On April 22, the SEC announced that George Canellos and Andrew Ceresney will share responsibilities as co-directors of the SEC’s Division of Enforcement. Mr. Canellos has been serving as Acting Enforcement Director since January. He previously had been the division’s Deputy Enforcement Director since June 2012, prior to which he served as Director of the SEC’s New York Regional Office. Mr. Ceresney previously served as a Deputy Chief Appellate Attorney in the United States Attorney’s Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. Most recently, he was in private practice with recently-confirmed SEC Chairman Mary Jo White. On April 23, the SEC named Anne Small as General Counsel. Ms. Small is a former Special Assistant to the President and Associate Counsel in the White House Counsel’s Office where she advised on legal policy questions with a focus on economic issues. She previously worked at the SEC as Deputy General Counsel for Litigation and Adjudication and now becomes the first woman to be named General Counsel.
On May 7, the DOJ charged two employees of a U.S. broker-dealer and a senior official in Venezuela’s state economic development bank for their alleged roles in what the DOJ describes as a “massive international bribery scheme.” According to an unsealed criminal complaint, the DOJ accuses the broker-dealer employees and the foreign official of violating the FCPA by conspiring to pay $5 million in bribes to the foreign official in exchange for her directing the economic development bank’s trading business to the broker-dealer, which yielded millions of dollars more in mark-ups and mark-downs for the broker-dealer. The government alleges that commissions paid on the directed trades were split with the foreign official through monthly kickbacks and that some of the trades executed for the bank had no discernible business purpose. The government also claims that the kickbacks often were paid using intermediary corporations and offshore accounts, which will be pursued through a separate civil forfeiture action. On the same day, the SEC announced a parallel civil action against the two broker-dealer employees and two other individuals who allegedly participated in and profited from the scheme. The investigations stemmed from a routine periodic SEC examination of the broker-dealer. The DOJ warned others in the financial services industry, particularly brokers, about engaging in similar activities, and the SEC’s handling of this case suggests its examiners are focused on conduct that potentially violates the FCPA.
On April 24, the SEC released an order charging a financial institution and two senior executives for allegedly understating millions of dollars in auto loan losses during the period leading up to the financial crisis. The SEC stated that an investigation identified an alleged failure by the institution to incorporate internal loss forecasts into financial reporting, resulting in the institution understating loan loss expense. The institution did not admit the allegations, but agreed to pay $3.5 million to resolve the charges. The SEC also alleged that the two executives caused the understatements by deviating from established policies and procedures and failing to implement proper internal controls for determining its loan loss expense. The two executives did not admit the allegations, but agreed to pay a combined $135,000 to resolve the investigation, and to cease and desist from committing or causing any violations of the relevant federal securities laws.
On April 10, the SEC voted unanimously to adopt a final rule requiring broker-dealers, mutual funds, investment advisers, and other regulated entities to implement programs designed to detect and prevent identity theft. The final rule applies to SEC-regulated entities that meet the definition of “financial institution” or “creditor” under the FCRA. The final rule will take effect 30 days after publication in the Federal Register and give covered firms six months from the effective date to comply. Under the final rule, covered firms must establish policies and procedures designed to (i) identify relevant types of identity theft red flags, (ii) detect the occurrence of those red flags, (iii) respond appropriately to the detected red flags, and (iv) periodically update the identity theft program. The rule requires covered firms to provide staff training and oversight of service providers, and provides guidelines and examples of red flags to help firms administer their programs. Further, the rule requires covered firms that issue debit cards or credit cards to take certain precautionary actions when they receive a request for a new card soon after notification of a change of address for a consumer’s account.
On April 10, the SEC announced that Mary Jo White was sworn in as the 31st Chair of the SEC, two days after the Senate confirmed her for the position. The announcement notes that Chairman White most recently led the litigation department of a large law firm. Prior to her time in private practice, Chairman White specialized in prosecuting complex securities and financial institution frauds and international terrorism cases in her position as the U.S. Attorney for the Southern District of New York from 1993 to 2002. She also served as the First Assistant U.S. Attorney and later Acting U.S. Attorney for the Eastern District of New York from 1990 to 1993 and as an Assistant U.S. Attorney for the Southern District of New York from 1978 to 1981, where she became Chief Appellate Attorney of the Criminal Division.
On April 9, the U.S. District Court for the Central District of California dismissed claims brought by the FDIC as receiver for a failed bank against a financial institution related to 10 MBS certificates sold to the bank, holding that the FDIC’s claims were time-barred. Fed. Deposit Ins. Corp. v. Countrywide Secs. Corp., No. 12-6911, slip op. (C.D. Cal. Apr. 9, 2013). The court found that “a reasonably diligent plaintiff had enough information about false statements in the Offering Documents of [the firm’s] securities to file a well-pled complaint before” the statute of limitations expired on August 14, 2008. The court noted that deviations from stated underwriting guidelines and inflated appraisals had come to light prior to the expiration of the statute of limitations through “multiple lawsuits” and “numerous media sources.” The court found that it was irrelevant that the FDIC was named receiver for the bank because “[t]he FDIC [did] not have the power to revive expired claims.” Similarly, on April 8, the U.S. District Court for the District of Kansas granted, in part, a motion to dismiss federal and state claims brought by the NCUA on behalf of three failed credit unions against a financial institution related to certain MBS certificates sold to the credit unions, holding that certain NCUA claims were time-barred. Nat’l Credit Union Admin. Bd. v. Credit Suisse Secs. (USA) LLC, No. 12 Civ. 2648, 2013 WL 1411769 (D. Kan. Apr. 8, 2013). The court found that the applicable federal and state law statutes of limitations required claims to be filed within one or two years of discovery of the alleged misstatement or omission, and within three or five years of sale or violation, respectively. The judge dismissed the federal and state claims for 12 of the MBS certificates as untimely, but preserved federal claims as to eight certificates, determining that the statutes of limitations were tolled on those claims. In addition, the court found that (i) venue was proper because defendant engaged in activity that would constitute the transaction of business in the district for purposes of the applicable venue statute and (ii) plaintiff set forth plausible claims for relief.
On April 5, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s partial denial of a financial institution’s motion to dismiss on standing and timeliness grounds a suit brought by the FHFA. Fed. Hous. Fin. Agency v. UBS Americas, Inc., No. 12-3207, 2013 WL 1352457 (2d Cir. Apr. 5, 2013) The FHFA brought multiple suits against numerous institutions alleging that the offering documents provided to Fannie Mae and Freddie Mac in connection with the sale of $6.4 billion in residential MBS included materially false statements or omitted material information, resulting in massive losses. The institutions moved to dismiss, contending that (i) the securities claims were time-barred, (ii) FHFA had no standing to pursue the action, and (iii) a negligent misrepresentation claim failed to state a claim upon which relief could be granted. The district court denied the motion to dismiss with respect to the statutory claims and granted it only with respect to the negligent misrepresentation claim. On appeal, the Second Circuit held that the action, filed within three years after the FHFA was appointed conservator of Freddie Mac and Fannie Mae, was timely under the relevant sections of Housing and Economic Recovery Act, and that the FHFA has standing to bring the action. The decision, on interlocutory appeal from the U.S. District Court for the Southern District of New York, holds implications for more than a dozen other similar actions the FHFA has filed.
New York Appellate Division Holds Bond Insurer Can Pursue Repurchase Obligations on Performing Loans
On April 2, the Supreme Court of New York, Appellate Division, held that loans underlying mortgage-backed securities need not be in default to trigger the lender’s repurchase obligations. MBIA Ins. Corp. v. Countrywide Home Loans Inc., No. 602825/2008, 2013 WL 1296525 (N.Y. Sup. Ct. App. Div. Apr. 2, 2013). The trial court granted partial summary judgment in favor of a bond insurer who alleges that a lender (i) fraudulently induced the insurer to insure securitized loans and (ii) breached representations and warranties in the transaction documents. On appeal, the court held that the contract at issue does not require a loan to be in default to trigger the defendant’s repurchase obligation. The court found that the relevant clause requires only that the inaccuracy underlying the repurchase request materially and adversely affect the interest of the insurer. If the insurer can prove that a loan which continues to perform materially and adversely affected its interests, it is entitled to have the lender repurchase the loan. The Appellate Division also (i) affirmed the trial court’s holding that causation is not required under New York insurance law to prevail on a fraud and breach of contract claim, and (ii) determined that the trial court erred in granting summary judgment on the issue of rescissory damages, holding instead that rescission is not warranted in this case.
On April 2, the SEC issued a report that allows companies to use social media outlets to announce key information in compliance with Regulation Fair Disclosure (Regulation FD), provided investors have been alerted about which social media will be used to disseminate such information. The report reviews 2008 SEC guidance that clarified that websites can serve as an effective means for disseminating information to investors if the investors have been made aware in advance. The report determined that the policy is equally applicable to current and evolving social media communication channels. The report states that disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to comply with existing regulations, even if the individual in question has a large number of subscribers, friends, or other social media contacts, such that the information is likely to reach a broader audience over time.
On March 24, the U.S. District Court for the Eastern District of New York held that a Dodd-Frank Act rule requiring the SEC, within 180 days of notifying a target of the pendency of an investigation, to file an action or obtain an extension of time from an SEC director, does not provide for the dismissal of an enforcement action that does not comply with the rule. SEC v. NIR Group, LLC, No. 11-4723, slip op. (E.D.N.Y. Mar. 24, 2013). In deciding a motion in which the SEC sought to halt discovery into its compliance with the rule, the court explained that the statute does not explicitly provide for dismissal of an enforcement action that does not comply with the 180-day requirement, but that the absence of such a remedy does not render the provision superfluous. The court determined that evidence concerning compliance with the internal deadline is not relevant to the action. For that and other reasons, the court held that the evidence sought was not discoverable.
On March 19, the Senate Banking Committee approved Mary Jo White to serve as SEC Commissioner/Chair through June 2014, and Richard Cordray to serve a five-year term as CFPB Director. The vote on Ms. White was 20-1. Senator Sherrod Brown (D-OH) was the lone dissenter, citing his general concern with nominees who previously worked for the industry they are intended to regulate. Mr. Cordray was approved on party lines, 12-10. In an opening statement Ranking Member Michael Crapo (R-ID) reiterated Republican opposition to any nominee until structural changes are made to the CFPB.
On March 18, the U.S. Supreme Court denied a petition seeking review of a Second Circuit decision that reinstated a class action against an underwriter and an issuer of mortgage-backed securities. Goldman Sachs & Co. v. NECA-IBEW, No. 12-528, 2013 WL 1091772 (2013). An institutional purchaser of certain MBS filed suit on behalf of a putative class alleging that the offering documents contained material misstatements regarding the mortgage loan originators’ underwriting guidelines, the property appraisals of the loans, and the risks associated with the certificates. After the district court dismissed the case, the Second Circuit reinstated and held that the plaintiff had standing to assert the claims of the class, even when the securities were purchased from different trusts, because the named plaintiff raised a “sufficiently similar set of concerns” to allow it to seek to represent proposed class members who purchased securities backed by loans made by common originators. With regard to the plaintiff’s ability to plead a cognizable injury, the court reasoned that while it may be difficult to value illiquid assets, “the value of a security is not unascertainable simply because it trades in an illiquid market.”
On March 12, the Senate Banking Committee held a confirmation hearing for Richard Cordray to serve as CFPB Director, and for Mary Jo White to serve as SEC Commissioner/Chairman. While majority and minority committee members commended Mr. Cordray for his leadership of the CFPB to date, the basic disagreement over the structure of the agency itself remains. Democrats maintain that Mr. Cordray deserves a confirmation vote, citing the facts that Congress already approved the structure of the CFPB, that it is the only financial regulator subject to a funding cap and whose rules are subject to a veto. Republicans argue that the CFPB lacks transparency and accountability, and that it should be changed to a commission structure and subject to congressional appropriations. In his testimony, Mr. Cordray stressed his efforts to be transparent and accountable, and Chairman Johnson (D-ND) entered into the record a letter from Rep. Stivers (R-OH) to the Committee calling on members to confirm Mr. Cordray as someone who could help bridge the gap on policy differences. Committee members also generally supported Ms. White. In her testimony, Ms. White addressed concerns from Senators on both sides about potential conflicts of interest given her recent work as a defense attorney, and stated her primary focus will be to finalize rules required by the Dodd-Frank Act and the JOBS Act. Additional priorities identified by committee members that Ms. White agreed should be agency priorities included finalizing rules for (i) credit rating agency conflicts of interest, (ii) money market funds, (iii) CEO pay versus median employee pay disclosures, (iv) high frequency trading, and (vi) crowd funding. Ms. White also pledged to vigorously enforce existing laws. The committee is scheduled to vote on both nominees on March 19, 2013.
On March 1, the U. S. Court of Appeals for the Second Circuit held that an investor plaintiff may be able to assert claims on behalf of a class for securities in which it had not invested, and additionally found that the investor had alleged sufficient facts of abandoned mortgage underwriting standards to survive defendants’ motion to dismiss. N.J. Carpenters Health Fund v. The Royal Bank of Scot. Grp., PLC, No. 12-1701, 2013 WL 765178 (2d Cir. Mar. 1, 2013). An investor claimed on behalf of a putative class that the offering documents for six mortgage-backed securities (MBS) materially misrepresented the standards used to underwrite the loans. The district court initially dismissed the case as to five of the trusts, holding that the investor could not bring claims on securities in which it had not invested. The investor amended its complaint and focused on the one trust in which it had invested. The district court then held that the allegations were not specific enough to the loans at issue, and that the risks were sufficiently disclosed and known at the time of the transaction. After the district court’s rulings, the Second Circuit held in another case, NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), that where an issuer had issued multiple securities under the same shelf registration statement, an investor who invested in at least some of those securities could, on behalf of a putative class, bring claims on securities in which it had not invested so long as all of the relevant claims involved “the same set of concerns.” On appeal in the instant case, the Second Circuit held that in light of its decision in NECA-IBEW, the investor had standing to bring its claims as to all six of the original MBS. The court also held that the “allegations in the complaint-principally, that a disproportionately high number of the mortgages in a security defaulted, that rating agencies downgraded the security’s ratings after changing their methodologies to account for lax underwriting, and that prior employees of the relevant underwriter had attested to systematic disregard of underwriting standards-state a plausible claim that the offering documents” violated the 1933 Securities Act. The court remanded the case for further proceedings.
On February 27, the U.S. Supreme Court held that the clock on the five-year statute of limitations for the SEC to pursue civil fraud claims under the Investment Advisers Act begins to run when the fraud occurs, and not when it is discovered, because the “discovery rule” does not apply to government enforcement actions for civil penalties. Gabelli v. SEC, No. 11-1274, 2013 WL 691002 (Feb. 27, 2013). The Court’s holding followed an investment adviser’s appeal from a Second Circuit decision that, under the discovery rule, the statute of limitations had not accrued until the fraud was discovered or could have been discovered with reasonable diligence because the claims sounded in fraud. The Court reversed the Second Circuit’s decision and remanded for further proceedings on the basis that extending the fraud discovery rule to government civil penalty enforcement actions would improperly leave defendants exposed to government action for an uncertain period beyond the five years after their alleged misdeeds. The Court explained that the discovery rule is meant to preserve the claims of parties who have no reason to suspect fraud, but that the government, here the SEC, is different insofar as it is specifically tasked with rooting out fraud and possesses several legal tools to that end. The Court also observed that, unlike a standard victim of fraud seeking only recompense, the government also seeks remedies intended to punish.