Banking Law Prof Blog

Uniform Commercial Code Issues in Mortgage Foreclosures

The Permanent Editorial Board for the Uniform Commercial Code (UCC) has issued a report discussing the applicability of UCC Article 3 (Negotiable Instruments) and Article 9 (Secured Transactions) to certain issues in judicial and non-judicial foreclosures, including:

• Who is the person entitled to enforce a mortgage note?
• How is the transfer of a property interest (ownership or a security interest to secure an obligation) in a mortgage note accomplished?
• What effect does the transfer of a mortgage note have on the related mortgage?
• How can a person enforce a mortgage note by foreclosing non-judicially if the person does not have a recordable assignment of the mortgage?

Link to article:  "Setting the UCC Record Straight on Mortgage Foreclosures" by Steven Weise:  http://apps.americanbar.org/buslaw/blt/content/2011/12/keepingcurrent.shtml

(ag) Dec. 22, 2011, in Banking, Lending Issues, Real Estate, Foreclosures

Corporate Governance: The Option to Incorporate Outside the U.S.

NY Times DealBook has an intriguing note about the recent decision by the New York Stock Exchange listed fashion company, Michael Kors Holdings, to reincorporate in the British Virgin Islands.

Reasons to incorporate outside the U.S. include:  avoiding unfavorable U.S. tax laws and securities laws aimed at transparency, disclosure, and investor protection -- as well as a desire to avoid the intensely litigation-focused approach to problem-solving in the U.S.

What's the impact on U.S. investors who expect legal protections?

LInk to "The Benefits of Incorporating Abroad in an Age of Globalization" by Deal Prof. Steven Davidoff:  http://dealbook.nytimes.com/2011/12/20/the-benefits-of-incorporating-abroad-in-an-age-of-globalization/?nl=business&emc=dlbka33

(ag) Dec. 21, 2011, in Corporate Governance, Securities Law, Global Markets

FinCEN is Serious: No Disclosing SARs

The Financial Crimes Enforcement Network (FinCEN) announced that it assessed of a $25,000 civil money penalty against an individual for violation of Bank Secrecy Act (BSA) prohibitions against disclosing suspicious activity reports ("SARs").

The individual contacted the subject of a bank SAR, disclosed existence of the report, and extracted bribes from the subject of the report.  The individual was convicted in a criminal case of bribery and unlawful SAR disclosure in the U.S. District Court for the Central District of California.

LInk to FinCEN announcement:  http://www.fincen.gov/news_room/nr/pdf/20111215.pdf

(ag) Dec. 20, 2011, in BSA/AML

SEC Sues Former GSE Execs -- But Will the Agency Follow Through?

Last week the SEC filed two civil lawsuits against six former executives of Fannie Mae and Freddie Mac:  Former Fannie Mae CEO Daniel Mudd, former Fannie Mae chief risk officer Enrico Dallavecchia, and former Fannie Mae EVP Thomas Lund; and, former Freddie Mac CEO Richard Syron, former Freddie Mac chief business officer Patricia Cook, and former Freddie Mac EVP Donald Bisenius. The SEC seeks disgorgement of profits and financial penalties in addition to a permanent bar against serving as an officer or director of a public corporation.

The SEC sued under Rule 10b-5 for securities fraud, alleging that the named defendants intentionally misled investors by understating the GSEs exposure to "subprime loans."  The litigation will turn on the definition of "subprime loan"  -- so the SEC's ultimate success is far from assured.

Law Professor Peter Henning, writing for the New York Times DealBook says that by filing this litigation, the SEC signals "an aggressive turn in the pursuit of cases tied to the subprime mortgage crisis."

Link to article:  http://dealbook.nytimes.com/2011/12/19/closer-look-at-s-e-c-s-mortgage-fraud-charges/

I wish I could be as optimistic about the ultimate outcome of this litigation.  

• Remember that the SEC desperately wants to settle the Citigroup litigation for peanuts compared to the initial amount claimd.  (See my previous blog posts.)
• Remember also that the Justice Department has not pursued criminal actions against either GSE. 
• Note that these GSE execs are likely entitled to insurance coverage for these claims. In the meantime, the GSEs in conservatorship (so translate: the U.S. taxpayers) are obligated to front litigation expenses incurred by these defendants unless and until they are found guilty of wrongdoing.
• Even Professor Henning recognizes that:  "Filing fraud charges creates a big splash, but like any enforcement action, a number of questions remain."   My biggest question is whether the SEC has the will to see this litigation through.  The proof is in the pudding.

(ag) Dec. 19, 2011, in Securities Law, Subprime/Predatory Lending, Secondary Mortgage Market, Fannie Mae/Freddie Mac, SEC 

SEC Appeals Rakoff Rejection of Settlement

The Securities and Exchange Commission (SEC) has appealed Judge Jed Rakoff's rejection of the proposed $285 Million settlement between the SEC and Citigroup.  

This seems like a no-win for the SEC.  If they win the appeal, they look like enforcement wimps.  If they lose the appeal, there's a clear indication that other judges could require admission of fault or proof of alleged misdeeds before approving settlement.  

SEC, of course, says that it settles to avoid years of litigation.

OK, but what about sending a strong message to wrongdoers in the aftermath of the financial crisis? 

Link:  http://m.ibtimes.com/sec-citigroup-appeal-rakoff-268053.html

(ag) December 15, 2011, in Enforcement, Securities Law, SEC

FDIC Administers a Slap on the Wrist to WaMu Executives

FDIC is settling its lawsuit against three executives of the failed Washington Mutual -- for $64 Million, only $400,000 to come out of personal pocketbooks & the rest from the D&O policy.  

Washington Mutual represents the largest bank failure in U.S. history.  CEO Kerry Killinger, COO Stephen Rotella and Chief Lending Officer David Schneider apparently masterminded WaMu's operations which have been described as a "mortgage time bomb" contributing substantially to the subprime crisis.  FDIC initially sued the executives and their wives (who allegedly engaged in hiding assets) for $900 Million.

Here's the real question:  Has the FDIC forgotten everything it knew about D&O liability following the financial crisis of the 1980s?  FDIC used to know how to win at these lawsuits.  FDIC's total professional liability collections exceeded $5 billion from 1986 to 1996.

And here's another question:  Why don't more judges and government officials express the same degree of outrage we see from U.S. District Judge Jed Rakoff who last month struck down the proposed $285 Million settlement between Citigroup and the SEC?

(ag) Dec. 14, 2011, in Bank Directors, FDIC, Subprime/Predatory Lending

Redlining - Alive and Well

A 2011 St. Louis Federal Reserve Bank working paper, "Race, Redlining, and Subprime Loan Pricing" by Andra C. Ghent, Rubén Hernández-Murillo, and Michael T. Owyang, finds evidence of both disparate treatment and disparate impact racial and ethnic discrimination.  Based on data from 2005, at the peak of subprime lending, the researchers found redlining as well as adverse pricing for blacks and Hispanics.

Link:  http://research.stlouisfed.org/wp/more/2011-033

(ag) Dec. 13, 2011, in Consumer Protection, Fair Lending, Subprime/Predatory Lending

Corporate Governance: A Hostile Takeover to Watch

NY Times DealBook reports that Martin Marietta Marietta Materials has initiated a hostile takeover bid for Vulcan Materials.  The initial exchange offer is worth more than $4.6 billion and would result in combining two rivals -- the two largest U.S. producers of crushed stone and gravel.

Martin Marietta is offering to exchange half a share of its own stock for each Vulcan share. As of Friday's closing price, that bid was worth $36.69 a share, 9 percent above Vulcan's stock price.

Here's the "hostile" part:  Martin Marietta intends to name five nominees to Vulcan's board of directors and has filed a lawsuit in Delaware's Court of Chancery to increase the pressure on Vulcan. Martin Marietta has engaged in more than a year and a half of private discussions, with no positive result, before taking the "hostile" route.

Link to story: http://dealbook.nytimes.com/2011/12/12/martin-marietta-materials-unveils-4-6-billion-hostile-bid-for-vulcan/ 

(ag) Dec. 12, 2011, in Corporate Governance, Securities Law

MF Global Chief: "I Simply Do Not Know Where the Money Is."

It's the Sergeant Shultz defense again.  (I see nothing, I know nothing. I was not here.  I did not even get up this morning.) 

Jon Corzine, former CEO of MF Global Holdings as well as former New Jersey Senator and former Goldman Sachs Group Chairman, testified before the U.S. House Agriculture Committee yesterday that he did not know where the $1.2 Billion in missing funds belonging to customers of now-defunct MF Global Holdings could be. 

Even though the ostrich defense did not work for Enron executives, the no-nothing approach lives on.

Link to House Agriculture Committee:  http://agriculture.house.gov/press/PRArticle.aspx?NewsID=1493

Link to WSJ article "Corzine Defends Tenure, Puzzles Over Missing Funds" by Scott Patterson and Aaron Lucchetti:  http://online.wsj.com/article/SB10001424052970203413304577085953794621344.html?mod=WSJ_hp_LEFTTopStories

Link to Sgt. Schultz video clip: http://www.youtube.com/watch?v=34ag4nkSh7Q&feature=related

(ag) December 9, 2011, in Congress, Global Markets 

Senate Blocks Confirmation of CFPB Nominee

Today, by vote of 53 to 45, the Senate blocked consideration of the President's nominee to head the Consumer Financial Protection Bureau.  Sixty favorable votes would have been required to terminate a filibuster and move to confirm the nomination of Richard Cordray.   

Senate Republicans blocked the nomination as a means of seeking changes to the CFPB's governing structure and budget -- not because of any issues with Cordray's qualifications. 

(ag) Dec. 8, 2011, in CFPB

Senate Subcommittee Hearing on "Too Big to Fail"

Today, the Senate Committee on Banking, Housing, and Urban Affairs, Subcommittee on Financial Institutions and Consumer Protection has scheduled a hearing on "Too Big to Fail" and solutions which could include limiting size.

Witnesses for today's hearing on "Enhanced Supervision: A New Regime for Regulating Large, Complex Financial Institutions" include:

• Sheila Bair, Senior Advisor, Pew Charitable Trusts and former FDIC Chairman;
• Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management;
• Philip L. Swagel, Professor of International Economic Policy, University of Maryland School of Public Policy.

 

Link to Hearing Information:  http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_id=6ee66e38-fcc3-4128-b69f-7c2d923c2216

Link to story:  http://www.bloomberg.com/news/2011-12-07/too-big-to-fail-is-back-on-senate-agenda-with-megabank-hearing.html

(ag) Dec. 7, 2011, in Financial Regulatory Reform, Too Big to Fail, Congress

Will the Supreme Court Undercut RESPA Anti-Kickback Provisions?

The U.S. Supreme Court heard oral argument November 30, 2011, in First American Financial Corp. v. Edwards.  The issue, under the Real Estate Settlement Procedures Act (RESPA), is whether a plaintiff can bring a class action to challenge unlawful kickbacks without alleging "injury" -- higher price or lower quality -- when a real estate settlement agent refers a customer to a title insurance company and receives a "kickback."  

RESPA is one of the "alphabet soup" of consumer protection statutes in the financial services arena (RESPA, TILA, HMDA, ECOA, . . .) dating back to the late 1960s and 1970s.  RESPA prohibits kickbacks in connection with a federally related mortgage loan.  The statutory penalty for violation is up to three times the amount paid for the settlement services.  The statute does not require the consumer to show that he was overcharged or that he received inferior services.

The U.S. Constitution Article III requires a plaintiff to allege "a distinct and palpable injury to himself" in order to establish standing to sue.  In passing RESPA, Congress did not specifically require the consumer to show damages resulting from a kickback scheme. 

The Ninth Circuit upheld this plaintiff's standing to bring a class action lawsuit.

The current Supreme Court majority seems unlikely to agree with the Ninth Circuit that Congress can pass a law that contradicts the Constitutional requirement to show injury.  Chief Justice Roberts suggested, in his questions to the attorneys in oral argument, that there might be two other possibilities:  That the plaintiff had been injured by not obtaining a conflict-free referral OR that Congress presumed that a transaction involving a kick-back caused injury.  Of course, the Supreme Court might simply overturn the Ninth Circuit ruling and require a specific showing of injury.

Consumer protection laws such as RESPA seem to be grounded in the concept that everyone suffers injury when markets are not conducted fairly because they are tainted by prohibited practices such as kickbacks and concealed conflicts of interest.  The recent financial crisis supports the conclusion that real estate markets are particularly susceptible to abuse resulting in harm to all.  

Links:  http://www.huffingtonpost.com/2011/11/28/facebook-supreme-court-conservatives-standing-to-sue_n_1117202.html

http://www.scotusblog.com/case-files/cases/first-american-financial-corp-v-edwards/

(ag) Dec. 6, 2011, in Supreme Court, RESPA, Real Estate, Consumer Protection

Speaking Candidly about "Too Big to Fail"

President of the Dallas Reserve Bank Richard Fisher is not one to beat around the bush.  Here's what he says about the problem of "too big to fail":

"I shall speak of the difficulty of treating this pernicious problem in a culture held hostage by concerns for “contagion,” “systemic risk” and “unique solutions.” I will posit that preoccupation with these concerns leads to an ethic that coddles survival of the fattest rather than promoting survival of the fittest, to the detriment of social welfare and economic efficiency.'

Link:  http://dallasfed.org/news/speeches/fisher/2011/fs111115.cfm

(ag) Dec. 5, 2011, in Too Big to Fail

What Crisis-Response Tools Are Still Available to the Fed?

The Wall Street Journal reviews the Federal Reserve's currently available crisis-response tools (after Dodd-Frank Act curbs and new powers):

• The Discount Window:  Short-term (usually overnight) loans to banks for liquidity.  During the 2008 financial crisis, the Fed's loans through the discount window totaled $111 Billion, down now to $113 Million -- leaving substantial capacity, even with the European debt crisis.
• Lending to non-bank entities with Treasury Department approval (now required by Dodd-Frank) in "unusual and exigent" circumstances. 
• Term Auction Facility:  Program to auction bonds could be reactivated without Treasury approval.
• Commercial Paper Funding Facility:  Could be reactivated.
•  Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility.
• Term Asset-Backed Securities Loan Facility.
• Primary Dealer Credit Facility.
  

Link:  http://online.wsj.com/article/SB10001424052970204083204577078670735241252.html?mod=googlenews_wsj

(ag) Dec. 4, 2011, in Economy, Financial Regulatory Reform, Dodd-Frank, Global Markets

High Frequency Trading Issues

First, the news from Europe:  The European Commission's proposal for an update to its Markets in Financial Instruments Directive (MiFID), the new MiFID II is expected to become effective in 2013 and it does regulate high frequency trading (HTF).  

Why are regulators concerned?  More transparency and safeguards are needed for both algorithmic and high-frequency-trading activities because they have dramatically increased the speed of trading and raise the possibility of heightened systemic risk. 

Link to story: http://advancedtrading.com/regulations/232200312?pgno=1

Now, some consideration of the issue of the relationship between high frequency trading, media coverage of financial news, and market volatility:

Support exists for the proposition that high frequency trading increases market volatility:

• http://news.yahoo.com/video/business-15749628/high-frequency-trading-a-culprit-in-market-s-volatility-27438142.html

And that high frequency trading does not increase market volatility:

• http://www.cnbc.com/id/44337362/High_Frequency_Trading_Cuts_Volatility_Professor

There is also a concern that high frequency traders target phrases in financial news coverage to trigger trades.

• http://www.investmentu.com/2011/September/high-frequency-trading-arguments.html 

(ag) Dec. 3, 2011, in Global Markets, Economy

 

Hawalas, Terrorist Funding, and Humanitarian Issues in Somalia

Regulatory concerns about money-laundering issues involving terrorist financing appear likely to quash bank willingness to arrange wire transfers to Somalia on behalf of Minnesota hawalas. 

Humanitarian organizations are distressed about the impact this will have on legitimate funds transfers to benefit famine victims in Somalia.  

Minnesota's Sunrise Community Banks, parent company for Franklin Bank (the last U.S. bank to allow wire transfers to Somalia), announced that it will close all accounts with Somali hawalas by December 14, 2011.  The Twin Cities area is home to a large Somali population.

Money laundering and terrorist financing concerns heightened when two Somali women from Rochester, MN, were convicted in October 2011 of funneling money to terrorists in Somalia.

Link to "Bank to end wire transfers to hawalas; Somali community scrambles":  http://minnesota.publicradio.org/display/web/2011/12/02/hawala-shutdown/

Link to Financial Crimes Enforcement Network (FinCEN) - federal agency (bureau of Treasury Department) administering anti-money-laundering laws, including Bank Secrecy Act (BSA) and USA PATRIOT Act:  www.fincen.gov

Link to:  "Women Found Guilty On All Counts In Terror Funding Case":  http://minnesota.cbslocal.com/2011/10/20/deliberations-continue-in-minn-terror-funding-case/

Link to:  "Guilty Verdicts in Somali Terror Financing Trial":  http://www.myfoxtwincities.com/dpp/news/minnesota/verdict-somali-terror-money-oct-20-2011

(ag) Dec. 2, 2011, in BSA/AML