In the April 2010 Edition:
The subprime lending crisis and ensuing credit crunch have resulted in significant losses and numerous lawsuits involving parties to the mortgage lending and securitization process. This digest collects and summarizes recent media reports regarding potential liability, government initiatives, litigation and regulatory actions arising from the subprime mortgage crisis and credit crunch, as well as the increasing number of reported cases of financial fraud.
This issue focuses on recent significant decisions in civil litigation regarding subprime and other high-risk mortgages, the status of the Madoff, Rothstein, Petters, Nadel and Aliaga Ponzi schemes and related litigation, and the status of financial regulatory reform legislation in response to the subprime crisis and credit crunch.
In the Spotlight:
Litigation & Regulatory Investigations
Banks Fare Well in Credit Crisis-Related Lawsuits
According to recent studies by analysts, it appears that banks have had success in fighting lawsuits filed by investors stemming from the financial crisis. It appears that the majority of these lawsuits accuse financial firms of misrepresenting the risks of various products, including mortgage-backed securities (MBS). According to a former Securities and Exchange Commission (SEC) commissioner and professor at Stanford Law School, "judges across the country are realizing that not every massive loss of investor capital is caused by fraud." In addition, analysts note that it appears investors are beginning to recognize that a possible reason for the collapse of the financial market is mistake, rather than fraud. Since the end of 2007, approximately 40 securities fraud cases have been dismissed in the early stages, compared with approximately 20 cases in which some claims were allowed to proceed with discovery. Analysts have determined that the usual dismissal rates for securities fraud cases are between 33 percent-40 percent. In cases where the plaintiffs survived the motion to dismiss stage, they were able to point to specific questionable acts within a company, such as alleged insider trading. ("Banks Winning When Investors Sue," The Wall Street Journal, April 8, 2010)
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Ponzi Schemes & Fraud Actions
Federal Regulators Uncover Alleged Ponzi Scheme in Florida
On April 6, 2010, the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit in federal court in Miami against CMA Capital Management LLC and its owner, Claudio Aliaga, as well as Global Investment Fund LLC and its owner, Betty Aliaga. According to the lawsuit, the defendants were operating a $4.5 million Ponzi scheme. Claudio Aliaga apparently solicited investors for Global Investment Fund by promising returns of 2 percent to 3 percent per month on foreign exchange investments, and he allegedly represented to investors that they were, in fact, earning such returns on their investments. However, according to the CFTC, Claudio Aliaga traded only half of the funds that he received from investors and used the remainder of the funds for personal expenses and to pay off previous investors. In the lawsuit, the CFTC seeks monetary penalties, cancellation of all existing contracts and disgorgement of customer funds. Additionally, the lawsuit seeks to prevent the Aliagas from engaging in future commodity trading activities. ("Feds: CMA Capital Management a Ponzi Scheme," South Florida Business Journal, April 7, 2010)
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Government & Regulatory Investigations
Merrill Lynch Ordered to Pay New Jersey $4.87 Million
On April 6, 2010, New Jersey Attorney General Paula Dow announced that Merrill Lynch has agreed to pay $4.87 million in penalties to end an investigation into the financial firm's marketing of auction rate securities. Merrill Lynch has also agreed to repurchase auction rate securities from private investors. According to state officials, the securities were marketed as a safe and accessible alternative to cash. However, when the $330 billion market for the securities crashed in 2008, many investors were left with illiquid auction rate securities. The settlement with New Jersey is part of a multistate agreement that Merrill Lynch has entered regarding the marketing of auction rate securities. The potential amount of repurchases from private investors has not been disclosed. ("Merrill Lynch to Pay N.J. $4.9M In Penalties," NJ.com, April 7, 2010)
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Government & Regulatory Investigations
SEC Expects to Bring More Credit Crisis-Related Lawsuits
In an interview on March 29, 2010, Mary Schapiro, chair of the SEC, said that the SEC has spent a great deal of time in the past year to refocus the agency and bring in the right people in order to restore investor confidence and the integrity of the marketplace. Schapiro noted that the SEC has already brought approximately a dozen cases related to the financial crisis, including State Street and Evergreen, and cases against executives at Countrywide Financial and Beazer Homes. According to Schapiro, "there are many more [cases] in the pipeline." Specifically, Schapiro noted that the SEC is closely watching the Lehman Brothers Bankruptcy case and will be probing the accounting procedure known as "Repo 105" with "every major financial institution very thoroughly" in the coming months. ("More Crisis-Related Cases in the Pipeline: SEC's Schapiro," CNBC.com, March 29, 2010)
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