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Financial Services Law Insights and Observations


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  • 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.


  • SEC Chairman Announces Departure, President Obama Names Replacement


    On November 26, SEC Chairman Mary Shapiro announced that she will step down from her position on December 14, 2012, after serving as Chairman for nearly four years. The SEC press release described her tenure as one during which she “strengthened, reformed, and revitalized the agency” while overseeing “a more rigorous enforcement and examination program” and implementing new rules. On the same day, President Obama designated SEC Commissioner Elisse Walter as Chairman.


  • Residential Mortgage-Backed Securities Working Group Announces Several New Cases


    On November 20, New York Attorney General Eric Schneiderman, one of the Co-Chairs of the federal-state Residential Mortgage-Backed Securities (RMBS) Working Group, announced a new case filed in the New York State Supreme Court alleging Martin Act violations by a securities firm and several of its affiliates in connection with the offering of RMBS. The complaint charges that the firms made fraudulent misrepresentations and omissions to promote the sale of RMBS to private investors and deceived investors regarding the care with which the firms evaluated the quality of loans included in certain RMBS offerings. The suit claims that investors suffered cumulative losses over $11 billion on RMBS sponsored and underwritten in 2006 and 2007. The DOJ’s Financial Fraud Enforcement Task Force, of which the RMBS Working Group is a part, noted the significant federal-state coordination that led to the filing, including the “significant” contributions of the FHFA’s Inspector General, as well as assistance from the SEC and Assistant U.S. Attorneys from across the country.

    On November 16 the SEC announced that it had obtained more than $400 million from two firms alleged to have misled investors in RMBS. In cases coordinated with the RMBS Working Group, the SEC charged that both firms failed to fully disclose their bulk settlement practices, which involved retaining cash from the settlement of claims against mortgage loan originators for problem loans that the firms had sold into RMBS trusts, and which they no longer actually owned. The SEC also claimed, among other things, that one of the firms misstated information concerning the delinquency status of loans that served as collateral for an RMBS offering it had underwritten, while the second firm allegedly applied different quality review procedures for loans that it sought to put back to originators and instituted a practice of not repurchasing such loans from trusts unless the originators had agreed to repurchase them.

    State Attorney General RMBS SEC FHFA

  • Federal District Court Dismisses Virginia State Law Claims in FHFA RMBS Suit


    On November 19, the U.S. District Court for the Southern District of New York held that the FHFA’s state-law claims against a financial institution with regard to the offering of certain residential mortgage-backed securities (RMBS) could not survive because, unlike federal law, the state law does not apply to the “offering” of securities. Fed. Housing Fin. Agency v. Barclays Bank PLC, No. 11-6190, slip op. (S.D.N.Y. Nov. 19, 2012). The case is one of sixteen in which the FHFA alleges as conservator for Fannie Mae and Freddie Mac that billions of dollars of RMBS purchased by Fannie Mae and Freddie Mac were based on offering documents that contained materially false statements and omissions. In prior rulings in this series of cases the court generally has denied the financial institutions’ motions to dismiss, with the lead case currently pending on appeal to the Second Circuit. The instant case, however, presented a unique issue with regard to the FHFA’s state law claims. As the court explained, the federal Securities Act’s private liability provisions apply to any person who “offers or sells” a security and broadly defines “offer,” while the Virginia Securities Act “omits the term ‘offer’ from its otherwise identical private liability provision.” The court determined that through inaction, Virginia “has purposefully sought to ensure that the scope of private liability under its statutes is more limited than that under federal law” and its law does not apply to the offering of securities, only the sale. The court dismissed the FHFA’s state law claims but allowed all other claims to proceed based on the reasoning presented in prior decisions.


  • SEC Reports Results of 2012 Enforcement and Whistleblower Programs


    On November 14, the SEC reported the results of its enforcement program for the fiscal year ending September 30, 2012. During the year, the SEC filed 734 enforcement actions, which included an increasing number of actions focused on highly complex products, transactions, and practices. The SEC obtained orders requiring more than $3 billion in penalties and disgorgement, an 11% increase over the amount required in 2011. The SEC believes these metrics indicate “sustained high-level performance,” which it attributes to various reforms and innovations put in place over the past two years. The announcement highlights certain cases related to (i) the financial crisis, (ii) insider trading, (iii) investment advisers, (iv) broker-dealers, (v) FCPA, and (vi) municipal securities. On November 15, the SEC released its Annual Report on the Dodd-Frank Whistleblower Program. The annual report provides an overview of the program and notes that the SEC received 3,001 whistleblower tips from all 50 states and from 49 countries, including a tip that resulted in the first ever award under the program. There were 143 enforcement judgments and orders issued with potential for a whistleblower award. The most common complaints related to corporate disclosures and financials (18.2%), offering fraud (15.5%), and manipulation (15.2%).

    SEC Whistleblower Enforcement


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