Month: October 2010

The Foreclosure Mess and Compliance

Why is the foreclosure machinery of our nation’s largest banks suddenly grinding to a halt?

The “Produce the Note” movement, encouraging consumers to challenge the lender in foreclosure and make them produce the note. It’s not about proving you are current on your mortgage. It’s about attacking a structural flaw to stay rent and mortgage payment free in your house. The success of the strategy is hit or miss. The first big success was In September of 2008, the First District Court of Appeals in Ohio ruled on a case in which Wells Fargo Bank had commenced a foreclosure action based on a mortgage it did not own. (Wells Fargo Bank, N.A. v. Byrd) Ultimately, the produce the note attack is just a delay. The mortgage holder can find the note or a copy with a lost note affidavit. There are only a few rare cases where the foreclosure claim will be dismisses and effectively forgive the debt.

This is not a new problem. In 2007, a federal judge held that Deutsche Bank lacked standing to foreclose in 14 cases because it could not produce the documents proving that it had been assigned the rights in the mortgages when they were securitized. The theory of simply trading mortgage notes ran into the reality of real estate law.

In the past, I represented banks in M&A transactions. For many, it was an afterthought in transferring the mortgage loans in the portfolio they acquired. The reality is that they needed to file assignment documents with the land records. The bigger the transaction, the more filings. In Massachusetts, some registry of deeds were requiring a filing fee for each mortgage assignment. That gets expensive very quickly.

The other reality of real estate law is that the foreclosure process and laws are different in every state. There are 23 states that require approval of a court to get a foreclosure order. These have been labeled the “judicial states.” The remaining states do not require court action. In non-judicial states, banks aren’t required to submit anything to the court until they are sued by a homeowner seeking to stop a foreclosure.

Another reality of real estate law is that contracts for real estate must be written. This is the “Statute of Frauds” drilled into the heads of law students during their first year.

What kicked off the latest developments was the deposition of a GMAC loan officer named Jeffrey Stephan and what he did for foreclosures in judicial states. Stephan admitted in a sworn deposition in Pennsylvania that he signed off on up to 10,000 foreclosure documents a month for five years. He hadn’t reviewed the mortgage or foreclosure documents, even though he was signing court affidavits that he had done so. This got him the label of “robo-signer.”

It didn’t help that he used the title of  “limited signing officer,” a red flag that his knowledge of the case was nonexistent. I would bet that he had been pleading for additional people to help him.

The loan servicers have mishandled the records management process and legal requirements. The process is in place to prevent foreclosure mistakes. Unfortunately for them, this included submitting false documents to the court. You can’t file an affidavit saying your familiar with the loan file if you are not actually familiar with the loan file.

Now let’s also layer in the origination fraud and sloppy paperwork when the mortgage loans were put in place. There was plenty of fraud during the residential real estate boom.

The last piece is the selection of servicer for securitized mortgage loans. The ultimate servicer for the loan once its securitized is generally the bidder with the lowest price. There may not have been must emphasis on quality. That means sloppiness was rewarded.

Eventually, the mortgage servicers will get the proper procedures and controls in place for their foreclosure process. They will end up paying some fines and it will cost them more money to go through the foreclosure process. They may even bring some individuals up on criminal charges.

In the end, those house where the mortgage bill has not been paid and the borrower has not prospect for paying the mortgage bill will end up in foreclosure. Its just going to take some additional time and money.

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Image: Sign Of The Times – Foreclosure by Jeff Turner

California’s New Placement Agent Law

California has become the latest state to regulate the use of placement agents who help investment managers secure government pension fund money. (Or is that placement agents who help government pension fund money find suitable investment managers?)

California Assembly Bill 1743 was backed by the California Public Employees’ Retirement System, the state treasurer and the state controller. Placement agents must register as lobbyists before they can pitch investment proposals to California government investors.

As Keith Paul Bishop notes in the California Corporate & Securities Law Blog

“the proposed rule does not appear to require disclosure of gifts and campaign contributions to losing candidates for positions that have the authority to appoint persons to the CalPERS Board.  This is not consistent with the Securities and Exchange Commission’s recently adopted “time out” Rule 206(4)-5 for investment advisers which appears to cover contributions to both successful and unsuccessful candidates.  Nor is this approach consistent with the Municipal Securities Rulemaking Board’s interpretation of Rule G-37 (See FAQ II.22)”

Meanwhile CalPERS is has its own rules which area bit stricter. Placement agents must report gifts and campaign contributions made to all Board members as well as to persons who have the authority to appoint persons to the CalPERS Board: the Governor, the Speaker of the Assembly, and the members of the Senate Rules Committee.

One point to focus is the definition of “Placement Agent.” An investment manager’s employees, officers, directors, and equityholders who solicit California public retirement systems for compensation may be placement agents under the definition, unless they spend more than one-third  of their time during the calendar year managing securities or assets of the manager. With respect to solicitation of CalPERS and CalSTRS only, if the manager is registered with the Securities and Exchange Commission as an investment adviser or broker-dealer, is selected through a competitive bidding process, and has agreed to a fiduciary standard of care applicable to the retirement board, then the employees, officers, and directors of a manager will not be a placement agent.

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Compliance Bits & Pieces for October 15

Pink LamborghiniThese are some compliance-related stories that recently caught my eye:

A Mansion, a Lamborghini, and Cocaine in Investor’s Watchdog

I often get the question, “How can we spot a financial scamster?” I always answer that, without training, you cannot spot them by sight and that the very best scamsters look just like the face in the mirror. But there is one exception to that rule. If he drives a Lamborghini, he’s running a con. Don’t give him your money.

New York Bans Manatt Law Firm From Pension-Fund Placements for Five Years

Law firm Manatt Phelps & Phillips LLP agreed to be banned for five years from appearing before any New York public pension fund and will pay $550,000 to the state, Attorney General Andrew Cuomo said. The accord stems from Manatt’s representation of financial firms seeking investments from public pension funds without a securities license, Cuomo said today in an e-mailed statement.

D&O Insurers Relieved of Advancing Allen Stanford’s Criminal Defense Fees by Kevin LaCroix in The D&O Diary

The insurers had denied coverage in reliance on the D&O policy’s money laundering exclusion. The exclusion applies if insured persons took any of a number of specified actions with respect to “criminal property,” which is a benefit the Plaintiff knew of suspected , or reasonably know or should have suspected was obtained through “criminal conduct.”

DOJ: Contractor Asked For $180,000 Bribe In A $10 Suitcase by Joe Palazzolo in WSJ.com’s Corruption Currents

Neil P. Campbell, an Australian citizen, was a senior construction manager for the International Organization for Migration, an intergovernmental group that has worked closely with the
Afghan ministries of Public Heath and Education to erect hospitals and schools. Since 2002, IOM has received more than $260 million in contracts from the U.S. Agency for International Development. Campbell sat on the IOM panel that awarded an Afghan construction company, identified in court documents as Sayed Bilal Sadath Construction Co., two subcontracts worth a total of about $15.5 million, one for a training college and the other for a hospital, according the indictment. Prosecutors say Campbell met with a person he believed was a representative of the Afghan company in July and demanded the $190,000 in return for allowing SBSCC to continue its work under the contracts.

SEC’s Proposed “Family Office” Rule and Rule 260.204.9 by Keith Paul Bishop in California Corporate & Securities Law blog

In The Snows of Kilimanjaro, Ernest Hemingway wrote: “‘The very rich are different from you and me.’ And how someone had said to Julian, ‘Yes, they have more money.’” That is certainly true in the case of the families described in the Securities and Exchange Commission’s recently proposed family office rule.

Ukraine Gov’t, Backed by US Law Firms, Files Second Corruption Suit by Joe Palazzolo in WSJ.com’s Corruption Currents

Plato Cacheris and his well-known Washington law firm Trout Cacheris PLLC announced in May that they had been been selected by the government of Ukraine to audit the country’s spending under former prime minister Yulia Tymoshenko, now opposition leader. The selection of white-collar specialists rather than Big Four auditing firms suggested that ”audit” in this case meant “corruption investigation.”

Caught Spying on Student, FBI Demands GPS Tracker Back by Kim Zetter in Wired.com’s Threat Level

A California student got a visit from the FBI this week after he found a secret GPS tracking device on his car, and a friend posted photos of it online.

Image:

Lamborghini Diablo. Work done … resprayed from metallic pearl green to shocking pink
AttributionNoncommercialNo Derivative Works Some rights reserved by Bobasonic

The Family Office Exemption under the Investment Advisers Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act wiped out the exemption enjoyed by most private funds. I’m still waiting to see how the SEC will define a “venture capital fund manager.” In the meantime, the SEC has published its proposed rule defining a “family office” and its exemption from registration under the Investment Advisers Act.

Historically, family offices have not been required to register with the SEC under the Advisers Act because of the same exemption used by private funds. The Dodd-Frank Act removed that “small adviser” exemption under section 203(b)(3) to enable the SEC to regulate hedge fund and other private fund advisers, but includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

“Family offices” are established by wealthy families to manage their wealth and provide other services to family members. That leaves the fabulously wealthy time to go yachting and leaves others to manage their securities portfolios, plan for taxes, worry about accounting services, and to directing charitable giving. The issue is the the family office management of securities.

In the past, the SEC has issued dozens of exemptive orders for family offices who requested them, removing them from the registration and supervision of the SEC. The proposed rule 202(a)(11)(G)-1 would largely codify the exemptive orders. Most of the conditions of the proposed rule are designed to restrict the structure and operation of a family office relying on the exemption to activities unlikely to involve commercial advisory activities, while still allowing family office activities involving charities, tax planning, and pooled investing.

(b) Family office. A family office is a company (including its directors, partners, trustees, and employees acting within the scope of their position or employment) that:

(1) Has no clients other than family clients; provided that if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person shall be deemed to be a family client for purposes of this section 275.202(a)(11)(G)-1 for four months following the transfer of assets resulting from the involuntary event;

(2) Is wholly owned and controlled (directly or indirectly) by family members; and

(3) Does not hold itself out to the public as an investment adviser.

The key is how the SEC defines a family member:

(d) (3) Family member means:

(i) the founders, their lineal descendants (including by adoption and stepchildren), and such lineal descendants’ spouses or spousal equivalents;

(ii) the parents of the founders; and

(iii) the siblings of the founders and such siblings’ spouses or spousal equivalents and their lineal descendants (including by adoption and stepchildren) and such lineal descendants’ spouses or spousal equivalents.

I guess that some family offices will be cutting off some distant relations to get under this definition. For “less-beloved” family members, the family office management can use SEC regulation as an excuse to kick them out.  Of course, they can still seek and exemptive order from the SEC if they don’t fit under this definition.

The comments should involve a whole new area for the SEC: family law.

As I expected, this exemption is of no value to private funds look for a safe harbor from SEC registration.

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Rosand Enterprises and Real Estate Fraud

I find looking at fraud cases instructive, seeing common themes, failures and techniques. Since my company is in real estate, real estate fraud catches my eye. Recently the SEC brought a case against Rosand Enterprises and one of its principals, Robert A. Anderson.

The Securities and Exchange Commission came in late. The Illinois Secretary of State had already filed an order against Rosand Enterprises, Rossetti and Anderson.

In the Illinois order, they alleged that the enterprise had solicited investors to loan them $2.735 million, with repayment at 15% per month for a six-month note or 20% for a twelve-month note.

The SEC found a broader network of $12 million solicited from 77 investors. (I wonder why the SEC did not include Mr. Rossetti their complaint.) The US Attorney also got involved and announce criminal charges.

Let’s look at some of the red flags.

Extremely high returns should be a big warning. Rosand was offering returns of 15% or 20% per month on loan payments. If the business is that profitable, why bother getting outside collateral. They are doubling their money every six months.

The money was guaranteed. Risk equates to reward. If money is in a safe investment, you should only get a small return. If there is a high rate of return then the investment is going to be risky. Any promised returns above 10% per year should immediately be suspect.

They were offering the notes to non-accredited investors. If you make less than $200,000 per year or have a net worth of less than $1 million you are non an accredited investor. That means you are not generally able to purchase unregistered securities like the notes offered by Rosand.

One aspect of real estate is that ownership is part of the public record. Anyone can walk into the registry of deeds and see who owns a piece of property and who they bought it from. In most places, you can also see the price paid.  If Rosand was buying and rehabilitating houses, a potential investor could easily look up the information in the land records.

The Cook County Registry of Deeds is online. I ran a quick grantor/grantee search on “rosand.” No surprise, Rosand Enterprises has not bought or sold any real estate in the past 15 years.

Like most Ponzi schemes, eventually you will run out ways to get new money in the door to cover the money going out. Rosand stopped making payment in June 2008. Two years later, the State of Illinois and the SEC stepped in to protect investors.

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The Corruption of Scott Rothstein

In Miles Away… Worlds Apart, Alan Sakowitz tells the story of the biggest financial fraud in South Florida history, from his unique perspective of a whistleblower. Throughout the book Sakowitz compares his close-knit neighborhood to the Scott Rothstein’s greed.

Sakowitz takes us through the narrative of the events leading to the arrest of Scott Rothstein. He was contacted through a broker to invest in structured settlements offered by Rothstein. The investment was to but a stream of payments from an employment dispute and deliver a lump sum payment to Rothstein’s client.

Conversion of structured settlements is completely legitimate, but usually subject to regulation and judicial oversight. A victim may prefer a big lump sum instead of installment payments made over time. Certainly, the capital source in the middle is going to want some reward for exchanging cash today for future payments.

Rothstein was offering a huge reward for investors willing to be the capital source. In one example he was offering a $900,000 settlement, payable over three months for an investment of $660,000. Why would any plaintiff be willing to take $660,000 today when they could have the entire $900,000 at the end of 90 days?

For an investor, that is an incredible return. Even more incredible given the assurances from Rothstein that payments are guaranteed. Sakowitz found the returns and Rothstein’s showmanship to be intoxicating, but was suspicious. The intoxication was enough for Sakowitz to have three meetings with Rothstein.

When asked about volume, Rothstein said he was settling 3,000 cases per year, all without actually filing a lawsuit. The smallest of his payouts was $500,000. When asked to speak to the attorneys handling the cases, Rothstein claimed he was personally handling all of the cases.

The biggest red flag for me was Rothstein acting as a seller of the settlements and the attorney for plaintiffs at the same time. There is a terrible conflict between trying to get the best financial deal for his clients at the same time he is trying to offer an enticing return for “investors.” A real attorney would have advised his clients to get a better deal in structuring a settlement.

With all the red flags, it’s easy to see why someone would think that the investment was a fraud and not get involved. It’s a bigger step to call the authorities and make the assertion. Even being 90% sure that it was fraud, that leaves a 10% chance that you’re wrongly accusing an innocent man, damaging both of your reputations.

Why did Sakowitz call the FBI? He tells interleaves stories from his close-knit community telling stories of charity and self-sacrifice for the benefit of others. He writes about his parents as role models and wanting to set a fine example for others.

Rothstein’s walls were plastered with hundreds of awards and plaques from charitable causes, plus photos of Scott with the governor of Florida, the Broward County Sheriff, the Fort Lauderdale chief of police, other politicians, famous athletes and entertainers. Given Rothstein’s connection to the political establishment, the predicament becomes who do you call to tell you found the fraud. The Fort Lauderdale Police Department would be a bad a choice. It turns out that when Rothstein fled the country, he had a police escort to his plane from a lieutenant in the FLPD. After eliminating all of the other government organizations appearing on Rothstein’s wall of shake-n-smile, he turned to the FBI. I found it interesting to hear how Sakowitz felt a sense a relief after making the call.

I was drawn to the story for a few reasons. Sakowitz runs Pointe Development Company, a real estate company. Like me, he is an attorney by training, working in the real estate industry. As a compliance professional, I am fascinated by the mechanics of fraud and Ponzi schemes. Sakowitz was kind enough to send me a copy of the book to review.

Although the book provided great information and perspective on the Rothstein fraud, I was hoping for more. Sakowitz provides plenty of information about his own background to show why he turned in Rothstein. He does not provide equivalent information to show how Rothstein went bad.

Most people do not wake up one morning and decide to perpetrate a fraud on his clients, friends, business partners and anyone who walks through his office door. Clearly greed was a factor. He must have seen an opportunity to sell a settlement for his own benefit. It’s not clear that Rothstein felt the pressure to be a mover and a shaker or what the pressure was that made him initially step over the line. Clearly his extravagant lifestyle created the pressure to keep the scheme going. We certainly could guess at the rationalization Rothstein used to justify his crimes. Perhaps he thought he was supporting the political system, endowing charities and creating jobs.

I would have liked to read more about Sakowitz’s thought process in deciding to report Rothstein to the authorities. Walking away is easy when you suspect a fraud. You merely risk passing on an investment. Reporting a fraud does put you at risk. If you’re wrong, you risk the personal and professional repercussions.  If you accuse a person like Rothstein, who showed off a gun strapped to his ankle, you risk physical harm.

In the end, Rothstein was an evil man, blatantly stealing money. Sakowitz was a good man, who saw through the greed, and took the extra step to try and stop the evil man. That alone is makes a compelling story.

Enjoy Columbus Day

Replicas of the Pinta, Santa Maria, Nina, lying in the North River, New York. The caravels which crossed from Spain to be present at the World's Fair at Chicago.

I’m enjoying Columbus Day. School is closed and the office is closed.

The Chicago World’s Fair in 1893 celebrated the 400th anniversary of Christopher Columbus’s arrival in the New World in 1492.

The Nina, the Pinta, and the Santa Maria Come to the World’s Columbian Exposition

During the fair, replicas of the Nina, the Pinta, and the Santa Maria were moored in the south lagoon of Jackson Park.

William Curtis, an official with the U.S. State Department in Spain, had proposed the idea of building replicas of Columbus’s caravels. A commission was established in Spain to build the ships and sail them to Chicago, site of the World Columbian Exposition marking the 400th anniversary of Columbus’ voyage.

Building the Santa Maria went smoothly, but the construction on the Nina and the Pinta which Americans in Spain were building, went more slowly. Instead of building new ships, the builders used the hulls of two rotting ships for the replicas of the Nina and Pinta.

The Santa Maria was finished and sea worthy by July 1892, but officials ruled that the Nina and the Pinta were not sea worthy. The Santa Maria sailed for Puerto Rico under its own steam, while two United States Navy ships towed the Nina and Pinta from Spain. All three of the replica ships were towed through the St. Lawrence River and the Great Lakes to Chicago.

After the fair, the three ships were turned over to the City of Chicago. Tourists still came to see and tour them, but the city of Chicago didn’t maintain them. The city of Chicago decided to use them in the ceremonies for the opening of the Panama Canal, sailing them from Chicago to the new Panama Canal.

The three ships ran into rough seas on Lake Michigan. The Nina and the Pinta managed to reach the shores of Lake Erie, where they had to be beached and eventually towed back to Chicago. The Santa Maria struggled on to Boston.

The idea then became to show of the ship at ports along the East Coast. But the crowds did not come.

The Pinta sank at its moorings and in 1919. The Nina caught fire and sank. In 1920, the Santa Maria was rebuilt and drew tourists until 1951, when it, too, burned.

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Compliance Bits and Pieces for October 8

Here are some interesting compliance related stories that I’ve run into recently:

Birthday Parties Not Enough to Support Inference of Discrimination; Shifting Reasons for Termination Get Case to Jury Though by Dan Schwartz in the Connecticut Employment Law Blog

First, beware the birthday parties. They may be good morale boosters but some people may find them distasteful. In any event, keep the age-related jokes to a minimum.

Explaining the AIG Exit by Felix Salmon in Reuters

There’s now an end in sight to a huge and enormously complex corporate restructuring, of an entity — AIG — which was too big to fail, too big to manage, and which had an enormous black hole at its heart known as AIG Financial Products. Today, AIG is set to emerge as a viable entity roughly half its former size, small enough to fail, with the black hole gone. That’s not only a substantial achievement; it’s also a good proof of concept when it comes to the FDIC’s new resolution authority.

This Week in Social Media & Employment Law: Facebook Privacy Settings, Stored Communications Act, Social Media Policies by Daniel Schwartz in the Connecticut Media and Employment Law Blog

As social media continues to dominate the world — or at least conversations about employment law — there are a few notable posts that are worth delving into this week that explore the topic further.

Image is courtesy of Cake Wrecks

Save Your Company, Save Yourself

What happens when you have a business disaster on your resume? Maybe listing an Enron or WorldCom would not be so bad. Those companies are big enough that you may not be tainted by the corporate fraud. Unless you ended up in handcuffs.

As the company gets smaller, you’re more likely to get caught in the stink of corporate fraud. That gets even worse when you share the last name on the door.

The Wall Street Journal highlighted the lack of future job prospects with former Madoff employees: Not Exactly a Résumé Highlight: Madoff Work

The story focuses on the Madoff sons, Mark and Andrew, who are labeled as being “untouchable in any firm that deals with the public.” I am not surprised that they are unemployable. Would you hire a Madoff?

But the scar of the fraud falls farther down the corporate ladder. Eleanor Squillari, Bernard Madoff’s former assistant, has moved on to cosmetology. She knows she’ll “never get a job in finance.”

The trading business, which was not implicated in the Madoff fraud and was purchased by Surge Trading, Inc., has the challenge of convincing clients to do business with former Madoff employees.

I suppose the upside is that company schwag could turn into collector’s items.