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

 Federal securities class action activity declined in the first half of 2009, with a particularly significant decline in the second quarter, according to the Securities Class Action Filings—2009: Mid-Year Assessment, an annual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research.

According to the report, a total of 87 federal securities class actions were filed in the first half of 2009, a 22.3 percent decline from the 112 filings in both halves of 2008.  Only 35 filings were observed in the second quarter, the lowest quarterly total since the first quarter of 2007.  While filings are on the decline, the report also found that financial services firms have been named as defendants in 66.7% of filings this year, an increase over the 50% share of all filings in 2008.

Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse commented that “[s]ecurities litigation activity continues to be driven by claims against financial services firms, but all the large firms in the industry have already been sued.  Plaintiffs are therefore filing claims against the smaller number of smaller financial services firms yet to be sued.”

Among the report’s key findings:

• About half of the filings so far in 2009 were driven by the credit crisis, with 42 filings in the first half of the year containing allegations related to the credit crisis.

• Financial firms have been named as defendants in an increasing number of suits. 12.8 percent of companies in the S&P 500 classified by Bloomberg as financial were named as defendants, accounting for 41.2 percent of the market capitalization of that sector.  (See below chart)

• There were 15 filings related to Ponzi schemes thus far in 2009. The majority of these lawsuits, 11 filings, were on behalf of investors in Madoff funds, with most suits targeting so-called feeder funds, hedge funds, and other financial intermediaries that invested their clients’ money with Madoff.

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The Federal Reserve Board on Thursday proposed significant changes to Regulation Z (Truth in Lending) intended to improve the disclosures consumers receive in connection with closed-end mortgages and home-equity lines of credit (HELOCs). These changes, offered for public comment, reflect the result of consumer testing conducted as part of the Board's comprehensive review of the rules for home-secured credit. The amendments would also provide new consumer protections for all home-secured credit.

Press Release with links to proposal: http://tiny.cc/TenbM

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On July 21, 2009, House Financial Services Committee Chairman Barney Frank said that he will postpone a previously planned vote on legislation to create a new federal consumer protection agency until after the August recess.  The new agency  was included in the Obama administration's June 2009 proposal to overhaul the financial sector as an oversight body charged with protecting consumers of mortgages, credit cards and other financial products.  The Washington Post has reported praise for the proposed new agency from consumer protection groups, and sharp criticism from several industry groups, who argue that that the proposed agency will cause increase costs for consumers and further exacerbate the patchwork nature of current financial sector regulation.

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According to a new FBI report , mortgage fraud increased considerably in 2008.  Relying on Suspicious Activity Reports from financial institutions, the report cited a 36 percent increase in mortgage fraud compared to 2007, with losses of over $1.4 billion.  During the first six months of 2009, losses already exceed all of 2008 by $208 million.  The report links the increase in mortgage fraud reports to a declining economy and depreciating home values.

The FBI report includes a list of common mortgage scams, including fraudulent short sales, bankruptcy filings, arson to collect insurance, and reverse mortgage, refinancing and modification related schemes.

Not all states experienced an increase in mortgage fraud .  The Seattlepi.com, reported that Washington was one few states that experienced a decline in mortgage fraud reports during 2008.   On the other end of spectrum, the report lists California and Florida as states with the highest incident of mortgage fraud reporting.

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On Wednesday, July 1st, the SEC filed a civil suit against the former chief accounting officer of Beazer Homes USA, Inc. The complaint alleges that from 2000 to 2007, Michael Rand manipulated Beazer’s reported quarterly and annual income in order to meet EPS projections and analyst expectations, as well as to maximize bonuses for company officers and senior staff. The complaint also alleges that Rand took affirmative steps to conceal the fraud from Beazer’s auditors.

The SEC first alleges that during the housing boom from 2000 to 2005, Rand caused Beazer to under report its net income by a total of $63 million through the recording of improper operating expenses which created false accounting reserves and liabilities in Beazer’s books and records. Next, during 2006 and 2007, when the housing market began to slow, Rand is alleged to have caused the improper reserves to be reversed, thereby inflating Beazer’s income by approximately $47 million. The SEC also alleges that during 2006 and 2007, Beazer improperly recognized revenue from the sale and leaseback of model homes, when in fact no revenue should have been recognized from such transactions.

In May 2008, Beazer restated its financial statements to reflect adjustments for fiscal years 1998 through 2006, and the first half of fiscal year 2007. The SEC is seeking a permanent injunction against future violations, disgorgement if ill-gotten gains, civil penalties and a D&O ban against Rand.

Also on July 1st, Beazer Homes USA, Inc. reached a settlement with the U.S. DOJ to pay up to $53 million to resolve allegations that the company violated the False Claims Act.  Specifically, the government alleged that when the mortgage division of Beazer Homes made FHA insured loans, it 1) required purchasers to pay "interest discount points" at closing, but then kept the cash and failed to reduce interest rates; 2) provided cash "gifts" to home purchasers through certain charities, so purchasers could provide down payments, with assurances the "gifts" would not have to be repaid, and then increased home purchase prices to offset the amount of the gifts; 3) obscured which of its branches made defaulting mortgage loans to avoid FHA detection of excessive default rates, and; 4) ignored "stated income" requirements in making loans to unqualified purchasers.
 

To resolve these allegations, Beazer agreed to pay the United States $5 million, plus contingent payments of up to $48 million dollars to be shared with Beazer homeowners impacted by the above allegations.  Please refer to the Department of Justice press release regarding the Beazer Homes settlement for additional details.

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In a highly anticipated decision, a divided U.S. Supreme Court  authorized states to investigate national banks for lending discrimination, thus rejecting the OCC's position that its regulatory authority preempted states' enforcement powers.   In the 5-4 opinion authored by Justice Scalia, the high court in Cuomo v. Clearing House Association, LLC held that federal banking regulations did not pre-empt states from enforcing their own fair-lending laws.

The ruling decided a dispute between the OCC and the New York attorney general's office, which had initiated investigations into national banks' residential real-estate lending practices.  Former Attorney General and Governor Eliot Spitzer initiated the investigation of several banks, including Wells Fargo, JPMorgan Chase and Citigroup, based on mortgage data he claimed showed black and Hispanic borrowers received a larger percentage of high-interest home loans than white borrowers.

CNN reported the mixed reactions to the ruling.  The American Bankers Association issued a statement contending that the ruling "changes over 140 years of settled law," and expressed concern that national banks will  "face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions."  On the other hand, current New York Attorney General Cuomo said the ruling "reaffirms the vital role state attorneys general play in protecting consumers from illegal and improper practices by our country's biggest and most powerful banks."  Similarly, the Lawyers' Committee for Civil Rights Under Law applauded the decision, stating in a press release that the the decision "will unshackle the oversight muscle of state attorneys general whose attempts to enforce fair lending laws against national banks were thwarted when most needed." 

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