by T. GormanPosted on Posted in SECActions

The New York Attorney General added Martin Act securities fraud claims and other charges to a whistleblower complaint in taking over a suit against Bank New York Mellon. The complaint centers on claims that the bank made almost $2 billion in revenues by misrepresenting the interbank rates it obtained in foreign currency transactions for clients. The victims of the wrongful conduct include public and private pension funds and the State University of New York. The suit was originally based on the false claims act. It represents the first time the New York AG has combined securities fraud and false claims act charges.

The charges are based on the bank’s Standing Instructions program. As part of that program Bank of New York Mellon represented that it would obtain the “best rate of the day” or the “most competitive/attractive FX rates available” for its customers. In fact it did not, according to the pending complaint. Rather, the bank provided customers what the NY AG terms “the worst or nearly the worst” pricing rates available to the bank on a given day. A bank employee admitted that customers were not provided with the best execution. In fact the bank neither sought nor obtained the best execution despite its representations to its customers.

Bank of New York Mellon is alleged to have concealed its wrongful conduct from clients while profiting from it. Profits for the bank came from giving customers the worst or nearly the worst pricing and then pocketing the difference between that price and the actual market price.

Over a ten year period the bank is alleged to have made nearly $2 billion in profits from its illegal practices. The transactions from this program were about seven times as profitable for the bank as those from negotiated transactions. Thus while the Standing Instruction program accounted for only about 20% of the bank’s foreign currency exchange transactions, it yielded 65% to 75% of its foreign exchange sales revenue.

The New York AG took over and expanded the initial whistleblower suit following a lengthy investigation. The City and City Comptroller have joined the State in the action. It seeks repayment of the profits, restitution, damages and treble damages and penalties under the false claims act.

Program: The Impact of the Supreme Court’s Decision in Morrison v. National Bank of Australia on securities litigation and SEC enforcement actions. Presented by Celequ Legal Education in conjunction with West Thomson. Webcast on October 12, 2011 from 12:00 to 1:00 EST. For furtrher information please click here

Tagged with: , , ,

by T. GormanPosted on Posted in SECActions

Rating agencies, officially known as nationally recognized statistical rating organizations or NRSROs, played a key role in the evolution of the market crisis. Accordingly, the Dodd-Frank Wall Street Reform and Consumer Protection Act included a series of provisions bolstering their reporting obligations and restructuring their activities. The SEC’s authority over the organizations was enhanced as discussed here. That authority began with the Credit Rating Agency Reform Act of 2006.

The SEC staff has published its most recent report regarding on the latest examinations of these agencies. It is titled: “2011 Summary Report of Commission Staff’s Examinations of Each Nationally Recognized Statistical Rating Organization” (here). The Report identifies ten NRSROs.

Key findings in the report include:

  • Fees: The NRSROs are trending toward an issuer pay business model in contrast to the subscribers pay model. This trend is occurring with respect to asset-backed securities. Three of the smaller agencies using this payment model “appear to have some weakness” in their policies and procedures for managing the potential conflicts arising from it.
  • Reform: Each of the three large NRSROs have devoted what the report calls “notable resources” toward responding to staff comments from the July 2008 examinations. Those exams focused on the rating of subprime residential mortgage-backed securities and collateralized debt obligations.
  • Following procedures: All of the agencies failed to follow their ratings procedures in some instances. One of the larger NRSRO’s self-reported a failure to comply with its procedures regarding its ratings methodology for certain asset backed securities. Two of the smaller agencies had “notable” instances of apparent failures to adhere to the policies and procedures for committee review of rating actions.
  • Adopting procedures: Two of the larger agencies did not have specific policies and procedures for managing the potential conflict of rating issuers that may be significant shareholders of the firm.
  • Separation of functions: One of the smaller NRSROs had “weak barriers” between its rating analysts and those employed in an ancillary service that presents a potential conflict of interest.
  • Supervision: Three of the smaller agencies have weak internal supervisory controls.
  • Selective dissemination: At one of the larger agencies the policies for the publication of a rating allowed for early, selective disclosure. At three of the smaller organizations there appeared to be unnecessary delay in publication.

Program: The Impact of the Supreme Court’s Decision in Morrison v. National Bank of Australia on securities litigation and SEC enforcement actions. Presented by Celequ Legal Education in conjunction with West Thomson. Webcast on October 12, 2011 from 12:00 to 1:00 EST. For furtrher information please click here

Tagged with: , , ,