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New York Court of Appeals rules claims under Martin Act governed by three-year statute of limitations
On June 12, the New York Court of Appeals issued a 4 to 1 ruling that claims brought under the state’s Martin Act are governed by a statute of limitations of three years, not six. Former New York Attorney General Eric Schneiderman filed a suit against a bank alleging that in 2006 and 2007, the bank misrepresented the quality of residential mortgage-backed securities it created and sold, bringing its claims under the state’s Martin Act, which grants the Attorney General of New York expanded liability for investigating and enjoining fraudulent practices in the marketing of stocks, bonds and other securities beyond what can be recognized under the common law fraud statute. The bank argued that the action was time-barred because too much time had elapsed to bring claims under the Martin Act, and an argument ensued as to whether the three-year statute of limitations that applies to actions to recover upon a liability or penalty imposed by a statute, or the six-year statute of limitations that applies to an action based upon fraud, applied. In its decision, the majority wrote that the three-year period applied because the Martin Act “expands upon, rather than codifies, the common law of fraud” and “imposes numerous obligations—or ‘liabilities’—that did not exist at common law, justifying the imposition of a three-year statute of limitations.” The court concluded that the broad definition of “fraudulent practices” encompasses wrongs that are not otherwise cognizable under the common law and “dispenses, among other things, with any requirement that the Attorney General prove scienter or justifiable reliance on the part of investors.” The court remanded the case to the New York State Supreme Court for further proceedings concerning the state’s claim against the bank for alleged violations of Executive Law Section 63(12).
On June 12, the SEC issued an order against a brokerage firm to settle allegations that it violated antifraud provisions of federal securities laws when it failed to properly supervise traders who persuaded customers with false or misleading statements to overpay for residential mortgage-backed securities (RMBS). According to the SEC, the firm misled customers about how much the firm paid for the securities and illegally profited from the improper markups that were, in some cases, allegedly more than twice as much as what the customers should have paid. The order claims that the firm did not charge a traditional commission on the transactions, but rather derived profits “from the difference between the price at which [the firm] sold securities and the price at which it had purchased them.” Additionally, while the firm had policies and procedures to monitor and prevent excessive markups on RMBS transactions, they were “not reasonably designed and implemented.” While neither admitting nor denying the SEC’s charges, the firm agreed to be censured for failing reasonably to supervise its traders, to pay a fine of approximately $5.2 million, and to pay more than $10.5 million in disgorgement and interest to affected customers.
International bank agrees to pay $2 billion in civil penalties to settle allegations of RMBS misconduct
On March 29, the DOJ announced a $2 billion settlement with an international bank and several of its affiliates to resolve allegations of misrepresentation in the sale of residential mortgage-backed securities, in violation of the Financial Institutions Reform, Recovery, and Enforcement Act. The bank agreed to pay the civil monetary penalty in exchange for dismissal of a civil action filed in 2016. According to the settlement agreement, the investigation focused on 36 securitizations by the bank between 2005 and 2007. In addition to the alleged misrepresentations in the offering documents, the bank allegedly misled investors about the quality of the mortgage loans backing the deals. Separately, two former bank executives agreed to pay a combined $2 million to resolve claims brought against them individually. The bank did not admit to any liability or wrongdoing.
New York Attorney General reaches $230 million settlement for international company’s RMBS misconduct
On March 21, the New York Attorney General announced a $230 million settlement with two divisions of an international financial services company to resolve allegations that the company made misrepresentations in the sale of residential mortgage-backed securities (RMBS) in violation of New York’s Martin Act and Section 63(12) of New York’s Executive Law. According to the settlement agreement, the investigation focused on 15 securitizations sold by the company between 2006 and 2007. In addition to the alleged misrepresentations in each of the securitizations’ prospectus and prospectus supplements, the company also included loans in the sales portfolio that diligence reports flagged for underwriting and valuation issues. The $230 million settlement includes $41 million to New York State and $189 million to consumer relief programs.
On March 6, the New York Attorney General announced a $500 million settlement with an international bank to resolve allegations of misrepresentations in the sale of residential mortgage-backed securities (RMBS), in violation of New York’s Martin Act and Section 63(12) of New York’s Executive Law. According to the settlement agreement, the investigation focused on 44 securitizations sold by the bank between 2006 and 2007. In addition to the alleged misrepresentations in the offering documents, the bank also included loans in the sales portfolio that due diligence vendors warned did not comply with underwriting guidelines. The $500 million settlement includes $100 million in damages to New York State and $400 million to consumer relief programs.
As previously covered by InfoBytes, the bank recently settled with the California Attorney General for misrepresentations while selling RMBS to California’s public employee and teacher pension fund.
On December 22, the California Attorney General announced a $125 million settlement with an international bank to resolve allegations of misrepresentations while selling residential mortgage-backed securities to California’s public employee and teacher pension funds. According to Attorney General Xavier Becerra’s office, an investigation found that descriptions of the RMBS “failed to accurately disclose the true characteristics of many of the underlying mortgages” to the state investors. Additionally, the international bank allegedly failed to adequately perform due diligence checks to remove poor quality loans from the investment pool, leading to millions of dollars of loss to the pension funds.
Global Securities Firm Agrees to Pay Million Dollar Penalty Related to Alleged Securities Fraud Scheme
On October 26, the United States Attorney for the District of Connecticut announced a non-prosecution agreement between the office and a global securities firm. The resolution was a result of a government investigation, which concluded that the firm perpetrated a scheme to defraud its customers in trades of residential mortgage-backed securities (RMBS) and collateralized loan obligations (CLOs) between 2008 and 2013. Specifically, the investigation alleges that the firm, (i) misrepresented material facts in trades and monetarily benefited from the misrepresentations; (ii) instructed traders to use fraudulent trading practices; (iii) lied to affected customers who suspected the fraudulent activity; (iv) ignored complaints from its own employees regarding the fraudulent activity; (v) deceived rival broker-dealers in trades by using a purportedly independent propriety trading operation; and (vi) concealed the fraudulent conduct from customers and employees in order to prevent or delay discovery.
The agreement, which was entered into on October 25, requires that the firm pay a $35 million monetary penalty and pay around $9 million in restitution to affected customers.
On July 12, the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac (GSEs), announced a $5.5 billion settlement with an international bank. The settlement resolves FHFA’s claims, lodged in a federal lawsuit in the District of Connecticut, that the bank violated federal and state securities laws in relation to residential mortgage-backed securities (RMBS) trusts purchased by the GSEs between 2005 and 2007. The settlement covers all RMBS “issued, sponsored, sold, or underwritten by . . . [d]efendant between January 1, 2004 and December 31, 2008,” which is intended to include all securities for which FHFA brought claims against the bank in the District of Connecticut action. Under the terms of the agreement, the bank will pay $4.525 billion of the settlement amount to Freddie Mac, and approximately $975 million to Fannie Mae.
As a result of last Tuesday’s election, Republicans will control the White House and both houses of Congress in 2017. It is likely there ultimately will be some significant changes affecting financial services regulation and enforcement, but they will take time to implement. The President-elect has articulated sympathy for less regulation and opposition to the Dodd-Frank Act but also an unconventional economic populism. The Congressional Republicans have already prepared, and in some cases passed, more specific changes to limit and cabin the CFPB. We anticipate efforts focused on changing the CFPB Director and CFPB structure, reduced regulation that may encourage product innovation (particularly in the FinTech space), and potentially less emphasis on certain Department of Justice (“DOJ”) enforcement initiatives such as fair lending and the Residential Mortgage-Backed Securities (“RMBS”) task force. Nonetheless, we expect continued enforcement and supervisory activity, including by states and by prudential regulators that are less directly tied to shifting political winds.
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Questions regarding the matters discussed in this alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeremiah S. Buckley, (202) 349-8010
- Joseph M. Kolar, (202) 349-8020
- John P. Kromer, (202) 349-8040
- Jon D. Langlois, (202) 349-8045
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Christopher M. Witeck, (202) 349-8051
On October 3, Connecticut AG Jepsen, alongside Banking Commissioner Jorge Perez, resolved a four-year investigation into a Connecticut-based investment bank’s residential mortgage-back securities (RMBS) practices. According to the consent order, from January 2005 to December 2008, the investment bank was the lead securities underwriter of about 250 RMBS deals with a value of more than $250 billion. The state alleged, among other things, that the bank’s due diligence process on the 250 RMBS deals was “inadequate and resulted in omissions and misstatements in the representations made to the public and investors about the securities.” The $120 million settlement is Connecticut’s largest single settlement in history.