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DOJ, State AGs File Civil Fraud Suits against Ratings Agency over RMBS Ratings; Buckley Offers Complimentary FIRREA Webinar
On February 5, the DOJ filed a lawsuit in the Central District of California against a major credit rating agency, alleging that the firm defrauded investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by issuing inflated ratings that misrepresented the securities’ true credit risks, and by falsely representing that its ratings were uninfluenced by its relationships with investment banks. According to the complaint, the agency publicly represented that its ratings of RMBS and CDOs were objective and independent, notwithstanding the potential conflict of interest posed by the agency being selected to rate securities by the investment banks that sold those securities. The complaint alleges that, in fact, fear of losing market share and profits led the company to (i) weaken the ratings criteria and analytical models it used to assess credit risks posed by RMBS and CDOs, and (ii) issue inflated ratings on hundreds of billions of dollars’ worth of CDOs. When CDO’s rated by the agency failed, investors lost billions of dollars. The DOJ brings claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), alleging that the company engaged in (i) mail fraud affecting federally insured financial institutions, (ii) wire fraud affecting federally insured financial institution, and (iii) financial institution fraud, and seeks civil penalties up to the amount of the losses suffered as a result of the alleged violations. The DOJ believes such losses total $5 billion to date.
Also on February 5, the attorneys general for at least 12 states and the District of Columbia announced state court actions against a ratings agency in coordination with a parallel federal suit filed on the same day, as described above. The actions announced by the AGs for Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Iowa, Maine, Missouri, North Carolina, Pennsylvania, Tennessee, and Washington, allege violations of various state laws related to the same general conduct outlined in the federal complaint, i.e. that the ratings agency defrauded investors, including state pension funds, by inflating ratings of certain RMBS and CDOs for private gain, while publicly maintaining that the ratings were objective assessments of the risks posed by the securities. At least three states, Connecticut, Illinois, and Mississippi, are continuing to pursue similar, previously filed, suits against the same agency.
SEC Names Acting Enforcement Director
On January 31, the SEC announced that George Canellos will serve as Acting Director for the Division of Enforcement. Mr. Canellos currently is the Deputy Director of that division, and effective February 8, 2013, will fill the director role vacated by the departing Robert Khuzami. Mr. Canellos was appointed Deputy Director in June 2012 and, according to the release, has been instrumental in developing the division’s Cooperation Program, in generating numerous programmatic, policy, and legislative initiatives, and in critical decisions on national priority enforcement actions. He previously served three years as Director of the SEC’s New York Regional Office.
President Obama Re-nominates Richard Cordray for CFPB Director, Nominates Mary Jo White for SEC Chair
On January 24, President Obama announced his re-nomination of current CFPB Director Richard Cordray. Mr. Cordray has led the Bureau since January 2012 when President Obama used his recess appointment authority to install the CFPB director. Absent Senate confirmation, Mr. Cordray’s recess appointment expires at the end of this year. Further, the constitutionality of that appointment may be called into question by a recent federal appellate court decision addressing other recess appointments. Also on January 24, President Obama nominated Mary Jo White for Senate confirmation to serve as Chairman of the SEC. Ms. White is a former U.S. Attorney for the Southern District of New York, during which time she led high-profile prosecutions of organized crime members and terrorists. Most recently she was in private practice.
FHFA Settles One of Many Pending MBS Suits
On January 23, the FHFA settled and voluntarily dismissed one of the lawsuits it initiated in 2011 as conservator for Fannie Mae and Freddie Mac, alleging against many parties that billions of dollars of MBS purchased by the GSEs were based on offering documents that contained materially false statements and omissions. FHFA v. Gen. Elec. Co., No. 11-7048, Notice of Dismissal (Jan. 23, 2013). This is the first settlement to be announced in connection with this series of cases; the lead case currently is on appeal to the U.S. Court of Appeals for the Second Circuit. Although the FHFA did not release any details related to the settlement, in reports the FHFA’s general counsel described the resolution as “consistent with FHFA’s responsibilities as conservator.”
Federal Agencies Announces Numerous Appointments
SEC Names Office of Market Intelligence Chief. On January 22, the SEC announced that Vincente Martinez will serve as the head of the Office of Market Intelligence, a unit of the Enforcement Division that collects and evaluates tips, complaints and referrals. Mr. Martinez rejoins the SEC from the CFTC where he served as the first director of that agency’s whistleblower office. He previously spent eight years in the SEC’s Enforcement Division, most recently helping to develop Enforcement Division and SEC-wide policies and procedures for handling tips, complaints, and referrals. Lori Walsh, who is currently serving as the Acting Chief of the Office of Market Intelligence, will serve as Deputy Chief of the office.
FHFA Announces Deputy Director for Housing Mission and Goals. On January 15, the FHFA announced that beginning in March Sandra Thompson will serve as Deputy Director of the Division of Housing Mission and Goals with responsibility for overseeing the FHFA’s housing and regulatory policy, financial analysis, and policy research and analysis of housing finance and financial markets. Ms. Thompson will leave her current position as Director of the Division of Risk Management Supervision at the FDIC where she led the agency’s examination and enforcement program for risk management and consumer protection. The FHFA also promoted Nina Nichols to serve as Deputy Director of the Division of Supervision Policy and Support.
OCC Announces Chief Counsel. Last week, the OCC announced Amy Friend as the agency’s Chief Counsel beginning in February, replacing Julie Williams who retired last fall. Ms. Friend is a former assistant chief counsel at the OCC and served as chief counsel to the Senate Banking Committee during the development of the Dodd-Frank Act.
SEC Announces Departure of Enforcement Director, Names New General Counsel and Chief Accountant
On January 9, the SEC announced that its Enforcement Director, Robert Khuzami, is leaving the agency. Mr. Khuzami was appointed to the position in February 2009. The SEC press release credits him with, among other things, restructuring the division and aggressively pursuing financial crisis-related cases and insider trading enforcement, which, together with other enforcement activities, yielded the all-time record number of 735 SEC enforcement actions in FY 2011 and another 734 actions in FY 2012. Earlier in the week, the SEC announced that Geoffrey Aronow will serve as the agency’s General Counsel. Mr. Aronow previously served as the Director of the Division of Enforcement at the CFTC for nearly four years, but most recently was in private practice. Last week, the SEC named Paul Beswick as Chief Accountant, head of the agency office responsible for establishing and enforcing accounting and auditing policy. Mr. Beswick joined the SEC in September 2007 and has filled the position in an acting role since July 2012.
NCUA Files Another Major MBS Suit
On January 4, the NCUA announced another major mortgage-backed securities lawsuit. Similar to prior suits, the NCUA alleges on behalf of three insolvent corporate credit unions that a mortgage securitizer violated federal and state securities laws in the sale of $2.2 billion in mortgage-backed securities to the credit unions. In this case, the NCUA is suing a securities firm for alleged wrongdoing by companies the defendant later acquired. The NCUA complaint alleges the acquired firms made numerous misrepresentations and omissions of material facts in the offering of the securities sold to the failed corporate credit unions, and that underwriting guidelines in the offering documents were “systematically abandoned.” The NCUA argues that these actions caused the credit unions to believe the risk of loss was low, when, in fact, the opposite was true. When the securities lost value, the NCUA claims, the credit unions were harmed and forced into insolvency.
SEC Names Acting Directors for Corporation Finance, Trading and Markets
On December 17, the Securities and Exchange Commission (SEC) announced that Lona Nallengara will serve as Acting Director of the Division of Corporation Finance, replacing Meredith Cross who recently announced her departure. Mr. Nallengara has served as Deputy Director for Legal and Regulatory Policy of the Division since March 2011 and has been responsible for overseeing the Division’s offices of Chief Counsel, Enforcement Liaison, International Corporate Finance, Mergers and Acquisitions, and Small Business Policy. The SEC also announced that John Ramsay will replace Robert Cook, Director of the Division of Trading and Markets, on an acting basis when Mr. Cook departs after a short transition period. Mr. Ramsay has served since September 2010 as a Deputy Director for the Division and is responsible for broker-dealer financial responsibility, risk oversight, and clearance and settlement functions. He has played a key role in the advancement of rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
NCUA Files Its Largest MBS Suit To Date
On December 17, the National Credit Union Administration (NCUA) announced a lawsuit on behalf of four insolvent credit unions against a mortgage securitizer in which the agency alleges violations of federal and state securities laws in the sale of $3.6 billion in mortgage-backed securities. The complaint, which the NCUA filed in the U.S. District Court for the District of Kansas, claims that the securitizer made numerous misrepresentations and omissions in the offering documents regarding adherence to the originators’ underwriting guidelines, which concealed the true risk associated with the securities and routinely overvalued them. When the allegedly risky securities lost value, the NCUA claims, the credit unions were forced into conservatorship and liquidated as a result of the losses sustained. The NCUA has eight similar suits pending, and it has previously settled similar claims for more than $170 million with three other mortgage securities firms.
Sixth Circuit Affirms Dismissal of Suit Challenging MBS Ratings by Major Credit Reporting Agencies
On December 3, the U.S. Court of Appeals for the Sixth Circuit affirmed the dismissal of claims brought by Ohio public employee pension funds against major credit-rating agencies related to the sale of mortgage-backed securities. Ohio Police & Fire Pension Fund v. Standard & Poor’s Financial Services LLC, No. 11-4203, 2012 WL 5990337 (6th Cir. Dec. 3, 2012). The pension funds claim to have suffered estimated losses of $457 million from investments in MBS made between 2005 and 2008 allegedly caused by their reasonable reliance on the agencies’ false and misleading MBS ratings. The court affirmed the district court’s dismissal and held that the funds’ allegations lacked the requisite specificity to establish either a violation of Ohio’s “blue sky” laws or common-law negligent misrepresentation. Because the agencies’ fees were fixed rather than contingent on the success or proceeds of the sale, the court held that the agencies did not profit from the sale of MBS under the plain language of the statute. The court also rejected the claim that the Agencies either aided or participated in securities fraud because (i) the pension funds offered no facts from which it was possible to conclude that an entity other than the Agencies engaged in securities fraud, and (ii) the pension funds did not adequately plead that the Agencies themselves made affirmative misrepresentations as to the MBS. In addition, the court affirmed the dismissal of the funds’ common-law negligent misrepresentation claims, determining that under both New York and Ohio law the agencies did not have a relationship with the funds that would establish a duty of care. Finally, the court found that the agencies’ MBS ratings were predictive opinions rather than affirmative false statements, and that the funds failed to adequately allege, beyond general criticism of their business practices, that the agencies did not believe the correctness of their ratings.