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

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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American Banker reports that  JPMorgan Chase & Co. has agreed to eliminate mandatory arbitration clauses in its credit card contracts .   Bank of America made a similar decision in August 2009.   The scraping of mandatory arbitration clauses followed last summer's settlement between National Arbitration Forum and the Minnesota attorney general, which included NAF's agreement that it would stop handling consumer disputes.  The American Arbitration Association made a similar decision shortly thereafter.

The JPMorgan decision preceded an announcement by Berger & Montague P.C.that it had agreed to drop a class-action suit alleging that JPMorgan Chase and other issuers of "unlawfully conspired to require their cardholders to arbitrate disputes." Under the terms of the settlement, JPMorgan Chase will eliminate its arbitration clause for three-and-a-half years, will not discuss arbitration with other issuers and will cover attorney's fees for the plaintiffs.

Mandatory arbitration provisions have long been a source of tension between credit providers and consumer advocates.  Creditors have for many years used arbitration to resolve consumer claims, arguing that arbitration provides a cost-effective and expeditious method to resolve disputes.  Consumer groups, on the other hand, have criticized the arbitration process, including charging that the arbitration groups managing the arbitration process have a pro-industry bias.   

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With the recent flurry of legislative activity focused on reform of the regulatory framework for financial institutions and the financial markets, the Perkins Coie Financial Services Practice is pleased to bring you the Financial Services Bulletin.  This bulletin highlights recent legislative activity impacting financial services and financial institutions.  We plan to publish future bulletins as new legal developments are announced.  The Bulletin is available at the following link:  www.perkinscoie.com/news/pubs_detail.aspx .

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In response to various crises that have besieged the financial services industry in recent years, will the government create more governmental regulation or expand the role of SROs, such as Finra, to bolster public confidence in financial institutions? This topic is addressed in an article recently published in InvestmentNews by Perkins Coie partner Pravin Rao and Howard Rosenburg, general counsel and chief regulatory officer of the Chicago Investment Group LLC. The article, entitled “Forecasting Finra's Future,” features an in-depth discussion of Finra’s current jurisdiction and likely changes that would need to take place should the government further expand Finra’s authority.  Among the recommendations provided by the authors are: consolidating oversight of broker-dealers and investment advisers and adopting uniform fiduciary standards for these investment professionals; revising Finra’s internal operating procedures to allow for greater transparency in decision-making and financial management processes; and increasing coordination with other regulatory authorities, including the CFTC, the Federal Reserve, and the SEC.

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The Financial Industry Regulatory Authority (FINRA) has announced that the SEC approved a major expansion of  FINRA's BrokerCheck service — to make records of final regulatory actions against brokers permanently available to the public, regardless of whether they continue to be employed in the securities industry.  Under current rules, a broker's record generally becomes unavailable to the public two years after he or she leaves the securities industry and is no longer under FINRA's jurisdiction.

BrokerCheck is a an online service through which investors can reviewthe employment, qualifications and disciplinary history of more than 650,000 brokers under FINRA's jurisdiction. FINRA estimates there are more than 15,000 individuals who have left the securities industry after being the subject of a final regulatory action and whose disciplinary history is not currently available on BrokerCheck.

Disclosure records for former brokers will become available on November 30 and will include any final sanction (such as bars, suspensions and fines) imposed by the SEC, the Commodity Futures Trading Commission, any federal banking agency, the National Credit Union Administration, any other federal regulatory agency, any state regulatory agency, any foreign financial regulatory authority or any self-regulatory organization (such as FINRA).

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