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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.
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%).
ACLU Fair Lending Case Against Mortgage Securitizer Highlights New Fair Lending Litigation Risk; Fair Lending Litigation Against Lenders Continues
On October 15, the ACLU filed a putative class action suit on behalf of a group of private citizens against a financial institution alleged to have financed and purchased subprime mortgage loans to be included in mortgage backed securities. The complaint alleges that the institution implemented policies and procedures that supported the market for subprime loans in the Detroit area so that it could purchase, pool, and securitize those loans. The plaintiffs claim those policies violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) because they disproportionately impacted minority borrowers who were more likely to receive subprime loans, putting those borrowers at higher risk of default and foreclosure. The suit seeks injunctive relief, including a court appointed monitor to ensure compliance with any court order or decree, as well as unspecified monetary damages. The National Consumer Law Center, which developed the case with the ACLU, reportedly is investigating similar activity by other mortgage securitizers, suggesting additional suits could be filed. The ACLU also released a report on the fair lending aspects of mortgage securitization and called for, among other things, DOJ and HUD to expand their Fair Housing Testing Program, and for Congress to increase penalties for FHA and ECOA violations and provide additional funding for DOJ/HUD fair lending enforcement.
On October 18, three Georgia counties filed suit on behalf of their communities and certain residents against a financial institution the counties allege targets FHA-protected minority borrowers with “predatory high cost, subprime, ALT-A and conforming mortgages without considering the borrowers’ ability to repay such loans.” The complaint claims that the lender’s practices caused and continue to cause minority borrowers to be more at risk of default and foreclosure than similarly situated white borrowers, and, as such, constitute a pattern or practice of discriminatory lending and reverse redlining in violation of the FHA. The counties are seeking injunctive relief and unspecified compensatory and punitive damages.
BuckleySandler’s Fair and Responsible Financial Services Team has extensive experience litigating fair lending cases and assisting financial institutions seeking to manage fair lending risk. For a review of fair lending red flags for banks and strategies for addressing them, see our recent article.
Nevada AG Obtains Multi-Million Dollar Settlement of MBS Investigation
On October 24, Nevada Attorney General (AG) Catherine Cortez Masto announced the resolution of an investigation into a financial institution’s purchasing and securitization of subprime and payment option adjustable rate mortgages. The Nevada AG’s investigation concerned potential misrepresentations by lenders with regard to loans with such terms as adjustable rates, stated income, 100 percent financed, extended amortization periods, prepayment penalties, and/or initial teaser rate. The Nevada AG was examining whether the securitizer knowingly purchased such loans and substantially assisted the lenders by financing and purchasing their potentially deceptive loans. To resolve the investigation, the securitizer agreed to pay $42 million and to abstain from financing, purchasing, or securitizing Nevada subprime mortgage loans in the future unless it has engaged in a “reasonable review” of such loans and determined that the loans comply with the Nevada Deceptive Trade Practices Act.
Report Identifies Increased Enforcement Activity By State Securities Regulators
On October 23, the North American Securities Administrators Association (NASAA), a voluntary association whose membership consists of sixty-seven state, provincial, and territorial securities administrators in North America, published a report that indicates enforcement of state securities laws by U.S. state securities regulators is on the rise. The report reflects the results of a survey in which forty-eight U.S. NASAA members participated. According to the report, more than 2,600 administrative, civil and criminal enforcement actions involving nearly 3,700 respondents and defendants were reported by the states in 2011, including a near doubling of enforcement actions against investment adviser firms from the previous year. The report presents other summary findings and enforcement trends, including new risks related to crowdfunding and Internet offers.
SEC Names New Director for New York Region
On October 17, the SEC announced Andrew M. Calamari as Director of its New York Regional Office, a position he has held on an acting basis for the past several months. He replaces George Canellos, who earlier this year was appointed Deputy Director of the Division of Enforcement. Mr. Calamari joined the SEC in 2000 and served as Senior Associate Director and co-head of Enforcement for the New York Region. In his new role, Mr. Calamari will oversee 400 SEC employees including enforcement attorneys, accountants, investigators, and compliance examiners.
Federal District Court Holds Foreclosures Negate Trust's Ability to Enforce Representations and Warranties
On October 1, the U.S. District Court for the District of Minnesota granted a lender’s motion for partial summary judgment finding that a trustee’s foreclosure on properties securing mortgage loans extinguished the loans and rendered them unavailable for repurchase by a lender. MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage Corporation, No. 11-2542, 2012 WL 4511065 (D. Minn. Oct. 1, 2012). The trustee filed the action to compel the lender to repurchase certain loans the lender sold to the trust, alleging that the lender breached representations and warranties made in connection with the sale. The lender moved for partial summary judgment on the grounds that (i) the loans at issue no longer existed to be repurchased after the trust foreclosed on the properties securing the mortgages, and (ii) the trust failed to provide the lender with “prompt notice” of the alleged breaches on which its repurchase demands were based as was required by the relevant agreement between the parties. In opposition to the lender’s motion, the trustee argued that, notwithstanding its foreclosure on the properties securing the loans, the loans remained available for repurchase given that the relevant agreement between the parties defined “mortgage loans” to include proceeds from any foreclosure sale. The court rejected the trustee’s argument and granted the lender’s motion for partial summary judgment, concluding that the loans no longer existed for repurchase. With respect to the lender’s “prompt notice,” that court said that while it found notice was not “prompt” under the circumstances presented, it could not grant summary judgment on that basis prior to discovery.
NY AG Files First RMBS Working Group Action, Expects More to Follow
On October 2, the Residential Mortgage-Backed Securities (RMBS) Working Group announced its first legal action. The civil complaint, filed against a major bank by New York Attorney General Eric Schneiderman on behalf of the people of that state, alleges that an underwriter acquired by the bank made fraudulent misrepresentations and omissions in the sale of RMBS to investors. The suit claims that losses resulting from the allegedly fraudulent sales total approximately $22.5 billion to date, but the complaint does not specify the damages sought. In announcing the suit, Attorney General Schneiderman, as well as Acting U.S. Associate Attorney General Tony West and other federal Working Group members, described the coordinated efforts that culminated in this filing. Specifically, Working Group members stressed the assistance provided by the SEC and the FHFA. Indeed, the allegations in the New York Attorney General’s complaint are similar to allegations previously made by the FHFA on behalf of Fannie Mae and Freddie Mac against numerous financial institutions. The allegations also parallel those made by private plaintiffs. On behalf of the RMBS Working Group, which was first announced by President Obama during his 2012 State of the Union address, Mr. Schneiderman has promised more civil, and potentially criminal, enforcement activity against other financial institutions.