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US stock market daily report (December 13, 2013, Friday)
Vice President Kurt Lofrano of San Francisco-based Wells Fargo & Company (WFC-NYSE) could face charges from a Manhattan federal judge, in its year-old lawsuit accusing the country's largest mortgage lender of fraud. Lofrano would be the first individual targeted in the lawsuit against Wells Fargo, from October 2012. Lofrano, vice president for quality control for WFC from 2002 to 2010, was responsible to ensure proper reporting however he kept many defective loans "secret," causing HUD to pay more than $189 million in insurance for loans that were not eligible.
Wells Fargo was charged by the U.S. Department of Justice of misleading the Department of Housing and Urban Development into believing many of its loans qualified for federal insurance, costing taxpayers hundreds of millions of dollars.
Justice said Lofrano played a "critical role" in Wells Fargo's decision not to report more than 6,000 materially defective loans that the bank falsely certified for Federal Housing Administration insurance, to HUD. Lofrano is expected to be held liable by Justice, under the federal False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
Ancel Martinez Wells Fargo spokesman said, "We are disappointed in the ruling, but respect the court's decision, and we fully support Mr. Lofrano."
U.S. District Judge Jesse Furman concluded Justice could add Lofrano and amend its complaint, substantially for the reasons it cited. Judge Furman said in the Wells Fargo case, Justice Department shall file its second amended complaint by December 20.
Extensive criticism has been voiced toward federal investigators for failing to hold enough individuals accountable for activities contributing to the recent U.S. housing and financial crises.
SEC Charges Merrill Lynch For Faulty Disclosures
Merrill Lynch has agreed to pay $131.8 million to settle charges by Securities and Exchange Commission, with making faulty disclosures about collateral selection for two collateralized debt obligations (CDO) the firm structured and marketed to investors. Charges announced Friday include maintaining inaccurate books and records for a third CDO. George S. Canellos, co-director of the SEC’s Division of Enforcement said, "Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors. Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.” During 2006 and 2007, Merrill Lynch engaged in the misconduct when its CDO group was a leading arranger of structured product CDO's, according to the order from the SEC.
The order instituting settled administrative proceedings from the SEC, finds that Merrill Lynch failed to inform investors that hedge fund firm Magnetar Capital LLC had a third-party role and exercised significant influence over the selection of collateral for the CDO's entitled Octans I CDO Ltd. and Norma CDO I Ltd. Magnetar bought the equity in the CDO's and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the CDOs.
During May 2006, four representatives from Merrill Lynch, met with a Magnetar representative and an internal email explained the arrangement as “we pick mutually agreeable [collateral] managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio and in return [Magnetar] retains the equity class and we distribute the debt.” Merrill Lynch agreed in principle to do a series of deals with largely synthetic collateral and a short list of collateral managers, as the email noted. While the equity piece of a CDO transaction is typically the hardest to sell and greatest impediment to closing a CDO, Magnetar’s willingness to buy the equity in a series of CDO's gave the firm substantial leverage to influence portfolio composition.
Magnetar had a contractual right to object to the inclusion of collateral in the Octans I CDO selected by the supposedly independent collateral manager Harding Advisory LLC during the warehouse phase that precedes the closing of a CDO, according to the order from the SEC. While the disclosure Merrill Lynch provided to investors incorrectly stated that the warehouse agreement was only between Merrill Lynch and Harding, Merrill Lynch, Harding and Magnetar finalized a tri-party warehouse agreement that was sent to outside counsel. Harding and its owner have been charged with fraud by the SEC for accommodating trades requested by Magnetar, despite its interests not necessarily aligning with the debt investors.
Order by the SEC found that Merrill Lynch failed to disclose in marketing materials that the CDO gave Magnetar a $35.5 million discount on its equity investment and separately made a $4.5 million payment to the firm that was referred to as a “sourcing fee.” One-third of the assets for the portfolio underlying the Norma CDO were acquired during the warehouse phase by Magnetar rather than by the designated collateral manager NIR Capital Management LLC. Merrill Lynch provided a disclosure to investors incorrectly stating that the collateral would consist of a portfolio selected by NIR.
Andrew M. Calamari, director of the New York Regional Office of the SEC said, “Keeping adequate books and records is not an elective requirement of the federal securities laws, and broker-dealers who fail to properly record transactions will be held accountable for their violations.” SEC order charged that Merrill Lynch violated books-and-records requirements in another CDO called Auriga CDO Ltd., which was managed by one of its affiliates. Merrill Lynch improperly avoided recording many of the warehoused trades at the time they occurred, and delayed recording those trades, for their own benefit.
Without admitting or denying the SEC’s findings, Merrill Lynch agreed to a censure and is required to cease and desist from future violations of these sections of the Securities Act and Securities Exchange Act. Merrill Lynch consented to the entry of the order finding that it willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(2). Merrill Lynch agreed to pay disgorgement of $56,286,000, prejudgment interest of $19,228,027, and a penalty of $56,286,000.
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