Financial Regulation

Week in Review: The Administration on Wall Street

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Obama Administration has continued its aggressive prosecution of suspect players in the financial meltdown that shaped most of the President’s first term.

Four mortgage insurers, including an AIG subsidiary, have agreed to a $15 million settlement over allegations of improper ‘kickbacks’ paid to lenders for more than a decade.  The Consumer Financial Protection Bureau made the announcement today.  Its director, Richard Cordray, charged, “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.”  For more, see the NYTimesand WSJ.

Also today, the U.S. Department of Justice filed a fraud suit against Golden First Mortgage Corp, alleging the company and its CEO “repeatedly lied” to the government.  The complaint claims that Golden First rushed paperwork through internally, although the company certified (to HUD and the FHA) that proper due diligence had been conducted.  According to the government, Golden First used three employees to process 100-200 loans per month—predictably leading to “extraordinarily high” default rates as high as 60% in 2007.  For more, see Thomson Reuters.

On a related note, district court Judge Victor Marrero (S.D.N.Y.) indicated that he may not accept a “neither admit nor deny” provision in SAC Capital Advisor’s insider trading settlement.  At a hearing last week, he made a point unlikely to encounter much resistance:  “There is something counterintuitive and incongruous in a party agreeing to settle a case for $600 million that might cost $1 million to defend and litigate if it truly did nothing wrong.”  Judge Marrero is not the first to question these clauses – commonly demanded by corporate litigants – but his remarks demonstrate a growing judicial skepticism with the practice.  For more, see Businessweek, Reuters, and The New Yorker.

JOBS Act Symposium: Do the crowdfunding provisions make bigger problems than the ones they try to solve?

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Symposium’s second panel discussed the JOB Act’s crowdfunding exception.  Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks.

Eric Brooks sees investors defrauded everyday in his job with the SEC. As a result, the cynic in him says that the crowdfunding provisions do create greater problems than the solve. Fraud is even easier to perpetrate over the internet and the Act sanctions the funding portals. The SEC will likely face an increase in customer complaints from investors who lose money through crowdfunding investments which then have to be researched. Nevertheless, the Act and attendant regulations can work well if protections are preserved.

Robert Bartlett analogized crowdfunding to the ability to generally solicit investments up to a million dollars in the 90’s. That freedom led to significant instances of fraud. There is a definite potential for this act to be a repeat of those failures.

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JOBS Act Symposium: Which of the Title 1 provisions has the biggest potential impact to incentivize IPO offerings and will it work?

By Will Schildknecht, J.D. Candidate 2015 | Posted on

This morning’s first panel features Robert Bartlett, Reza Dibadj, and Martin Zwilling, discussing the JOBS Act’s Title I provisions for initial public offerings.

The panelists were asked to predict which part of Title 1 of the JOBS Act will have the biggest impact on IPO offerings?

Reza Dibadj discussed the way in which the JOBS Act allows emerging growth companies to escape the onerous accounting and reporting required by the Sarbanes-Oxley legislation. Furthermore, companies are taking advantage of the opportunity to withhold executive compensation information.

Martin Zwilling emphasized that any changes to the law which decrease the number of regulatory hoops that have to be jumped through is beneficial to the IPO process. Some companies have had to dramatically increase their personnel and time resources to comply with Sarbanes-Oxley.

Robert Bartlett looked to the statistics about the parts of the JOBS Act actually being employed to understand which parts of the act are most effective. A Skadden, Arps study concluded that emerging growth companies are taking advantage of withholding executive compensation but are  still revealing three or more years of financial records even though the legislation permits them to offer with only two years of reports. Seventy percent of emerging growth companies are also taking advantage of the ability to submit their prospective IPO offer to the SEC privately.

Stay with The Network for further updates from the Berkeley Business Law Journal JOBS Act Symposium.

JOBS Act Symposium: What IPO problems did the JOBS Act set out to solve?

By Will Schildknecht, J.D. Candidate 2015 | Posted on

This morning’s first panel features Robert Bartlett, Reza Dibadj, and Martin Zwilling, discussing the JOBS Act’s Title I provisions for initial public offerings.

The panelists were asked to discuss the problems with IPOs antecedent to the passage of the JOBS Act and the problems that the Act set out to solve.

Reza Dibadj provided statistical evidence to support the fact that IPOs have significantly declined in the 2000’s. There was a significant fear on the part of policy makers that IPOs were declining or going overseas costing jobs here. But what wasn’t clear was the causation of the IPO decline. Statistics do not confidently show the cause of the demise of the IPO market and whether entrepreneurs are just preferring mergers and acquisitions instead.

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Supreme Court Refuses to Extend Statute of Limitations for SEC Fraud Actions

By Luke Burton, J.D. Candidate 2015 | Posted on

On February 27, 2013 the Supreme Court handed down a unanimous decision holding that the Securities and Exchange Commission (“SEC”) may not invoke the “discovery rule” when bringing fraud charges under the Investment Advisors Act.  15 U.S.C. §§ 80b-6(1), (2).  The “discovery rule,” so often extended to plaintiffs in private actions, triggers the statute of limitations at the time fraud is discovered by the plaintiff.  The “standard rule,” on the other hand, triggers the statute of limitations when the alleged illegal acts occurred.

In the Supreme Court’s decision in Gabelli v. SEC, the Court chose not to extend the plaintiff-friendly discovery rule to the SEC.  The reasoning was based on the asymmetries between the discovery powers of private plaintiffs and the nation’s securities regulation agency.  The Court specified that the federal government had powerful discovery tools, such as the power to “subpoena data, use whistleblowers and force settlements” and that this should ensure “timely action.”  Moreover, the Court noted, “[T]he SEC’s very purpose is to root [fraud] out.”  The Court rested the distinction on the equitable nature of the discovery rule:  the SEC’s mission of discovering and prosecuting fraud, coupled with its powerful enforcement tools, “[are] a far cry from the defrauded victim the discovery rule evolved to protect.”  In the Court’s view, the SEC did not need the discovery rule.

The Supreme Court’s decision led to mixed reactions.  The result in Gabelli came with the approval of the Cato institute, which filed an amicus brief for the defendants.  In contrast, many investors were disappointed, concluding that those who contributed to the financial crisis will continue to go without sanction.  Members of the “Occupy the SEC” movement (whose amicus brief can be found here) called the decision a “boon for fraudsters.”

The Network first covered this story the day after the Court handed down its decision.  See the archived “Week in Review” post here.

The Week in Review: SEC Nomination, Symposium, DOJ and FDIC

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Mary Jo White, President Obama’s pick to be the next S.E.C. chairwoman, took a tough stance on Wall Street regulation yesterday, testifying before the Senate Banking Committee.  Ms. White is a former federal prosecutor, although she has also worked as a corporate Wall Street defense attorney.  She appears likely to win confirmation (as early as next week).  If and when she does, banks should expect rigorous oversight from the government’s top securities regulation agency.  During her testimony, Ms. White said:  “I don’t think there’s anything more important than vigorous and credible enforcement of the securities laws.”  For more, see the NYTimes.  On a related note, Senator Warren (D-MA) has continued to push for increasing bank oversight and regulation.

The Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal will be hosting their 2013 symposium on the JOBS Act this Friday, March 15.  Registration is required.  See a previous post for a complete description of this year’s symposium lineup.

Federal prosecutors recently caught a break in an ongoing offshore tax evasion investigation, centered around Swiss financial advisor Beda Singenberger.  In a letter mailed to the United States, Singenberger unintentionally included a list of approximately 60 U.S. ‘clients.’  “The government has mined that list to great effect and prosecuted a number of people who were on that list,” according an assistant U.S. Attorney working the case.  The government continues its crack-down on unreported foreign accounts, which included a $780 million settlement with UBS, Switzerland’s largest bank.  For more, see Bloomberg. 

A recent Los Angeles Times report shows that the FDIC has been quietly settling actions against banks involved in unsound mortgage loans—including “no press release” terms that have kept the matters quiet unless and until it received a “specific inquiry.”  The newspaper claims that this practice constitutes “a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.”  Under a Freedom of Information Act request, the Times recovered more than 1,600 pages of FDIC settlement documents “catalog[ing ] fraud and negligence.”  Yesterday, Forbes picked up on the story, asking, “Is the FDIC Protecting Banks from Bad Press?”  For more, see the LATimes and Forbes.

 

From the Bench: Wells Fargo’s Contribution to Mortgage Settlement Does Not Bar Some Future Claims

By Mark Rutter, J.D. Candidate 2015 | Posted on

Wells Fargo’s bid to block the government’s most recent charges against it stemming from the mortgage crisis—primarily alleged violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”)—took a blow earlier this month when a court ruled that its $5 billion contribution to the multi-bank, $25 billion settlement in April over foreclosure practices did not preclude the new charges.  Previous coverage of Wells Fargo’s attempt to preclude the litigation is here.  U.S. District Judge Rosemary Collyer ruled that the settlement did not bar all civil or administrative claims against Wells Fargo, including those under the False Claims Act, paving the way for prosecutors in the United States Attorney’s Office for the Southern District of New York to move forward with the suit.

Collyer’s decision left the bank’s lawyers, led by teams from Fried Frank and K&L Gates, vehemently protesting the court’s interpretation of contested language in the settlement.  According to Collyer, that language indicated the government retained the right to sue Wells Fargo for material violations of Housing and Urban Development/ Fair Housing Administration (“HUD-FHA”) requirements, only barring claims based on false annual certifications regarding the bank’s compliance with those requirements.  Collyer stated that the current charges do not fall under the precluded claims, finding Wells Fargo ignored the plain language of the settlement in coming to a mistaken interpretation.   As a result, the government can bring allegations under the False Claims Act in the current suit.

Collyer, however, did not address the pending case directly.  The court for the Southern District of New York will still have to make a final determination as to whether the prosecution has pled barred claims as the case moves forward.

The defense team has strongly attacked the government’s charges in its court filings, framing the current charges as part of a broader effort to avoid honoring FHA and HUD commitments to insure thousands of defaulting mortgages as it attempts to wrongly implicate the financial industry for the defaults.

The prosecution has not yet filed its response to Wells Fargo’s motion to dismiss the current suit.

From the Bench: Dichter-Mad Family Partners v. United States

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Ninth Circuit recently affirmed a judgment – from the Central District of California – that the victims of Bernard Madoff’s Ponzi scheme lack subject matter jurisdiction to sue the Securities and Exchange Commission as an agency of the United States under the Federal Tort Claims Act.

The SEC compiled a 450-page public report highlighting its failure to uncover Madoff’s problematic investment activities.  The allegations posed by the victim plaintiffs centered on decisions made by the SEC which the district court acknowledged “should have and could have been made differently” and “reveal[ed] the SEC’s sheer incompetence.”  Nevertheless, the court held that the United States was protected from suit because the Securities and Exchange Commission was engaged in a discretionary function.  An exception is set aside in the Federal Tort Claims Act (“FTCA”) whereby employees of the Government cannot be held liable for failures relating to purely “discretionary” functions of that employee.

The district court, considering the legislative history of the FTCA, noted that Congress “repeatedly and explicitly suggested” that the SEC should be shielded by the discretionary function exception.  The FTCA only allows a claim where statutory language mandates a particular course of action.  By contrast, the duties and functions of the SEC allow it discretion in choosing who to investigate and when to bring enforcement proceedings.  Because the plaintiffs could not demonstrate that the SEC violated a specific and mandatory policy directive that related to the investigation, the court held they failed to overcome an FTCA claim’s threshold requirement.

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CFPB Announces “Ability to Repay” Rule for Mortgage Lenders

By Amanda Berloni, L.L.M. Candidate 2013 | Posted on

The Consumer Financial Protection Bureau has announced a new rule (the “Ability-to-Repay rule”) requiring mortgage lenders to ensure that potential borrowers will be able to repay their mortgages.  The CFPB is charged with amending Regulation Z, which carries out the Truth in Lending Act.  The CFPB also implements the ability-to-repay requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Under Dodd-Frank, creditors must make a reasonable and good faith determination that borrowers have a reasonable ability to repay the loan.

The Ability-to-Repay rule is aimed at protecting American consumers.  According to the CFPB Director, the “Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”

Under the new rule:

  • 1. Lenders are required to obtain and verify financial information from potential borrowers,
  • 2. Lenders must evaluate and conclude that potential borrowers have sufficient assets or income to repay the loan, and
  • 3. Lenders cannot use lower, introductory “teaser” interest rates (which cause monthly payments to jump to unaffordable levels) to base their evaluation of a potential borrower’s ability to repay the loan.

In assessing whether a borrower will be able to repay their loan, lenders must generally consider the following underwriting factors:  1) current or reasonable expected income or assets, 2) current employment status, 3) the monthly payment, 4) monthly payment on any simultaneous loan, 5) the monthly payment for mortgage-related obligations, 6) current debt obligations, 7) monthly debt-to-income ratio, and 8 ) credit history.

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