by an affiliate and subsidiary of JP Morgan Chase & Co. (Proprietary Funds). JPMCB also failed to disclose its preference for investing its clients’ funds in third-party-managed hedge funds, each a commodity pool or exempt pool, that shared management and/or performance fees with a JPMCB affiliate. JPMorgan has admitted to facts set forth in the Order and acknowledged that its conduct violated the Commodity Exchange Act and/or related Regulations.

The CFTC Order requires JPMCB to pay a $40 million civil monetary penalty, to pay disgorgement in the amount of $60 million, and to cease and desist from further violations as charged.

Aitan Goelman, the CFTC’s Director of Enforcement, commented: “Investors are entitled to know if a bank managing their money favors placing investments in its own proprietary funds or other vehicles that generate fees for the bank. As demonstrated by the enforcement actions made public today, we and our regulatory partners will aggressively pursue financial institutions that fail to provide adequate disclosures to clients.”

As set forth in the Order, JPMCB serves as the investment manager for certain of its clients’ investment management accounts (IM Accounts) and certain private funds, known as the Global Access Portfolios (GAP), which are also offered to JPMCB clients. Since at least 2008, JPMCB has preferred to invest IM Accounts and GAP private fund assets in Proprietary Funds and has expected that a significant percentage of relevant portfolio assets will be invested in Proprietary Funds. Although JPMCB had historically made some disclosures regarding this preference, JPMCB did not disclose its preference for Proprietary Funds from January 2011 through January 2014, and never disclosed its preference for investment in proprietary hedge funds prior to January 2014.

Additionally, prior to August 2015, JPMCB failed to disclose its preference to invest IM accounts and GAP private funds in third-party hedge funds (each a commodity pool or exempt pool) for which JPMCB acts as the placement agent and earns fees for placement, shareholder servicing and other ongoing services.

These placement agent fees are typically referred to as “retrocessions.” Since at least 2005, JPMCB sought “retrocessions” from third-party hedge fund managers that were under consideration for IM account and GAP private funds investments. During introductory meetings, third-party hedge fund managers were typically asked about their willingness to pay retrocessions. If a manager declined to pay retrocessions, JPMCB typically sought an alternative manager with a similar investment strategy who was willing to pay JPMCB retrocessions. JPMCB did not disclose its preference for retrocession-paying third-party hedge fund managers until August 2015, when it added additional language to certain client documentation.

The CFTC Order is being announced simultaneously with the issuance of an order by the U.S. Securities and Exchange Commission settling charges for related conduct. The CFTC thanks and appreciates the assistance of the U.S. Securities and Exchange Commission.

The CFTC Division of Enforcement staff members responsible for this case are Neel Chopra, Katie Rasor, Chad Silverman (former staff), K. Brent Tomer, Lenel Hickson and Manal Sultan.