Financial Services Litigation & Investigation Monitor

DOJ Settles Lending Discrimination Case Against AIG Subsidiaries

Fred Rivera — Fri, 05 Mar 2010 16:47:06 -0500

The DOJ's Civil Rights Division announced a $6.1 million settlement with two AIG subsidiaries that government alleged had engaged in a pattern and practice of lending discriminated against African-Americans. According to the Wall Street Journal, the government identified approximately 2,500 African-American borrowers that will each receive about $2,300 in compensation under the agreement.

The settlement was filed to resolve the Justice Department's complaint filed under the federal Fair Housing Act and Equal Credit Opportunity Act. The complaint alleges that African American borrowers were charged higher fees on wholesale loans made by AIG Federal Savings Bank and Wilmington Finance Inc., an affiliated mortgage lending company.

According to the WSJ article, the AIG subsidiaries disagreed with the Justice Department's allegations but were pleased to reach the settlement and "avoid the distractions and burdens of protracted litigation over contentious issues."

The settlement comes a month after the Department of Justice announced the creation of a Fair Lending Task Force, and resulted from a 2007 referral by the Treasury Department's Office of Thrift Supervision to the Justice Department's Civil Rights Division. In announcing the AIG settlement, Assistant Attorney General Thomas Perez signaled that more such cases were in the pipeline. Perez said that for a long time, lenders' supervision over their mortgage brokers was inadequate.

The DOJ's full press release and links to the complaint and settlement agreement are available at the Civil Rights Division's website: DOJ, Civil Rights Division.

The recent settlement sends a clear message that lending discrimination matters are a top priority for the Obama Justice Department, and this is likely the tip of the iceberg. As DOJ's Civil Rights Division continues to staff its new Lending Discrimination Task Force and communications between the various federal banking regulatory agencies improve, many more complaints and settlements can be expected over the next several months.

Mortgage Fraud Losses Continue to Mount for Financial Institutions

Fred Rivera — Thu, 18 Feb 2010 12:37:41 -0500

A February 16, 2010 report released by the U.S. Federal Financial Institutions Examination Council (FFIEC) confirms that financial institutions continue to suffer mortgage-fraud related losses. The council, which is comprised of the U.S. Federal Reserve, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the State Liaison Committee, did not quantify the monetary losses, but noted that "[f]inancial institutions have experienced an increase in the number, volume, and types of mortgage fraud schemes resulting in significant losses." The report also identifies "red flag" indicators of possible mortgage fraud or of the risk of potential exposure to mortgage fraud, and includes a set of best practices illustrating how to detect and prevent mortgage fraud at regulated institutions. The report is the result of a 2009 symposium that was aimed at helping examiners identify various fraud schemes.

A copy of the report is available at the FFIEC's website: The Detection and Deterrence of Mortgage Fraud Against Financial Institutions.

FINRA to Propose Expansion of BrokerCheck Data

Regina Ori — Thu, 18 Feb 2010 10:17:34 -0500

On Wednesday, February 17th, the Financial Industry Regulatory Authority (FINRA) announced that it will seek authority from the SEC to significantly expand the amount of information available to the public on current and former securities brokers through its online BrokerCheck service.

The proposed BrokerCheck expansion would enable the public to access more data on customer complaints; extend the time that the public may view the full record of a broker who has left the industry from two years to 10 years; and make certain information about former brokers available permanently, such as criminal convictions and certain civil and arbitration judgments.

Commenting on FINRA’s proposals to make more information about former brokers available to the public for longer periods of time, FINRA Chairman and CEO Rick Ketchum stated that such changes “will provide valuable information about persons who have left the securities industry, often not of their own accord, but who can still cause great harm to the investing public. Recent regulatory and criminal proceedings in the financial services sector reveal that former brokers have been engaging in fraud and other misconduct long after establishing themselves in other segments of the financial services industry.”

Specifically, FINRA's proposed expansion of BrokerCheck would:

Disclose all historic complaints, including customer complaints, arbitrations or certain litigation dating back to 1999 for individual brokers who are currently registered or whose registrations were terminated within the preceding two years. If the SEC approves all of FINRA’s proposals, the reporting of historic complaints could apply to brokers whose registrations were terminated within the preceding 10 years.

Expand the disclosure period for former brokers from two years to ten years. The current two-year period coincides with the period in which an individual remains subject to FINRA's jurisdiction. The new proposal calls for making a former broker's record public for 10 years.

Increase the amount of information that is permanently available on former brokers. Last year, BrokerCheck made information about final regulatory actions (i.e., bars, suspensions, fines, etc.) against former brokers permanently available to the public. The new proposal would add more information to that list, including criminal convictions or pleas of guilty or nolo contendere; civil injunctions or findings of involvement in a violation of any investment-related statute or regulation; and arbitration awards or civil judgments based on the individual's involvement in an alleged sales practice violation.

Financial Services Bulletin: Despite Heavy Snowfall, Financial Reform Moving Forward

Fred Rivera — Wed, 17 Feb 2010 12:13:21 -0500

Despite bad weather, Congress appears to be moving forward with financial services reform. On Tuesday, February 9, House Financial Services Committee Chairman, Barney Frank issued a statement regarding the financial industry and the need for increased consumer protection in the U.S. financial industry. A comprehensive update and Chairman Frank's statement is available at Perkins Coie's Update Page.

Revisions to FINRA Financial Responsibility Rules Effective February 8th

Regina Ori — Wed, 27 Jan 2010 11:30:10 -0500

Effective February 8, 2010, FINRA members will be subject to new rules governing financial responsibility that are based in part on, and replace, provisions in the NASD and Incorporated NYSE Rules. The rules add new requirements relating to minimum net capital, financial reporting, and notification rules for member firms that clear or carry customer accounts and firms that operate under an exception created under SEC Rule 15c3-3(K)(2)(i) that either (1) clear customer transactions pursuant to this exemption, or (2) hold customer funds in a bank account established pursuant to this exemption.

Collectively, the FINRA Financial Responsibility Rules consist of FINRA Rules 4110, 4120, 4130, 4140, and 4521. The new Rules also amend FINRA Rules 9557 and 9559 to provide an expedited appeals process for members served with a notice under the Financial Responsibility Rules to increase capital or net worth. FINRA Regulatory Notice 09-71 provides an overview of the Financial Responsibility Rules, including their impact on: minimum net capital requirements; notification rules; certain restrictions on business activities; reporting requirements; and audits.

U.S. Department of Justice Forms Lending Discrimination Task Force

Fred Rivera — Thu, 14 Jan 2010 09:37:51 -0500

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.

More Struggles for SEC's Case Against BOFA

Regina Ori — Tue, 12 Jan 2010 10:06:09 -0500

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.

Khuzami Testimony: "Mortgage Fraud, Securities Fraud and the Financial Meltdown: Prosecuting Those Responsible."

Regina Ori — Mon, 28 Dec 2009 10:50:02 -0500

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.

New Legislation Attempts to Increase Financial Services Regulation

Fred Rivera — Thu, 10 Dec 2009 16:30:58 -0500

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

New NYSE Disclosure Requirements Take Effect January 1, 2010

Regina Ori — Tue, 08 Dec 2009 10:07:06 -0500

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.

JPMorgan Chase Eliminates Mandatory Arbitration in Credit Card Contracts

Fred Rivera — Wed, 02 Dec 2009 18:23:35 -0500

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.

Financial Services Bulletin: Financial Reform Bills

Fred Rivera — Fri, 20 Nov 2009 19:21:52 -0500

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 .

InvestmentNews Article Forecasts FINRA's Future

Regina Ori — Wed, 18 Nov 2009 15:04:33 -0500

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.

SEC Approves Expansion of FINRA's BrokerCheck Program

Regina Ori — Wed, 18 Nov 2009 11:14:24 -0500

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).

Jury Finds Ex-Bear Stearns Managers Not Guilty in Subprime Hedge Fund Case

Fred Rivera — Fri, 13 Nov 2009 00:45:45 -0500

Two former managers who ran a Bear Stearns hedge fund that invested in subprime bonds and derivatives were found not guilty of securities fraud charges by a Brooklyn jury. According to a report in the Wall Street Journal, the government alleged that the two men, Ralph Cioffi and Matthew Tannin, lied to investors about the condition and value hedge funds filled with subprime bonds. The funds collapsed in 2007, shortly before the pinnacle of the mortgage crisis that eventually doomed Bear Stearns. WSJ noted that the acquittals are a setback for New York's U.S. Attorney's Office, which is also involved in investigating other Wall Street players for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and AIG.

In a press release, U.S. Attorney Benton J. Campbell said "Of course, we are disappointed by the outcome in this case, but the jurors have spoken, and we accept their verdict. Honesty and integrity are the principles upon which our financial markets function. Enforcing and protecting those principles will continue to be one of the principal efforts of this Office."

Senator Dodd proposes more dramatic financial services reform

Veronica McGregor — Wed, 11 Nov 2009 18:36:38 -0500

Sen. Dodd rolled out his vision of consumer financial services regulatory reform this week and, among other things, it threatens to further consolidate oversight of banks into a single federal agency.

For Dodd's press release and links to a summary and a draft of the proposed legislation, go to http://dodd.senate.gov/?q=node/5321

House Votes to Speed Up Credit CARD Act

Veronica McGregor — Thu, 05 Nov 2009 18:05:22 -0500

Maloney-Frank bill will implement credit card reforms immediately upon enactment

Washington, DC – The House of Representatives today overwhelmingly approved legislation sponsored by Reps. Carolyn Maloney (D-NY) and Barney Frank (D-MA) that would push up the effective date of credit card reforms scheduled for next year to immediately upon the signing of the bill. Originally passed by Congress and signed into law by the President last spring, the Credit CARD Act had three staged implementation dates: August 2009, February, 2010, and August, 2010. H.R. 3639 moves up the remaining dates by which banks and credit card issuers would have to comply and applies to the largest card issuers that control over 80% of the credit card market. The bill passed by a vote of 331-92.

Rep. Carolyn Maloney said, “Card companies have redoubled many of the abusive practices that brought Congress to pass my original reforms last Spring. Rather than use the time-- time they asked for-- since the bill’s signing in May to prepare for the changes, they’ve raised rates and fees with absolutely no regard for the dire position of millions of their customers.

“I believe the card issuers have heard the message loud and clear today: their practices can no longer be tolerated. These reforms are crucial changes which level the playing field between card issuers and card holders. The reforms force the credit card market to actually function as markets should: by open competition among card offerings, with clear disclosure of interest rates, fees and other features. It bans rate hikes on existing balances, deceptive due-date gimmicks, and requires consumer opt-in to over-limit fees—and allows consumers enough time to switch cards if other terms and conditions change,” Maloney said.

“Consumers, especially in this economy, cannot wait any longer for these protections. I am extremely pleased that this legislation passed today,” said House Financial Services Committee member Rep. Dan Maffei (D-NY), who successfully offered an amendment today that will move the effective date of the bill to the date of enactment.

The House also approved an amendment, offered by Carolyn McCarthy (D-NY) and Betsy Markey (D-CO), permitting card issuers that adopt a moratorium on interest rate increases on current balances and new balances incurred before Feb. 22 to be exempt from the earlier effective date for a provision that requires an issuer to apply customer payments to the highest rate balance. Today’s bill also would exempt small credit card issuers that frequently outsource computer programming functions, and gift card providers, due to the fact that gift cards have already been printed and shipped for the 2009 holiday season. Both would have to comply with the later deadlines previously laid out in the Credit CARD Act.

The bill now goes to the Senate, where Sen. Mark Udall (D-CO) has introduced companion legislation (S. 1833) and Sen. Christopher Dodd (D-CT), Chair of the Senate Banking Committee, has introduced an immediate moratorium on retroactive rate increases (S. 1927).

The provisions which will take effect immediately upon enactment include:

· Prohibits arbitrary interest rate increases and universal default on existing balances;

· Prohibits issuers from charging over-limit fees unless the cardholder elects to allow the issuer to complete over-limit transactions, and also limits over-limit fees on electing cardholders;

· Requires payments in excess of the minimum to be applied first to the credit card balance with the highest rate of interest;

· Prohibits issuers from setting early morning deadlines for credit card payments;

· Prohibits interest charges on debt paid on time (double-cycle billing ban);

· Requires issuers extending credit to young consumers under the age of 21 to obtain an application that contains: the signature of a parent, guardian, or other individual 21 years or older who will take responsibility for the debt; or proof that the applicant has an independent means of repaying any credit extended;

· Requires penalty fees to be reasonable and proportional to the omission or violation.

· Requires that creditors periodically review all interest rate increases since January 2009 and reduce rates when a review indicates that a reduction is warranted.

These provisions already took effect last August 20^th:

· Provide increased written notice to consumers of any increases in the interest rate or otherwise makes a significant change to the terms of a credit card account;

· Inform consumers of their right to cancel the card before the rate hike goes into effect;

· Send statements to consumers 21 days before the due date of any payments.

Madoff Accountant Pleads Guillty to Fraud

Fred Rivera — Wed, 04 Nov 2009 10:50:05 -0500

The New York Times reports that Bernard. Madoff’s longtime accountant pleaded guilty to three counts of obstructing the administration of the federal tax laws carrying a prison sentence of up to 114 years . The accountant, David G. Friehling, admitted that for nearly 20 years he had "rubber-stamped" audits that allowed Madoff to conceal his Ponzi scheme from regulators. Friehling essentially conceded that he had never properly conducted an independent audit of the Madoff operation. Despite this lack of independence, he produced the purported independent audits that helped to enable the Madoff scheme for several years. Friehling also acknowledged that he had prepared tax returns for Madoff and "others," who remained unnamed. Legal experts suggest that the "others" are Madoff family members, who may be the next targets of the government's continuing investigation.

Creation of Consumer Financial Protection Agency One Step Closer with House Financial Services Committee Vote

Fred Rivera — Fri, 23 Oct 2009 00:07:46 -0500

In a 39-29 vote, on October 22, 2009 the House Financial Services Committee approved legislation (H.R. 3126) establishing an independent federal agency charged with overseeing financial products and services. Under the legislation, the Consumer Financial Protection Agency (CFPA) would be an independent agency headed by a Presidentially-appointed and Congressionally-approved Director appointed to a five year term. The CFPA's responsibilities would include rulemaking, examination and enforcement of financial institutions that provide consumers with financial products and services. The rulemaking authority of the Federal Reserve Board and other Federal banking regulator agencies under current consumer banking laws would transfer to the CFPA.

A press release from Committee Chairman Barney Frank states that, in addition to having enforcement and broad examination powers, "the agency will closely monitor the marketplace for any new financial products or services that could potentially harm consumers as well as the larger economy. Once the agency identifies these threats or abuses, it will have the power to write rules that can regulate, restrict or ban them. It will also have the power to establish guidelines so that companies issue clear and fair disclosures to customers on products such as credit cards and mortgages. "

The proposed CFPA includes an Office of Fair Lending and Equal Opportunity responsible for enforcement of the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act (HMDA), and coordinating with other federal agencies regarding fair lending matters.

The Committee vote is only the first step in what is likely to be a long process towards the creation of a new consumer financial services oversight agency. Many issues remain, including exemptions for small banks, the remaining scope of the Federal Reserve Board's authority, enforcement powers, and preemption. The CFPA also faces strong opposition from many corners, including from the American Bankers Association.

MERS, Interthinx to Collaborate on Mortgage Fraud Database

Fred Rivera — Tue, 13 Oct 2009 19:46:36 -0500

On October 12, 2009, MERSCORP, Inc. (MERS) and Interthinx announced the launch of a national fraud prevention database that will help lenders seek, identify, and share suspected fraudulent activity in loan applications from the point of origination. MERS FraudALERTSM, powered by Interthinx, will allow lenders to identify potential mortgage fraud through the sharing and reporting of data among the more than 62 million loans currently registered on the MERS® System, according to a MERS press release. Lenders using FraudALERTSM will submit loan application data and incident reports with suspected or confirmed fraudulent activity to a centralized database. The system will then notify other lenders who have loans that may have connections to the data, alerting them to possible fraudulent transactions in their pipelines. FraudALERTSM will be released during the fourth quarter 2009.