Saturday, December 17, 2011
Ex-Freddie, Fannie chiefs charged with fraud
From The Hindu
In a move that marked one of the U.S. government's first major
legal actions against company executives for their role in causing the 2008
financial meltdown, the Securities and Exchange Commission on Friday charged six
former bosses of the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud.
In its lawsuit against them, SEC authorities alleged that the
federally-backed mortgage giants “knew and approved of misleading statements
claiming the companies had minimal holdings of higher-risk mortgage loans,
including subprime loans”.
In an odd twist to the case, however, the SEC hinted
that the investigation and prosecution of wrongdoing may be limited to the
lawsuits against the executives, rather than the corporate entities themselves.
It did so when it noted that both companies had entered into a “Non-Prosecution
Agreement” with the SEC.
As per this agreement, each company would accept responsibility
for its conduct and not dispute, contest, or contradict the contents of an
agreed-upon Statement of Facts without admitting or denying liability.
In committing to cooperate with the SEC's litigation against the
former executives the concession that the two companies won was that the SEC
would consider the “unique circumstances presented by the companies' current
status, including the financial support provided to the companies by the U.S.
Treasury, the role of the Federal Housing Finance Agency as conservator of each
company, and the costs that may be imposed on U.S. taxpayers.”
The SEC named three former Fannie Mae executives – former Chief
Executive Officer Daniel Mudd, former Chief Risk Officer Enrico Dallavecchia,
and former Executive Vice President Thomas Lund — in the complaint filed in
District Court for the Southern District of New York.
Robert Khuzami, Director of the SEC's Enforcement Division
commented on the case against the executives saying, “Fannie Mae and Freddie Mac
executives told the world that their subprime exposure was substantially smaller
than it really was,” adding however that such material misstatements occurred
during a time of acute investor interest in financial institutions' exposure to
subprime loans, and misled the market about the amount of risk on the company's
books.
Emphasising that all individuals, regardless of their rank or
position, would be held accountable for “perpetuating half-truths or
misrepresentations about matters materially important to the interest of our
country's investors,” Mr. Khuzami and his colleagues said that when Fannie Mae
began reporting its exposure to subprime loans in 2007, it admitted that the
loans as those “made to borrowers with weaker credit histories”.
According to court documents stating the case against Freddie Mac,
the SEC further alleged that the company led investors to believe that the firm
had used a broad definition of subprime loans and was disclosing all of its
Single-Family subprime loan exposure.
However former Freddie Mac Chairman and CEO Richard Syron and
former Executive Vice President and Chief Business Officer Patricia Cook had
reinforced the “misleading perception when they each publicly proclaimed that
the Single Family business had ‘basically no subprime exposure,'” the SEC said.
Labels: charged, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, SEC
Friday, March 25, 2011
Top Indian-American executive charged with insider trading
From The Hindu
Rajat Gupta (62), a former Managing Director of consulting giant McKinsey and Company and independent Director at banking conglomerate Goldman Sachs, has been charged with insider trading by the United States Security and Exchange Commission.
In an order instituting cease-and-desist proceedings against Gupta, the market regulator alleged that he illegally tipped off Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information on the quarterly earnings at Goldman Sachs and Procter & Gamble and also an impending $5 billion investment by Berkshire Hathaway in Goldman.
The charges brought by the SEC’s Division of Enforcement further alleged that Gupta supplied Rajaratnam, who is already facing impending trial proceedings for insider trading, with “material non-public information” that Gupta obtained during calls with management boards of Goldman Sachs and Proctor & Gamble.
Subsequently, the SEC said, “Rajaratnam used the inside information to trade on behalf of some of Galleon’s hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms.”
This trading activity resulted in Rajaratnam and others generating more than $18 million in illicit profits and loss avoidance, the SEC noted, pointing out that Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam.
Robert Khuzami, Director of the SEC’s Division of Enforcement, said “Gupta was honoured with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” adding, “Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions.”
The order against Gupta went on to cite specific instances of large scale fraud by Gupta, including an allegation that while Gupta was a member of Goldman’s Board of Directors, Gupta he illicitly passed on information to Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman Sachs and Goldman Sachs’ upcoming public equity offering before that information was publicly announced on September 23, 2008.
The SEC order said, “Gupta called Rajaratnam immediately after a special telephonic meeting at which Goldman’s Board considered and approved Berkshire’s investment in Goldman Sachs and the public equity offering.” It added that within a minute after the Gupta-Rajaratnam call and just minutes before the close of the markets, Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman shares, leading to Rajaratnam making illicit profits of more than $900,000.
Under the administrative proceedings to follow the imposition of the SEC’s charges, authorities will determine what relief, if any, is in the public interest against Gupta, including “disgorgement of ill-gotten gains, prejudgment interest, financial penalties, an officer or director bar, and other remedial relief,” the SEC order said.
Labels: Goldman Sachs, hedge fund probe, insider trading, P and G, Raj Rajaratnam, SEC
Tuesday, April 20, 2010
Goldman Sachs rakes in $3 billion in quarterly profits
Investment bank Goldman Sachs on Tuesday announced profit of $3.46 billion for the first quarter (January-March) of 2010, even as it faced a double embarrassment of the U.K. market regulator joining the United States' Securities and Exchange Commission in announcing fraud investigations into the firm's activities.
Goldman Sach's first quarter performance came on the back of net revenues of $12.78 billion with an annualised return on equity of 20.1 per cent for the quarter. The bottom line was boosted by especially strong performance in the bank's fixed income, commodities and currency division, which generated quarterly net revenues of $7.39 billion.
While Goldman noted that compensation and benefits — including bonuses — to its staff had dropped to 43 per cent of net revenues for the quarter, down from 50 per cent a year ago, it still left its staff with a combined pay package of $5.49 billion, or about $169,000 on an average per employee.
The firm's stellar performance, in the face of continuing economic woes in the U.S., came shortly after the U.K.'s Financial Services Authority announced that “Following preliminary investigations the FSA has decided to commence a formal enforcement investigation into Goldman Sachs International in relation to recent SEC allegations.”
The regulator added that it would be liaising closely with the SEC in this review.
Last week the SEC announced that it had charged Goldman Sachs and one of its vice presidents, Fabrice Tourre, for “defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages,” even as the U.S. housing market began to collapse.
The regulator had alleged that when Goldman Sachs structured and marketed a synthetic collateralised debt obligation (CDO) whose value was based on the performance of subprime security it did not disclose to investors the fact that Paulson and Company — a major hedge fund that had bet against CDO — played a key role in the decision to include that CDO in investors' portfolios.
Labels: CDO, fraud, Goldman Sachs, RMBS, SEC, sub-prime mortgages
Friday, April 16, 2010
Regulator sues Goldman Sachs for fraud
From The Hindu
The United States Securities and Exchange Commission on Friday announced that it has charged investment bank Goldman Sachs and one of its vice presidents, Fabrice Tourre, for “defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages,” even as the U.S. housing market began to collapse.
According to the SEC filing in a U.S. court in the Southern District of New York, the cost of Goldman’s fraudulent activities to investors was more than $1 billion.
In a statement the SEC alleged that when Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) whose value was based on the performance of subprime residential mortgage-backed securities (RMBS), it failed to disclose to investors the fact that Paulson and Company – a major hedge fund that had bet against CDO – played a key role in the decision to include that CDO in investors’ portfolios.
The SEC further alleged that Tourre had “devised the transaction, prepared the marketing materials and communicated directly with investors,” knowing fully of Paulson and Company’s short interest in the instruments and its role in the collateral selection process.
Tourre also misled a third-party fund marketing firm into believing that Paulson and Company invested approximately $200 million in a long position on the instrument and, accordingly, that Paulson and Company’s interests in the collateral section process were aligned with the fund marketer’s. In reality Paulson and company’s interests were sharply conflicting.
“The product was new and complex but the deception and conflicts are old and simple,” according to Robert Khuzami, Director of the Division of Enforcement at the SEC.
Kenneth Lench, Chief of the SEC's Structured and New Products Unit, added that the SEC continued to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the then floundering U.S.. housing market.
In a move that heralds a first major prosecution in the aftermath of the financial markets collapse of 2008 the SEC alleged that Paulson and Company paid Goldman Sachs to structure the transaction such that in which Paulson and Company could “take short positions against mortgage securities chosen by Paulson and Company based on a belief that the securities would experience credit events.”
In other words Paulson and Company bet that the instrument would lose value and in a bid to maximise its profit from that event it paid Goldman Sachs to get its clients to bet that it would gain in value.
As per the SEC’s charges the marketing materials for the CDO all “represented that the residential mortgage-backed securities portfolio underlying the CDO was selected by ACA Management LLC, a third party with expertise in analyzing credit risk in RMBS.
The SEC alleged that undisclosed in the marketing materials and unbeknownst to investors Paulson and Company played a significant role in selecting which RMBS should make up the portfolio.
According to the SEC's complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing the instruments. The SEC went on to note that by October 24 2007, 83 percent of the portfolio had been downgraded and 17 percent were on “negative watch”; by January 29 2008, “99 percent of the portfolio had been downgraded,” the SEC said.
In the filing the SEC sought “injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.”
Labels: CDO, fraud, Goldman Sachs, mortgages, RMBS, SEC
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