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June 21, 2011

J.P. Morgan to Pay $153.6 Million to Settle SEC Charges of Misleading Investors in CDO Tied to U.S. Housing Market

The Securities and Exchange Commission today announced that J.P. Morgan Securities LLC will pay $153.6 million to settle SEC charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet. Under the settlement, harmed investors will receive all of their money back.

In settling the SEC’s fraud charges against the firm, J.P. Morgan also agreed to improve the way it reviews and approves mortgage securities transactions.

The SEC alleges that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO) without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.

The SEC separately charged Edward S. Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio.

“J.P Morgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests,” said Robert Khuzami, Director of the Division of Enforcement. “What J.P. Morgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection. With today’s settlement, harmed investors receive a full return of the losses they suffered.”

According to the SEC’s complaint against J.P. Morgan filed in U.S. District Court for the Southern District of New York, the CDO known as Squared CDO 2007-1 was structured primarily with credit default swaps referencing other CDO securities whose value was tied to the U.S. residential housing market. Marketing materials stated that the Squared CDO’s investment portfolio was selected by GSCP (NJ) L.P. – the investment advisory arm of GSC Capital Corp. (GSC) – which had experience analyzing CDO credit risk. Omitted from the marketing materials and unknown to investors was the fact that the Magnetar Capital LLC hedge fund played a significant role in selecting CDOs for the portfolio and stood to benefit if the CDOs defaulted.

The SEC alleges that by the time the deal closed in May 2007, Magnetar held a $600 million short position that dwarfed its $8.9 million long position. In an internal e-mail, a J.P. Morgan employee noted, “We all know [Magnetar] wants to print as many deals as possible before everything completely falls apart.”

The SEC alleges that in March and April 2007, J.P. Morgan knew it faced growing financial losses from the Squared deal as the housing market was showing signs of distress. The firm then launched a frantic global sales effort in March and April 2007 that went beyond its traditional customer base for mortgage securities. The J.P. Morgan employee in charge of Squared’s global distribution said in a March 22, 2007, e-mail that “we are soooo pregnant with this deal, we need a wheel-barrel to move around. … Let’s schedule the cesarian (sic), please!” By 10 months later, the securities had lost most or all of their value.

According to the SEC’s complaint, J.P. Morgan sold approximately $150 million of so-called “mezzanine” notes of the Squared CDO’s liabilities to more than a dozen institutional investors who lost nearly their entire investment. These investors included:

Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis.
Security Benefit Corporation, a Topeka, Kan.-based company that provides insurance and retirement products.
General Motors Asset Management, a New York-based asset manager for General Motors pension plans.
Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd.
Without admitting or denying the allegations, J.P. Morgan consented to a final judgment that provides for a permanent injunction from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and payment of $18.6 million in disgorgement, $2 million in prejudgment interest and a $133 million penalty. Of the $153.6 million total, $125.87 million will be returned to the mezzanine investors through a Fair Fund distribution, and $27.73 million will be paid to the U.S. Treasury. The settlement also requires J.P. Morgan to change how it reviews and approves offerings of certain mortgage securities. In addition, J.P. Morgan’s consent notes that it voluntarily paid $56,761,214 to certain investors in a transaction known as Tahoma CDO I. The settlement is subject to court approval.

In a separate complaint filed against Steffelin, who headed the team at GSC responsible for the Squared CDO, the SEC alleges that Steffelin allowed Magnetar to select and short portfolio assets. The complaint alleges that Steffelin drafted and approved marketing materials promoting GSC’s selection of the portfolio without disclosing Magnetar’s role in the selection process. In addition, unknown to investors, Steffelin was seeking employment with Magnetar while working on the transaction.

The SEC’s complaint charges Steffelin with violations of Sections 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Investment Advisers Act of 1940. The SEC seeks injunctive relief, disgorgement of profits, prejudgment interest, and penalties against Steffelin.

Separately, GSC’s bankruptcy trustee has consented to the entry of an administrative order requiring the firm to cease and desist from committing or causing violations or future violations of Sections 17(a)(2) and (3) of the Securities Act and Section 204 and 206(2) of the Advisers Act and Rule 204-2 thereunder. GSC is in bankruptcy, and its settlement is subject to approval by the bankruptcy court.

The SEC’s investigation was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The SEC investigative attorneys were Carolyn Kurr, Jason Anthony, Jeffrey Leasure, and Brent Mitchell. The SEC trial attorneys that will handle the litigation against Steffelin are Matt Martens, Jan Folena, and Robert Dodge.

For more information about dozens of other SEC enforcement actions against misconduct related to the financial crisis, visit the SEC website at:

Posted By: Ralph Roberts @ 12:30 pm | | Comments Off on J.P. Morgan to Pay $153.6 Million to Settle SEC Charges of Misleading Investors in CDO Tied to U.S. Housing Market | Trackback |
Filed under: Housing Crisis,Housing Scam,JPMorgan Chase,JPMorgan Chase & Co,Loan Fraud,Mortgage Fraud,Mortgage Fraud Scheme,Mortgage Loan Fraud,Mortgage-backed securities,Real Estate Fraud,SEC,Securities and Exchange Commission,Securities Fraud,Subprime Mortgages,Wire Fraud

October 29, 2010

Mortgage fraud, bank bailouts continue

The lifting of the major banks’ “foreclosure moratoriums” — which had been instituted to stem the outcry over massive fraud in the processing of foreclosure documents — demonstrates the necessity for the working class to launch a struggle to win a genuine two-year moratorium on foreclosures and evictions predicated on the premise that housing is a fundamental human right.

With the federal government having essentially nationalized the mortgage industry, the president has the authority to implement such a moratorium through executive action.

Bank of America on Oct. 18 announced its intent to resume foreclosures in the 23 states which have judicial foreclosures. BOA had suspended foreclosures in those states on Oct. 1 due to revelations of fraud in the processing of foreclosure documents. BOA also announced it would resume foreclosures in a few weeks in the remaining 27 states. This move will likely encourage JP Morgan Chase and GMAC, who had similarly suspended foreclosures in the 23 judicial foreclosure states, to resume taking people’s homes. (New York Times, Oct. 18)

Barbara J. Desoer, president of Bank of America Home Loans, stated, “We did a thorough review of the process and we found the facts underlying the decision to foreclose have been accurate. We paused while we were doing that, and now we’re moving forward.”

While even bourgeois commentators treated this announcement with the cynicism and derision it deserved, Bank of America was emboldened to make this move with the backing of the federal government.

From the onset of the exposure of massive bank fraud, the Obama administration has opposed any calls for a national moratorium on foreclosures. When David Axlerod, President Barack Obama’s chief advisor, appeared on CBS’s “Face the Nation” Oct. 10, he came out against a national moratorium. He was followed by Housing and Urban Development Secretary Shaun Donovan, who published an article Oct. 17 in the Huffington Post that also rejected calls for a national moratorium, saying it would hurt the economy.

Billions for banks

Bank of America noted that the major holders of its mortgages, Fannie Mae and Freddie Mac, had been consulted during the review and had signed off on the decision to resume foreclosures. Of 14 million mortgages BOA services, one-half of them — worth $2.1 trillion — are owned by Fannie Mae and Freddie Mac, the giant mortgage holding companies controlled by the U.S. Treasury. (NYT, Oct. 18)

Fannie Mae and Freddie Mac were formerly government-sponsored enterprises, private corporations chartered by the federal government to give them enhanced standing to buy or back up mortgage loans.

However, in July 2008 Fannie Mae and Freddie Mac were taken over by the federal government due to massive losses they incurred as a result of the record rise in foreclosures caused by the fraudulent and predatory lending practices of the banks. The federal government placed Fannie Mae and Freddie Mac in trusteeship under the Federal Housing Finance Administration, guaranteeing up to $200 billion in federal tax dollars to back up their loans. That figure was raised to $400 billion, and is now uncapped.

According to a June 3, 2009, statement by FHFA Director James Lockhart, Fannie Mae and Freddie Mac own or guarantee 56 percent of single-family mortgages worth $5.4 trillion in the U.S. When combined with the Federal Housing Administration, the federal government backs or issues a whopping 75 percent of the country’s mortgages. (Associated Press, Sept. 9, 2008)

What this means is that when a borrower goes into foreclosure, the bank which made the loan gets paid off at the loan’s full value by Fannie Mae or Freddie Mac. In addition, the government pays the bank to process the foreclosure. Then the government takes over the home, evicts the homeowner and any tenants, places the home on the market, and sells it at a fraction of the loan’s value.

The difference in what the government paid the bank for the loan, and what the home sells for after foreclosure and eviction, is paid for by taxpayers. That arrangement amounts to a silent bailout of the banks.

For example, a home several doors from where this writer lives in Detroit sold for $137,000 in 2001. The home was then foreclosed and the loan was taken over by Fannie Mae. The home is now being listed by Fannie Mae for $31,000. The $99,000 difference between the $130,000 still owed on the home for which the bank received full value, and the $31,000 for which Fannie Mae is selling the home, is paid for out of taxpayer funds.

This bailout to the banks, which occurs with virtually every foreclosure, has already amounted to $145 billion.

While the FHFA estimated that the total cost of this bailout will be $221 to $363 billion, in 2009 the Congressional Budget Office estimated that Fannie Mae and Freddie Mac would require $389 billion in federal subsidies through 2019. (Bloomberg News, Oct. 21)

Barclays Capital Inc. analysts put the price tag as high as $500 billion, and Sean Egan, president of Egan-Jones Ratings Co., estimated that the total taxpayer bailout to the banks through Fannie Mae and Freddie Mac will total $1 trillion. (BN, June 13)

These figures do not include the additional hundreds of millions of dollars in federal subsidies on FHA-backed loans.

Still-soaring foreclosures, no relief for homeowners

The Obama administration has announced modest loan modification programs to help homeowners, such as the Home Affordable Modification Program, in exchange for this continued massive bailout.

HAMP and other programs are supposed to be mandatory for the banks. But the banks do not comply to help homeowners in any significant way. The government relies on the banks themselves to carry out these modifications, and the federal government and most courts have refused to enforce any sanctions for refusal to perform them.

With the banks knowing they will be getting paid full value on the loans after foreclosure, the banks have little incentive to modify loans and have sabotaged HAMP and led to the program’s virtual collapse. As of August less than one-sixth of the 3 million homeowners who were supposed to be helped have received loan modifications, and the number of borrowers being offered trial modifications has drastically declined. (NYT, Aug. 20)

It was recently exposed that Fannie Mae and Freddie Mac are using the same law firms that prepared the fraudulent documents for the major banks in their processing of foreclosures and evictions. Fannie Mae and Freddie Mac are sanctioning loan servicers if they do not toss people out of their homes within a short period of time. (NYT, Aug. 22)

Obama: Issue moratorium now!

Today the foreclosure crisis continues to intensify. An estimated 2.8 million foreclosures are projected across the U.S. during 2010, with foreclosures totaling 9 million for the years 2009 to 2012. The total lost home-equity wealth due to foreclosures is expected to be $1.9 trillion for the years 2009 to 2012. (Center for Responsible Lending, Aug. 20)

Foreclosures and evictions are a direct product of persistent high unemployment. Of the 1 million homeowners who received foreclosure counseling through the National Foreclosure Mitigation Counseling Program, 58 percent listed unemployment as the main reason for default. (HousingWire, June 1)

With the federal government controlling or backing the vast majority of mortgage loans, President Obama has the clear authority to implement a two-year moratorium on foreclosures and foreclosure-related evictions through an executive order.

A moratorium would let homeowners and tenants remain in their homes, stabilize communities and allow time to develop a long-term solution to this crisis. Then home loans could be restored to their proper value and housing for all guaranteed.

We must fight each foreclosure and eviction and begin implementing such a moratorium through direct action. During the Depression of the 1930s, move-ins reversed many evictions and led to foreclosure moratoriums being enacted in 25 states, which were upheld as constitutional by the U.S. Supreme Court.

What is needed is for the working class to launch a mass struggle to win this demand. It’s time to fight to reverse the government policies which place the well-being of the financial institutions ahead of the welfare of the people.

Jerry Goldberg is an anti-foreclosure attorney and a leader in the Detroit-based Moratorium NOW! Coalition to Stop Foreclosures, Evictions and Utility Shutoffs. Articles copyright 1995-2010 Workers World. Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.

October 10, 2010

Major lenders reveal massive mortgage fraud

The recent revelations of massive fraud in the processing of foreclosures by major banks demonstrate the urgent necessity for activists to press the demand for an immediate declaration of a two-year moratorium to halt all foreclosures and evictions in the U.S.

On Sept. 22 it was reported that GMAC announced it was suspending the evictions of homeowners in the 23 states governed by judicial foreclosures. This was followed by similar announcements by JPMorgan Chase and Bank of America.

The states affected by this suspension of foreclosure activity are Connecticut, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin.

The basis for these announcements was the uncovering of massive fraud by the banks in the processing of foreclosures. In states covered by judicial foreclosure — where the banks have to take borrowers to court to seize their homes — the lenders were filing motions for summary judgment to speed the process, accompanied by affidavits stating that the signers had personal knowledge that the loans were in fact owned by the bank and were in default.
Foreclosures & lost wealth

Mortgage delinquencies and foreclosures:

State foreclosure projections: 2010: 2.8 million

State foreclosure projections (2009-2012): 9 million

Total state foreclosure starts (Q1-2008 through Q1-2010): 4.9 million

Total state foreclosure sales (Q1-2008 through Q3-2009): 1.3 million

Total state foreclosure inventory (end Q1-2010): 2.1 million

Total state past due mortgages (end Q1-2010): 6.2 million

Annual change in foreclosure starts in the state (ending Q1-2010): -10 %

Change in state foreclosure starts (Q3-2006 to Q1-2010): 162 %
Lost wealth:

U.S. lost home equity wealth due to nearby foreclosures, 2009-2012: $1.9 trillion

Number of homes experiencing foreclosure-related decline: 91.5 million

Average loss per home affected: $20,288

Source: Center for Responsible Lending, August 2010

During legal depositions in several cases, it was revealed that the signers of the affidavits had, in fact, no personal knowledge of the facts being sworn to. They were working for foreclosure mills.

A Sept. 22 New York Times article noted that Jeffery Stephens, working on behalf of GMAC (now Ally Bank), was signing 10,000 affidavits a month over the past last five years despite not having reviewed the files to determine whether banks were entitled to enforce their liens.

The New York Times on Oct. 4 went even further, pointing out that many signatures on the affidavits appeared to be forged and the notarizations improper.

The foreclosure suspensions by GMAC, JPMorgan Chase and Bank of America were to give them time to clean up their acts. But the revelations of this massive fraud by some of the country’s largest financial institutions are symptomatic of the overall foreclosure crisis devastating the working class.

What can stop the crisis?

Virtually every government program announced to help homeowners with modifications is collapsing. The programs are based on the premise that the same banks that will not even take the time to properly carry out foreclosure activity, which is their primary concern, will treat borrowers who seek loan modifications in a fair manner.

The programs are all based on the borrower calling the lender to request the mandated modification. However, borrowers are stymied by the fact that the lenders either have no one to answer the call, or when they do, the banks routinely deny the modifications in violation of their agreements with the federal government to carry them out.

For example, on Aug. 20 the New York Times reported the collapse of President Barack Obama’s Making Home Affordable modification program. It said that of the 3 million households that were intended to benefit from the program, only one-sixth had actually had their loans modified. In July, some 96,000 individuals were denied permanent modifications, while only 17,000 were placed into new trial modifications, signaling the program’s demise.

In July, the state of Michigan announced it had received $184 million from the federal government for the Helping Hardest Hit Homeowners program, a program geared to keeping unemployed workers in their homes. While the funding for this program has increased to $500 million, the program has been a dismal failure thus far, with only 230 homeowners being helped out of the 30,000 that were expected to qualify.

According to an August report by the Center for Responsible Lending, the home equity wealth lost in the U.S. due to nearby foreclosures for 2009-2012 is projected to be $1.9 trillion. Nine million homes are expected to be lost to foreclosure during the same period.

The immediate necessity is for the federal government to declare a national two-year moratorium on all foreclosures and evictions. With the majority of home loans now either owned or backed up by the federal government through Fannie Mae, Freddie Mac or the Federal Housing Authority, President Obama has the authority to declare such a moratorium by executive order.

The time is ripe for housing activists to press this demand in light of the current revelations. Sign the online petition in support of a two-year moratorium at:

By Jerry Goldberg

Goldberg is an anti-foreclosure attorney and an organizer in the Moratorium NOW! Coalition to Stop Foreclosures, Evictions and Utility Shutoffs.

Articles copyright 1995-2010 Workers World. Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.

Posted By: Ralph Roberts @ 1:14 am | | Comments (2) | Trackback |
Filed under: Bank of America,Foreclosure,GMAC,JPMorgan Chase & Co,Loan Modification

October 9, 2010

Foreclosure Fraud: Every Affidavit a Fraud?

The scope of foreclosure fraud may not be limited to GMAC and not just to JPMorgan Chase; it may be every bank you can think of, including mortgages held by government-sponsored enterprises Fannie Mae and Freddie Mac. Any bank whose foreclosures have been handled by a law firm specializing in foreclosure services — a “foreclosure mill” — may be affected.

A paralegal at the foreclosure mill of David Stern gave a deposition to Florida’s Attorney General Bill McCollum’s office indicating that virtually every affidavit, assignment or other sworn document coming out of that firm is faked.

It’s over 100 pages, and it will curl your hair. Two thousand foreclosure files were processed each day by just this one firm and the entire lot appears to have been a sham. Go read the transcript for yourself. If this happened at one foreclosure mill, it’s hard to believe this wasn’t happening at all the other foreclosure mills.

Ohio’s attorney general is suing for $25,000 in fines for each fraudulent affidavit; at this rate, he could solve his state’s budget gap.

By the way, Florida’s assistant attorneys general conducted a very nice line of questioning; Mr. McCollum owes them a pat on the back. The states of Ohio and Florida are showing how it’s done, the rest of you states’ attorneys general and U.S. Attorneys need to get on the stick.

By: Cynthia Kouril

Posted By: Ralph Roberts @ 8:37 am | | Comments Off on Foreclosure Fraud: Every Affidavit a Fraud? | Trackback |
Filed under: Bank Foreclosure Mill,Bank of America,Banking Foreclosure Sham,Fannie Mae,Fraudulent Affidavit,Freddie Mac,GMAC,JPMorgan Chase & Co