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Investors, SEC Sue Mortgage Executives

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Many of the defendants named in investor lawsuits are former executives of failed and acquired mortgage firms, while the Securities and Exchange Commission is frequently the plaintiff in such actions. Several cases involve investors of either the Federal National Mortgage Association or the Federal Home Loan Mortgage Corp.

A hearing has been scheduled for Jan. 15, 2013, for final approval of the Citigroup Inc. agreement to pay $590 million to settle a shareholder lawsuit accusing it of hiding tens of billions of dollars of toxic mortgage assets. The case, filed in a federal court in Manhattan in 2009, was settled on Aug. 29. The agreement resolves claims that shareholders ended up with massive losses after the bank allegedly failed to take timely write downs on collateralized-debt obligations, many backed by subprime mortgages, and allegedly engaged in transactions that hid the risks.

Citigroup denied wrongdoing in agreeing to settle. The settlement covers shareholders from Feb. 26, 2007, to April 18, 2008.

The claims filing deadline is Nov. 19 and a transcript of the Aug. 27 settlement hearing over the proposed $2 million settlement was filed on Oct. 29 in the lawsuit involving Thornburg Mortgage Inc. shareholders who sued alleging fraud regarding its financial performance.

The Securities and Exchange Commission’s lawsuit against former IndyMac executives Michael W. Perry and A. Scott Keys settled on Sept. 27. The case was also closed on Sept. 27, according to court records. The SEC had filed its securities fraud suit in February 2011 against Perry and two former IndyMac chief financial officers — S. Blair Abernathy, who paid $125,000 to settle the allegations without denying wrongdoing, and A. Scott Keys, who also denied the SEC allegations — in a case stemming from the lender’s collapse. The lawsuit represents shareholders who bought the mortgage lender’s stock from March 1, 2007, to May 12, 2008.

Bank of America announced on Sept. 28 an agreement to pay $2.43 billion to shareholders who had accused the bank of false statements and omissions surrounding its 2008 acquisition of Merrill Lynch. BofA also agreed to put into place corporate governance changes as part of the settlement. Shareholders alleged that BofA’s management and board had withheld information about losses occurring at Merrill prior to the acquisition, while the bank had also allowed Merrill to pay nearly $6 billion in bonuses to executives before the deal closed. BofA’s stock lost value when the true facts were revealed in a series of disclosures in January 2009, according to a statement issued by the parties in the case. A trial in federal court in New York was set to begin Oct. 22.

The class representatives in the BofA case are the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System, the Teacher Retirement System of Texas, Stichting Pensioenfonds Zorg en Welzijn, represented by PGGM Vermogensbeheer B.V., and Fjärde AP-Fonden. The settlement was reached after almost four years of litigation with a trial set to begin on Oct. 22. The settlement covers the class previously certified by the court on Feb. 6.

BofA’s settlement is, by a wide margin, the single largest securities class action settlement ever resolving a Section 14(a) claim — the federal securities provision designed to protect investors against misstatements in connection with a proxy solicitation. In addition, the settlement amount is one of the four largest ever funded by a single corporate defendant for violations of the federal securities laws to date, and the single largest settlement of a securities class action in which there was neither a financial restatement involved nor a criminal conviction related to the alleged misconduct, according to a statement issued by the parties in the case.

BofA has denied the allegations and said it agreed to the settlement as a way of eliminating the uncertainty of protracted litigation.

In The City of Farmington Hills Employees Retirement System v. Wells Fargo Bank, the defendant’s motion to exclude from the class those who did not suffer any loss was denied. The City of Farmington Hills Employees Retirement System, a pension plan, sued Wells Fargo in October 2010 on behalf of 100 institutional investors over its securities lending program.

Answers to the complaint and lawyers filing motions to appear are the latest legal developments In re 2008 Fannie Mae ERISA Litigation; Comprehensive Investment Services v. Mudd, et al.; and Smith v. Fannie Mae, et al., the legal action was filed on behalf of all current and former Fannie employees who are or were plan participants in the company’s employee stock option plan during the period from April 17, 2007, to May 14, 2010. The case has survived the filing of a motion to dismiss but the claims have been narrowed as a result.

Answers to the complaints and motions by attorneys to appear in the case are still being filed in the lawsuit involving Fannie, Daniel Mudd, Edward Smith and others over allegations that the secondary lender, its executives and certain underwriters made material misstatements in the company’s filings with the SEC and in various securities offerings, concerning Fannie’s subprime and Alt-A exposure; risk management controls; and core capital financials. The lawsuit has survived several motions to dismiss.

The judge also dismissed a lawsuit against Goldman Sachs Group Inc. that had been consolidated with the Fannie litigation. Liberty Mutual Insurance Co. alleged the bank misled investors in its capacity as lead underwriter for the Fannie Mae offerings, which Liberty purchased.

Franklin Raines, the former chairman and chief executive officer of Fannie, has been dismissed from a class action securities fraud suit against the Washington, D.C.-based company, its former accountant KPMG LLP, and three of its former senior executives, brought by a class of parties represented by lead plaintiffs Ohio Public Employees Retirement System and State Teachers Retirement System of Ohio. Raines is Mae.

In the case In re Federal Home Loan Mortgage Corp. Securities Litigation, Freddie’s motion to dismiss with prejudice, all claims asserted against Freddie and certain of its former senior officers was granted on Sept. 26. The court rejected claims that the McLean, Va.-based firm’s public disclosures from Nov.20, 2007. to Sept. 7, 2008, were materially false or misleading.

A federal judge has again dismissed a lawsuit accusing Freddie of misleading shareholders by understating its subprime mortgage exposure and overstating its capital strength ahead of the 2008 financial crisis, according to a story reported by Reuters. A federal court judge in Manhattan said the allegations made in an amended lawsuit failed to show that Freddie Mac officials, including former Chief Executive Richard Syron, intended to mislead shareholders, or withheld significant information from them

A management order has been filed in Securities and Exchange Commission v. Anthony J. Nocella and J. Russell McCann. According to the order, former Franklin Bank Corp. executives Nocella and McCann must take their three most important depositions by Nov. 29. By Nov. 19, the SEC must tell Nocella and McCann what they think are the relevant accounting standards. By Nov. 29, the parties must jointly report on what accounting standards they think are appropriate, noting any differences of opinion. The defendants are accused in the SEC’s April 2012 lawsuit of aggressively using loan modifications to hide bad loans and artificially inflate earnings. The modification programs were operated under names like “Fresh Start” and “Great News” and made the lender appear to be out-performing its rivals.

The SEC has announced that Robert Stinson, Jr. of Berwyn, Pa. was sentenced in a parallel criminal action for orchestrating a Ponzi scheme that defrauded at least 263 investors of more than $17 million. Judge Michael M. Baylson of the U.S. District Court for the Eastern District of Pennsylvania sentenced Stinson to 33 years in federal prison, followed by three years of supervised release, and ordered him to pay more than $14 million in restitution, according to a statement issued by the SEC. The SEC alleged that from at least 2006 through the present, Stinson, primarily through two of his companies, Life’s Good, Inc. and Keystone State Capital Corporation, sold purported “units” in four Life’s Good private real estate hedge funds. The SEC alleged that Stinson falsely claimed the Life’s Good Funds generated annual returns of 10 to 16 percent by originating more than $30 million in commercial mortgages and other investment income gained on the sale of foreclosure and investment properties. In reality, the SEC alleged that Stinson stole investor funds for his personal use, transferred money to family members and others and used new investor proceeds to make payments to existing investors.

The SEC has charged three former bank executives in Nebraska for participating in a scheme to understate millions of dollars in losses and mislead investors and federal regulators at the height of the financial crisis, according to a written statement issued by the SEC. One of the executives and his son also are charged with insider trading. The SEC alleged that Gilbert G. Lundstrom, who was the CEO and chairman of the board at Lincoln, Neb.-based TierOne Bank, along with president and chief operating officer James A. Laphen and chief credit officer Don A. Langford played a role in TierOne understating its loan-related losses as well as losses on real estate repossessed by the bank.

An objection to claim and notice of hearing was filed on November 9 in the Meridian Investors Trust Chapter 11 bankruptcy. The objection was filed by the liquidating trustee and sought to disallow and expunge certain filed proofs of claim in accordance with settlements reached with the Berg trustee. According to a statement from the law firm defending one of the investors, Meridian Mortgage investors were unpleasantly surprised to receive a letter demanding that they repay interest and dividends they may have received from their Meridian Mortgage investments. One investor was asked to pay back $90,000 in dividend payments.

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