Judge Rakoff would feel a lot better about this if someone from Citi could be compelled to just admit they engaged in fraud; to have them say, “Guilty, your honor.” Sure, the $285 million they’ll be forking over sort of suggests as much on its own but just for fucking once, it’d be nice to hear someone say it. Read more »
A while back Bear Stearns sold some mortgage-backed securities to a thing called FSAM, which was basically a subsidiary of Franco-Belgian monstrosité Dexia, and FSAM sold the RMBS on to Dexia, and the mortgages were all terrible, and their value dropped, and Dexia sued JPMorgan, currently the proud owner of Bear Stearns, and today JPMorgan won:
JPMorgan Chase & Co has won the dismissal of the vast majority of a lawsuit accusing it of misleading the Belgian-French bank Dexia SA into buying more than $1.6 billion of troubled mortgage debt.
The decision, made public Wednesday by U.S. District Judge Jed Rakoff in Manhattan, is a victory for the largest U.S. bank, in a case that gained notoriety after emails and other materials were disclosed that suggested the bank and its affiliates knew the debt was toxic, but sold it anyway.
Despite the notoriety this is kind of a boring case: it’s a garden-variety RMBS fraud case; Bear said various things in the offering documents that maybe weren’t so true, and the market crashed and the investors lost a lot of money, and now they’re mad. There’s like a zillion of those cases; actually there’s like a zillion of those cases just against Bear Stearns (here are two).
But the fact that the bank won is pretty interesting? Like, if JPMorgan can win a garden-variety RMBS case then so can anyone? I guess? So I suppose it’s worth spending a minute figuring out what this means for other banks.
We run into immediate problems because it’s hard to know exactly why JPMorgan won; the judge’s order is two pages of “opinion to follow.” But reading JPMorgan’s submissions you can get behind CNBC’s interpretation: Read more »
Is this JPMorgan Lehman thing a big deal? I mean the thing where JPMorgan used Lehman customer segregated securities as collateral for financing Lehman, allowing Lehman to overextend itself by a bit more than it otherwise would have, in pretty clear violation of the Commodities Exchange Act, although also maybe by accident? And where the CFTC fined them $20 million in a negotiated settlement today?
I don’t know. On a monetary basis, no – the fine is pocket change to JPMorgan, though it’s pretty big for the CFTC. And the misconduct also seems to be relative pocket change; in September 2008 the relevant mis-credited account was $330mm, vs. like $639bn of assets at Lehman, so 5bps of extra leverage, tiny yaaaay.*
On the other hand, though, there are some obvious things to get worked up about here, if that makes you happy. Here are three, in roughly ascending order: Read more »
A lot of legal issues look like substantive things but are actually things about what institutions can and want to do. Obviously more people want to think about questions like “should the U.S. have universal health insurance?” than about questions like “does the Anti-Injunction Act bar lower federal courts from reviewing the individual mandate until taxes are collected in 2014?,” but judges tend to get into the latter question. That’s why they’re judges. That difference can make judicial decisions sort of hard to interpret.
Today everyone’s favorite federal judge, Jed Rakoff, surprised few but pleased many by beating the ever-loving crap out of the SEC’s settlement with Citigroup, in which Citi had agreed to pay the SEC $285 million in exchange for the SEC not asking too many questions about its synthetic CDO deals that were maybe not so hot. Here’s the gist of it:
Applying these standards to the case in hand, the Court concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest. Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.
Here, the S.E.C.’s long-standing policy – hallowed by history, but not by reason – of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relieve it is being asked to impose has any basis in fact.
Right on! But also maybe just a little disingenuous. Judge Rakoff was not being asked for “substantial injunctive relief,” not really. It looks like that on the surface, in the sense that (1) the SEC and Citi worked out a deal where Citi gives the SEC money, promises not to violate the securities laws again, and agrees to do some remedial stuff like telling its salespeople to stop peddling synthetic CDOs structured by the protection buyer without telling anyone because somehow that is still a problem; and in the sense that (2) the SEC was asking Judge Rakoff to enshrine that agreement in an injunction. And then, if Citi didn’t keep its agreement – by not doing the remedial things, say, or by violating the securities laws again – the SEC could go back to court and say “hey, Citi violated the injunction” and Judge Rakoff could hold Citi in contempt and fuck. it. up. Read more »
If, like me and David Kotz, you get some sad pleasure from getting annoyed at SEC incompetence, then you might enjoy the filings that the SEC and Citi made today in a federal court defending their settlement over charges that Citi did some bad stuff with CDOs.
The quick background: Citi decided to make a big prop bet against some mortgages, so it structured a synthetic CDO with the exposures it wanted to short and sold it to some dopes, keeping virtually all of the short side of the trade on its books. This was a good idea and Citi made $160mm, but it worked out less well for the dopes. The SEC sued Citi for not telling the dopes certain things, like that it had picked the mortgages involved because of their exceptional badness, and they signed up a $285 million settlement. Unfortunately for them, the federal judge hearing the case is Jed Rakoff, who is as high on the enemies list of the SEC’s employees as it is possible to be without standing between them and their tranny porn. Judge Rakoff had some questions about the settlement. Questions like “Why, for example, is the penalty in this case less than one-fifth of the $535 million penalty assessed in SEC v. Goldman Sachs & Co.,” or “How can a securities fraud of this nature and magnitude be the result simply of negligence?” Today Citi and the SEC filed answers those questions. They’re a fun read.
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You might think – particularly if you’re a certain hedge fund manager counting down the days to a September sentencing – that Rajat Gupta did pretty well by not being prosecuted criminally (yet!) for allegedly passing inside information to Galleon. All he’s got so far is an SEC administrative action looking for “disgorgement of ill-gotten gains” and other civil penalties – which, not great, but better than jail.
But then again, not great – and Gupta ran McKinsey so you’d better believe he’s looking for ways to optimize the process. First up: get out of SEC administrative “court” and into a real court.
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Attorneys for Raj Rajaratnam have filed a brief to the Second Circuit Court of Appeals seeking to reverse an order compelling them to turn over wiretap evidence to the Securities and Exchange Commission in the Galleon civil case.
The SEC wants the FBI’s wiretap evidence to bolster its civil suit against Raj and the other defendants but, the defendants are resisting, in part, because they say it was obtained illegally and are trying to suppress the evidence in the criminal case. Read more »