BANK TO PAY OVER $212 MILLION TO RESOLVE FALSE CLAIMS ACT ALLEGED VIOLATIONS

FROM:  U.S. JUSTICE DEPARTMENT
Monday, June 1, 2015
First Tennessee Bank N.A. Agrees to Pay $212.5 Million to Resolve False Claims Act Liability Arising from FHA-Insured Mortgage Lending

First Tennessee Bank N.A. has agreed to pay the United States $212.5 million to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements, the Justice Department announced today.  First Tennessee is headquartered in Memphis, Tennessee.

“First Tennessee’s reckless underwriting has resulted in significant losses of federal funds and was precisely the type of conduct that caused the financial crisis and housing market downturn,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division.  “We will continue to hold accountable lenders who put profits before both their legal obligations and their customers, and restore wrongfully claimed funds to FHA and the treasury.”

Between January 2006 and October 2008, First Tennessee, through its subsidiary First Horizon Home Loans Corporation (First Horizon), participated in the FHA insurance program as a Direct Endorsement Lender (DEL).  As a DEL, First Tennessee had the authority to originate, underwrite and endorse mortgages for FHA insurance.  If a DEL such as First Tennessee approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD, FHA’s parent agency, for the losses resulting from the defaulted loan.  Under the DEL program, neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance.  DELs such as First Tennessee are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance, to maintain a quality control program that can prevent and correct deficiencies in their underwriting practices and to self-report any deficient loans identified by their quality control program.  In August 2008, First Tennessee sold First Horizon to MetLife Bank N.A. (MetLife), a wholly-owned subsidiary of MetLife Inc., which thereafter originated FHA-insured mortgages under the MetLife name.  In February 2015, MetLife agreed to pay $123.5 million to resolve its False Claims Act liability arising from its FHA originations after it acquired First Horizon from First Tennessee.

“First Tennessee admitted failings that resulted in poor quality FHA loans,” said Acting U.S. Attorney John A. Horn of the Northern District of Georgia.  “While First Tennessee profited from these loans, taxpayers incurred substantial losses when the loans defaulted.  The settlement, as well as the investigation that preceded it, illustrates that the Department of Justice will closely scrutinize entities that cause financial injury to the government, and, in turn, the American taxpayer.”

The settlement announced today resolves allegations that First Tennessee failed to comply with FHA origination, underwriting and quality control requirements.  As part of the settlement, First Tennessee admitted to the following facts: From January 2006 through October 2008, it repeatedly certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements.  Beginning in late 2007, First Tennessee significantly increased its FHA originations.  The quality of First Tennessee’s FHA underwriting significantly decreased during 2008 as its FHA lending increased.  Beginning no later than early 2008, First Tennessee became aware that a substantial percentage of its FHA loans were not eligible for FHA mortgage insurance due to its own quality control findings.  These findings were routinely shared with First Tennessee’s senior managers.  Despite internally acknowledging that hundreds of its FHA mortgages had material deficiencies, and despite its obligation to self-report findings of material violations of FHA requirements, First Tennessee failed to report even a single deficient mortgage to FHA.  First Tennessee’s conduct caused FHA to insure hundreds of loans that were not eligible for insurance and, as a result, FHA suffered substantial losses when it later paid insurance claims on those loans.

“Our investigation found that First Tennessee caused FHA to pay claims on loans that the bank never should have approved and insured in the first place,” said HUD Inspector General David A. Montoya.  “This settlement reinforces my commitment to combat fraud in the origination of single family mortgages insured by the FHA and makes certain that only qualified, creditworthy borrowers who can repay their mortgages are approved under the FHA program.”

“We are pleased that First Tennessee has acknowledged facts that demonstrate its failure to comply with HUD’s requirements and has agreed to settle with the government,” said HUD General Counsel Helen Kanovsky.  “We thank the Department of Justice and HUD’s Office of Inspector General for all of their efforts in helping us to make this settlement a reality.  We hope this agreement sends a message to those lenders with whom we do business that HUD takes compliance very seriously and so should they.”

The investigation of the allegations in the government’s complaint was a coordinated effort between the Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s Office of the Northern District of Georgia, HUD and HUD’s Office of Inspector General.

REMARKS BY PRESIDENT OBAMA TO AARP

FROM:  THE WHITE HOUSE
February 23, 2015
Remarks by the President at the AARP
AARP
Washington, D.C.
**Please see below for a correction, marked with an asterisk.
2:05 P.M. EST

THE PRESIDENT:  Thank you.  (Applause.)  It is great to be back here -- not just to pick up my AARP card.  (Laughter.)  I want to thank Jo Ann and everybody at AARP for the work you do every single day on behalf of seniors.  I am especially grateful to all of you for the work you're doing to help us prepare for the White House Conference on Aging, which will be coming up later this year and will cover a whole host of issues, including protecting one of the most critical components of middle-class life, and that's a secure and dignified retirement.  And that’s what we're here to talk about today.

I want to thank some other people who care passionately about this issue:  My energetic, tireless Secretary of Labor, Tom Perez.  (Applause.)  A couple of outstanding Senators, Cory Booker from New Jersey -- (applause) -- and Elizabeth Warren from Massachusetts.  (Applause.)  And Congressmen John Delaney is here -- proud of the work he is doing.  (Applause.)

So six years after the financial crisis that shook a lot of people’s faith in a secure retirement, the good news is our economy is steadily growing and creating new jobs.  Last year was the best year for job growth since the 1990s.  And all told, over the past five years, the private sector has created nearly *2 12 million new jobs.  And since I took office, the stock market has more than doubled, which means that 401ks for millions of families have been replenished.

America is poised -- as long as Washington doesn’t screw it up, as long as we keep the progress going with policies that help and don't hinder the middle class, no stalemates, no standoffs, no self-inflicted wounds or manufactured crisis -- if we stay away from those things, then the projections are that the economy can do very well again this year.

But we're going to have to choose whether we accept an economy where only a few of us do spectacularly well, or whether we build an economy where everybody who works hard can get ahead, and have some semblance of security in this ever-changing world?

Because while we’ve come a long way, we’ve got a lot more work to do to make sure that the recovery reaches every single American out there and not just those at the top.  That’s what I've been calling middle-class economics -- the idea that this country does best when everybody does their fair share, and everybody gets a fair shot and everybody is playing by the same set of rules.

And that last part -- everybody playing by the same set of rules -- is why we passed historic Wall Street reform that put in place smarter, tougher, common-sense rules of the road to protect consumers and to end taxpayer-funded bailouts.  And by the way, I know that there have been times where folks questioned whether or not Wall Street reform works.  If you look at how the banking system has responded, if you look at what’s happened on Wall Street, when you look at how the markets gauge what we've done, reform has been meaningful.  It has been effective.

That's why we passed a Credit Card Bill of Rights that gives consumers a simpler credit card bill -- no more hidden fees, no more shifting deadlines, no more sudden changes of terms, or “any time, any reason” rate hikes.  It’s why we created a new consumer watchdog agency that protects hardworking Americans from everything from predatory mortgage practices to payday loans that can destroy people’s finances.  And I want to thank our outstanding CFPB Director Rich Cordray and his team -- (applause) -- they are working day in, day out to protect working families, and when families are taken advantage of, they’ve been working hard to get them their hard-earned money back.

Today, we’re going to build on these consumer protections for the middle class by taking a new action to protect hardworking families’ retirement security.  Because, in America, after a lifetime of hard work, you should be able to retire with dignity and a sense of security.

And in today’s economy, that's gotten tougher.  Most workers don’t have a traditional pension.  A Social Security check often isn't enough on its own.  And while the stock market is doing well right now, that doesn't help folks who don't have retirement accounts.  As a consequence, too few Americans at or near retirement have saved enough to have peace of mind.

So, in addition to keeping Social Security strong -- and we will keep it strong as long as I am President.  That is going to be a priority for me.  (Applause.)  In addition to keeping Social Security strong, I’ve proposed ways to make it easy and automatic for workers to save for retirement through their employer, including offering tax incentives to small businesses that offer retirement plans.  And these proposals, it's estimated, would expand workplace savings opportunities to 30 million more workers.  We’ve also proposed paying for them by closing tax loopholes for the wealthy.

At the same time, we’ve got to make sure that Americans who are doing the responsible thing by preparing for retirement are getting a fair share of the returns on those savings.  That's what I want to focus on today.  If you are working hard, if you're putting away money, if you're sacrificing that new car or that vacation so that you can build a nest egg for later, you should have the peace of mind of knowing that the advice you’re getting for investing those dollars is sound, that your investments are protected, that you're not being taken advantage of.

And the challenge we've got is right now, there are no uniform rules of the road that require retirement advisors to act in the best interests of their clients -- and that’s hurting millions of working and middle-class families.  There are a lot of very fine financial advisors out there, but there are also financial advisors who receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns.  So what happens is these payments, these inducements incentivize the broker to make recommendations that generate the best returns for them, but not necessarily the best returns for you.

They might persuade investors, individuals with savings, to roll over their existing savings out of a low-fee plan and into a high-cost plan.  They might even recommend investments with worse returns simply because they get paid to recommend those products. And one study by professors at Harvard and MIT had researchers send people to pose as middle-class investors seeking investment advice from advisors.  In 284 client visits, advisors recommended higher-fee funds about half the time.  The lowest-fee funds were recommended only 21 times.

So think about what that means.  You’ve done the right thing.  You’ve worked hard.  You’ve saved what you could.  You're responsibly trying to prepare for retirement, but because of bad advice, because of skewed incentives, because of lack of protection, you could end up in a situation where you lose some of your hard-earned money simply because your advisor isn’t required to put your interests first.  And the truth is most people don’t even realize that’s happening.
 
We read a story in the paper about Merlin and Elaine Toffel, a retired couple from near my hometown of Chicago -- Lindenhurst, Illinois.  They had worked their whole lives so they could rest easy in their golden years.  They got bad advice to invest in expensive annuities that made it hard for them to access their money.  Suddenly, they were short on cash -- which is exactly what they had tried to avoid by saving and acting responsibly all those years.  They were taken advantage of by an advisor of an institution where they had been longtime clients and it was an institution they trusted.  And Merlin now lives in a nursing home and he and Elaine aren’t here today.  As they get older, their children are trying to help them get all this sorted out.  And that's just one family.  They’re not alone.

On average, conflicts of interest in retirement advice results in annual losses of 1 percentage point for affected persons.  I know 1 percent may not sound like a lot, but the whole concept of compounding interest -- it adds up.  It can cut your savings by more than a quarter over the course of 35 years  -- cut your savings by more than 25 percent.  So, instead of $10,000 in savings growing to more than $38,000, it will grow to just over $27,500.  That's a big spread.  And all told, bad advice that results from conflicts of interest costs middle-class and working families about $17 billion a year -- $17 billion every year.

So you can put a number on how this affects us.  But it affects something else.  It offends our basic values of honesty and fair play.  The values that say, in America, responsibility is rewarded and not exploited.

I want to emphasize once again, there are a whole lot of financial advisors out there who do put their clients’ interests first.  There are a lot of hardworking men and women in this field and got into this field to help people.  They’re folks like financial advisor Sheryl Garrett, from Arkansas, who says, “The role” -- is Sheryl here?  There she is.  Sheryl, stand up just so we know where you are.  (Applause.)  We're proud of Sheryl.  So I'm quoting you, Sheryl.  Sheryl says, “The role of a financial advisor is one of the most important jobs.  But there is a segment of the industry today that operates like the gunslingers of the Wild West.  We don’t have the rules and regulations to protect those who we’re supposed to be serving.”

Couldn't have said it better myself, which is why I quoted you.  (Laughter.)  Sheryl is right.  The rules governing retirement investments were written 40 years ago, at a time when most workers with a retirement plan had traditional pensions, and IRAs were brand new, and 401ks didn’t even exist.  So it's not surprising that the rules that existed 40 years ago haven't caught up to the realities of most families today.  Now, outdated regulations, legal loopholes, fine print -- all that stuff today makes it harder for savers to know who they can trust.  Financial advisors absolutely deserve fair compensation for helping people save for retirement and helping people figure out how to manage their investments.  But they shouldn’t be able to take advantage of their clients.  The system makes it harder, in fact, for those financial advisors like Sheryl who are trying to do the right thing, because if she’s making really good advice but somebody who is competing with her is selling snake oil, she’s losing business.  And ultimately, those clients are going to lose money.
So, today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests.  It's a very simple principle:  You want to give financial advice, you’ve got to put your client’s interests first.  You can't have a conflict of interest.

And this is especially important for middle-class families, who can't afford to lose even a penny of the hard-earned savings that they’ve put away.  These folks aren’t asking for any special help or special consideration.  They just want to be treated with fairness and respect.  And that’s what this new rule would do.  And for outstanding advisors out there, it levels the playing field so that they can do what they know is the right thing to do -- putting their clients first.

Now, here’s one last element of it I've got to emphasize.  Just because we put forward a new rule doesn’t mean that it becomes law.  There are a lot of financial advisors who support these basic safeguards to prevent abuse, but there are also some special interests that are going to fight it with everything they’ve got, saying that these costs will skyrocket or services are going to be lost.

But it turns out that we can actually look at the evidence.  These industry doomsday predictions have not come true in other countries that have taken even more aggressive action on this issue than we're proposing.  And if your business model rests on taking advantage, bilking hardworking Americans out of their retirement money, then you shouldn’t be in business. (Applause.) That's pretty straightforward.

So we welcome different perspectives and ideas on how to move forward.  That's what the comment period for the rule is all about.  What I won’t accept is the notion that there’s nothing we can do to make sure that hardworking, responsible Americans who scrimp and save somehow end up losing some of those savings to less than scrupulous practices.  We should be able to make sure that folks are treated fairly, and give every possible assistance we can so that they can retire with security and dignity.

So we’re going to keep on pushing for this rule.  It’s the right thing to do for our workers.  It’s the right thing to do for our country.  We are thrilled that AARP is supporting this, but AARP is not alone.  We've got all kinds of organizations that are stepping up -- consumer advocates, civil rights organizations, labor organizations.  We've got a great coalition of people who understand that the strength of our economy rests on whether hardworking families can feel more secure, knowing that if they do the right thing, they can get ahead.  And that’s what I’m going to keep fighting for -- an economy where not only everybody is sharing in America’s success, but they’re also contributing to America’s success.  This is a important component in that basic promise that makes America the greatest country on Earth.

So thank you so much, everybody.  God bless you.  God bless America.  (Applause.)

END
2:28 P.M. EST

DOJ, STATES AND D.C. ENTER INTO $1.375 BILLION SETTLEMENT WITH S&P RELATED TO STRUCTURED FINANCIAL PRODUCTS

FROM:  U.S. JUSTICE DEPARTMENT 
Tuesday, February 3, 2015
Justice Department and State Partners Secure $1.375 Billion Settlement with S&P for Defrauding Investors in the Lead Up to the Financial Crisis

Attorney General Eric Holder announced today that the Department of Justice and 19 states and the District of Columbia have entered into a $1.375 billion settlement agreement with the rating agency Standard & Poor’s Financial Services LLC, along with its parent corporation McGraw Hill Financial Inc., to resolve allegations that S&P had engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs).  The agreement resolves the department’s 2013 lawsuit against S&P, along with the suits of 19 states and the District of Columbia.  Each of the lawsuits allege that investors incurred substantial losses on RMBS and CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks.  Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities.

The settlement announced today is comprised of several elements.  In addition to the payment of $1.375 billion, S&P has acknowledged conduct associated with its ratings of RMBS and CDOs during 2004 to 2007 in an agreed statement of facts.  It has further agreed to formally retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States.  Finally, S&P has agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia, and to respond, in good faith, to requests from any of the states and the District of Columbia for information or material concerning any possible violation of those laws.

“On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” said Attorney General Holder.  “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business.  While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”

Attorney General Holder was joined in announcing the settlement with Acting Associate Attorney General Stuart F. Delery, Acting Assistant Attorney General for the Civil Division Joyce R. Branda and Acting U.S. Attorney for the Central District of California Stephanie Yonekura.  Also joining the Department of Justice in making this announcement are the attorneys general from Arizona, Arkansas, California, Connecticut, Colorado, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Washington and the District of Columbia.

“This resolution provides further proof that the Department of Justice will vigorously pursue investigations and litigation, no matter how challenging, to protect the best interests of the American people,” said Acting Associate Attorney General Delery.  “As part of the resolution, S&P admitted facts demonstrating that it misrepresented itself to investors and the public, allowing the pursuit of profits to bias its ratings.  S&P also agreed to retract its unsubstantiated claim that this lawsuit was initiated in retaliation for the decisions S&P made about the credit rating of the U.S. government.  Today's announcement is the latest result of our dedicated effort to address misconduct of every kind that contributed to the financial crisis.”

“Today’s historic settlement demonstrates that we will use all of our resources and every legal tool available to hold accountable those who commit financial fraud,” said Acting Assistant Attorney General Branda.  “Thanks to the tireless efforts of our team in Washington and California, S&P has not only paid a record-setting penalty, but has now admitted to the American people facts that make clear its own unlawful role in the financial crisis.”

Half of the $1.375 billion payment – or $687.5 million – constitutes a penalty to be paid to the federal government and is the largest penalty of its type ever paid by a ratings agency.  The remaining $687.5 million will be divided among the 19 states and the District of Columbia.  The allocation among the states and the District of Columbia reflects an agreement between the states on the distribution of that money.

In its agreed statement of facts, S&P admits that its decisions on its rating models were affected by business concerns, and that, with an eye to business concerns, S&P maintained and continued to issue positive ratings on securities despite a growing awareness of quality problems with those securities. S&P acknowledges that:

S&P promised investors at all relevant times that its ratings must be independent and objective and must not be affected by any existing or potential business relationship;

S&P executives have admitted, despite its representations, that decisions about the testing and rollout of updates to S&P’s model for rating CDOs were made, at least in part, based on the effect that any update would have on S&P’s business relationship with issuers;

Relevant people within S&P knew in 2007 many loans in RMBS transactions S&P were rating were delinquent and that losses were probable;

S&P representatives continued to issue and confirm positive ratings without adjustments to reflect the negative rating actions that it expected would come.
In addition, S&P acknowledges that the voluminous discovery provided to S&P by the United States in the litigation does not support their allegation that the United States’ complaint was filed in retaliation for S&P’s 2011 decisions on the credit rating of the United States.  S&P will formally retract that claim in the litigation.

“S&P played a central role in the crisis that devastated our economy by giving AAA ratings to mortgage-backed securities that turned out to be little better than junk,” said Acting U.S. Attorney Yonekura.  “Driven by a desire to increase profits and market share, S&P blessed innumerable securitizations that were used by aggressive lenders to offload the risks of billions of dollars in mortgage loans given to homeowners who had no ability to pay them off.  This conduct fueled the meltdown that ultimately led to tens of thousands of foreclosures in my district alone.  This historic settlement makes clear the consequences of putting corporate profits over honesty in the financial markets.”

Today’s settlement was announced in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. Attorneys’ Offices and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes, enhancing coordination and cooperation among federal, state and local authorities, addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations.  Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants.

DOJ ANNOUNCES $16.85 BILLION SETTLEMENT WITH BANK OF AMERICA

FROM:  U.S. DEPARTMENT OF JUSTICE 

Thursday, August 21, 2014

Bank of America to Pay $16.65 Billion in Historic Justice Department Settlement for Financial Fraud Leading up to and During the Financial Crisis 

Attorney General Eric Holder and Associate Attorney General Tony West announced today that the Department of Justice has reached a $16.65 billion settlement with Bank of America Corporation – the largest civil settlement with a single entity in American history ­— to resolve federal and state claims against Bank of America and its former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch.  As part of this global resolution, the bank has agreed to pay a $5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) – the largest FIRREA penalty ever – and provide billions of dollars of relief to struggling homeowners, including funds that will help defray tax liability as a result of mortgage modification, forbearance or forgiveness.  The settlement does not release individuals from civil charges, nor does it absolve Bank of America, its current or former subsidiaries and affiliates or any individuals from potential criminal prosecution.

“This historic resolution - the largest such settlement on record - goes far beyond ‘the cost of doing business,’” said Attorney General Holder.  "Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct.  This is appropriate given the size and scope of the wrongdoing at issue.”

This settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force and its Residential Mortgage-Backed Securities (RMBS) Working Group, which has recovered $36.65 billion to date for American consumers and investors.

“At nearly $17 billion, today’s resolution with Bank of America is the largest the department has ever reached with a single entity in American history,” said Associate Attorney General West.  “But the significance of this settlement lies not just in its size; this agreement is notable because it achieves real accountability for the American people and helps to rectify the harm caused by Bank of America’s conduct through a $7 billion consumer relief package that could benefit hundreds of thousands of Americans still struggling to pull themselves out from under the weight of the financial crisis.”

The Justice Department and the bank settled several of the department’s ongoing civil investigations related to the packaging, marketing, sale, arrangement, structuring and issuance of RMBS, collateralized debt obligations (CDOs), and the bank’s practices concerning the underwriting and origination of mortgage loans.  The settlement includes a statement of facts, in which the bank has acknowledged that it sold billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitized loans.  When the RMBS collapsed, investors, including federally insured financial institutions, suffered billions of dollars in losses.  The bank has also conceded that it originated risky mortgage loans and made misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA).

Of the record-breaking $16.65 billion resolution, almost $10 billion will be paid to settle federal and state civil claims by various entities related to RMBS, CDOs and other types of fraud.  Bank of America will pay a $5 billion civil penalty to settle the Justice Department claims under FIRREA.  Approximately $1.8 billion will be paid to settle federal fraud claims related to the bank’s origination and sale of mortgages, $1.03 billion will be paid to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC), $135.84 million will be paid to settle claims by the Securities and Exchange Commission.  In addition, $300 million will be paid to settle claims by the state of California, $45 million to settle claims by the state of Delaware, $200 million to settle claims by the state of Illinois, $23 million to settle claims by the Commonwealth of Kentucky, $75 million to settle claims by the state of Maryland, and $300 million to settle claims by the state of New York.

Bank of America will provide the remaining $7 billion in the form of relief to aid hundreds of thousands of consumers harmed by the financial crisis precipitated by the unlawful conduct of Bank of America, Merrill Lynch and Countrywide.  That relief will take various forms, including principal reduction loan modifications that result in numerous homeowners no longer being underwater on their mortgages and finally having substantial equity in their homes.  It will also include new loans to credit worthy borrowers struggling to get a loan, donations to assist communities in recovering from the financial crisis, and financing for affordable rental housing.  Finally, Bank of America has agreed to place over $490 million in a tax relief fund to be used to help defray some of the tax liability that will be incurred by consumers receiving certain types of relief if Congress fails to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act of 2007.

An independent monitor will be appointed to determine whether Bank of America is satisfying its obligations.  If Bank of America fails to live up to its agreement by Aug. 31, 2018, it must pay liquidated damages in the amount of the shortfall to organizations that will use the funds for state-based Interest on Lawyers’ Trust Account (IOLTA) organizations and NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development.  The organizations will use the funds for foreclosure prevention and community redevelopment, legal assistance, housing counselling and neighborhood stabilization.

As part of the RMBS Working Group, the U.S. Attorney’s Office for the District of New Jersey conducted a FIRREA investigation into misrepresentations made by Merrill Lynch to investors in 72 RMBS throughout 2006 and 2007.  As the statement of facts describes, Merrill Lynch regularly told investors the loans it was securitizing were made to borrowers who were likely and able to repay their debts.  Merrill Lynch made these representations even though it knew, based on the due diligence it had performed on samples of the loans, that a significant number of those loans had material underwriting and compliance defects - including as many as 55 percent in a single pool.  In addition, Merrill Lynch rarely reviewed the unsampled loans to ensure that the defects observed in the samples were not present throughout the remainder of the pools.  Merrill Lynch also disregarded its own due diligence and securitized loans that the due diligence vendors had identified as defective.  This practice led one Merrill Lynch consultant to “wonder why we have due diligence performed” if Merrill Lynch was going to securitize the loans “regardless of issues.”

“In the run-up to the financial crisis, Merrill Lynch bought more and more mortgage loans, packaged them together, and sold them off in securities – even when the bank knew a substantial number of those loans were defective,” said U.S. Attorney Paul J. Fishman for the District of New Jersey.  “The failure to disclose known risks undermines investor confidence in our financial institutions.  Today’s record-breaking settlement, which includes the resolution of our office’s imminent multibillion-dollar suit for FIRREA penalties, reflects the seriousness of the lapses that caused staggering losses and wider economic damage.”

This settlement also resolves the complaint filed against Bank of America in August 2013 by the U.S. Attorney’s Office for the Western District of North Carolina concerning an $850 million securitization.  Bank of America acknowledges that it marketed this securitization as being backed by bank-originated “prime” mortgages that were underwritten in accordance with its underwriting guidelines.  Yet, Bank of America knew that a significant number of loans in the security were “wholesale” mortgages originated through mortgage brokers and that based on its internal reporting, such loans were experiencing a marked increase in underwriting defects and a noticeable decrease in performance.  Notwithstanding these red flags, the bank sold these RMBS to federally backed financial institutions without conducting any third party due diligence on the securitized loans and without disclosing key facts to investors in the offering documents filed with the SEC.  A related case concerning the same securitization was filed by the SEC against Bank of America and is also being resolved as part of this settlement.

“Today’s settlement attests to the fact that fraud pervaded every level of the RMBS industry, including purportedly prime securities, which formed the basis of our filed complaint,” said U.S. Attorney Anne M. Tompkins for the Western District of North Carolina.  “Even reputable institutions like Bank of America caved to the pernicious forces of greed and cut corners, putting profits ahead of their customers.  As we deal with the aftermath of the financial meltdown and rebuild our economy, we will hold accountable firms that contributed to the economic crisis.  Today’s settlement makes clear that my office will not sit idly while fraud occurs in our backyard.”

The U.S. Attorney’s Office for the Central District of California has been investigating the origination and securitization practices of Countrywide as part of the RMBS Working Group effort.  The statement of facts describes how Countrywide typically represented to investors that it originated loans based on underwriting standards that were designed to ensure that borrowers could repay their loans, although Countrywide had information that certain borrowers had a high probability of defaulting on their loans.  Countrywide also concealed from RMBS investors its use of “shadow guidelines” that permitted loans to riskier borrowers than Countrywide’s underwriting guidelines would otherwise permit.  Countrywide’s origination arm was motivated by the “saleability” of loans and Countrywide was willing to originate “exception loans” (i.e., loans that fell outside of its underwriting guidelines) so long as the loans, and the attendant risk, could be sold.  This led Countrywide to expand its loan offerings to include, for example, “Extreme Alt-A” loans, which one Countrywide executive described as a “hazardous product,” although Countrywide failed to tell RMBS investors that these loans were being originated outside of Countrywide’s underwriting guidelines.  Countrywide knew that these exception loans were performing far worse than loans originated without exceptions, although it never disclosed this fact to investors.

“The Central District of California has taken the lead in the department’s investigation of Countrywide Financial Corporation,” said Acting U.S. Attorney Stephanie Yonekura for the Central District of California.  “Countrywide’s improper securitization practices resulted in billions of dollars of losses to federally-insured financial institutions.  We are pleased that this investigation has resulted in a multibillion-dollar recovery to compensate the United States for the losses caused by Countrywide’s misconduct.”

In addition to the matters relating to the securitization of toxic mortgages, today’s settlement also resolves claims arising out of misrepresentations made to government entities concerning the origination of residential mortgages.

The U.S. Attorney’s Office for the Southern District of New York, along with the Federal Housing Finance Agency’s Office of Inspector General and the Special Inspector General for the Troubled Asset Relief Program, conducted investigations into the origination of defective residential mortgage loans by Countrywide’s Consumer Markets Division and Bank of America’s Retail Lending Division as well as the fraudulent sale of such loans to the government sponsored enterprises Fannie Mae and Freddie Mac (the “GSEs”).  The investigation into these practices, as well as three private whistleblower lawsuits filed under seal pursuant to the False Claims Act, are resolved in connection with this settlement.  As part of the settlement, Countrywide and Bank of America have agreed to pay $1 billion to resolve their liability under the False Claims Act.  The FIRREA penalty to be paid by Bank of America as part of the settlement also resolves the government’s claims against Bank of America and Countrywide under FIRREA for loans fraudulently sold to Fannie Mae and Freddie Mac.  In addition, Countrywide and Bank of America made admissions concerning their conduct, including that they were aware that many of the residential mortgage loans they had made to borrowers were defective, that many of the representations and warranties they made to the GSEs about the quality of the loans were inaccurate, and that they did not self-report to the GSEs mortgage loans they had internally identified as defective.

“For years, Countrywide and Bank of America unloaded toxic mortgage loans on the government sponsored enterprises Fannie Mae and Freddie Mac with false representations that the loans were quality investments,” said U.S. Attorney Preet Bharara for the Southern District of New York.  “This office has already obtained a jury verdict of fraud and a judgment for over a billion dollars against Countrywide and Bank of America for engaging in similar conduct.  Now, this settlement, which requires the bank to pay another billion dollars for false statements to the GSEs, continues to send a clear message to Wall Street that mortgage fraud cannot be a cost of doing business.”

The U.S. Attorney’s Office for the Eastern District of New York, together with its partners from the Department of Housing and Urban Development (HUD), conducted a two-year investigation into whether Bank of America knowingly made loans insured by the FHA in violation of applicable underwriting guidelines.  The investigation established that the bank caused the FHA to insure loans that were not eligible for FHA mortgage insurance.  As a result, HUD incurred hundreds of millions of dollars of losses.  Moreover, many of Bank of America’s borrowers have defaulted on their FHA mortgage loans and have either lost or are in the process of losing their homes to foreclosure.

“As a Direct Endorser of FHA insured loans, Bank of America performs a critical role in home lending,” said U.S. Attorney Loretta E. Lynch for the Eastern District of New York.  “It is a gatekeeper entrusted with the authority to commit government funds earmarked for facilitating mortgage lending to first-time and low-income homebuyers, senior citizen homeowners and others seeking or owning homes throughout the nation, including many who live in the Eastern District of New York.  In obtaining a payment of $800 million and sweeping relief for troubled homeowners, we have not just secured a meaningful remedy for the bank’s conduct, but have sent a powerful message of deterrence.”

“Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” said Rhea Kemble Dignam, Regional Director of the SEC’s Atlanta Office.  “Requiring an admission of wrongdoing as part of Bank of America’s agreement to resolve the SEC charges filed today provides an additional level of accountability for its violation of the federal securities laws.”

“Today’s settlement with Bank of America is another important step in the Obama Administration’s efforts to provide relief to American homeowners who were hurt during the housing crisis,” said U.S. Department of Housing and Urban Development (HUD) Secretary Julián Castro.  “This global settlement will strengthen the FHA fund and Ginnie Mae, and it will provide $7 billion in consumer relief with a focus on helping borrowers in areas that were the hardest hit during the crisis.  HUD will continue working with the Department of Justice, state attorneys general, and other partners to take appropriate action to hold financial institutions accountable and provide consumers with the relief they need to stay in their homes.  HUD remains committed to solidifying the housing recovery and creating more opportunities for Americans to succeed.”

“Bank of America and the banks it bought securitized billions of dollars of defective mortgages,” said Acting Inspector General Michael P. Stephens of the FHFA-OIG.  “Investors, including Fannie Mae and Freddie Mac, suffered enormous losses by purchasing RMBS from Bank of America, Countrywide and Merrill Lynch not knowing about those defects.  Today’s settlement is a significant, but by no means final step by FHFA-OIG and its law enforcement partners to hold accountable those who committed acts of fraud and deceit.”

The attorneys general of California, Delaware, Illinois, Kentucky, Maryland and New York also conducted related investigations that were critical to bringing about this settlement.  In addition, the settlement resolves investigations conducted by the Securities and Exchange Commission (SEC) and litigation filed by the Federal Deposit Insurance Company (FDIC).

The RMBS Working Group is a federal and state law enforcement effort focused on investigating fraud and abuse in the RMBS market that helped lead to the 2008 financial crisis.  The RMBS Working Group brings together more than 200 attorneys, investigators, analysts and staff from dozens of state and federal agencies including the Department of Justice, 10 U.S. Attorneys’ Offices, the FBI, the Securities and Exchange Commission (SEC), the Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the FHFA-OIG, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board’s Office of Inspector General, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network, and more than 10 state attorneys general offices around the country.

The RMBS Working Group is led by Director Geoffrey Graber and five co-chairs: Assistant Attorney General for the Civil Division Stuart Delery, Assistant Attorney General for the Criminal Division Leslie Caldwell, Director of the SEC’s Division of Enforcement Andrew Ceresney, U.S. Attorney for the District of Colorado John Walsh and New York Attorney General Eric Schneiderman.

Investigations were led by Assistant U.S. Attorneys Leticia Vandehaar of the District of New Jersey; Dan Ryan and Mark Odulio of the Western District of North Carolina; George Cardona and Lee Weidman of the Central District of Carolina; Richard Hayes and Kenneth Abell of the Eastern District of New York; and Pierre Armand and Jaimie Nawaday of the Southern District of New York.

ASSOCIATE AG WEST'S REMARKS ON RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS) MISCONDUCT

FROM:  U.S. JUSTICE DEPARTMENT 

Associate Attorney General Tony West Outlines Justice Department’s Approach to Toxic Mortgage Cases

~ Wednesday, July 16, 2014

Two days after the historic Citigroup settlement, Associate Attorney General Tony West outlined the Justice Department’s approach to resolving the remaining cases related to Residential Mortgage-Backed Securities (RMBS) misconduct that contributed to the financial crisis.  West declared that the department would not hesitate to bring litigation against these firms if these principles were not met.

Associate Attorney General West detailed three general principles that will continue to guide the Justice Department’s approach in all future RMBS cases: accountability, transparency and redress.  These principles will comprise of civil penalties, a robust statement of facts and consumer relief for the American people.

“If an institution is unwilling to admit its wrongful conduct in a statement of facts; or balks at paying a substantial penalty that reflects that conduct; or refuses to do right by those affected, then we will not shrink from litigating as long as we must to fulfill our law enforcement mandate,” said Associate Attorney General West.

Please see below for the Associate Attorney General’s prepared remarks:

Thank you, Mike [Bresnick] for the generous introduction.  We miss your wise counsel at the department.

I am quite pleased to be with you here this afternoon at the Exchequer Club.  For more than 50 years, this club has served as an important forum for the frank exchange of ideas on the most pressing economic and financial issues in the country.  And, having spent more than two years as the nation's Associate Attorney General and more than five years as a member of this administration's Department of Justice, I particularly appreciate the opportunity to be with all of you -- an impressive group of leaders from the public and private sectors.

The people in this room are making important contributions that enrich our nation ’s economic life.  You are grappling with the challenge of improving the financial health of this country -- in the work you do, the words you write, the ideas you debate and put forward.  And in the wake of the Great Recession, I believe we share a common goal of ensuring that our nation is economically strong, fiscally sound and financially fair.

Today, I thought I would share some thoughts on the last of those three elements -- financial fairness -- and the Justice Department's role in helping to achieve that goal by targeting fraud in our financial system.  First, I'll talk about some of our recent financial fraud efforts, and particularly the work of the Residential Mortgage-Backed Securities Working Group.  Next, I'll share a couple of brief observations about how we approach these RMBS cases.  And finally, I'll discuss some of the factors we consider when determining whether to sue or settle these large, often multi-billion dollar RMBS-related fraud matters.

Let me begin with the observation that much of my tenure as Associate Attorney General has been focused on executing the department's financial fraud priorities, particularly through the use of civil enforcement tools, as my office manages the civil litigation side of the Justice Department.

Part of this focus grows out of the precedent set by my predecessor, Tom Perrelli.  He, along with HUD Secretary Shaun Donovan and several state attorneys general, negotiated a landmark $25 billion National Mortgage Servicer settlement with several financial institutions that was designed to bring some relief to consumers hurt by unfair and, in some cases, illegal loan servicing tactics.

And part of it comes from my own experience: I grew up professionally in the Justice Department, serving first as young lawyer on then-Deputy Attorney General Jamie Gorelick's staff in the early '90s, then for several years as a federal prosecutor in the Northern District of California where my caseload included white-collar crime.

When the president nominated and the Senate confirmed me as the Civil Division's Assistant Attorney General in 2009, I returned to the department and made, as one of my primary priorities, the aggressive use of the civil statutory authority Congress provided us to fight fraud in the pharmaceutical and health care industries.  During that time, I also launched an investigation of Standard & Poor’s Ratings Services for allegedly issuing RMBS ratings that were not objective and independent.

And during 2009, that first year of the Obama Administration, you'll recall we were all preoccupied with addressing the wreckage left by the financial crisis.  As part of that response, in November 2009, President Obama created the Financial Fraud Enforcement Task Force, or FFETF, on which I serve as a co-chair and which Mike Bresnick led as Executive Director before returning to private practice.  And since its inception, the FFETF has brought together a broad coalition of agencies, enforcement tools and resources to fight fraud.

A critical component of the FFETF's efforts is a targeted group formed, as the president said in his 2011 State of the Union Address, to “hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”  That group – the Residential Mortgage Backed Securities Working Group -- comprised of several state agencies and state attorneys general -- is charged with investigating fraud in the packaging, marketing, sale and issuance of these securities -- conduct that was a major contributing factor to the financial crisis.

To date, the efforts of the RMBS Working Group have secured $20 billion in penalties, compensation and consumer relief to investors, victims and the American people.  Those results include the $13 billion resolution with J.P. Morgan last November -- the largest settlement against a single defendant in the Justice Department's history -- and a $7 billion resolution with Citibank announced just two days ago, which made history by including a record-breaking civil penalty of $4 billion.

Now, resolutions like these -- notwithstanding their record-breaking size or historic significance -- always seem to spark a debate between those who say we're being too easy on the big banks and those who say we're being too tough.  To some, no penalty is high or harsh enough; to others, we insist on settlement terms that are unfairly punitive.

I welcome this debate because it is part of a long, democratic tradition of questioning the activities our government takes in the name of the people it serves.  And while I am quite certain there is little I can say to persuade the most ardent partisans on either side of this debate, let me offer the following observations:

First, the RMBS Working Group settlements we have announced to date are civil resolutions; they do not preclude the possibility of criminal prosecutions.  Importantly, neither the J.P. Morgan nor the Citibank settlement agreements absolve either institution or its employees from possible criminal charges.  And as the recent criminal pleas of BNP and Credit Suisse –  as well as the more than 37,000 individual white collar criminals we have prosecuted over the last five years – demonstrate, we do not hesitate to aggressively investigate allegations of financial wrongdoing, and, if the evidence warrants, to demand accountability.  Because, as the Attorney General has said before, no institution, no matter how large, and no individual, no matter how powerful, is above the law.

Second, while most of the attention has been focused on these multi-billion dollar settlements, let me be clear: we do not investigate these matters intending to settle them.  Through the RMBS Working Group, we have assembled an enforcement apparatus to vindicate those who fell victim to the financial crisis, and that apparatus continues to grow.  Resolving these cases will require more than simply seeking a meeting with the Attorney General.  It will require taking true responsibility for misconduct that contributed to the Great Recession, which I will discuss more in a moment.  If an institution is unwilling to admit its wrongful conduct in a statement of facts; or balks at paying a substantial penalty that reflects that conduct; or refuses to do right by those affected, then we will not shrink from litigating as long as we must to fulfill our law enforcement mandate.  Our RMBS-related cases against S&P in California and Bank of America in North Carolina demonstrate this, and I would not be surprised if we were to see additional RMBS lawsuits in the future.

And that observation leads me to the next topic I wanted to discuss today: those factors we consider when determining how and whether we will sue or settle a RMBS fraud case.  And let me note here: I'm talking about whether we will pursue or settle a civil RMBS case against an institution, not a financial fraud case that's being considered for criminal prosecution against an institution or individual, so my comments are limited to that context.

Now, as a general matter, it should be no surprise that the primary drivers in any RMBS fraud case will be the facts and evidence of that particular case.  The conduct at issue; the egregiousness of that conduct and who was involved; the quality of the evidence and what we can prove in court given the applicable law -- those are the scene-setters for any discussion about how we will resolve any given case.

And long before discussions get to my level, there have usually been months of back-and-forth conversations between the investigators and Assistant U.S.  Attorneys who will try the case and the potential bank defendant to make sure our facts are right and our theory of the case is sound.

So by the time I am sitting across the table from a financial institution to discuss whether we will settle or sue, there aren't generally many facts that remain in dispute.  The main question on the table is whether we will be able to satisfy three general principles that guide us in all of these cases: accountability, transparency and redress.

Let me discuss each one in turn.

First, accountability.  The main question here, of course, is whether the financial institution is willing to be held accountable for the harmful conduct our investigation has uncovered.  In other words, now that we have developed an evidentiary record of wrongdoing, is the institution willing to step up and accept responsibility for the unlawful activity, be it the conduct of the parent or a subsidiary?

In the RMBS-related cases we pursue, the only remedy under FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989) that the government can seek, besides injunctive relief, is a civil penalty.  As many of you know, FIRREA was passed in response to the savings and loan crisis 30 years ago, and under that statute, civil penalties are our only recourse.

So it follows that in many of these cases, accountability has taken the form of record-breaking civil penalties.  And our approach to calculating the appropriate penalty in any given case involves taking into account a number of factors, including but not limited to:  the egregiousness and pervasiveness of the conduct, and amount of harm caused by that conduct; the strength of the evidence; whether the penalty is of such a level that it could be regarded by shareholders and management as merely the “cost of doing business”; whether the institution has failed to fully cooperate with our investigation; and whether any steps have been taken to remediate meaningfully the harm caused by the harmful conduct.

Now, some have argued that other considerations, such as a firm’s market share, should outweigh the facts and evidence in a given case.  We disagree.  While a firm's market share footprint may be among the informational data points we consider, it is not determinative.  The facts and evidence of a particular case -- they are what will ultimately matter the most.

Let me turn to the second principle, transparency.  In every RMBS Working Group case where there is a negotiated resolution short of trial, we will demand a statement of facts in which the institution admits the conduct at issue.

Attorney General Holder has made this a non-negotiable term of every RMBS Working Group settlement for two reasons:  First, it's an important component of accountability.  It requires the institution to articulate to its own employees, its shareholders and to the public that it engaged in conduct that is both unacceptable and wrong.  Second, it explains to the American people what our investigation uncovered and allows them to see for themselves the building blocks of our case against the institution.

In both JPMorgan and Citibank, the Attorney General and I believed it was imperative for each institution to acknowledge publicly its conduct, and we believe that obtaining a statement of facts in any negotiated resolution is as important as any monetary penalty.

Finally, let's talk about redress. 

As we all know, the packaging up of defective loans into mortgage backed securities, and the misrepresentations made to investors about the quality of those securities not only caused financial losses to investors; it contributed to the near-collapse of our entire economy.  Millions of Americans who had no idea what an RMBS was felt the pain of this conduct.  Families lost homes.  Communities were ravaged by foreclosures.  You had neighborhood streets that had vacant house after vacant house, like a mouthful of missing teeth.  This debacle hurt everybody.

So when the president announced the formation of the RMBS Working Group, he gave it two main objectives: seek accountability where the facts warrant, and pursue efforts to remediate the harm where possible.

That is why the pre-trial resolutions of these cases to date have contained, as a major element, relief for consumers.  In the J.P. Morgan resolution, we insisted on the bank providing $4 billion of relief to underwater homeowners and potential homebuyers, including those in distressed areas of the country.  Half of that total will go towards forgiveness and forbearance of principal for qualifying homeowners who are currently paying a mortgage.  The other half will go towards rate reductions or refinancing, low-to-moderate income and disaster area lending, and neighborhood stabilization programs.

In the Citibank settlement , we have required $2.5 billion in consumer relief.  In addition to loan modifications and refinancing assistance, as we did in J.P.  Morgan, we worked with Citibank and our colleagues at the Department of Housing and Urban Development to include innovative measures that will create affordable rental housing for families who were pushed into the rental market by the financial crisis; significant investments in community development and neighborhood stabilization efforts around the country; and interest rate reductions for those responsible borrowers who have responsibly kept current on their mortgages but for whom it's been a struggle because their rates are so high.

Now, we know these measures won't cure every ill or solve every problem created by the financial crisis; but they are significant steps, and we are optimistic that they will bring some much-needed relief to those who are still feeling the ill effects of what the president called "an era of recklessness" in our financial markets.

So let me close by saying that I believe we have achieved a great deal in fighting financial fraud since the formation of the RMBS Working Group: record civil penalties; factual statements that evidence an unprecedented level of accountability from the financial institutions and transparency to the marketplace; and consumer relief for the American people.

But equally important is the fact that we are not done yet.  As I said on Monday, we're not letting up, and we're not going away.  We will continue to pursue these cases and follow the facts wherever they lead and enforce the law fairly but aggressively should we uncover evidence of unlawful conduct.  Because a level financial playing field requires that type of oversight and the American people deserve no less.

Thank you.

PRESIDENT OBAMA'S STATEMENT ON THE VOLCKER RULE

FROM:  THE WHITE HOUSE
Statement by the President on the Volcker Rule

Five years ago, a financial catastrophe on Wall Street was rapidly fueling a punishing recession on Main Street that ultimately cost millions of jobs and hurt families across the country.  So as we prepared steps to rescue our economy and put Americans back to work, we also put in place tough rules of the road to make sure a crisis like that never happened again – rules that reward sound financial practices, allow honest innovation and strengthen the financial system’s ability to support job creation and durable economic growth.

As part of this Wall Street reform, we fought to include the Volcker Rule – a rule that makes sure big banks can’t make risky bets with their customer’s deposits.  The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firm’s practices.

Our financial system will be safer and the American people are more secure because we fought to include this protection in the law.  I thank Paul Volcker, a former Chairman of the Federal Reserve and advisor I trust, for helping to create this important safeguard.  I also thank Secretary Lew and the regulators who worked diligently to finalize the rule by the end of this year as we called on them to do.  I encourage Congress to give these regulators adequate funding to effectively and efficiently implement the rule, which will help protect hardworking families and business owners from future crisis, and restore everyone’s certainty and confidence in America’s dynamic financial system.

SEC CHARGES HOLDING COMPANY OF FIFTH THIRD BANK WITH IMPROPER ACCOUNTING DURING FINANCIAL CRISIS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the holding company of Cincinnati-based Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis.

Fifth Third agreed to pay $6.5 million to settle the SEC’s charges, and Daniel Poston agreed to pay a $100,000 penalty and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

According to the SEC’s order instituting settled administrative proceedings, Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market declined in 2007 and 2008 and borrowers failed to repay their loans as originally required.  Fifth Third decided in the third quarter of 2008 to sell large pools of these troubled loans.  Once Fifth Third formed the intent to sell the loans, U.S. accounting rules required the company to classify them as “held for sale” and value them at fair value.  Proper accounting would have increased Fifth Third’s pretax loss for the quarter by 132 percent.  Instead, Fifth Third continued to classify the loans as “held for investment,” which incorrectly suggested that the company had not made the decision to sell the loans.

“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”

According to the SEC’s order, Poston was familiar with the company’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans.  Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required.  Poston also made inaccurate statements to Fifth Third’s auditors about the company’s loan classifications, and certified the company’s inaccurate results for the third quarter of 2008.

“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.

Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing any violations and any future violations of these provisions.  Poston is suspended from appearing or practicing before the SEC as an accountant pursuant to Rule 102(e) of the Commission’s Rules of Practice with the right to apply for reinstatement after one year.

The SEC’s investigation was conducted by Beth Groves, Paul Harley, Jonathan Jacobs, and Jim Blenko.  The SEC appreciates the assistance of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

TWO KPMG AUDITORS CHARGED FOR FAILURE TO FIND HIDDEN LOAN LOSSES

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Two KPMG Auditors for Failed Audit of Nebraska Bank Hiding Loan Losses During Financial Crisis

Washington, D.C., Jan. 9, 2013 — The Securities and Exchange Commission today charged two auditors at KPMG for their roles in a failed audit of a Nebraska-based bank that hid millions of dollars in loan losses from investors during the financial crisis and eventually was forced to file for bankruptcy.

The SEC previously charged three former TierOne Bank executives responsible for the scheme. Two executives agreed to settle the SEC’s charges, and the case continues against the other.

The new charges in the SEC’s case are against KPMG partner John J. Aesoph and senior manager Darren M. Bennett. The SEC’s investigation found that they failed to appropriately scrutinize management’s estimates of TierOne’s allowance for loan and lease losses (known as ALLL). Due to the financial crisis and problems in the real estate market, this was one of the highest risk areas of the audit, yet Aesoph and Bennett failed to obtain sufficient evidence supporting management’s estimates of fair value of the collateral underlying the bank’s troubled loans. Instead, they relied on stale information and management’s representations, and they failed to heed numerous red flags when issuing unqualified opinions on TierOne’s 2008 financial statements and the bank’s internal controls over its financial reporting.

"Aesoph and Bennett merely rubber-stamped TierOne’s collateral value estimates and ignored the red flags surrounding the bank’s troubled real estate loans," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management’s representations."

According to the SEC’s order instituting administrative proceedings against Aesoph, who lives in Omaha, and Bennett, who lives in Elkhorn, Neb., the auditors failed to comply with professional auditing standards in their substantive audit procedures over the bank’s valuation of loan losses resulting from impaired loans. They relied principally on stale appraisals and management’s uncorroborated representations of current value despite evidence that management’s estimates were biased and inconsistent with independent market data. Aesoph and Bennett failed to exercise the appropriate professional skepticism and obtain sufficient evidence that management’s collateral value and loan loss estimates were reasonable.

According to the SEC’s order, the internal controls identified and tested by the auditing engagement team did not effectively test management’s use of stale and inadequate appraisals to value the collateral underlying the bank’s troubled loan portfolio. For example, the auditors identified TierOne’s Asset Classification Committee as a key ALLL control. But there was no reference in the audit work papers to whether or how the committee assessed the value of the collateral underlying individual loans evaluated for impairment, and the committee did not generate or review written documentation to support management’s assumptions. Given the complete lack of documentation, Aesoph and Bennett had insufficient evidence from which to conclude that the bank’s internal controls for valuation of collateral were effective.

The SEC’s order alleges that Aesoph and Bennett engaged in improper professional conduct as defined in Section 4C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true and what, if any, remedial sanctions are appropriate pursuant to Rule 102(e). The administrative law judge will issue an initial decision no later than 300 days from the date of service of the order.

The SEC’s investigation of the auditors was led by Mary Brady and Michael D’Angelo of the Denver Regional Office. Barbara Wells and Nicholas Heinke will lead the Enforcement Division’s litigation in the administrative proceeding.

SEC CHARGES THREE TOP EXECUTIVES AT KCAP FINANCIAL INC., WITH OVERSTATING ASSETS DURING FINANCIAL CRISIS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 28, 2012 — The Securities and Exchange Commission today charged three top executives at a New York-based publicly-traded fund being regulated as a business development company (BDC) with overstating the fund’s assets during the financial crisis. The fund’s asset portfolio consisted primarily of corporate debt securities and investments in collateralized loan obligations (CLOs).

An SEC investigation found that KCAP Financial Inc. did not account for certain market-based activity in determining the fair value of its debt securities and certain CLOs. KCAP also failed to disclose that the fund had valued its two largest CLO investments at cost. KCAP’s chief executive officer Dayl W. Pearson and chief investment officer R. Jonathan Corless had primary responsibility for calculating the fair value of KCAP’s debt securities, while KCAP’s former chief financial officer Michael I. Wirth had primary responsibility for calculating the fair value of KCAP’s CLOs. Wirth, a certified public accountant, prepared the disclosures about KCAP’s methodologies to fair value its CLOs, and Pearson reviewed those disclosures.

The three executives agreed to pay financial penalties to settle the SEC’s charges.

"When market conditions change, funds and other entities must properly take into account those changed conditions in fair valuing their assets, said Antonia Chion, Associate Director in the SEC’s Division of Enforcement. "This is particularly important for BDCs like KCAP, whose entire business consists of the assets that it holds for investment."

This is the SEC’s first enforcement action against a public company that failed to properly fair value its assets according to the applicable financial accounting standard — FAS 157 — which became effective for KCAP in the first quarter of 2008.

According to the SEC’s order instituting administrative proceedings against the fund and the three executives, KCAP did not record and report the fair value of its assets in accordance with Generally Accepted Accounting Principles (GAAP) and in particular FAS 157, which requires assets to be fair valued based on an "exit price" that reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

The SEC’s order found that Pearson and Corless concluded that any trades of debt securities held by KCAP in the fourth quarter of 2008 reflected distressed transactions, and therefore KCAP determined the fair value of its debt securities based solely on an enterprise value methodology. However, this methodology did not calculate or inform KCAP investors of the FAS 157 "exit price" for that security. Wirth calculated the fair value of KCAP’s two largest CLO investments to be their cost, and did not take into account the market conditions during that period.

According to the SEC’s order, in May 2010, KCAP restated the fair values for certain debt securities and CLOs whose net asset values had been overstated by approximately 27 percent as of Dec. 31, 2008. Moreover, KCAP’s internal controls over financial reporting did not adequately take into account certain market inputs and other data.

"KCAP should have accounted for market conditions in the fourth quarter of 2008 in determining the fair values of its assets," said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. "FAS 157 is critically important in fair valuing illiquid securities, and funds must consider market information in making FAS 157 fair value determinations and comply with their disclosed valuation methodologies."

KCAP’s overvaluation and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Pearson, Corless, and Wirth caused KCAP’s violations and directly violated Exchange Act Rule 13b2-1 by causing KCAP’s books and records to be falsified. Pearson and Wirth also directly violated Exchange Act Rule 13a-14 by falsely certifying the adequacy of KCAP’s internal controls.

Pearson and Wirth each agreed to pay $50,000 penalties and Corless agreed to pay a $25,000 penalty to settle the SEC’s charges. KCAP and the three executives, without admitting or denying the findings, consented to the SEC’s order requiring them to cease and desist from committing or causing any violations or any future violations of these federal securities laws.

The SEC’s investigation was conducted by Adam Aderton of the Asset Management Unit, Noel Gittens, and Richard Haynes, and was supervised by Assistant Director Ricky Sachar