InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Buckley Sandler Secures Second Circuit Victory in Lender-Placed Insurance Rate Case
On July 22, BuckleySandler secured a substantial victory before the United States Court of Appeals for the Second Circuit. Representing a global insurance company in a nationwide lender-placed insurance (“LPI”) class action brought by mortgage borrowers, the Firm argued on interlocutory appeal that the Second Circuit should reverse the district court’s denial of its motion to dismiss on the basis of the “filed-rate” doctrine. Ordinarily, the filed-rate doctrine provides that rates approved by the applicable regulatory agency – including LPI rates – are per se reasonable and unassailable in judicial proceedings brought by ratepayers. The district court, however, held that the plaintiffs’ claims were not barred by the doctrine because, rather than directly billing the plaintiffs for the LPI premiums, the insurance company initially charged the premiums to the plaintiffs’ mortgage servicer who, in turn, charged the borrowers. The Second Circuit reversed the Southern District of New York’s decision, holding that the filed-rate doctrine applied notwithstanding the fact that the mortgage servicer served as an intermediary to pass on the LPI rates to borrowers. Because the plaintiffs’ claims ultimately rested on the premise that the LPI rates approved by the regulators were too high and included impermissible costs, the Second Circuit held that the claims were barred by the filed-rate doctrine.
FIFA Investigation Updates: Plea Agreement with American FIFA Official Unsealed
On June 15, the U.S. District Court for the Southern District of New York unsealed a 2013 plea agreement under which American FIFA Executive Committee Member Chuck Blazer secretly pleaded guilty to ten charges related to corruption in the soccer organization. Mr. Blazer agreed to forfeit more than $1.9 million, and to pay back-taxes and penalties on more than $11 million in unreported income.
According to the plea agreement, Mr. Blazer began cooperating with the DOJ’s investigation in December of 2011, even agreeing to work undercover making secret recordings. The unsealing of the plea agreement is the latest development in the ongoing fallout from the racketeering, wire fraud, and money laundering indictments announced three weeks ago by the DOJ against soccer executives at FIFA and others tied to the organization. Mr. Blazer’s testimony at his plea hearing in November 2013 was unsealed two weeks ago.
Southern District of New York Denies Class Certification in Fair Lending Suit Against Global Investment Bank
On May 14, the District Court for the Southern District of New York denied class certification status in a fair lending suit brought by the ACLU and NCLC against a global investment bank. Adkins v. Morgan Stanley, No. 12-CV-7667 (VEC) (S.D.N.Y. May 14, 2015). The Plaintiffs had alleged that the bank, as a significant purchaser of subprime residential mortgage loans, had caused a disparate impact on African-American borrowers in Detroit in violation of the Fair Housing Act and the Equal Credit Opportunity Act. In an exhaustive 50-page opinion, the court denied class certification on multiple grounds, including the variation in loan types and the role of broker discretion. BuckleySandler anticipates the ruling will be widely cited in future fair lending class actions.
Second Circuit Affirms Dismissal of Lawsuit over Mortgage Auction Terms
On March 31, 2015, the Second Circuit in Truman Capital Advisors LP v. Nationstar Mortgage, LLC, No. 14-cv-3533 (2d Cir. Mar. 31, 2015), affirmed the dismissal of a lawsuit involving the auction sale of hundreds of non-performing residential mortgage loan notes. Truman Capital is an investment manager that was the winning bidder in an auction of non-performing mortgage notes that were being sold by Nationstar Mortgage, a mortgage servicing company. After the auction, the mortgage servicing company exercised its contractual right not to complete the sale of the notes for the high bid price. The investment manager then sued the mortgage servicing company in the Southern District of New York, alleging that the auction terms gave the winning bidder the right to purchase the notes. The mortgage servicer defended on the grounds that the auction terms permitted the seller to refuse to enter into a contract for the sale of the notes even after a high bidder was recognized. The district court and the Second Circuit agreed, holding that no obligation would be binding on the seller unless and until the seller executed a loan sale agreement, which never occurred. BuckleySandler LLP represented Nationstar in this matter.
Fed and OCC Assert Bank Examination Privilege in Mortgage-Backed Securities Class Action
On March 23, the Federal Reserve and the Office of the Comptroller of the Currency – both non-parties in the suit – filed briefs requesting that a district court reject a motion to compel discovery of over 30,000 documents held by a large bank. Arguing that the documents contain confidential supervisory information, the regulators asserted the bank examination privilege – “a qualified privilege that protects communications between banks and their examiners in order to preserve absolute candor essential to the effective supervision of banks.” As for scope, the regulators argued that the privilege covers the documents because they provide agency opinion, not merely fact, and that any factual information was nonetheless “inextricably linked” with their opinions. Additionally, they contended that the privilege is not strictly limited to communications from the regulator to the bank – instead, it may also cover communications made from the bank to the regulator and communications within the bank. As for procedure, the regulators claimed that a plaintiff is required to request the disclosure of privileged documents through administrative processes before seeking judicial relief, a requirement they contend exists even where a defendant bank also holds copies of the documents. Finally, the regulators argued in the alternative that the lead plaintiff has not shown good cause to override the qualified privilege, as the interests of the government in protecting the supervisory information outweighs the interest of the plaintiffs in production.
Federal and State Agencies Announce $714 Million FX Settlement
On March 19, four federal and state agencies –DOJ, the Department of Labor (DOL), the SEC, and New York Attorney General – entered into a proposed $714 million settlement agreement against a large bank to resolve allegations of fraudulent conduct involving the pricing and misleading representation of a specific foreign exchange product. According to the settlement, for over a decade the bank misled clients about the pricing they received on the bank’s automatic platform used to execute trades on the clients’ behalf. The bank quoted clients prices that were at or near the least favorable interbank rate, purchased the most favorable interbank rate for themselves, and sold the highest prices to clients, profiting from the difference. Under the proposed settlement, the bank will pay (i) a $167.5 million civil penalty to the DOJ to resolve allegations brought under federal statutes including FIRREA and the False Claims Act; (ii) $167.5 million to the State of New York to resolve claims brought under the Martin Act; (iii) $14 million to the DOL for ERISA claims, (iv) $30 million to the SEC to resolve violations of the Investment Company Act, and (v) $335 million to settle private class action suits filed by customers. The bank also agreed to end its employment relationship with senior executives involved in the conduct.
New York DFS Takes Action Against Bank for BSA/AML Compliance Deficiencies
On March 12, the New York DFS issued a consent order against a Germany-based global bank for alleged Bank Secrecy Act and other anti-money laundering (BSA/AML) compliance violations that occurred between 2002 and 2008. According to the DFS’s press release, certain bank employees were selected “to manually process Iranian transactions — specifically, to strip from SWIFT payment messages any identifying information that could trigger OFAC-related controls and possibly lead to delay or outright rejection of the transaction in the United States.” The DFS also alleges that the bank’s New York branch failed to implement proper BSA/AML compliance thresholds, allowing certain alerts regarding suspicious transactions to be excluded. Under the terms of the consent order, the bank must pay a $1.45 billion penalty, to be distributed as follows: $610 million to the DFS; $300 million to the U.S. Attorney’s Office for the Southern District of New York; $200 million to the Federal Reserve; $172 million to the Manhattan District Attorney’s Office; and $172 million to the U.S. DOJ. Additionally, the order requires that the bank “terminate individual employees who engaged in misconduct, and install an independent monitor for Banking Law violations in connection with transactions on behalf of Iran, Sudan, and a Japanese corporation that engaged in accounting fraud.”
U.S. Marshals to Auction 50,000 Bitcoins Seized During Investigation of Silk Road Operator
On February 18, the U.S. Marshals Service announced that it will auction 50,000 bitcoins seized from wallet files found on computer hardware belonging to Ross Ulbricht, who was recently convicted in connection with his operation and ownership of Silk Road, a website that functioned as a criminal marketplace for illegal goods and services. The auction is scheduled for March 5. On February 4, a federal jury in the Southern District of New York found Ulbricht guilty on seven federal charges. In the court’s January 27, 2014 Stipulation and Order for Interlocutory Sale of Bitcoins, the Federal Government and Ulbricht agreed that “the Computer Hardware Bitcoins [were] to be liquidated or sold by the Government…”
Large Global Bank Settles Legacy Claims Surrounding Mortgage-Backed Securities
On February 2, a major bank agreed to a $500 million settlement to resolve years of litigation surrounding the sale of mortgage securities by Bear Stearns, which the company acquired. In re: Bear Stearns Mortgage Pass-Through Certificates Litigation, No. 1:08-cv-08093-LTS (S.D.N.Y. Feb. 2, 2015). The litigation concerned the sale of $17.58 billion in mortgage securities by Bear Stearns, and alleged that the former investment bank “misrepresented the quality of the loans in the loan pools.” Although investors did not accuse Bear Stearns of fraud, they alleged that it was strictly liable and negligent for the losses incurred, evidenced by the downgrading of most mortgage certificates from a AAA rating to below investment grade, or “junk” status. In the settlement, the New York-based institution denied any wrongdoing relating to the mortgage sales of Bear Stearns, which occurred during 2006-2007 prior to acquisition.
Silk Road Operator Found Guilty
On February 4, a federal jury found Ross Ulbricht guilty on all seven federal charges brought against him in connection with his role in operating the Silk Road website, including narcotics and money laundering charges. According to the government, Mr. Ulbricht created, owned, and operated the website, which functioned as a criminal marketplace for illegal goods and services until the website was shut down in October 2013. This marketplace allowed individuals to sell controlled substances and illegal services, and included a Bitcoin-based payment system that allowed buyers and sellers to conceal their identities. According to Ulbricht’s attorneys, while Ulbricht did create the Silk Road, he turned over operation of the website to other individuals who eventually grew the site into the vast criminal marketplace. Ulbricht faces a sentence of 20 years to life in prison and is scheduled to be sentenced by Judge Forrest on May 15. Ulbricht’s attorney described the verdict as “very disappointing” and is planning to appeal. U.S. v. Ulbricht, No-14-cr-68 (S.D. NY. Feb. 3, 2014).