Thursday, July 31, 2014
Yesterday, the Tax Court in T.C. Memo. 2014-149 decided Amazon's petition for partial summary judgement. In the petition, Amazon contended that it was "entitled to judgment as a matter of law on two related questions: (1) whether [the IRS] abused [its] discretion by allocating 100% of the costs in certain cost centers to intangible development costs (IDCs) under section 1.482-7(d)(1), Income Tax Regs.; and (2) whether [Amazon] is entitled as a matter of law to apply an allocation method to determine IDCs under the governing regulations."
The Tax Court denied Amazon's petition, holding "[o]n the first question, we find that there are genuine disputes of material fact that preclude partial summary judgment. On the second question, we conclude that petitioner must show that the cost centers in question constitute “mixed costs”--that is, costs benefiting other business activities as well as intangible development activities--before it can justifiably employ an allocation method to determine IDCs under section 1.482-7(d)(1), Income Tax Regs. Because there is a genuine dispute of material fact as to whether, and the extent to which, the cost centers at issue constitute “mixed costs,” we will deny petitioner’s motion for partial summary judgment on both questions."
"Property barons Robert and Vincent Tchenguiz, renowned for their champagne-fuelled parties and super yachts, sued the agency over dawn raids on their homes and offices and their high-profile arrests in March 2011 in a case linked to the 2008 collapse of Iceland's Kaupthing bank."
"David Green, who took over as head of the agency one month later, has secured a 4.5 million-pound deal with the brothers, excluding hefty legal costs. The deal averts an October civil trial and further public airing of the SFO's handling of a case that has already been slated as "incompetent" by a senior judge."
Who are Robert and Vincent Tchenguiz? (Telegraph, 18 May 2011)
"But then followed revelations that the Tchenguizs' exposure to Kaupthing was big enough to bring down not just the bank, but even Iceland itself." ...
"No one anticipated the scale of the debts. To start with, there were the staggering personal losses: at one stage during the crunch, Robert was dubbed the "$1bn man" for the paper losses he had incurred."
"Further to its announcement on 25 July 2014 of a settlement [£3 million plus their reasonable costs] with Mr Vincent Tchenguiz and his business interests, the Serious Fraud Office announces that it has now settled the remaining civil damages claims brought by Mr Robert Tchenguiz, R20 Limited and his Trustee, Rawlinson & Hunter Trustees SA, arising from his arrest and the searches of his home and business premises in March 2011."
"On 31 July 2012, following a judicial review, the High Court quashed the search warrants and was highly critical of the SFO's conduct to the extent that, in November 2012, the SFO was required to pay Mr Robert Tchenguiz and his business entities' costs for those public law proceedings on the indemnity basis."
"The SFO has now agreed to pay Mr Robert Tchenguiz, R20 and the Trustee the total sum of £1.5 million in full and final settlement, with costs to be determined by the Court if they cannot be agreed."
“All of these considerations must be taken into account in any consideration of the present case and criticism of those involved, as it is clear to us that the SFO was not properly resourced for this investigation.
“In the present case, the result has been our decision to set aside search warrants against two well known businessmen after a long investigation of transactions in the financial markets. In other cases, the result could have been the failure properly to investigate and prosecute successfully conduct where there could be no doubt as to its criminality and serious effect on public confidence in financial institutions and the financial markets. It is clear that incalculable damage will be done to the financial markets of London, if proper resources, both human and financial, are not made available for such investigations and prosecutions in the financial markets of London.”
The Washington Post reports that a "federal judge on Wednesday ordered Bank of America to pay $1.27 billion in damages over thousands of defective mortgages sold by its Countrywide Financial unit, delivering a win for the government in one of the few major trials stemming from the financial crisis.
The decision arrives as the nation’s second largest bank is locked innegotiations with the Justice Department to resolve a probe into its sale of other faulty mortgage securities, talks that could result in the bank paying more than $12 billion. That would be on top of the $50 billion that the bank has already doled out to settle a series of cases largely tied to crisis-era misdeeds."
Harvard Law School recently tweeted a link to a Reuters article where Professor Stephen Shay (former deputy assistant Treasury secretary for international tax affairs) in an upcoming Tax Notes article said "by invoking a 1969 tax law, Obama could bypass congressional gridlock and restrict foreign tax-domiciled U.S companies from using inter-company loans and interest deductions to cut their U.S. tax bills... . If a corporation has loaded debt into a U.S. unit beyond a certain level, Section 385 could be used by the government to declare the excess as equity and ineligible for deductions."
The Securities and Exchange Commission announced … a final judgment in the Commission's civil action against John ("Jack") J. Egan, Jr. ("Egan"), the former chief financial officer of Volt Information Sciences, Inc. ("Volt"). The Commission's litigation against Egan was assisted by cooperation from Debra L. Hobbs ("Hobbs"), the former chief financial officer of a Volt subsidiary. As a result of Hobbs' cooperation, the SEC did not to seek a financial penalty against her.
In its complaint, the Commission alleged that Egan participated in a scheme to materially overstate revenue.
For Volt's fourth quarter and fiscal year ended October 28, 2007, Egan signed and filed financial statements reporting $7.55 million of revenue that had not been earned and was not recognizable under U.S. Generally Accepted Accounting Principles. The $7.55 million of improper revenue caused Volt's net income for its fourth quarter and fiscal year ended October 28, 2007, to be materially overstated.
The complaint further alleges that the scheme relied on fabricated paperwork purporting to be a contract selling software to a customer. Egan knew that any sale of the software was impossible because Volt intended to lease the same software to the same customer the following year.
Nevertheless, Egan authorized that the $7.55 million in improper revenue be included in the Company's consolidated income statement for 2007, which were included in Volt's: (1) 2007 Form 10-K filed with the Commission on January 11, 2008, as amended by Form 10-K/A filed with the Commission on February 25, 2008; and (2) earnings release on Form 8-K furnished to the Commission on December 20, 2007. Egan signed the fraudulent 2007 Form 10-K and subsequent SEC filings that included the same overstatement of revenue. In addition, the complaint alleges that Egan mislead Volt's external auditors and he signed one or more certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading.
The final judgment, to which Egan consented without admitting or denying the allegations in the Commission's complaint, permanently enjoins Egan from violating certain of the antifraud, representations to accountants, and certification provisions of the federal securities laws … and from aiding and abetting certain reporting, books and records, and internal controls provisions of the federal securities laws... The final judgment also bars Egan from serving as an officer or director of a public company, and orders him to pay a $35,000 civil penalty.
In addition, on July 24, 2014, the Commission instituted settled administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice against Egan. In those proceedings, Egan consented to the entry of an order permanently suspending him from appearing or practicing before the Commission as an accountant.
In addition, on July 24, 2014, the Commission instituted settled administrative proceedings by consent against Hobbs, who was previously enjoined by consent in this matter, pursuant to rule 102(e) of the Commission's Rules of Practice. In those proceedings, without admitting or denying the allegations of the Commission's Order, Hobbs agreed to be suspended from appearing or practicing before the Commission as an accountant, with the right to reapply for reinstatement after five years. For further information, see SEC Litigation Release No. 22589 (January 11, 2013).
Volt ranks No. 11 on Staffing Industry Analysts’ list of largest U.S. staffing firms - See Staffing Industry.com
Bank of America and Former Executive Found Guilty, Ordered to Pay $1.27 Billion for Defrauding the United States
SIGTARP reports that Bank of America has been ordered to pay a $1.27 billion civil penalty for fraud it committed. Additionally, former Bank of America executive Rebecca Mairone was ordered to pay a civil penalty of $1 million to the government.
Starting in 2007 and continuing as the mortgage crisis worsened up to 2009, Bank of America developed a program known as the “Hustle” (which stood for “High Speed Swim Lane” or “HSSL”), that, as its name implies, focused on generating and selling a high volume of mortgages at high speed to the GSEs.
To do so, Bank of America removed critical quality control checks and fraud prevention measures that could have slowed down the origination process, despite repeated warnings that doing so would yield disastrous results, including defaults on the loans.
Through the Hustle program, Bank of America originated thousands of poor quality loans and sold them to the GSEs based on lies that the loans were investment quality and met the GSEs’ requirements, cheating the GSEs of money in the process.
On October 23, 2013, after a four week trial, a federal jury in Manhattan found Bank of America and its predecessors, Countrywide Financial Corporation and Countrywide Home Loans, and Mairone liable for defrauding the United States by selling thousands of defective toxic loans to the government sponsored entities, Fannie Mae and Freddie Mac (the “GSEs”).
This significant civil penalty reflects Bank of America’s culpability, bad faith, and the public harm caused by its mortgage fraud.
The Consumer Financial Protection Bureau (CFPB) filed a lawsuit in a federal district court against a Georgia-based firm, Frederick J. Hanna & Associates, and its three principal partners for churning out 350,000 debt collection lawsuits in Georgia alone between 2009 and 2013, using illegal tactics to intimidate consumers into paying debts they may not owe. One attorney at the firm, for example, signed over 130,000 debt collection lawsuits over a two-year period. The CFPB further alleges the defendants collected millions of dollars each year through these lawsuits, often from consumers who may not actually have owed the debts.
This Complaint challenges two categories of Defendants’ conduct in the Georgia Collection Suits: (1) their lack of meaningful attorney involvement in preparing and filing complaints; and (2) their use of affidavits.
The Bureau requests that the Court:
a. permanently enjoin Defendants from committing future violations of the FDCPA and CFPA;
b. award damages or other monetary relief against Defendants;
c. order Defendants to pay restitution to consumers harmed by their unlawful conduct;
d. order disgorgement of ill-gotten revenues against Defendants;
e. impose civil money penalties against Defendants;
f. order Defendants to pay the Bureau’s costs incurred in connection with prosecuting this action; and
g. award additional relief as the Court may determine to be just and proper.
The CFPB alleges that the defendants violated the Fair Debt Collection Practices Act (FDCPA). Among other things, the FDCPA prohibits making misrepresentations to consumers, and specifically prohibits misrepresenting to a consumer that a communication is from an attorney. The CFPB also alleges that the defendants violated the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits deceptive acts or practices in the consumer financial marketplace.
Violations alleged in the CFPB’s complaint include:
- Intimidating consumers with deceptive court filings: The firm files collection suits signed by attorneys when, in fact, the lawsuits are the result of automated processes and the work of non-attorney staff, without any meaningful involvement of attorneys. The resulting lawsuits misrepresent to consumers that they are “from attorneys.” This process allows the firm to generate and file hundreds of thousands of lawsuits. One attorney at the firm, for example, signed over 130,000 debt collection lawsuits over a two-year period.
- Introducing faulty or unsubstantiated evidence: The firm uses sworn statements from its clients attesting to details about consumer debts to support its lawsuits. The firm files these statements with the court even though in some cases the signers could not possibly know the details they are attesting to. In a substantial number of cases, when challenged, the firm dismissed lawsuits. Since 2009, the firm has dismissed over 40,000 suits in Georgia alone, and the CFPB believes it does so frequently because it cannot substantiate its allegations.
Are the IRS and State Department On the Same Page With the IRS Including the "State of Palestine" on the FATCA GIIN list?
For purposes of FATCA GIIN registration by foreign financial institutions, the IRS lists as one of the foreign jurisdiction choices: "State of Palestine". The July GIIN list was updated to also include West Bank and Gaza.
I am curious whether a “Palestine” IGA with the IRS will cover the "State" and the two territories.
SEC Charges Company CEO and Former CFO With Hiding Internal Controls Deficiencies and Violating Sarbanes-Oxley Requirements
The Securities and Exchange Commission announced charges against CEO Marc Sherman and former CFO Edward L. Cummings of QSGI Inc., a Florida-based computer equipment company, for misrepresenting to external auditors and the investing public the state of its internal controls over financial reporting. The SEC's allegations are excerpted below.
The Sarbanes-Oxley Act of 2002 requires a management’s report on internal controls over financial reporting to be included in a company’s annual report. The CEO and CFO must sign certifications confirming they’ve disclosed all significant deficiencies to the outside auditors, reviewed the annual report, and attest to its accuracy.
[Inadequate Inventory Controls]
The SEC’s Enforcement Division alleges that CEO Marc Sherman and former CFO Edward L. Cummings represented in a management’s report accompanying the fiscal year 2008 annual report for QSGI Inc. that Sherman participated in management’s assessment of the internal controls. However, Sherman did not actually participate.
The Enforcement Division further alleges that Sherman and Cummings each certified that they had disclosed all significant deficiencies in internal controls to the outside auditors. On the contrary, Sherman and Cummings misled the auditors – chiefly by withholding that inadequate inventory controls existed within the company’s Minnesota operations.
[Improper Accounting Maneuvers to Maximize Borrowing ]
They also withheld from auditors and investors that Sherman was directing and Cummings participating in a series of maneuvers to accelerate the recognition of certain inventory and accounts receivables in QSGI’s books and records by up to a week at a time. The improper accounting maneuvers, which rendered QSGI’s books and records inaccurate, were performed in order to maximize the amount of money that QSGI could borrow from its chief creditor.
[Falsification of Books and Records]
The SEC’s Enforcement Division alleges that in management representation letters and other communications with QSGI’s external auditors, Sherman and Cummings claimed they had disclosed all significant deficiencies in internal controls over financial reporting. Yet they did not disclose or direct anyone else to disclose the ongoing inventory and accounts receivable issues, nor did they disclose the improper acceleration of recognition and the resulting falsification of QSGI’s books and records.
In fact, Sherman and Cummings withheld information from the external auditors. Had they disclosed the deficiencies and the circumvention of inventory controls as well as the improper acceleration of accounts receivable and inventory recognition, the auditors would have changed the nature, timing, and extent of their procedures in conducting the audit of QSGI’s financial statements.
According to the SEC’s orders, Sherman and Cummings signed a Form 10-K and Sherman signed a Form 10-K/A each containing the false management’s report on internal controls over financial reporting. And each signed certifications required under Section 302 of the Sarbanes-Oxley Act in which they falsely represented that they had evaluated the report and disclosed all significant deficiencies to the auditors.
According to the SEC’s orders for the administrative proceedings, QSGI’s efforts in 2008 to introduce new internal controls to the operations at its Minnesota facility largely failed. The deficiencies existed throughout that fiscal year and continued until the company filed for bankruptcy in July 2009. [In 2009 , QSGI filed for Chapter 11 bankruptcy creditor protection, emerging in 2011.]
QSGI failed to design inventory control procedures that took into account the existing control environment, such as employees’ qualifications and experience levels. For example, sales and warehouse personnel often failed to document their removal of items from inventory. When they did prepare the paperwork, accounting personnel often failed to process it and adjust inventory in the company’s financial reporting system.
[Settlement by CFO]
Without admitting or denying the SEC’s findings, Cummings consented to a cease-and-desist order finding that he willfully violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2. The order also finds that he caused QSGI’s violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Cummings agreed to pay a $23,000 penalty, and to be barred from serving as an officer and director of a publicly traded company for five years. Cummings also agreed to be suspended for at least five years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.
[Litigation with CEO]
... the SEC’s Enforcement Division will litigate its case against Sherman in a separate administrative proceeding.
Wednesday, July 30, 2014
The Institute of International Education (IIE), known to most U.S. Academics for administering the
William J. Fulbright program, reported that Brazil has doubled down on its scholarship program, increasing it from the original 100,000 to 200,000 scholarships.
from IIE's article: "...Currently over 80,000 students are participating in the program. The announcement means that by 2018, some 200,000 will have had the chance to learn another language and study and intern in relevant fields for the country's employment needs."
Brazil is near and dear to myself, being my wife is from Florianopolis, and her mother a Brazilian Bio-Pharma academic. But the Brazil program is little known to most U.S. academics and institutions. It's well worth reaching out to the Brazilian academic community - I have hosted more than 200 Brazilian students in intersession at Thomas Jefferson as well as post doctorate academics, and been offered academic lecture / research opportunities in Brazil.
Most recently, Dr. Valcir Gassen, professor of taxation of University of Brasilia, spent one year in San Diego via this program, sponsored by Brazil's CAPES, jointly working on a project and book (in Portuguese and English) regarding Brazilian and U.S. comparative taxation. He just returned home to begin his Spring international tax courses (reverse seasons in the Southern hemisphere).
As reported in the BBA Brief, "Lloyds Banking Group has frozen bonuses for 22 members of staff after the bank was fined £226 million by UK and US regulators for its role in rigging the rates in the Bank of England’s Special Liquidity Scheme (Mail). Bank of England Governor Mark Carney issued a statement calling the actions “highly reprehensible” and suggested crimin al proceedings may be undertaken against those involved. Chief executive Antonio Horta-Osorio condemned the practice, saying: “Together, the board and the group’s management team have taken vigorous action over the last three years to prevent this kind of behaviour, through closing or reducing our legacy investment banking activities”. Lloyds Chairman Lord Blackwell added: “Their behaviour involved a gross breach of trust and we condemn it without reservation” (Telegraph)."
According to Reuters, Barclays says DOJ requested extension to non-prosecution agreement to investigate F/X trading. The existing agreement was for $450M. According to the article, "Barclays said the U.S. Department of Justice had requested an extension to a non-prosecution agreement (NPA) that was due to expire last month, to allow it to continue to investigate possible misconduct in foreign exchange trading. The NPA was put in place after the bank was fined $450 million for the alleged rigging of Libor interest rates, and means if the DOJ finds any wrongdoing in FX activities it could come down harder on the bank."
In a recent report, Lukas Wyss and Maurus Winzap discuss the impact of the new FACTA rules on Swiss debt finace transactions. They state that:
"In the context of debt financing transactions, the risk is that:
- payments from an US tax obligor (i.e. an obligor that is either (i) formed or organised under the laws of the US or (ii) engaged in a trade or business in the US (or, if a treaty applies, has a per- manent establishment in the US) (a US Tax Obligor) are subject to a 30% with- holding tax in the event that either the agent or any lender is a Non-Participating FFI;
- if an obligor itself is an FFI and either the agent or any lender under the transaction is a Non-Participating FFI, a 30% withholding tax applies on at least a portion of all payments made under the transaction that are treated as «passthru payments» (however, it should be noted that passthru payment withholding has been delayed until the later of 2017 or 6 months after regulations are finalised; IGAs currently reserve on passthru payments); and
- payments among finance parties might become subject to FATCA Deductions in the event that one finance party is a US Tax Obligor and the other finance party is a Non-Participating FFI. Documentation should therefore address these risks."
3,778 Lead Entities of EAGs among the approximately 88,000 FFI registrations from 250 countries. Haydon Perryman, FATCA Compliance expert of Strevus, and I undertook an analysis of the July 1st FATCA FFI list release by country and by IGA, and by EAG. Haydon has put together the below chart based upon the excel logic that he created during our discussions. Check out Haydon Perryman’s FATCA blog at http://haydonperryman.wordpress.com/
What the below leads me to conclude is that a substantial portion of the current FATCA GIIN registrations are as part of an EAG. That is, small financial firms have not registered in large numbers yet.
FATCA EAG Definition
The FFI and its branches and affiliates are defined as an “expanded affiliated group” (“EAG”). An entity is a part of an EAG if it is affiliated with a common parent that directly or indirectly owns over 50% of the stock by vote and value of such corporation, or in the case of a partnership or non-corporate entity, owns over 50% by value of the beneficial interest of such partnership or non-corporate entity.
Subject to certain phase-in provisions regarding “Limited Branches” and “Limited Affiliates, discussed below, each FFI that is a member of an EAG must obtain the status of either a PFFI or RDCFFI before any of the other group members are able to obtain the benefit of either such status. Said another way, one bad apple poisons the barrel, and leads to FATCA withholding for all.
Except to the extent that the rules allowing limited branches and limited affiliates apply (described below the chart), each member of an EAG (including all of its branches, units, offices, and divisions) must conduct due diligence on its accounts, enact FATCA policies and procedures, abide by the terms of the FFI-agreement, and close U.S. accounts if the holder fails to provide required disclosure and reporting information.
|Model 1A IGA||Model 1B IGA||Model 2 IGA||No IGA||US||Grand Total|
|Antigua and Barbuda||1||1|
|Bolivia, Plurinational State Of||3||3|
|Isle of Man||16||16|
|Korea, Republic of||21||21|
|Papua New Guinea||1||1|
|Saint Kitts and Nevis||4||4|
|Saint Vincent and The Grenadines||2||2|
|Tanzania, United Republic Of||1||1|
|Trinidad and Tobago||7||7|
|United Arab Emirates||14||14|
|Venezuela, Bolivarian Republic Of||4||4|
|Virgin Islands (British)||85||85|
|WEST BANK AND GAZA||1||1|
Limited Branches and Affiliates Exceptions Under Regs
A FFI is, however, allowed to be a PFFI even if one or more of its branches cannot satisfy all of the requirements of an FFI-agreement under important exceptions to the general rule regarding “limited branch” and “limited FFI affiliates”.
An FFI is permitted to obtain “participating FFI” status if one or more of its branches are non-compliant under the “limited branch” exception. The limited branch exception applies to those FFIs that are in a jurisdiction that has applicable law that prohibits the FFI from reporting, closing, or transferring U.S. accounts, or withholding, closing, blocking, or transferring recalcitrant or nonparticipating FFI accounts. In such case, the limited branch is treated as a “nonparticipating FFI” even though it is an affiliated branch of the “participating FFI.” The other branches with “participating FFI” status must withhold on payments to the limited branch. The limited branch must not open U.S. accounts and must identify itself as a “nonparticipating FFI” to withholding agents.
The exception to the EAG requirements for “limited FFI” affiliates is similar to the regulatory scheme for limited branches. Under the relevant transition rule, a “participating FFI” may be permitted to have an affiliated FFI that is not compliant with FATCA until December 31, 2015 provided that such affiliates are separately identified as a nonparticipating FFI and the PFFI agrees to withhold on payments it makes to, or receives on behalf of, that branch or affiliate and agrees to report (or provide sufficient information to its U.S. withholding agents to allow them to report) payments made to these limited branches and affiliates as required on Forms 8966 or 1042/1042-S.
A Reporting Model IGA FFI may continue to treat branches and affiliates as compliant under the limited branch and limited FFI exceptions even after the expiration of the transitional rule, provided that the branch or affiliate is still unable to comply with FATCA due to restrictions under local law and the Reporting Model FFI continues to comply with its obligations under the IGA with respect to such limited branches or affiliates.
Morgan Stanley pays $275 million fine & disgorgement for $2.5 billion of sub-prime backed securities sales
The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) against Morgan Stanley and Co. LLC (f/k/a Morgan Stanley and Co. Incorporated) (“MS & Co.”), Morgan Stanley ABS Capital I Inc. (“MSAC”), and Morgan Stanley Mortgage Capital Holdings LLC (“MSMCH”). The Order is excerpted below.
Accordingly, it is hereby ORDERED that:
...Respondents shall, jointly and severally, within ten (10) business days of the entry of this Order, pay disgorgement of $160,627,852, prejudgment interest of $17,995,437, and a civil penalty of $96,376,711 to the Securities and Exchange Commission.
This matter concerns Morgan Stanley’s misleading public disclosures regarding the number
of delinquent loans in two subprime residential mortgage-backed securities (“RMBS”) transactions offered in 2007—Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 (“NC4”) and Morgan Stanley ABS Capital I Inc. Trust 2007-HE7 (“HE7”) (collectively “the transactions”). Morgan Stanley sponsored, issued, and underwrote the transactions, which were collateralized by mortgage loans with an aggregate principal value balance of over $2.5 billion.
The offering documents for the transactions disclosed that less than 1% of each pool’s aggregate principal balance was more than 30 but less than 60 days delinquent as of each transaction’s “cut-off date” (the “current delinquency representation”). With the exception of these loans disclosed as currently delinquent, Morgan Stanley represented that, as of each transaction’s “closing date,” no payment under any other loan had been more than 30 days delinquent at any time since origination (the “historical delinquency representation”).
Notwithstanding the historical delinquency representation, approximately 17% of the
loans collateralizing the HE7 transaction had been delinquent at some point since origination
Further, although Morgan Stanley represented that the number and percentage of currently
delinquent loans included in the HE7 offering materials was as of the transaction’s September 1,
2007 cut-off date, Morgan Stanley actually used payment data as of mid-September to determine
the disclosed delinquencies. By using the later payment data, Morgan Stanley misreported the
number of current delinquencies by 46 loans.
As a result of this conduct, the HE7 trust contains loans that have actual and projected
losses, based on bankruptcies, real estate owned properties (“REOs”), and foreclosures, of
$138,255,564, while the NC4 trust contains loans that have actual and projected losses, based on
bankruptcies, REO’s and foreclosures, of $21,230,863. Investors in these transactions have
The Securitization Process
Morgan Stanley structured and sold the NC4 and HE7 transactions through the sponsor, depositor and underwriter entities described above. On or about June 20, 2007, MSAC transferred 5,340 loans to the issuing entity Morgan Stanley ABS Capital I Inc. Trust 2007-NC4.
On or about September 28, MSAC transferred approximately 7,670 loans to the issuing trust for
Morgan Stanley ABS Capital I Inc. Trust 2007-HE7. In both instances, MSAC transferred the
loans to the trusts in exchange for certificates representing the RMBS investments. MSAC sold the certificates to MS & Co., the underwriter, which sold them to the public. MS & Co. obtained money through its sales of securities to the public and received underwriting fees in connection with the transactions.
On June 14, Morgan Stanley filed a preliminary Prospectus Supplement offering
$781,761,000 of securities collateralized by approximately 5,340 subprime mortgage loans with a
total principal balance of just over $1 billion as of the cut-off date. The preliminary Prospectus
Supplement included bracketed blanks as placeholders for the specific delinquency values. It
stated that: “[ ] mortgage loans with an aggregate principal balance as of the cut-off date of $[
], which represents no more than approximately 1% of the mortgage loans in the final mortgage
pool, were more than 30 days but less than 60 days Delinquent with respect to their scheduled
monthly payments.” [Emphasis added]
On June 20, 2007, after obtaining the updated remittance data discussed above
Morgan Stanley filed a final Prospectus Supplement including specific delinquency values. Morgan Stanley stated that “41 mortgage loans with an aggregate principal balance as of the cut-off date of $10,501,930.24, which represents approximately 0.9994% of the mortgage loans in the final mortgage loan pool, were more than 30 days but less than 60 days Delinquent with respect to their scheduled payments.”
The updated payment data Morgan Stanley obtained on June 13, 2007, showed that delinquencies as of that date were materially higher than what Morgan Stanley disclosed in
the final Prospectus Supplement as of the May 1 cut-off date. This updated payment information was available to Morgan Stanley a week before the transaction closed.
For the HE7 transaction, Morgan Stanley included at least 1,241 loans that had been historically delinquent. Despite receiving the historical delinquency chart showing that approximately 17% of the HE7 loan pool had been historically delinquent, Morgan Stanley represented in the offering documents that no loans had been more than 30 days delinquent since origination, other than the approximately 1% of loans disclosed as being more than 30 days delinquent. Further, Morgan Stanley used payment data as of September 20, not the stated September 1 cut-off date, as the basis for stating in its offering documents that less than 1% of the aggregate principal balance of the pool was 30 days delinquent.
read the complete Cease & Desist here.
Lexis FATCA Compliance Guide free chapter download —> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671 Number of Pages in PDF File: 58
Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA).
Monday we posted about the Lloyds non-prosecution agreement. The Commodity Futures Trading Commission (CFTC) posted, in its announcement, examples of the electronic communications between the LIBOR traders. Below is excerpts from the traders e-communications because readers may find such interesting, if not exotic (like Elvin language from Lord of the Rings). Also included are links to the excerpts of the e-communications of other completed LIBOR investigations.
Finally, Llyods suspended seven employees after agreeing to the fine and admitting criminal guilt. Read the Compliance-Ex article.
Examples of Requests for Skewed Sterling LIBOR Submissions
March 6, 2009: (emphasis added)
Former HBOS Sterling Submitter: I am paying on 12 yards of 1s today; a re-fix against Group, so if is there any way of making 1s relatively low, it would be helpful for us all. [. . .] I think it is going to be about 126 or something, maybe 128, it is a tricky one at the moment.
Lloyds TSB Sterling Submitter: Well I could, I mean I have left mine at 125 mate, I mean.
Former HBOS Sterling Submitter: Yeah, well I that will be perfect. As long as you—you can’t go lower than 125, if you are going at 125 that is what, that is what I am hoping to shape it down to, so if you can do that, that would be great.
Lloyds TSB Sterling Submitter: Yeah I have got a fixing small one nowhere near 12 yards, so yeah I do it at 25, alright?
Former HBOS Sterling Submitter: And I am a payer the 3s as well, I don’t know what were you thinking of going in the 3s. [. . .] I have only 500 quid the 3s so I am not that—it’s not the end of the world, but if you’re the other way around don’t worry about it.
Lloyds TSB Sterling Submitter: No, no, no, I have got a small loan going out but it is less than that, alright I will probably have to go 90- probably 96 but I will let you know before, I do 25 definitely for 1s and I will speak to you on—
Former HBOS Sterling Submitter: Yeah don’t stress mate, go 25 in the 1s and just go with what you can in the 3s. No great stress.
Lloyds TSB Sterling Submitter: Yeah, no problem.
Former HBOS Sterling Submitter: Alright thanks.
March 31, 2009: (emphasis added)
Former HBOS Sterling Submitter: [. . .] I was just going to say, I am receiving on 3s LIBOR today on a couple on—on a big reset on about 2 and a half yards and I am receiving tomorrow on 5 yards, so on the LIBOR front obviously I don’t know if you have got anything contrary to that, but if you haven’t the firmer the better please.
Lloyds TSB Sterling Submitter: The higher the better.
Former HBOS Sterling Submitter: Yes please.
Lloyds TSB Sterling Submitter: Oh mate, I have always got loads of loans going out at the end of the month so I always try and fix it higher, so. Trouble is mate they keep calling it fucking lower, I can’t work out why it is fucking going down all the time. [. . .] I mean we put 67 in yesterday, I will leave it at 67 and I won’t go any lower, right?
Former HBOS Sterling Submitter: Yeah.
Lloyds TSB Sterling Submitter: What do you need, and what was the other period, was it all 3s?
Former HBOS Sterling Submitter: No just 3s today and tomorrow.
Lloyds TSB Sterling Submitter: Okay, we will leave it at 67.
Former HBOS Sterling Submitter: Yeah cool, just 1s I am small receiving today, tomorrow is a massive one in the 1s. I am paying but we’ll worry about 1s tomorrow?
Lloyds TSB Sterling Submitter: Well luckily not today mate because I have got trillions and billions of 1s going out today, tomorrow I can set it slightly lower.
Former HBOS Sterling Submitter: Yeah that’s cool, I am receiving 1s today in the yard, tomorrow I am paying on 11.5 yards. [. . .] In the 1s but we will worry about it tomorrow, tomorrow.
Lloyds TSB Sterling Submitter: Yeah, okay mate no problem
April 1, 2009:
Lloyds TSB Junior Trader: Just a quick question: do you have lots of 1s fixing today? Do you want us to keep the libor higher?
Former HBOS Sterling Submitter: Yeah, I have a big liability fix, so as low as possible, please. [. . .] But I have a massive asset fix in the 3s, so as high as you can in the 3s.
Lloyds TSB Junior Trader: Oh, right. Okay, okay. Got it.
Examples of Requests for Skewed U.S. Dollar LIBOR Submissions
January 17, 2008:
HBOS Trader: 3mth higher today pls!
HBOS U.S. Dollar Submitter: Should be 92 for guide ill put in 93 to get couunted.
May 11, 2009:
Former HBOS U.S. Dollar Submitter to Trader Who Assisted Lloyds TSB U.S. Dollar Submitter: when we have big resets as to be honest we shoudl be co ordinating the libor inputs to suit the books. for example later this month i have a 5y 3 month liability reset so we shoudl put in a low one there ill let u know.
May 19, 2009:
Lloyds TSB U.S. Dollar Submitter to Former HBOS U.S. Dollar Submitter: we got the LIBORs down for you.
Examples of Collusion between the Lloyds TSB Yen LIBOR Submitter and the Rabobank Yen LIBOR Submitter
June 27, 2006: (emphasis added)
Rabobank Yen Submitter: just for your info skip...i need a high 1mth today - so i will be setting an obseenly high 1 mth (6)
Lloyds TSB Yen Submitter: sure mate no worries...give us an idea where and I’ll try n oblige...;)
July 27, 2006: (emphasis added)
Rabobank Yen Submitter: morning skip....my little …[racial epithet redacted] friend in tokyo wants a high 1m fix from me today....am going to set .37 - just for your info sir
Lloyds TSB Yen Submitter: that suits mate as got some month end fixings so happy to ablige..rubbery jubbery..:-O
January 5, 2007:
Rabobank Yen Submitter: need a high 1mth fix today mate - just for info ;)
Lloyds TSB Yen Submitter: suits (bu)
Rabobank Yen Submitter: (b)
Lloyds TSB Yen Submitter: just b4 you beat me up....I was in meeting so didn’t do me libors today...thk they put .52 for 1s....
March 19, 2008: (emphasis added)
Rabobank Yen Submitter: [Rabobank Senior Yen Trader] needs a high 6m libor if u can help skip - asked me to set 1.10
Lloyds TSB Yen Submitter: oops my 6s is 1.15!!! he’ll love me
Rabobank Yen Submitter: hahaha so di i!
Lloyds TSB Yen Submitter: send him my regards the lovely fella....
March 28, 2008: (emphasis added)
Rabobank Yen Submitter: morning skip – [Rabobank Senior Yen Trader] has asked me to set high libors today - gave me levels of 1m 82, 3m 94....6m 1.02
Lloyds TSB Yen Submitter: sry mate can’t oblige today...I need em lower!!!
Rabobank Yen Submitter: yes was told by jimbo...just thought i’d let you know why mine will be higher ...and you don’t get cross with me
Lloyds TSB Yen Submitter: never get cross wiv yer mate
June 27, 2006: (emphasis added)
Lloyds TSB Yen Submitter: mrng mate...my turn today...what u going 3s libor...hoping for a higher one....0.35 or u think that is pushing it a bit?
Rabobank Yen Submitter: nope - fine with me mate - will set 35 for you (b)
Lloyds TSB Yen Submitter: (K) cheers dude
Rabobank Yen Submitter: no prob at all mate ;)
July 19, 2007:
Lloyds TSB Yen Submitter: mrng beautiful.....if u can would love a low fixing in 3s libor today....(y)
Rabobank Yen Submitter: ok skip - what u need? no prob
Lloyds TSB Yen Submitter: .77 if poss but just no higher than yest!!
January 7, 2008: (emphasis added)
Lloyds TSB Yen Submitter: plse may i have a nice high 1m libby today..grovel grovel...(k). [. . .]
Rabobank Yen Submitter: yes nice and toasty....what would you like me to set for 1m mate? i’ve gone 70 so far....or hogher?
Lloyds TSB Yen Submitter: thats fine..thx lad xx
Examples of Communications Relating to HBOS Lowering Its U.S. Dollar and Sterling LIBOR Submissions to Protect Its Market Reputation
May 6, 2008:
HBOS Senior Manager to Two Other HBOS Senior Managers and Other HBOS Personnel: it will be readily apparent that in the current environment no bank can be seen to be an outlier. The submissions of all banks are published and we could not afford to be significantly away from the pack.
August 8, 2008: (emphasis added)
HBOS Senior Manager to HBOS Managers and Senior Managers: As a bank we are extremely careful about the rates we pay in different markets for different types of funds as paying too much risks not only causing a re-pricing of all short term borrowing but, more importantly in this climate, may give the impression of HBOS being a desperate borrower and so lead to a general withdrawal of wholesale lines.
September 26, 2008:
HBOS U.S. Dollar LIBOR Submitter to an Employee of Another Financial Institution: youll like this ive been pressured by senior management to bring my rates down into line with everyone else.
October 21, 2008:
HBOS LIBOR Supervisor to HBOS Sterling LIBOR Submitters: do not want to be an outlier in BBA submissions - this could potentially create an issue with buyers of our paper.
October 30, 2008:
Footnote from page 6 of the CFTC Order: The communications quoted in this Order contain shorthand trader language and many typographical errors. The shorthand and errors are explained in brackets within the quotations only when deemed necessary to assist with understanding the discussion.
...the CFTC has now imposed penalties of over $1.87 billion on entities for manipulative conduct with respect to LIBOR submissions and other benchmark interest rates.
- See In re RP Martin Holdings Limited and Martin Brokers (UK) Ltd., CFTC Docket No. 14-16 (May 15, 2014) ($1.2 Million penalty) (CFTC Press Release 6930-14);
- In re Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank), CFTC Docket No. 14-02, (October 29, 2013) ($475 Million penalty) (CFTC Press Release 6752-13);
- In re ICAP Europe Limited,CFTC Docket No. 13-38 (September 25, 2013) ($65 Million penalty) (CFTC Press Release 6708-13);
- In re The Royal Bank of Scotland plc and RBS Securities Japan Limited, CFTC Docket No. 13-14 (February 6, 2013) ($325 Million penalty) (CFTC Press Release 6510-13);
- In re UBS AG and UBS Securities Japan Co., Ltd., CFTC Docket No. 13-09) (December 19, 2012) ($700 Million penalty) (CFTC Press Release 6472-12);
- In re Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc., CFTC Docket No. 12-25 (June 27, 2012) ($200 Million penalty) (CFTC Press Release 6289-12).
Tuesday, July 29, 2014
Yesterday the Securities and Exchange Commission charged (excerpted below) Smith & Wesson Holding Corporation with violating the Foreign Corrupt Practices Act (FCPA) when employees and representatives of the U.S.-based parent company authorized and made improper payments to foreign officials (e.g. Pakistan, Indonesia) while trying to win contracts to supply firearm products to military and law enforcement overseas.
Smith & Wesson, which profited by more than $100,000 from the one contract that was completed before the unlawful activity was identified, has agreed to pay $2 million to settle the SEC’s charges. The company must report to the SEC on its FCPA compliance efforts for a period of two years. The WSJ reported that the DOJ dropped its own case.
According to the SEC’s order instituting a settled administrative proceeding, the Springfield, Mass.-based firearms manufacturer sought to break into new markets overseas starting in 2007 and continuing into early 2010. During that period, Smith & Wesson’s international sales staff engaged in a pervasive effort to attract new business by offering, authorizing, or making illegal payments or providing gifts meant for government officials in Pakistan, Indonesia, and other foreign countries.
According to the SEC’s order, Smith & Wesson retained a third-party agent in Pakistan in 2008 to help the company obtain a deal to sell firearms to a Pakistani police department. Smith & Wesson officials authorized the agent to provide more than $11,000 worth of guns to Pakistani police officials as gifts, and then make additional cash payments. Smith & Wesson ultimately won a contract to sell 548 pistols to the Pakistani police for a profit of $107,852.
The SEC’s order finds that Smith & Wesson employees made or authorized improper payments related to multiple other pending or contemplated international sales contracts. For example, in 2009, Smith & Wesson attempted to win a contract to sell firearms to an Indonesian police department by making improper payments to its third-party agent in Indonesia. The agent indicated he would provide a portion of that money to Indonesian officials under the guise of legitimate firearm lab testing costs. He said Indonesian police officials expected to be paid additional amounts above the actual cost of testing the guns. Smith & Wesson officials authorized and made the inflated payment, but a deal was never consummated.
[Turkey, Nepal, and Bangladesh]
The SEC’s order finds that Smith & Wesson also authorized improper payments to third-party agents who indicated that portions would be provided to foreign officials in Turkey, Nepal, and Bangladesh. The attempts to secure sales contracts in those countries were ultimately unsuccessful.
The SEC’s order finds that Smith & Wesson violated the anti-bribery, internal controls and books and records provisions of the Securities Exchange Act of 1934.
The company agreed to pay $107,852 in disgorgement, $21,040 in prejudgment interest, and a $1.906 million penalty.
Smith & Wesson consented to the order without admitting or denying the findings. The SEC considered Smith & Wesson’s cooperation with the investigation as well as the remedial acts taken after the conduct came to light. Smith & Wesson halted the impending international sales transactions before they went through, and implemented a series of significant measures to improve its internal controls and compliance process. The company also terminated its entire international sales staff.
Smith & Wesson Statement
Banco Espírito Santo's former CEO arrested for Money Laundering & Tax Evasion as bank reports Portugal's largest loss, Espirito Santo Financial Group seeks creditor protection
Bloomberg reports that the major Portugal bank, Banco Espirito Santo, will record a $3 billion loss tomorrow (Friday), wiping out its excess capital rerserves, thus requiring it to raise capital to maintain a solvency ratio. Meanwhile, its former CEO of 20 years, and family patriarch, Ricardo Salgado, was arrested on allegations of money laundering and tax evasion.
The WSJ reports that:
Troubles at Portuguese conglomerate Espírito Santo International SA intensified Thursday after another of its units filed for creditor protection in Luxembourg and the group's main figure, former Banco Espírito Santo SA Chief Executive Ricardo Salgado, ... was detained in a money-laundering investigation.
Reuters reports that:
The bank's links to the Espirito Santo family group and its troubled holding companies have wiped out around 50 percent from BES' market value in the last month. ...
Problems have been escalating for the family that founded the bank more than a century ago since accounting irregularities were identified in one of its holdings earlier this year.
Lexis' Law 360 reports that:
Espirito Santo Financial Group SA on Thursday became the third of the related companies to seek shelter from creditors, asking a Luxembourg court to institute a bankruptcy-like “controlled management” process after concluding that it could not meet obligations to customers in its commercial paper business or to creditors on its stand-alone debt obligations, according to a company statement. ESFG is 49 percent owned by ESI and is the largest shareholder of BES with a 20 percent stake.
Trading in ESFG shares had been suspended on July 10 over its potential exposure to ESI, which before its own insolvency filing had postponed making interest payments on some short-term debt securities. ESI’s request for controlled management was approved in court Tuesday, while Rioforte’s remains pending.
I have been asked a lot lately about inversions. As if VOX read my mind, here is a nice peice by Matthew Yglesias, Tax Inversions: 9 Questions About the Hottest New Trend in Tax Avoidance, with some of the basics.
Here is part of the introduction: "In a modest tax inversion, Company A decides to acquire Company B for some standard set of business reasons. It then turns out to be the case that domiciling the merged entity in Company B's homeland is more advantageous for tax purposes. Companies, like people, normally seek to exploit legal means of reducing their tax burden. So the merged company will probably domicile itself for tax purposes in Company B's country.
In a pure tax inversion, Company A decides to acquire Company B specifically in order to execute a tax inversion. In other words, Company A would be acquiring Company B not so much to obtain its technology or its brand or its supply chain but its tax status."