Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

A February 16, 2010 report  released by the U.S. Federal Financial Institutions Examination Council (FFIEC) confirms that financial institutions continue to suffer mortgage-fraud related losses.  The council, which is comprised of the U.S. Federal Reserve, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the State Liaison Committee, did not quantify the monetary losses, but noted that "[f]inancial institutions have experienced an increase in the number, volume, and types of mortgage fraud schemes resulting in significant losses."  The report also identifies "red flag" indicators of possible mortgage fraud or of the risk of potential exposure to mortgage fraud, and includes a set of best practices illustrating how to detect and prevent mortgage fraud at regulated institutions. The report is the result of a 2009 symposium that was aimed at helping examiners identify various fraud schemes.

A copy of the report is available at the FFIEC's website:  The Detection and Deterrence of Mortgage Fraud Against Financial Institutions.

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On Wednesday, February 17th, the Financial Industry Regulatory Authority (FINRA) announced that it will seek authority from the SEC to significantly expand the amount of information available to the public on current and former securities brokers through its online BrokerCheck service.

The proposed BrokerCheck expansion would enable the public to access more data on customer complaints; extend the time that the public may view the full record of a broker who has left the industry from two years to 10 years; and make certain information about former brokers available permanently, such as criminal convictions and certain civil and arbitration judgments.

Commenting on FINRA’s proposals to make more information about former brokers available to the public for longer periods of time, FINRA Chairman and CEO Rick Ketchum stated that such changes “will provide valuable information about persons who have left the securities industry, often not of their own accord, but who can still cause great harm to the investing public. Recent regulatory and criminal proceedings in the financial services sector reveal that former brokers have been engaging in fraud and other misconduct long after establishing themselves in other segments of the financial services industry.”

Specifically, FINRA's proposed expansion of BrokerCheck would:

Disclose all historic complaints, including customer complaints, arbitrations or certain litigation dating back to 1999 for individual brokers who are currently registered or whose registrations were terminated within the preceding two years.  If the SEC approves all of FINRA’s proposals, the reporting of historic complaints could apply to brokers whose registrations were terminated within the preceding 10 years.

Expand the disclosure period for former brokers from two years to ten years.  The current two-year period coincides with the period in which an individual remains subject to FINRA's jurisdiction.  The new proposal calls for making a former broker's record public for 10 years.

Increase the amount of information that is permanently available on former brokers.  Last year, BrokerCheck made information about final regulatory actions (i.e., bars, suspensions, fines, etc.) against former brokers permanently available to the public.  The new proposal would add more information to that list, including criminal convictions or pleas of guilty or nolo contendere; civil injunctions or findings of involvement in a violation of any investment-related statute or regulation; and arbitration awards or civil judgments based on the individual's involvement in an alleged sales practice violation.

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Despite bad weather, Congress appears to be moving forward with financial services reform.  On Tuesday, February 9, House Financial Services Committee Chairman, Barney Frank issued a statement regarding the financial industry and the need for increased consumer protection in the U.S. financial industry.  A comprehensive update and Chairman Frank's statement is available at Perkins Coie's Update Page.

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Effective February 8, 2010, FINRA members will be subject to new rules governing financial responsibility that are based in part on, and replace, provisions in the NASD and Incorporated NYSE Rules. The rules add new requirements relating to minimum net capital, financial reporting, and notification rules for member firms that clear or carry customer accounts and firms that operate under an exception created under SEC Rule 15c3-3(K)(2)(i) that either (1) clear customer transactions pursuant to this exemption, or (2) hold customer funds in a bank account established pursuant to this exemption.

Collectively, the FINRA Financial Responsibility Rules consist of FINRA Rules 4110, 4120, 4130, 4140, and 4521. The new Rules also amend FINRA Rules 9557 and 9559 to provide an expedited appeals process for members served with a notice under the Financial Responsibility Rules to increase capital or net worth. FINRA Regulatory Notice 09-71 provides an overview of the Financial Responsibility Rules, including their impact on: minimum net capital requirements; notification rules; certain restrictions on business activities; reporting requirements; and audits.

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The New York Times reports that the Department of Justice's Civil Rights Division has formed a Lending Discrimination unit devoted to investigating and prosecuting unfair lending practices.  According to Assistant Attorney General Tom Perez, the new unit  will look "at any and every practice in the industry,”   Under the DOJ's most recent budget, the Lending Discrimination unit will include at least 10 lawyers and an economist.   Unlike prior Lending Discrimination prosecutions by DOJ that concerned Redlining and discriminatory underwriting decisions, the new unit will focus on "Reverse Redlining," the practice of targeting minority neighborhoods for loans with inferior terms, including high rates and fees.

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The Wall Street Journal has reported that on Monday evening, U.S. District Judge Jed S. Rakoff of the Southern District of New York denied the SEC’s motion to expand charges against Bank of America in connection with the company’s 2009 merger with Merrill Lynch. A previously filed SEC suit accused the bank of concealing plans to pay billions of dollars in bonuses to employees at Merrill Lynch before shareholders were asked to approve a merger of the two firms.  Most recently, the SEC moved to amend that complaint to include allegations that Bank of America also failed to disclose “extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.” The SEC's proposed second amended complaint alleged that Bank of America negligently failed to disclose those losses before the shareholder vote, violating its fiduciary duty to its investors and making its previous disclosures materially false and misleading.

Judge Rakoff had previously rejected a $33 million settlement between the SEC and Bank of America last fall because it failed to hold accountable any of the executives or lawyers who were allegedly responsible for omissions in documents submitted to shareholders ahead of a vote that approved the acquisition. However, the SEC still declined to charge individuals in its proposed second amended complaint, stating that the “executives are not alleged to have deliberately concealed information from counsel or otherwise acted with scienter or intent to mislead.  Nor is any counsel alleged to have acted with scienter or intent to mislead.”

In a letter addressing the SEC’s proposed second amended complaint, Bank of America’s counsel stated that “the new theories the SEC seeks to advance in this case are baseless.”  The WSJK has now reported that on Monday evening, Judge Rakoff ruled that the S.E.C. cannot amend its complaint against Bank of America a second time, but can instead file a new complaint.

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On December 9, 2009, the Director of the SEC’s Division of Enforcement, Robert Khuzami, testified before Senate Judiciary Committee at a hearing entitled “Mortgage Fraud, Securities Fraud and the Financial Meltdown: Prosecuting Those Responsible.” Khuzami’s testimony detailed five primary areas in which the SEC is focusing its enforcement efforts.

First, the SEC is investigating and pursuing enforcement cases based on unlawful conduct related to the financial crisis.  Second, the SEC is enhancing its working relationship with other law enforcement authorities, including the DOJ.  Third, the SEC is implementing several reorganization initiatives, including the creation of specialized units within the Division of Enforcement that are aimed at attacking both the causes of the recent financial crisis, as well as current and future market practices that are a potential cause for concern for the SEC.  Fourth, the SEC’s staff is proposing various legislative reforms, including nationwide service of process, a whistleblower program and enhanced access to grand jury material.  Last, the SEC is seeking additional resources for both the Enforcement Division and throughout the SEC.

A transcript of Khuzami’s testimony is available here.

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On Wednesday, December 2, 2009, the House of Representatives Financial Services Committee passed two significant acts, the Financial Stability Improvement Act and the Federal Insurance Office Act, both of which are aimed at increasing federal regulation over the financial services industry.  Both bills have been referred to the full House for consideration.  

A brief summary of the legislation is at the following link: . http://www.perkinscoie.com/news/pubs_detail.aspx?publication=2411&op=updates
 

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Last month, the SEC approved a proposed rule change filed by the New York Stock Exchange which amends certain of the Exchange’s disclosure requirements for listed companies, including publicly traded financial services corporations. The changes take effect January 1, 2010, so the new disclosures will be required in proxy statements for annual meetings to be held after December 31, 2009. Below is a general overview of the new disclosure requirements. 

·        303A.02(a):  NYSE's independence disclosure will no longer require a listed company to disclose the board's categorical standards for independence. However, a listed company may still disclose these standards as a means of supporting its claim that a director is independent.

·        303A.02(b)(v):  A listed company may choose where to make its charitable contribution disclosure: on its website or in its annual proxy statement. If the former, the company must so disclose this fact in the proxy/Form 10-K and provide its website address.

·        303A.09 / 303A.10:  A listed company will no longer need to disclose that its nominating/corporate governance, compensation and audit committee charters, corporate governance guidelines and code of business conduct and ethics are available in print upon request. The company need only disclose that the above are available on the company's website and provide the website address.

·        303A.10:  A company must disclose any waivers of the code of business conduct and ethics for executive officers or directors within four days (rather than the "promptly," which had been inconsistently defined).

·        303A.12(a):  A listed company will not be required to disclose in the company's annual report to shareholders or Form 10-K that: the previous year's CEO certification was submitted to NYSE (and disclose any qualifications to that certification;  the company filed as an exhibit to its most recently filed Form 10-K, the Sarbanes-Oxley Act Section 302 certification.

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