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

A group of federal agencies and state attorneys general announced the formation of a new task force aimed at fighting mortgage fraud, according to a New York Times report.   The new task force includes the Treasury Department, Justice Department, Federal Trade Commission and Department of Housing and Urban Development, as well as attorneys general of some of the states with the highest foreclosure rates, including Arizona, Nevada, California and Ohio.

According to a press release from the Washington State Attorney General's Office, the task force, which will focus on both business practices and civil rights issues, is co-chaired by Washington Attorney General Rob McKenna and Iowa Attorney General Tom Miller.  McKenna said the task force was created during a July 15 meeting in Washington, DC, between several state attorneys general and federal agencies that focused on mortgage enforcement.

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A new analysis by the General Accountability Office (GAO) found that the existing fair lending enforcement efforts by bank regulators are not working. In the GAO's Fair Lending report noted that regulators have a fragmented enforcement mechanism that impairs effective fair lending enforcement.  The study also detailed deficiencies in the mortgage data currently made available through the Home Mortgage Disclosure Act (HMDA).  In particular, the GAO found that a lack of data concerning borrower credit risk and race/gender information for non-residential mortgages (i.e., small business loans) limited "agencies' and regulators' capacity to identify potential lending discrimination."

The GAO reports comes at a time when congress is considering President Obama's plan for a single financial services consumer regulator--the Consumer Financial Products Agency.   The GAO report may fuel the arguments of advocates who claim that the current system doesn't work, and that a consolidated enforcement agency is necessary.  The GAO report also renews the debate about the adequacy of the HMDA requirements, and whether lenders should be required to report more information about their lending practices.

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Bloomberg.com reports that a settlement has been reached resolving a U.S. Justice Department lawsuit against UBS AG seeking the names of Americans suspected of evading taxes through 52,000 secret Swiss accounts.  According to the Bloomberg report, tax lawyers believe that the settlement includes UBS agreeing to disclosure information about thousands of accounts.  In February, Zurich based UBS agreed to pay $780 million to defer prosecution for aiding tax evasion,  as well as providing data to the Internal Revenue Service on 250 clients. Since then, three UBS clients have pleaded guilty in the United States to secreting bank assets from the IRS in UBS accounts.  This data released under the latest settlement will undoubtedly result in further investigations and prosecutions.

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A former Florida appeals court judge pleaded guilty to defrauding a bank that loaned him money to purchase a residence in Hawaii and is now awaiting sentencing.  Criminal charges alleged that Thomas Stringer, a former judge in the Florida Second District Court of Appeals, falsified his mortgage application by falsely stating that he had not borrowed any funds used for the down payment.  The Tampa Bay Business Journal reported that, although Stringer faces up to 30 years in federal prison for the offense, because no one sustained a loss in the commission of the crime, he is expected to receive a non-custodial sentence and forfeiture of the $222,362 in loan proceeds from the fraud.

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At yesterday’s hearing on BofA’s proposed $33 million settlement of an SEC civil suit, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York continued to withhold his consent for the settlement, stating that he needs more time and information before deciding whether to approve the settlement. Judge Rakoff requested further filings by August 24th, and told the parties he would not be able to approve the settlement prior to September 9th.

The SEC’s complaint, initially filed on August 3rd, states that BofA made “materially false and misleading statements in the joint proxy statement that it filed with Merrill Lynch & Co., Inc. (“Merrill”) in connection with Bank of America’s $50 billion acquisition of Merrill on January 1, 2009.” Specifically, the SEC alleges that BofA authorized Merrill to pay up to $5.8 billion in bonuses, despite telling investors in proxy documents that Merrill had agreed not to award year-end performance bonuses or incentive pay before the merger closed. Merrill would ultimately pay $3.6 billion in bonuses, according to the SEC.

One issue on which Judge Rakoff focused his questioning was who at BofA was responsible for not disclosing that Merrill could award $5.8 billion in incentives and bonuses to employees. At one point the Judge asked David Rosenfeld, the associate regional director of the SEC’s New York office, “[w]as it some sort of ghost? Who were these people? Mr. Thain and Mr. Lewis would seem to be responsible, yes?” John Thain was the CEO at Merrill during negotiations of the sale to BofA, and Kenneth Lewis is BofA’s CEO. Rosenfeld responded, in part, that the SEC “can’t infer” misconduct from an accelerated bonus schedule.

Judge Rakoff also requested additional information on how the settlement figure of $33 million was arrived upon by the parties. “Don’t I need to know what the truth is to make a determination?” the Judge questioned. If BofA indeed broke the law by not disclosing the bonus payments in proxy materials, Judge Rakoff asked, “is there not something strangely askew in a fine of $33 million?” when compared to the billions that were paid in bonuses? Rosenfeld, on behalf of the SEC, responded that the settlement figure was “fair and reasonable” based upon prior cases.

Judge Rakoff concluded that he wants more information to determine whether the settlement amount is appropriate and whether an evidentiary hearing might be necessary, commenting that he “would be less than candid” if he didn’t “express [his] continued misgivings about the settlement at this stage.

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This afternoon at 4 p.m. EST, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York will hold a hearing at which the SEC and Bank of America (BofA) will have to justify a proposed $33 million settlement to resolve an SEC civil suit stemming from BofA’s takeover of Merrill Lynch earlier this year.

The SEC’s complaint, initially filed on August 3rd, states that BofA made “materially false and misleading statements in the joint proxy statement that it filed with Merrill Lynch & Co., Inc. (“Merrill”) in connection with Bank of America’s $50 billion acquisition of Merrill on January 1, 2009.” Specifically, the SEC alleges that BofA authorized Merrill to pay up to $5.8 billion in bonuses, despite telling investors in proxy documents that Merrill had agreed not to award year-end performance bonuses or incentive pay before the merger closed. Merrill would ultimately pay $3.6 billion in bonuses, according to the SEC.  Two weeks after the merger was complete, losses at Merrill prompted BofA to accept $20 billion of TARP funds, on top of its earlier $25 billion.

In conjunction with the August 3rd complaint, the parties submitted a proposed Consent Judgment by which BofA, without admitting or denying the allegations, agreed to pay a penalty of $33 million. However, Judge Rakoff took issue with the proposed settlement in an August 6, 2009 Order, stating that “[d]espite the public importance of this case, the proposed Consent Judgment would leave uncertain the truth of very serious allegations made in the Complaint. Further, the proposed Consent Judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its ‘bail out’.”

Today’s hearing is expected to focus on whether the $33 million settlement is in the public’s interest.  The underlying context is that shareholders and the public might get the short end of the deal twice in a row – first when they were “defrauded” by the BofA proxy statements, and then again if BofA uses TARP money to pay the fine for that fraud.

Ultimately, the settlement is expected to win Judge Rakoff’s approval if the SEC and BofA can convince him that the public’s interest is not being harmed.  In 2003, Judge Rakoff blocked a $500 million SEC settlement with WorldCom Inc. over the accounting fraud that led to the phone company's bankruptcy.  Judge Rakoff later approved a $750 million settlement of the case.

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