SEC Settles with Citigroup - Public Loses?

In today's New York Times there is an article by Gretchen Morgenson discussing the failure of the Securities and Exchange Commission to bring charges against persons responsible for financial institution misconduct.  The issue is viewed in the context of a recent settlement.

Earlier this month, the Securities and Exchange Commission announced an administrative settlement with two Citigroup entities in connection with municipal bond strategies that resulted in losses of about $2 billion for investors.  The settlement, in which Citigroup neither admitted or denied wrongdoing, requires the bank to pay $180 million.  The settlement named the two entities, Citigroup Alternative Investments, LLC, and Citigroup Global Markets, Inc.  It did not name any of the individuals involved in defrauding the investors.

This was a scheme that last from 2002 to 2008.  At the end the two funds imploded.  By 2009 investors were bringing private actions against the bank for misrepresenting the level of risk involved in the investment strategies.  In the same year attorneys for some of the private litigants met with the SEC staff to provide thousands of pages of evidence of violation of the U. S. securities laws.  Yet, the SEC did not reach its settlement for an additional six years.  Put another way, the SEC acted seven years after the implosion of the funds and failed to name any individuals in the administrative complaint.

The SEC (and for that matter the Justice Department) have been painfully slow to hold individuals responsible for wrongdoing at financial institutions.  Instead, the common practice is to name the financial institution or a component of such an institution and to reach a financial settlement with the named corporate defendant or respondent.  Typically, no individuals are named or charged in the complaint.  This is the case even in situations such as the current settlement where there appears to be significant evidence as to the individuals who are actually responsible for the wrongdoing.

While this and other settlements appear to be aggressive enforcement of the securities laws, in fact they are not.  In the current case $180 million will come from the shareholders of Citigroup, none of whom had any involvement in peddling the toxic investments to clients.  Those who actually devised the scheme and implemented it are left uncharged.  Such results lend credence to the claim that the rules are rigged to benefit the powerful.

To see The New York Times article, please click:  http://www.nytimes.com/2015/08/30/business/sec-settlement-with-citigroup-holds-no-one-responsible.html?ref=business&_r=0.

Visit our new South Florida Regulatory Law Website at https://rserafinilaw.com/

Bank of America Nears Record Settlement with Justice Department

News outlets are reporting that the U.S. Department of Justice and Bank of America are near agreement on a record civil settlement for actions arising out of the toxic mortgages, which significantly contributed to the financial crisis in the last decade.  Reports indicate that BofA will pay between $16 and $17 billion to settle investigations into its sale of toxic mortgages.  The potential settlement will require BofA to pay the Department of Justice and various federal and state agencies $9 billion in cash.  In addition Bank of America will offer more than $7 billion in relief to customers who are having financial difficulty with their mortgages.

The announced figure represents a significant victory for the Justice Department in its negotiations with Bank of America.  When settlement negotiations first began, the Justice Department demanded a settlement figure of $17 billion with $10 billion in cash.  Bank of America had remained adamant that its cash contribution should be no more that $3 or $4 billion with a maximum settlement of $13 billion including the consumer relief.  BofA appears to have fully capitulated to the Justice Department's demands.

Bank of America had argued for months that it should not be held completely responsible for losses arising from toxic mortgages that resulted from two Bank of America acquisitions, Merrill Lynch and Countrywide Financial.  BofA maintained that the Merrill Lynch acquisition took place at the behest of government regulators and that most of the toxic mortgage issues arising with Countrywide Financial occurred before Bank of America's acquisition of that company.  The Justice Department held to the position that BofA was responsible for the toxic mortgage issues of Merrill Lynch and Countrywide Financial.

Two issues probably precipitated the likely agreement to settle.  First, in a separate case involving Bank of America in the Southern District of New York, the court ordered BofA to pay approximately $1.3 billion.  This case arose out of Bank of America's sale of 17,600 loans, many of which were defective.  The ruling effectively undercut Bank of America's legal argument that it was not responsible for the problems arising out of the toxic mortgages.  The second issue involved the negotiating strategy of the Department of Justice.  Reportedly, last week the Attorney General Eric Holder advised the Bank of America's lawyers that the government was prepared to immediately file suit against the bank.  The United States Attorney for the District of New Jersey had prepared a civil complaint for filing.

Assuming that the settlement agreement becomes final, it will be the largest corporate payment to settle a federal action in the history the United States.  This reported settlement together with other suits against BofA arising out of the mortgage crisis will result in a total settlement value for the bank of about $23 billion.

For in depth articles about the proposed settlement, please see The New York Times,  http://dealbook.nytimes.com/2014/08/06/bank-of-america-nears-17-billion-settlement-over-mortgages/?ref=business, and The Wall Street Journal, http://online.wsj.com/articles/bank-of-america-near-16-billion-to-17-billion-settlement-1407355290?mod=WSJ_hp_LEFTWhatsNewsCollection.

Visit our new Fort Lauderdale Regulatory Law Website at https://rserafinilaw.com/

SunTrust Settles Mortgage Based Cases

In the last couple of weeks SunTrust Banks has entered into settlements arising out of its mortgage practices.  In mid June SunTrust reached an agreement with the Department of Justice, 49 states, and the District of Columbia to resolve two major investigations into mortgage related wrongdoing.  The settlement required the payment of approximately $1 billion by SunTrust to address loan origination and customer service issues of wrongdoing.

This settlement involves relief to distressed homeowners of approximately $500 million and a cash payment of $468 million.  The $500 million in borrower relief will include loan modifications.  Of the cash $418 million will go to the federal government to address faulty loans written by SunTrust between 2006 and 2012.  The faulty loans caused the Federal Housing Authority significant losses.  The payments will be repayment to the Federal Housing Authority for those losses.  Please see the Los Angeles Times article on this settlement, http://www.latimes.com/business/la-fi-suntrust-mortgage-settlement-20140618-story.html.

Today Department of Justice prosecutors in the Western District of Virginia announced a further agreement with SunTrust.  In this agreement the bank will pay up to $320 million for its delay in approving mortgage modifications and for making misrepresentations to homeowners.  The settlement divides the funds between borrower relief and housing counseling services.  Most of the money SunTrust will pay will compensate shortchanged borrowers.  The investigation involved the bank's compliance with the Home Affordable Modification Program. 

SunTrust will provide $179 million for consumer restitution with the possibility of setting aside another $95 if necessary.  Additionally, the bank will contribute $20 million to a fund for distribution to organizations providing housing counseling services.  Also, the settlement requires SunTrust to make a $10 million payment to Fannie Mae and Freddie Mac.  Fannie Mae and Freddy Mac are two government funded mortgage companies.  Lastly, SunTrust will forfeit $16 million to the United States.  The government estimates that thousands of borrowers who applied for loan modifications under the Home Affordable Modification Program may be entitled to relief.

For more on this settlement please see The New York Times,  http://dealbook.nytimes.com/2014/07/03/suntrust-reaches-settlement-on-mortgage-modifications/?ref=business, and the Charlotte Observer, http://www.charlotteobserver.com/2014/07/03/5022505/suntrust-agrees-to-320m-settlement.html#.U7W3-orD-po.

Visit our new South Florida Regulatory Law Website at https://rserafinilaw.com/

Corporate Prosecution: Double Standard or Government Weakness

In an interesting article in The New York Times, dated today, writer Jesse Eisinger discusses the Justice Department's recent efforts to prosecute wrongdoing by large banks.  Specifically, Credit Suisse and BNP Paribas have been charged criminally with violations of federal criminal statutes.  While no large American banks or bankers have been charged since the financial crisis of 2008, the first two efforts by the Department of Justice to move criminally against large financial institutions have involved foreign banks (Credit Swuisse - Switzerland, BNP Paribas - France).

The question is whether there is a double standard in the DOJ white collar prosecution of foreign banks as opposed to the use of deferred prosecution agreements with large American financial institutions.  A deferred prosecution agreement usually results after a financial institution retains a white collar criminal defense firm to conduct an internal investigation.  The results of the internal investigation are revealed to the Justice Department.  The bank and DOJ then enter into a deferred prosecution agreement, which requires that bank to pay monetary penalties, institute or improve internal controls, and not commit further violations.  For its part the Department of Justice refrains from prosecuting the bank or its employees.

The Times article suggests that the real issue may not be a double standard applied by DOJ to domestic and foreign financial institutions but instead weak enforcement and a reluctance to bring white collar criminal prosecutions by the Department of Justice.  Whether characterized as a deferred prosecution agreement as is typical with the American banks or a criminal prosecution as with Credit Suisse and BNP Paribas, the final sanctions look very similar.  Moreover, the banks involved do not face having criminal charges brought against any individuals.  They pay monetary penalties; none face the prospect of ongoing financial harm.

Finally, the article argues that the Justice Department should move away from settlements and try to begin taking to trial large white collar criminal cases against banks.  For more, please link to the article from the Times, http://dealbook.nytimes.com/2014/06/18/questions-of-a-double-standard-but-really-just-weak-justice/?ref=business.

Visit our new Miami Regulatory Law Website at https://rserafinilaw.com/

Acquittal in Iranian Trade Restriction Case

I recently won an acquittal in federal court in West Palm Beach, Florida, for a client accused of violating the U.S. restrictions on trade with Iran.  The case was United States v. Patrick Campbell, 13-CR-60245.  The government had charged my client with violation of the trading restrictions with Iran imposed by the United States and a count of conspiracy to violate those restrictions.

The case arose from a Department of Homeland Security ("DHS") sting operation.  DHS investigators posed on the internet as uranium brokers.  The defendant, a resident of Sierra Leone in West Africa, responded to the internet advertisement.  He stated that he mined and exported minerals including uranium.  The agents pretending to be business people told my client that they were brokering a deal for a Middle East country.  Eventually, the agents informed him that the country purportedly involved was Iran.  The agents insisted that the defendant come to the United States to meet the purported buyers and bring a sample of the uranium and a draft contract.  Upon clearing customs at Kennedy International Airport DHS agents arrested my client.  DHS treated the matter as a significant investigation, issuing a press announcement after the arrest, which was picked by a number of media outlets including The Wall Street Journal and The New York Times. 

My client was incarcerated pending trial and remained in jail for nine months until his acquittal by the jury.  Even after his exoneration, Immigration and Customs Enforcement ("ICE") held him on an immigration detainer until we could arrange his air travel back to Sierra Leone, a period of about a week.  Because the client was not deported, ICE did not make his travel arrangements.

There were a number of significant issues in the trial.  The first was whether the defendant had acted willfully in undertaking his activities.  Specifically, because the violation of law required a specific intent, the government had to prove that the defendant knew of an underlying prohibition of some type and acted with the specific willful intent to violate that prohibition.  The flip side of the willfulness issue is good faith.  That is, if the defendant acted in good faith, such action is incompatible with willful conduct in the context of a specific intent crime.  During the investigation the agents did not advise the defendant, a resident of Africa who had never been to the United States, that the US had a prohibition against trading with Iran.

The second issue involved the definition of a "United States person."  Under the law one must be a "United States person" or "US person" to violate the prohibition.  Presence in the United States is one of the definitions of a "United States person."  The issue was whether the action of the agents in insisting that the defendant come to the United States for the sole purpose of affecting his arrest made him a "United States person" for the purposes of the statute.

The final issue was the conduct of the DHS agents during the investigation.  The agents suggested to the defendant all of the actions which he took.  Moreover, agents insisted that the defendant come to the United States, threatening to end negotiations if he did not do so.  The facts raised the issue of entrapment to the extent that any crime at all had occurred. 

The jury deliberated for less than three hours before returning the verdict of not guilty on both counts.

Anyone wishing to obtain more information about the case may contact me at ras@rserafinilaw.com or at (754) 223-4718.

Visit our new Website at https://rserafinilaw.com/

Justice Department Moving Cautiously to Charge Large Banks Criminally

Recent reports state that the U.S. Department of Justice is primed to charge two of the world's largest banks with violations of U.S. criminal law.  News sources have reported that Credit Suisse and BNP Paribas are targets of Justice Department criminal investigations.  Please see the article in The New York Times about the investigations into these banks, http://dealbook.nytimes.com/2014/04/29/u-s-close-to-bringing-criminal-charges-against-big-banks/.  If accurate, the move by DOJ is a change in strategy and focus by the Department.

Since the conviction of the defunct accounting giant Arthur Anderson for obstruction of justice, federal prosecutors have become reluctant to charge large institutions with criminal conduct.  Arthur Anderson failed after its conviction, costing countless innocent people their jobs and creating a ripple effect of pain.  As a result, federal prosecutors have been "gun shy" about charging large companies criminally due to the potential for collateral effects on innocent employees and others.  Instead, the Department has increasingly obtained deferred prosecution agreements.  Under these agreements the company is not charged criminally but admits to wrongdoing, pays a substantial penalty, and takes remedial action often under the supervision of the Justice Department.

In the aftermath of the financial crisis of 2008 critics have complained that the Justice Department has been lax in bringing criminal charges against large financial institutions involved in questionable financial activities leading to the crisis.

As federal prosecutors begin to ponder the bringing of charges against large financial and other institutions, the prosecutors will try to walk a fine line of bringing the institutional defendants to justice without unleashing the collateral harm to innocents.  Due to the size and reach of some institutions and the interplay of state banking laws, there could be consequences that are unforeseen by the federal prosecutors grappling with the issues.

One possible avenue for the prosecutors is the bringing of criminal charges against the bank officials responsible for the allege criminal wrongdoing.  Unless the wrongdoing of the individual or individuals charged was so pervasive that it became endemic to the institution, the indictment and conviction of those responsible for the institution's wrongdoing should not endanger its continued existence.

This promises to be an interesting area of prosecution policy in the coming months.

Visit our new South Florida Regulatory Law Website at https://rserafinilaw.com/

Supreme Court to Hear Case about Warrantless Searches of Cellphones

Under traditional Fourth Amendment to the United States Constitution juris prudence, law enforcement may conduct a search incident to arrest.  The basis behind this exception to the Fourth Amendment's warrant requirement is the need to protect police officers and to prevent the destruction of evidence.  The issue is particularly important in the digital age when a cellular telephone can contain the information equivalent of tens of thousands of pages of paper. 

The Fourth Amendment provides protection against unreasonable searches and seizures.  The issue before the Supreme Court is whether the warrantless search of such an extensive database makes a mockery of the protection in the digital age.

Lower courts have split on the issue of requiring a warrant for the search to cellphones.  The Texas Court of Criminal Appeals suppressed evidence obtained from a cellphone in the absence of a search warrant, characterizing the search as the equivalent of a home desk, computer, bank information, and medicine cabinet.  In a California case on appeal before the Court, police searched the defendant's cellphone twice without warrants.  The California courts determined that warrants were not necessary for either search.  In another case before the Court the First Circuit Court of Appeals in Boston overturned a federal conviction resting on evidence obtained through the search of a cellphone without a search warrant.

The Department of Justice takes the position that a cellphone is functionally no different than wallets, address books, personal papers and other items subject to searches incident to arrests.

The Court will hear oral argument on the cases during session on April 29, 2014.  Whatever the Court rules, it will have a significant impact on how law enforcement conducts investigations in the future.

For more on the issue, see the article in The New York Times, http://www.nytimes.com/2014/04/28/us/supreme-court-taking-up-police-searches-of-data-troves-known-as-cellphones.html?hp.

Visit our new Miami Regulatory Law Website at https://rserafinilaw.com/