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

Two reports issued by the SEC's independent inspector general recommends sweeping changes to the agency's investigation and enforcement programs following failures to detect fraudulent activity, including Bernard Madoff's ponzi scheme, according to a New York Times report. 

The two reports issued by SEC inspector general H. David Kotz recommend a total of 58 changes in the way the agency evaluates tips, trains investigators and documents examinations.  The set of recommended changes include incorporation of basic investigative techniques, such as recording witness interviews and using a database for tips and complaints.  The SEC should also "require tips and complaints to be reviewed by at least two individuals experienced in the subject matter prior to deciding not to take further action,"  the report recommends.  (Read the Inspector General's Report)

The S.E.C. has accepted the recommendations, according the the New York Times article. 

The proposed changes follow the IG's publication of its investigative report regarding  the SEC’s failure to detect the Madoff ponzi scheme.  That investigation found that the SEC had failed to properly examine  Madoff’s firm and had not adequately followed up on whistleblower tips from as far back as 1992 that could have lead to discovery of the estimated $65 billion fraud scheme.

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The Credit Card Act of 2009 was set to go into effect in February, 2010, but Congressman Frank and Congresswoman Maloney want it to go into effect December 1, 2009.

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The Federal Reserve announced last week that it would begin examining nonbank subsidiaries of bank holding companies for compliance with consumer protection laws.  A September 14 letter from Sandra F. Braunstein, the agency's Director of Consumer and Community Affairs states:  

This letter establishes, effective immediately, a policy for conducting risk-focused consumer compliance supervision of, and the investigation of consumer complaints against, nonbank subsidiaries of bank holding companies (BHCs) and foreign banking organizations (FBOs) with activities covered by the consumer protection laws and regulations the Federal Reserve has the authority to enforce. This policy is designed to enhance our understanding of the consumer compliance risk profile of nonbank subsidiaries and to guide our supervisory activities for these entities. It leverages existing consumer compliance supervision policies and procedures as well as the existing prudential supervision processes for Large Complex Banking Organizations (LCBOs), FBOs, Regional Banking Organizations (RBOs), and Community Banking Organizations (CBOs).

The consumer compliance and full-scope examinations of nonbank subsidiaries will result in ratings based on the "Consumer Compliance Risk Management rating system (Strong, Satisfactory, Fair, Marginal, or Unsatisfactory) that is included in the draft Risk-Focused Consumer Compliance Supervision Program," according to the letter.

The Feds announced this move a day after President Obama publicly reiterated his support for a new consumer protection enforcement agency.

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Rep. Barney Frank, the sponsor of H.R. 3126, has sent a memo to House Democrats outlining his proposals for amendments to the proposed Consumer Financial Protection Agency Act.

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Bank of America Corp. has responded to  New York Attorney General Cuomo's allegations that the bank failed to inform shareholders of material information related to its takeover of Merrill Lynch, according to a report in the American Banker.  In a September 8 letter to the bank, Cuomo's office  also accused the bank of "indiscriminate invocation of the attorney-client privilege" and "hindering efforts to determine which company officers potentially should be charged with securities violations."  In a response from its outside counsel, Bank of America stated that "the basic premise of the letter [raising the allegations] is simply wrong" and that the allegations  about what the bank told investors were “spurious,” according to a report by the Charlotte Observer.  Bank of America had not  "sought to take unfair advantage of the assertion of the privilege by hiding information from [the AG's] office or anyone else," the letter continued. 

The September 8 letter from Cuomo's office identified several areas under investigating, including alleged wrong-doing by senior bank officials related to the release of a merger proxy document that did not identify $3.6 billion in Merrill Lynch bonuses, nor disclose Merrill's forecasted losses or a $2 billion goodwill charge.  In response, the bank stated that the merger proxy "did not contain any false or misleading statements," and the other matters alleged by the AG's office had been properly reconciled and reported as required by relevant laws.

On Wednesday, September 16, Bloomberg reported that the New York Attorney General had subpoenaed five members of Bank of America's board of directors amid his probe into the bank’s purchase of Merrill Lynch.

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A recent article in the Mortgage Banking Magazine by Donna Dezube summarizes numerous efforts by states, local governments, and borrower attorneys to delay or prevent foreclosure.  "Lawyers defending mortgage brokers have their hands full today.  The courts are jammed with motions to delay foreclosures actions, and frivolous litigation is going viral," the article states.   The article also summarizes numerous legislative efforts to delay or prevent foreclosure, along with strategies used by private attorneys and counselors to prevent foreclosure or pursue loan modification.   The article notes that, according to Perkins Coie attorney Fred Rivera, lenders desire to modify loans and avoid foreclosure, if borrowers are qualified and can qualify.

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After an 18 month investigation, federal prosecutors are preparing to impanel a grand jury in Brooklyn, N.Y., to consider an indictment of former American International Group Inc. executive Joseph Cassano, according to the Wall Street Journal.    WSJ reported that, according to sources familiar with the matter, the Justice Department and the SEC have been investigating whether Cassano, who ran AIG's Financial Products unit, committed securities fraud by allegedly misleading investors about the value of mortgage-related contracts, and by failing to disclose material facts regarding such contracts to AIG's outside auditor.

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The Wall Street Journal reports that FairfieldGreenwich Group, one of the largest funds to invest in Barnard Madoff's Ponzi scheme, has agreed to pay  Massachusetts $8 million to settle civil fraud charges filed by the state's chief securities regulator.  The April 2009 complaint alleged that FairfieldGreenwich invested its clients' money with Madoff, but neglected to conduct its promised due diligence.   According to the settlement, FairfieldGreenwich will pay a $500,000 fine to Massachusetts, with the remaining settlement funds used for restitution for Massachusetts investors who lost money in the Madoff scheme.  Following the filing of the complaint in April, the hedge fund initially denied the allegations, claiming that "[t]he complaint here was rushed into existence and is so filled with errors and factual distortions as to completely misstate the conduct of the companies that make up the Fairfield Greenwich Group."

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During its August 19, 2009 board meeting, the Financial Accounting Standards Board (FASB) re-opened discussions of a controversial proposal requiring companies to disclosure more information about actual and potential lawsuits, according to an article in the American Banker.   In 2008, FASB pushed for changes to FAS 5 (contingent liabilities) that would expand reports of potential outcomes of pending or anticipated lawsuits.  According to a FASB report, the proposed changes were based on investor complaints that the current reporting requirements failed to provide sufficient information to assess the impact of litigation matters.  FASB delayed the plan after receiving opposition from several major companies, including Bank of America, JPMorgan Chase, and Citigroup.

The proposed FASB amendments would require companies to disclosure, among other things: the amount, or an an estimated amount, of a lawsuit or potential claim; likely insurance coverage; maximum potential loss; details of the origin of the dispute and current status; the likely timing of resolution; and the likely outcome. 

Criticism of the original proposal included concerns that the proposed disclosure would require companies to release significant information about their internal deliberations regarding litigation matters, and put at risk information protected by the attorney-client privilege.

During its August 19, 2009 meeting, FASB discussed the effective date of any final guidance on the proposed changes,  and decided not to rule out the possibility that it could be effective for fiscal years ending after December 15, 2009.

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DocMagic, Inc.,  the largest loan document production company in the United States, alleges in a federal antitrust complaint that software and services provider Ellie Mae has illegally denied customers the ability access DocMagic's products through Ellie Mae's ePass web portal.  DocMagic claims that Ellie Mae has cut it off from a market worth $200 million by denying it use of ePass, a Web portal that allows mortgage lenders to prepare closing documents online.   According to a DocMagic press release, DocMagic had been provided access to the ePASS network until Ellie Mae notified DocMagic of its intent to terminate its ePASS Agreement and subsequently took steps to prevent its users from accessing DocMagic products through unfair and anti-competitive behavior, including sabotaging clients from accessing DocMagic via alternative web service calls.   DocMagic is seeking an immediate injunction preventing the alleged unfair activity of Ellie Mae.

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