Swiss Criminal Investigation into Barclays’ GoldenKey fail Moving Forward

That Barclays criminal complaint I told you about this winter is still alive in Geneva courts. I heard from people involved in the case that after news of Barclays role in the Libor scandal broke, the Swiss judge reviewing evidence brought by high net worth investor Philippe Rebourg took the case a lot more serious. Rebourg lost millions from a Barclays billion dollar structured investment vehicle, called GoldenKey, who failed in spectacular fashion in 2007 through his investment with Avendis Capital. Avendis ran a hedge fund called AEIF fund, which used about 50 percent of their investors assets to buy positions in GoldenKey and then levered up their stake in the SIV. Avendis was also a collateral manager for BarCap, who according to Rebourg’s claim; happen to get some easy money from Barcap to buy their over leveraged position in GoldenKey.

It’s a sordid tangle of relationships involving the America offices of BarCap, with executives like Kelsey Burr and John Parker playing the central role of evil banksters. Burr magically left the bank last year around the time Rebourg showed Barclays a slew of internal emails detailing his alleged role in the fraud. Burr and Parker built products called SIV-lite that would raise capital, borrow money in the short-term commercial paper debt market, and then invest all of this money in higher interest rate bearing products like mortgage-backed securities. The criminal claim tries to show, among other things, Barclays created these SIV’s to off-load their toxic mortgage products at the beginning of the financial crisis and sell them to unsuspecting investors via hedge funds the bankers were friendly with. It’s a tale that highlights how every firm from raters to auditors involved in these high finance products somehow played a role to cheat main street investors.

After I broke news highlighting the case, the judge temporarily gagged people involved from talking with the media. But insiders came forward this week with an update.

“The Swiss judge has done a deep dive into the evidence and charges could be brought within a month,” said a person involved in the Swiss criminal investigation.

The Swiss judge had to sort through multiple offshore entities BarCap set up within the GoldenKey transaction. Finding criminal liability is tough because the complexity of financial products like GoldenKey, which are very difficult to understand even for a specialized judge familiar with financial instruments, have been structured in order to make sure all the potential legal liability was outsourced to some external managers, like Avendis Capital, or domiciled in different bankruptcy remote jurisdictions.

There are questions to how in the heck some raters gave Barclays’ GoldenKey a stellar rating towards the end of the SIV’s heyday in 2007. Why was S&P so nice to Barclays? Now thanks to Rebourg’s case the Swiss judge is looking at email evidence that shows a level of arrogance and RICO like behavior by Barclays. One such email written in 2007 by a Barclays executive who was talking about the bank arranging GoldenKey says “…we can always strong-arm S&P if they become difficult over the CIO position as we use them day in day out for rating so many of our deals.”

The case also involves international auditor BDO because they were assigned as a court trustee for the liquidation of AEFI fund. Rebourg told me last year he couldn’t figure out why BDO was reluctant to go after Barclays to recover funds for investors harmed by the banks role in the alleged fraud. It was especially confusing since they found out that BDO had also been invested, via one of their companies, in the AEFI fund. The hope was BDO would be motivated to help investors get every dime possible after they kicked the AEFI managers out. Then investors in AEFI fund found out one of the partners of BDO was member of the board of Barclays Switzerland branch and figured some favoritism towards Barclays was at play.

Rebourg told me last year, “The attitude of Barclays’ employee, under Bob Diamond tenure, has been one of reckless brinkmanship. Convinced that they were above the law, they have repeatedly plucked clients and investors alike without fear of the law.”

With public sentiment turned against the bank from their admitted role in Libor manipulation this would be an easier time for the Swiss to use their unique financial crime laws against Barclays. But for anything serious to come out of Rebourg’s criminal claim it will have to be Geneva Attorney General Michael Lauber taking the Swiss judge’s opinion of the claim and Rebourg’s evidence to heart if we are going to see criminal charges drive that fear into Barclays’ bad actors.

Community Banks force New Canaan Realtor to Liquidate: Six Prime Homes Ordered for Auction

A top New Canaan real estate agent who tried to use a reorganization bankruptcy to save about a dozen of her investment properties in Fairfield County, CT is close to losing her battle with her bankers. After three years of fighting upstream in Bridgeport, Conn. federal bankruptcy court, Judge Shiff ruled last month against Ruth Jones and ordered a forced liquidation auction on six of the properties including her luxury primary residence in New Canaan. The case shows how even local community banks are not willing to modify loans with long time customers who once had an established history of payment credit and earned these banks millions in fees.

The homes scheduled for a September 11th auction at the Bridgeport court house included her 7,500 square ft primary residence which is underwater and a water-front vacation home near Westerly, RI that she bought in 2006 with a $2 million loan. The auction also includes along two other million dollar homes once used for corporate rentals on Old Stamford Road in New Canaan and two smaller multi-family rentals. Recent appraisals show they are prime properties in good condition – homes vulture distressed investors or even banks with bidding credits would love to get their hands on.

In Jones’ case, actions by the judge and trustee show how one-sided a Fairfield County bankruptcy court can be when banks can afford to hire embedded lawyers too familiar with a judge and trustees who owe them favors for referral fees.

But Jones isn’t taking this laying down. In the last month she filed a grievance report with the State regarding the bank appointed Trustee, Richard Coan. It’s unclear how Coan, whose experience is in Chapter 7 bankruptcy with Hartford-based law firm Coan, Lewedon, Gulliver & Miltenberger, was chosen as a reorganization trustee. Legal filings show Judge Shiff appointed Coan in February 2011 after the banks wouldn’t come to the table to accept any of the modification plans submitted by Jones.

Judge Shiff also stripped Jones of control to manage payments from her debtor in possession account which has around $300,000 in it from income producing rentals tied to the bankruptcy. The Judge’s order also listed “unauthorized use of cash collateral” related to monies in a DIP account that Jones managed prior to the trustee appointment. Jones refutes there was any inappropriate use of bankruptcy funds because she says the money taken out was earned from another company’s tax return that is not in bankruptcy. Her bookkeeper explains she made an investment with the funds in hopes of earning money to help payoff her creditors; unfortunately that money was pooled into a court monitored DIP account. Jones also states she had advice from her lawyer to use the money this way but Judge Shiff apparently took a hard-line because he saw it as a use of dollars that wasn’t first approved by the court. It was another legal setback for Jones that shows how hard it’s been to run real estate deals when you are hamstrung by the cold view of an overcrowded bankruptcy court mired in cases of homeowners hoping to use bankruptcy as they struggle to recover from the financial crises.

How the DIP money has been handled is a big bone of contention with Jones. The court appointed trustee, Coan, has hundreds of thousand in DIP dollars that could be used to offer adequate payment protection for the half a dozen banks who hold Jones’ mortgages hostage. But since Coan took over, financial filings show, he didn’t use the adequate payment protection option to help Jones negotiate with her creditors. Nor has he answered questions why he won’t use it. In fact, Coan told me in an interview this week the banks thought he would just roll over and begin liquidating her homes when he took over 17 months ago. Coan said he recently submitted a plan designed by his law firm — not one of the three plans Jones had worked with an accountant to submit — but the banks had no interest in the modification terms and Jones didn‘t see any form of liquidation as a practical plan. As a result, Coan, the Trustee, took Jones negotiation legs out from under her and filed a liquidation plan that was approved by the court on July 18th.

Jones says there are also conflicts of interest between the Trustee and one of her creditors, USA Bank. The original attorney USA Bank hired, Jim Verrillo of Ziegler & Ziegler, pushed hard from the start to get these homes liquidated and find reason for a trustee to take over, according to Jones. A trustee his firm has a history of working with. The conflict is before Coan was ever appointed by the Judge, Jones had met with his partner Tim Miltenberger to discuss her case because she wanted to hire their firm to represent her. According to Jones, Miltenberger said he couldn’t take the case because the firm gets too much business for trustee referrals from Ziegler & Ziegler. When I asked Coan about this he said his partner was on vacation and he didn’t know if he’d met with Jones before. Coan also said the U.S. Department of Trustees is the governing body to appoint bankruptcy trustees but attorneys on the case can make a request for a specific local trustee. Coan who also hired an attorney from his firm to represent him in the bankruptcy has applied for repayments of around $70,000 in fees that would come out of Jones’ DIP account. Fees Jones is frustrated with because she feels they could have been used to pay some relief to her secured and unsecured creditors. Verrillo was eventually fired by the bank for ‘submitting bills that didn’t add up’ according to published reports on the failure of USA Bank.

The Trustee is also paying Jones’ bookkeeper, Elizabeth Santaus, weekly fees to pay bills associated to the rental properties under his care in bankruptcy. This is a function the Trustee could be doing on his own but isn‘t. Then Jones, through a management company she owns, gets $5,000 a month to manage the properties but has to clear all expenses through Coan. So far her bookkeeper says Coan has denied paying property tax on some of the New Canaan properties because he knows the debt will be wiped out in liquidation or passed on to a new buyer. Jones was originally getting $10,000 a month but her creditors went to Coan and demanded he cut the management fee. Coan explains technically the creditors have the right to request how the incoming cash collateral (rents) are used on the properties in a chapter eleven bankruptcy.

Coan’s hands off management of cash collateral has also led to some questionable mistakes made in court. One bank lender had Coan’s attorney show up in front of Judge Shiff and demand all the cash collateral in a rental property account. The previous month cash flow statement submitted by the bookkeeper showed $22,000 was in the account. But the Trustee didn’t check with Jones bookkeeper to learn if she had used funds that month to pay property taxes on the rental. So there was really only $5,000 in the account when the cash collateral request was made. The trustee’s attorney testified there was $22,000 in the account and Jones said her attorney, Peter Ressler, wasn’t allowed to show evidence to dispute it. She was held in contempt by Judge Shiff and ordered to come up with the extra funds to pay back to the cash collateral account.

Santous told me, “I thought that showed how detached the trustee is to what is happening monthly within the bankruptcy estate. What is he doing to earn his fees?”

Jones also has concerns about the actions from the bankruptcy judge who hasn’t allowed for Jones to move the case into chapter 7 which could stave off her primary home being auctioned. Court records show Judge Shiff said he thought the Chapter Eleven trustee could handle this case and it didn‘t need to move into chapter 7. Even Coan admitted these liquidation moves in a chapter eleven ,while not rare, is unusual. Unfortunately for Jones a legal process designed to reset the borrower and get them back paying is now being used as a quick fix to gut her liquid assets and get immediate cash for her secured creditors – the banks who pushed high risk loans on her during the last decade.

That’s not the only mishap Coan or the court made. After the judge ordered the six properties for auction last month Coan used an old list of creditors to mail out notice. An amended list of creditors had been filed with the court at least a year ago, which included unsecured creditors, but apparently the creditors mailing list he got from the court clerk wasn’t checked against all the filings. As a result of the legal mishap Jones could have some relief. There is a motion for stay filed by Jones attorney against the scheduled auction. All secured and unsecured creditors have to be notified about the disposal of assets. A hearing is scheduled to hear the Stay motion on August 28th.

Peter Ressler, Jones attorney, told me, “We determined the notice did not go to all the creditors and while Judge Shiff may not agree with the Stay we do believe he will be sensitive to the technical issues not followed.”

If Judge Shiff doesn’t grant the stay Ressler, with Hartford-based Groob, Ressler & Mulgueen, said he will ask the district to overrule the decision and grant a stay on Judge Shiff’s ruling while Jones continues to fight her case on appeal in district court. Steve Wright bankruptcy attorney for Harlow, Adams, & Friedman explained that in State court a stay would be automatically granted with an appeal filing but in Federal court it’s the opposite.

“Unless the district court is sure there is some financial protection for the creditors to not disadvantage them while the appeal is being litigated they also might not grant a stay,” says Wright. That financial protection usually comes in the form of the debtor, Jones, posting a supersedes bond (liquid assets or cash held in lieu), but her attorney Ressler thinks the rental income and money in the DIP account could act as that type of bond protection.

Jones had also recently filed for Judge Shiff to be removed from the case for bias. But bankruptcy attorneys who practice in Shiff’s court say that would be highly unlikely for a seasoned Judge like him to remove himself.

Too Many Banks, Too Many Loans
Jones, a self-made success with thirty years of real estate sales experience, began building up her rental investments during the real estate boom years of the last decade. She even got actively involved in the start-up of a new bank and pulled together about a million dollars through family and friends as a founding shareholder for a local lender called USA Bank. Liens filed in court against her homes show 1st and 2nd loans were readily handed out by the banks she’d been partners with for years but USA bank was the most aggressive about throwing money her way. Money calculated off bank ran appraisals that now put most of her homes underwater. Jones was a subject in an investigative story published by The Distress Debt Report and CTWatchdog.com last year after she came forward on the alleged fraud she saw at USA Bank run by Fred DeCaro Jr. and his son. Jones, who along with other USA Bank borrowers, was interviewed as a whistleblower by the FBI and the FDIC– after the bank was seized by the FDIC in 2010. That investigation into the bank’s board, their attorneys, and bank executives is still ongoing. Some USA Bank borrowers have been able to hold off foreclosure by the new the bank, Customers First, that picked up USA Bank loans for around 20 cents on the dollar, because of evidence presented in state courts (or arbitration) detailing miss-use of construction loan funds, false appraisals, or even the borrowers signature being forged on loan documents. But in federal bankruptcy court Jones says she hasn’t even been given the chance to have similar fraud claims heard or allowed to present witnesses.

As a result, liens by USA Bank filed in court make it seem that she got more cash than she really did for each home. That’s because USA Bank used an aggressive method of cross collateralization in her loans. Jones says she was unaware her primary residence at 75 Beacon Hill was used in a $1.4mn loan USA Bank did on another investment property of hers not in her personal bankruptcy. A property she’s alleged USA Bank committed fraud in.

“It’s apparent that USA Bank placed Ruth Jones into an “Adhesion Contract”. In other words, the bank placed Ruth Jones in a situation that gave the bank an extremely lopsided advantage if it ever came time to revisit the mortgages on these properties with potential modifications or foreclosure by placing mortgages on each property and then cross collateralizing them together with multiple mortgages,” says Steve Dibert president of MFI-Miami, a firm that audits mortgages for fraud for borrowers and their attorneys.

“It appears the bank wanted to have it both ways. They wanted the right to one mortgage on each property so if they foreclosed they would have a clear title if and when they sold the property post-foreclosure while at the same time being able to foreclose on the other properties in order to cure any of their losses. Doing a cross collateralization in this manner creates a priority issue for which mortgage has priority over the other. By doing the financing in this manner, the bank set Ruth Jones up to fail. In my opinion they took full advantage of her lack of knowledge of real estate investing and should have known that her business model had risks because of the volatility of the real estate market and volume of loans they were giving her,” says Dibert.

But Jones isn’t only fighting USA Bank. JP Morgan Chase, Bank of America, Greenwich Bank & Trust, Ridgefield Bank, Wachovia, and a private lender Devon Kay Capital are all holding secured claims against Jones in her chapter 11 proceeding. Her primary residence, a beautiful New Canaan mansion, was bought in the late 90’s with a loan by a local community bank called Ridgefield Bank. Her $1.5 million 1st loan was then changed to a $2 million loan in 2005 and based off an appraisal of $6 million she says Ridgefield did, they even gave her another $1.5 million home equity loan. Jones went into the financial crisis with $3.5 million in principal owed to Ridgefield Bank on her residence and the town of New Canaan appraised the home at $3.2 million in 2008. Since then large homes like Jones that need multi million loans aren’t selling so fast and local real estate agents interviewed for this story say she’d be lucky to sell for a current market value of $2 million based on the few comparable sales available.

Jones bookkeeper she says she paid on her Ridgefield home loan until she was advised to file chapter 11 in August 2009. After the bankruptcy filing Jones says her lender told her they wouldn’t negotiate a modification with her. So she stopped paying the mortgage while in bankruptcy — these are monies that would have been held in the DIP account now controlled by the Trustee. Bankruptcy attorney Steve Wright says, “That’s a risk of bankruptcy these days. Some banks don’t negotiate with borrowers because the modification terms would be made public in court filings.”

But why Ridgefield Bank, who did other real estate loans with her in the last decade and she referred business too, won’t come to the table and negotiate is still unanswered. Jones has written letters to their board after modification plans given to the bank’s attorney Mike Wrona, of Halloran & Sage LLP, fell on deaf ears.

“I have made attempts to negotiate with Ridgefield Bank’s counsel, Michael Wrona, on Multiple occasions, I have attached a copy of a written offer I sent to Atty. Wrona in February. I have not received any written response from Atty Wrona,” wrote Jones to Ridgefield’s chief credit officer Charles Balocca on April 19th 2011. “I am trying to make offers to gain approval of a workout plan by my creditors so I come out of bankruptcy: It has been a harrowing 18 months.”

Jones bookkeeper Santaus said in an interview this week, “I have worked these numbers for three years. The rental income could support her loans if there was some form of modification. It would also help if the Trustee worked to ensure her renters understood they still need to pay while in bankruptcy.” Financial worksheets filed in court show at the end of Q2 (May) the bankruptcy estate was earning near $30,000 in rental incomes but Santaus says they should be producing around $10,000 – $15,000 more than that and the Q2 worksheet shows around $40,000 of rents is more than 90 days over due.

Ridgefield Bank, through their attorney, would not comment for this story except to say they have followed all the legal proceedings correctly.

Legal proceedings is exactly what Ridgefield used instead of a little hometown care. They even got a court order to enter the house to do their appraisal after the auction was ordered instead of calling Jones to simply schedule a date. Emails seen by this reporter between the bank, Jones, and her attorney show the bank wouldn’t communicate with Jones when she called to get the number of people who would enter her home where she is a caregiver for two relatives with cancer and other immune-deficient diseases. Jones was trying to ensure there were enough gloves and masks for the bank’s appraisers. The emails show a frustrated Attorney Wrona claiming Jones said they’d have to come with a sheriff if they wanted to enter her home. Jones says Wrona misunderstood her and emails to Wrona show she wrote she was ready to open the home to them if they wore gloves and masks.

Even the Bank’s executive vice president chimed in about the tussle. Chuck Balocca wrote about Jones in an email seen by this reporter on July 23rd which he sent to Jones, her attorney, his attorney and the Trustee, “talk about twisting the truth but then nothing she does surprises me!!”

Ridgefield is apparently anticipating the auction of her home with hope of some short-term financial recovery side stepping the long-term financial benefits of getting interest payments off Jones for the next decade or so. Interest payment Jones keeps offering but no one at Ridgefield is interested in hearing.

Dibert, who Jones hired to audit some of her USA Bank loans says, “It looks like Ridgefield forgot Gordon Gecko’s first rule of investing. Don’t let emotions get in the way of making money.”

Dibert points out the $1.5 million second loan would move to an unsecured position and get wiped out if Jones was allowed to go to chapter seven — leaving only $2 million of secured principle they can collect from a sale. To top it off, with the bank getting the trustee to keep her in a chapter 11 the bank now has Jones’ estate paying the trustee to auction off her own home and avoids foreclosure cost.

“If comparable homes in New Canaan sold on the free market are only going for $2 million… what does the bank think they’ll get at auction?,” says Dibert. “It reads like they want to stick it to her.”

The bankruptcy trustee auctioning off six prime properties in one day has some New Canaan realtors worried about how that sets new market comparables for local home owners now trying to sell. Patrick McEvoy, a long time New Canaan realtor says, “The local market really loses when we have too many forced distressed home sales like this auction could produce. It doesn’t reflect what a free market would pay. The banks got plenty of bailout money from the taxpayer. It’s their turn to show the community they can work with borrowers like Jones who’s done millions in business with them and likely will continue to generate real estate sales in the future.”

But concerns about real estate recovery apparently aren’t the problem of a court appointed trustee. Coan has shown he thinks his job to get quick cash for the secured creditors. Jones was furious with Coan who went and spent near $17,000 out of the DIP account to pay for expensive ads listing each home in the coming auction — even after he knew an appeal and stay was filed. Ads began this Friday in three of Hearst CT Newspapers (Greenwich Time, CT Post, Stamford Advocate) and more have been pre-paid to run in the WSJ and New York Times. If the auction is put on hold it’s unclear if Coan will spend more of the DIP account to re-advertise a new auction date. He does get direction from the judge on where to advertise and has a fiduciary duty to creditors to print a legal auction notice in the local newspapers.

Jones now waits for the mercy of the court to stay the auction next month while she continues to do what she’s done so well for the last three decades – connect buyers and sellers. She still has her ability to earn outside of bankruptcy through selling homes via her real estate firm Ruth Jones Homes LLC.

“I get up and go to work to sell homes every day. I pray. I’m not giving up,” says Jones.

Ruth Jones Bankruptcy case in Connecticut federal court is: 09-51596. Legal filings can be found in PACER.

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San Bernardino County Voters Can Still Dissolve Eminent Domain JPA

I am on finance TV show the Keiser Report today reporting from So-Cal’s Inland Empire about a private finance firm, Mortgage Resolution Partners, using San Bernardino County’s CEO Greg Devereaux as their guinea pig in a controversial eminent domain housing plan. A plan never attempted before that could effect future borrowing rates hurting local homeowners yet also gives them the chance to put to screws to Wall Street investors who have them in a debt death spiral. There are so many what-ifs to using eminent domain this way and miss information is being spun by both parties. After being on the ground in the county for a month here’s a few observations I think residents need to pay attention to.

First your local papers, The Sun, Press Enterprise, and even the LA Times just don’t have local reporters covering the story with the industry knowledge to understand how high-finance works so they can ask smart questions and get you the set of facts you need to make a decision. One thing’s for sure the current plan is all about those who know about how high-finance works trying to take advantage of those who don’t for a fat profit. Lefty politicians will tout its merits without reading the details of the plan and MRP has even hired a professor, Robert Hockett of Cornell, to spout out feel good expert sentences to reporters that are often inaccurate.

I get worried for readers when we see the LA Times housing reporter write, “Hockett has said that using eminent domain to seize underwater mortgages that have been securitized makes sense because often those mortgages can’t be sold at market value for legal reasons. Often, those loans must be sold at face value — a higher price — because of the contracts governing them.”

That sentence just isn’t true. The LA Times could have called over to the mortgage bond experts at SIFMA who explained, “No, he’s wrong, because the loans generally can’t be sold at all at the whim of the trustee prior to default. At whatever price.” Asset back traders confirmed mortgage bond trustees do sell loans out of the securities below face value, not often, but it happens.

A few national finance reporters and publications are trying to sort out the facts but MRP and the County just keep claiming they havn’t finalized anything – which kind of sound likes BS to me. I’d suggest reading Felix Salmon and Matt Goldstein at Reuters along with a group of high finance expert opinions Marc Hochstein has put together over at American Banker’s Bank Think to get your arms around the pros and cons of MRP’s home protection plan. On Max Keiser’s show I was referencing some really interesting points by Andrew Kahr, a banking industry veteran and opinion columnist for BankThink. Kahr spoke out against his own kind (Bankers) on why eminent domain could work but not the way MRP has planned it for San Bernardino. He even scolded mortgage investor groups for using fear of breaking contract law as the evil of all constitutional evils.

Today I also talked with Max Keiser about the County possibly violating California’s Brown Act. The notion that elected officials felt they needed to walk a grey line and break public trust to get their joint protection agency off the ground tells us a lot in this saga. With Paul Herrera, government affairs director for San Bernardino-area realtors association, now telling me that elected county board supervisors came to him all excited about the plan starting on February 15th – two months before the first public hearing in April – it’s getting clear the County felt it needed to meet in secret first to escape the wrath of deep pocket investor groups who‘d use the media to communicate all the scary pitfalls of this plan. And if reporters can’t get emails and meeting notes via FOIA request because the towns say they don’t have any, than MRP was also likely planning how they communicate (no emails) to keep their negotiations with San Bernardino County under wraps.

David Wert, spokesperson for San Bernardino County , swears to me the County doesn’t want to execute a plan that benefits one set of wealth investors over another and only helps one group of homeowners with jumbo loans who still have good credit. But local realtor groups don’t trust that. Bottom line is there is still time to reverse the formation of the Joint Protection Agency – the newly formed legal body run by Devereaux that is using county resources (lawyers and administrators) to make decisions on eminent domain. Herrera says if residents don’t want the plan they need to speak with their five elected board supervisors to get at least three to vote for dissolution of the JPA. Towns already signed on like Fontana and Ontario don’t have the money to fund a JPA on their own (lawyers are expensive) so it’s really at the feet of the County to pull this off–without a JPA they can‘t do the plan. Of course another idea is to let the JPA work through alternate plan details like including defaulting homeowners in the pool of loans MRP would buy. Even if they did that residents still better do their own research to understand on how the effects of counties using rule of law to break mortgage contracts could hurt them. They also need answers on any kind of gift tax they would have to pay if they got a principle reduction.

The reality is by using eminent domain this way what residents really have is a chance for an informed public to take control away from the banks and have a small role in redirecting their housing hell hole. And as I said on TV today if the banks had modified loan principles or at least written down these underwater loans to real market value years ago they might not be facing a possible take over by city governments that would hit their balance sheets with a big fat loss. I’d be watching if the people of San Bernardino County start showing up at public meetings to try and move the plan in a different direction through a collective vote or if a few high finance vets keep rolling along to pillage municipals.

Whistleblowers say Bear Stearns lied to Raters like Mizhuo Bank- Where are the Charges?

A Japan bank, Mizuho Securities, was hit with an enforcement action and fine from the SEC today for not telling the mortgage security raters the truth about the quality of the loans they were rating on a $1.6 billion CDO.

The Security & Exchange Commission says Mizuho rushed to sell a 2007 CDO called Delphinus at the same time S&P made a change in the formula they used to measure prime v. subprime loans. With the subprime valuation rating change the CDO filled with subprime rmbs likely wouldn’t have received the needed rating to convince investors to buy. The SEC claims the Japanese bank used an industry method know as packing the CDO with ‘dummy assets’ to get the security rated by S&P in a short amount of time. The problem is Mizuho didn’t actually package the CDO with mortgage bonds that had the high quality collateral they told the rating agency would be in the CDO. Delphinus 2007-1 closed on July 19th 2007 and six months later it started to default. As a result of this mortgage security fraud the SEC now gets $127.5 million in fines on a CDO the bank only earned $10 million on.

And guess what – Bear Stearns mortgage division run by Tom Marano and it’s mortgage packing team at EMC did the same thing on BILLIONS of mortgage securities but the SEC hasn’t sued or lobbed a settlement with the American bank now owned by JP Morgan. News of internal EMC whistleblowers falsifying mortgage info to get a 20 minute AAA rating from S&P was first reported by me at The Atlantic in May 2010. Since then most of the monoline insures and a ton of RMBS investors have sued JP Morgan/Bear Stearns for rmbs fraud. In fact JP Morgan admitted in recent financial fillings they are being sued for up to $120 billion of mortgage securities. In New York, lying to a rater and getting an insurance company to invest in and insure the mortgage security based on a false rating is criminal Insurance Fraud. Which is what investor lawsuits and over 30 whistleblowers have alleged Bear Stearns did.

The SEC has plenty of evidence available to sue JP Morgan/ Bear Stearns for sins it says Mizuho Securities executed. They can read emails from an EMC whistleblower cited in the Assured Guarantee amended complaint starting on paragraph 78 that describes how EMC rmbs analyst were directed to mislead raters by Bear Stearns management. Assured’s lawyers at PBWT have all kinds of internal documents and signed whistleblower testimony the SEC can get its hands on. There is even a documentary film about Bear Stearns now showing at film festivals across Europe and the U.S. called, Confidence Game, that actually has real live people on camera describing how they used ‘dummy assets’ and lied to raters. In fact, I’m pretty sure the filmmaker Nick Verbitsky of Blue Chip Films would even send them a copy of the DVD and his unedited tape for free. Last year I reported for The Distressed Debt Report the NY AG asked Verbitsky to see his whistleblower tapes and was actively interviewing some of the whistleblowers with hope of charging the Bear mortgage traders with the Martin Act. The SEC has even told JP Morgan earlier in the year they want to sue them for Bear Stearns mortgage sins via a Wells Notice but still NOTHING has been done.

Mizuho doesn’t have to admit guilt when they settle with the SEC and neither will JP Morgan if they settle for similar actions. Unfortunately it looks like the SEC even had to downplay the actions of the three individuals from Mizuho to get a settlement from the bank. The traders who no longer work for Mizuho received short-term bans (6mns-1yr) from the industry and were labeled negligent, instead of knowingly, in misleading clients. It will take a DOJ securities fraud charge or NY AG arrest to officially state these bank traders have committed criminal fraud against the investment community. An event I know many from Main Street to Wall Street are waiting to see – the question is when will our authorities have the political will to execute this kind action against an American Bank.

Did San Bernardino County Violate California’s Brown Act in Eminent Domain Talks?

This story has been updated with comments from San Bernardino County

Groups that represent the interest of mortgage bond investors have been caught off guard by a move San Bernardino County, Ca might make to use eminent domain to buy underwater mortgages with the help of wealthy private investors and a San Francisco based venture capitalist firm. Today the Southern California County held it’s first meeting with public comments on the subject and Greg Devourex, county CEO, started the meeting stating they’ve been working to address the issue openly with the community and ideas will be thoroughly vetted in public. But concerned residents and local real estate brokers say they only heard about the plan through press reports last month nor have they actually seen any plan proposals.

Representative of powerful financial investor groups like SIFMA and the Association of Mortgage Investors told me the newly formed joint protection agency hasn’t come to them for viewpoints or research on how this would affect mortgage investors, borrowing rates in their area, or the securitization market. SIFMA has clients like PIMCO and Blackrock who’ve bought billions of residential mortgage securities for investors and even pension funds that could be effected by the plan. They clearly have a role to lobby for only one of the players the plan could affect but they also have deep industry research and data to help elected officials, in one of California’s lower to mid income areas, make informed decisions. I found it interesting that Devourex, or city officials from Fontana and Ontario who also want to use the plan, didn’t think these industry groups were worth speaking with. It wasn’t until the industry groups proactively sent letters of concern that a special public hearing magically happen.

But these out-of-state players aren’t the only ones shut out of the decision-making process. Even groups like the Inland Valleys (San Bernardino area) Association of Realtors have tried to get officials to explain the request for proposal procedure the county used to engage in contract talks with the private investors, Mortgage Resolution Partners, but they’re getting stonewalled. One agency that expressed concern over the eminent domain plan said cities like Fontana responded to a Freedom of Information request saying they didn’t keep documents of their discussions to work with MRP so they couldn‘t honor the FOI request. Fontana city council did not respond for comment. This could bring up questions about the cities violating the Brown Act. A California legislation passed in the 50’s to prohibit secret meetings of official bodies.
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But it looks the Matt Goldstein, a pretty good Reuters investigative reporter, has done the leg work for those left questioning how long this new player, MRP, has been working to get the ear and interest of city officials. Interest in a plan that fellow Reuters financial blogger Felix Salmon explains is somewhat greedy and not a valid use of eminent domain. Goldstein’s report says according to public record Reuters got a hold of, Greg Devourex and his San Bernardino County team started talking to MRP in January. On February 9th they even signed a non-disclosure with MRP saying they’d keep the talks private. Goldstein reports it wasn’t until the County thought they might really want to do the plan that they let the public know what was on the agenda. The fact that it took them about six months to inform the public is kind of alarming and even now residents I’ve interviewed still don’t really know how the plan would work because the county isn’t sharing a lot of informed details of what they’ve labeled the ‘home ownership protection plan’.

Multiple industry professionals I spoke with today who were not ready to comment publicly felt there’s been some questionable back room dealing and idea sharing to get the process along this far.

Groups like SIFMA also prepared public comments for the hearing but very few who attended got past the 2-3 minute limit to finish their thoughts. The whole meeting lasted only 36 minutes and there was no discussion or rebuttal from the likes of Deveraux’s team.

SIFMA’s argument against the plan, while obviously concerned first for the mortgage investors, did bring up an interesting concern for homeowners who might take part in the plan. Will they be ready to pay taxes on debt relief if the IRS comes after them and the tax break temporarily in place goes away? Say a homeowner who is paying on their mortgage in an underwater home that isn’t government insured now ( we think this is MRP’s target customer) gets a $100,000 principle modification; does the homeowner have enough cash saved to pay tax on that little gift? Gift tax can be a pretty steep rate.

The other concern dissidents of the plan, like local realtors from the mountain resort of Crestline, Ca, expressed was this plan would wipe out local firms that are trying to do refi’s for San Bernardino County home owners. Remember MRP doesn’t want the delinquent loans, they want the ones that are still paying but underwater in value. Of course if local banks/lenders had moved faster to actually reduce principle on So-Cal‘s underwater homes (a tough economic decision because it lowers the assets on their balance sheet) the county of San Bernardino likely wouldn’t have even considered an extreme move like trying to use eminent domain on personal property that isn’t going to used for public projects.

This plan is going to get a lot of press on why it’s a ‘disastrous idea’ for long-term economic reasons and violations to basic contract law. A few lefty congress people like Rep Brad Miller will voice reasons why it should work without giving any stats or details to support his ideas. But the short-term story is whether the Joint Protection Agency even started the process legally and with transparency for the residents who they claim they’re trying to help? That’s the story local California reporters should be on but at least a well-known national reporter like Matt Goldstein, who has likely never been to the Inland Empire, got the news out.

UPDATE 7-17-12: David Wert, public relations for San Bernardino County, told me the talks with MRP actually began as far back as October. Reuters reported they began in January because that’s as far back as they requested county call logs. That means they didn’t sign the non-disclosure agreement with MRP for about 3 months. The timeline of when the talks started with MRP before the idea of forming the JPA was announced is important to industry observes who questioned if the County violated the Brown Act. Wert says the County CEO is an appointed position, not elected, so he is not subject to holding all meeting in public like the Board of supervisors. Wert flat said he doesn’t think Devourex did anything in secret but will continue to sign non-disclosures with private firms when an idea to help the county is presented to him so that intellectual property is protected. Wert expressed frustration with the media’s coverage on when the County CEO informed the public about the idea to use eminent domain for their housing problem and said this is nothing more than a smear campaign by the investment community. He believes once the idea of forming the JPA was first mentioned at an April public board meeting, that local press attended, the county did its job to start open communication with the public.

NetNet-he thinks they followed the books regarding the Brown Act but since local press didn’t pick up on the importance of using eminent domain in this knew way and the preceived risk it could place on the mortage investors and constitutional/contract law the public feels missinformed.

In a way he has a point – it wasn’t till my peers in the national media who are schooled in high finance caught on to what was going on (via calls from their mortgage investor/trader sources) and printed stories calling the plan a scheme did the Republican minded locals (and realtors) get restless and start to voice concern.

The County thinks there is a lot of miss-information getting printed about MRP’s plan because the County and MRP haven’t finalized anything yet. But speculation about how some of the details that have been shared work is simply part of the role of journalism. Question, analyze, share what you know, and let the reader decided – that’s our job. As San Bernardino County moves along in the process, it’s important all ideas and plan details are openly discussed and published. I’d expected San Bernardino to have a special website up soon to data dump everything they have on the possibility of the Home Protection Program. Unfortunately, most residents still aren’t likely to understand the impact of taking money off the table from one investor group and giving it to another in effort to modify underwater homes until the County starts to get their arms around the risks also. Risk San Bernardino County residents might be willing to take because at the end of the day having the chance to show Wall Street some pain might be enough of a motive – regardless of the financial after effects.

Court orders SEC whistleblower evidence on JP Morgan Hedge Fund fraud released

I’m on RT’s top financial show, Keiser Report, today talking about JP Morgan and the cascade of fraud the bank keeps trying to cover up. We learned last week Jamie Dimon had model the bank’s whale trade loss at a possible $9 billion but didn’t mention this when congress asked him to come in for an explainer on how he massively screwed up the bank’s risk management. JPM’s shareholders aren’t getting a lot of transparency from the bank’s leadership and I’ve learned there is another little problem coming to forefront.

A Connecticut state court judge has ordered whistleblower documents and internal emails sent to the SEC last year turned over to UBS who’s suing a JP Morgan owned hedge fund. According to a suit filed by ex-JPM’er Kevin Dillon the secret documents allegedly show JP Morgan’s back office trading administration worked with a Hedge Fund, Texas-based Highland Capital, to manipulate the net asset value of their fund’s assets. Court filings claim this was all done to get the Swiss banking giant, UBS, to lend them more money when they were in a performance death spiral and not let on to their investors that trouble was brewing in an effort to starve off redemptions.

The UBS lawsuit shows a complicated financial restructuring of a mega-million security by JPM’s staff to cover up the assets that likely should have failed sooner than they did. There are allegations of amping up the NAV to attract more investor money until the financial crisis whipped them into a tail spin they couldn’t recover from. Until a low-level internal whistleblower started gathering docs and complaining to his superiors we might have never known how deep the alleged deception was. Dillon was fired, sued, got some cash from JP Morgan in a private settlement but now UBS plans to reopen the wound and not let JP Morgan hide their bad behavior.

When UBS, who claims to have lost near $700mn on the Highland fraud, gets the whistleblower documents from Dillon’s Greenwich attorney Mark Sherman we could see all kinds of nasty emails exposing illegal acts like: back dating cross-trades between funds, applying trade-date accounting to up the NAV without settling trades, and moving crap assets out of one fund into another fund while making it look nice and rosy so UBS wouldn’t slam them with margin calls. Sherman said in CT state court filings last month there are actually 36,000 whistleblower documents he sent the SEC but since his whistleblower client, Dillon, signed a settlement with JP Morgan he won’t give them up for public viewing until the court orders it. Well, that’s happen now and when UBS gets their hands on the docs I’d expect the Swiss bank to file more evidence or claims attached to their fraudulent conveyance lawsuit that will basically outline a securities fraud case for the SEC against Highland and JP Morgan. If Sherman doesn’t request a protective order then the public will get a view of what kind of dirt the SEC has against JP Morgan/Highland.

Sherman’s used the new Dodd-Frank whistleblower law to score the largest reward for a client in the Art Samberg / Pequot Capital SEC settlement and it’s clear he’s hoping the SEC wakes up to the shenanigans at JP Morgan and files suit soon or moves right to a financial settlement with Highland/JPM. I realize it’s a big non US bank suing a big US bank for fraud so the case isn’t high on the SEC’s list but if we are seeing asset value manipulation within JP Morgan’s own hedge fund you have to wonder what other hedge funds JP Morgan has aided and abetted securities fraud with.

Highland Capital was run by James Dondero and became insolvent during the financial crises four years ago. The UBS lawsuit is FST-CV12-6013682-S and can found in Stamford, CT State Court.

JP Morgan Managers Being Told Trade Loss is $9 Billion

This news report has been updated

Banking competitors are trying to lure away top talent at JP Morgan by highlighting the recent prop trading losses are likely to affect bonuses and Jamie Dimon isn’t being honest about how bad the loss will be. On July 13th the banking giant will announce 2nd quarter earnings and a real-time number is expected on how many billions net income gets wacked with because the London whale trade has been wound down or they’re willing to admit how bad the wind down will be at based on how the trade looks at the end of June. Last week Mark DeCambre at the New York Post wrote his JPM sources expect the loss to be between $4-6 billion – JPM’s estimate in May was only $2bn. But I heard this week JPM managing directors are being told total losses on the trade are estimated to be more. To the tune of $9 billion – Ouch!

That could be two quarters worth of net income and since JPM staffers are paid in part on how the whole company earns that rumor about a yearend lack luster bonus is looking more like a reality. Not good if you are killing your quota this year and working in a group that has nothing to do with the wrong way derivative trade. So a few seasoned wealth managers I spoke with are weighing competitor offers and seriously thinking of jumping ship – even if that means they give up their not yet vest $JPM stock.

Of course JPM can use accounting tricks to make the trading loss look better on final quarterly income statements. They can also choose to stay in parts of the trade so they don’t have to back a full loss right away. I highlighted last month how litigation reserves can be added or taken away to move the net income number around when they need it. But considering the recent news heat they’ve gotten on how low the legal reserves already are for the size of the RMBS putback problem…they’d be pretty damn arrogant to try to play with that number in the face of their regulators. Of course if their other trading departments make good on another trading bet, like being short silver, that could help offset losses. But loosing $9 billion on a single trade strategy gone so very wrong will put a lot of pressure on the White House’s favorite banker and make the Senate look even more foolish for their fluffy congressional hearings on the failed trade. If a $9bn gross trading loss becomes reality then the 3 notch downgrade by Moody’s could slid even further which increases their cost of borrowing and well – that sucks for anyone contingent on a JPM paycheck.

UPDATE 6-28-12: This morning the New York Times Dealbook rewrote my scoop about a possible $9bn loss for JPM and didn’t credit me for reporting this first. They’ve done journalism theft like this before when I was scooping them at the New York Post during the financial crisis. Times reporters like Andrew Ross Sorkin led the scoop stealing behavior during 08 and this morning I see him doing the same thing on CNBC.Sorkin claimed ‘his sources’ were saying reported losses will be closer to $4-6bn – a number he read on June 21st when Mark DeCambre (my former jurno peer) 1st reported it at the New York Post. Scoops are assets for journalist and I don’t appreciate the New York Times or Sorkin taking my hard-earned research and sourcing and using it as their own without a mention or link to my original reporting. If you think this is wrong- write them, comment on their sites or tweet about it. Only together we can hold other journalist accountable and demand accuracy.

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