Jed Rakoff

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 »

I’ve had some fun these last few days proposing counterintuitive theories for why Citi might not suck as much as you probably think it does and it’s nice to see others joining in the pastime, even if this sounds a little far-fetched:

The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the S.E.C. might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors.

That piece of rank conjecture is from the Second Circuit’s opinion on an appeal* of Judge Rakoff’s rejection of the settlement between the SEC and Citi over some mortgage-backed securities. Here’s DealBook: 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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  • 09 Jun 2010 at 12:13 PM

Rajaratnam Seeks Reversal of Wiretap Ruling

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 »

  • 20 Apr 2010 at 12:55 PM

Judge Jed Approves Schottenfeld Settlement

Federal District Court Judge Jed Rakoff has approved the SEC’s settlement with Schottenfeld Group, a trading firm that once employed three traders charged in the Galleon insider trading case.

The settlement seemed shaky after Judge Jed requested more information from the SEC about how regulators came up with the $460,475.28 they say Schottenfeld needs to pay in disgorgement fees. Read more »