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14 Jun

Syncora Lawyers Could Clear Big Legal Hurdle making JP Morgan pay Billions in Putback Suits

The mortgage crisis litigation team at Paterson Belknap Taylor & Webb had their big RMBS putback hearing yesterday in New York Federal Court. It centered on one of the first monolines, Syncora, to highlight the alleged massive securities fraud Bear Stearns and EMC were engaged in when they sold billions of residential mortgage backed securities to Wall Street investors at the beginning of the financial crisis. Syncora’s lawyers at PBWT were asking for the court to allow them more damages if they can prove there was a material adverse effect in their breach of contract case against the Bear Stearns companies now owned by JP Morgan.

At the center of this highly watched legal debate is whether RMBS investors will have to do the costly legwork to prove exactly which loans were losses and how that loss was caused by a breach of contract. In the case of the $600mn-ish security Syncora is arguing over, that equates to digging through around 10,000 loans – which would delay discovery and be a huge financial burden to the a smaller sized monoline. So instead, PBWT’s Philip Forlenza and Erik Haas are arguing if they can prove the whole Bear Stearns RMBS sausage machine was so corrupt and irresponsible the entire due dilly process was knowingly broken and as a result the humpty dumpty of a RMBS they bought can’t be put back together again then the whole damn securities should be repurchased. In legal terms that means they don’t want the judge to make them prove loss causation for each loan and they want a return of all the money they paid out to investors when the RMBS failed.

JP Morgan’s outside counsel Bob Sacks of Sullivan Cromwell hardly challenged the PBWT lawyer’s legal theory about loss causation and instead led a condescending oral argument ‘telling’ Judge Crotty this isn’t an issue to decide til trial. In other words, it was just another kick the can down the road game by JP Morgan because, as I pointed out a few weeks ago, they don’t want to up their RMBS putback legal reserves and take a hit to regulatory capital levels. Sacks, represented the stereotypical, puffy-chested, arrogant Wall Street lawyer Sullivan Cromwell is known to breed, but I was surprised to see him talk down to the federal judge and insult his seasoned experience with lines like, “Your honor how can you decide on this when they haven’t even presented any evidence yet.” Judge Crotty politely reminded Sacks he does have equity power to make this decision and asked once again if JPM/Bear/EMC’s argument is still the RMBS failed because of the financial crisis and not because of a breach of reps and warranties. And Sacks boldly answered, “YES!”

The notion that no evidence has been presented yet in this case is absurd considering PBWT has brought in over 30 whistleblowers and shown internal emails/memos from Bear Stearns telling its staff to not waste money on loan level due diligence. The whole Sullivan and Cromwell oral argument read like an attempt to deflect from the real legal issues on the table because lawyers like Sacks know how serious this is for JP Morgan’s balance sheet if the judge decides in Syncora’s favor. I emailed Sacks after the hearing asking if he’s usually this arrogant when speaking with a Federal judge but surprise surprise I didn’t get a comment.

The mahogany paneled 20th floor court room overlooking a beautiful skyline of lower Manhattan was packed with lawyers from other firms. Presumably all looking to lift legal arguments for their clients who are also suing JP Morgan/ Bear for ,in total, $120bn of mortgage securities violations. San Francisco-based Attorney Isaac Gradman called the Syncora hearing one of the top five to watch this summer writing at his legal blog Subprime Shakeout:

“I’ve discussed at length how important the definition of materiality/loss causation will be to the ease of proof in put-back litigation. No single issue would cause a bigger swing in the pendulum of losses from investors to banks than a ruling that put-backs do not require a showing that the identified breach of reps and warranties actually caused the loan to go into default.”

Judge Crotty actually asked PBWT’s Forlenza why he needs this decision now and Forlenza explained it’s critical so they know how much data and witnesses they will have to gather to prepare for trial.

But in reality this is simply another BIG but important hurdle for the underdog Syncora to win early on so they can force JP Morgan to shell out billions for the sins of Bear’s mortgage traders in a settlement and avoid a trial which isn’t scheduled til next year.

Gradman agrees and told me in an interview this week, “This would be the quickest path to a favorable settlement for the monolines. It’s major leverage if they win this loss causation decision.”

But Crotty’s decision on how investors can win damages against banking giant JP Morgan, if they prove their case, isn’t all about a group of monolines getting billions of lost dollars back. It also hits at the core of investor confidence in the securitization market. Securitization doesn’t have to be the dirty word congress and liberal journalists have made it to be. The markets actually needs it to keep the money chain flowing. The issue is we need securities contracts that mean what they say and more importantly are upheld by the courts when challenged for things like lying to the raters/insurers about the homeowners loan level detail – a fact my reporting and the PBWT lawyers have already shown really happen.

In the view of powerful institutional investors, like Blackrock, the RMBS contract obligations were clear, but the banks simply are not adhering to the bargain. This putback litigation is now all about the banks trying every legal maneuver conceivable to re-write the deal. Question is will conservative federal judges like Crotty allow the banks to do this?

Reuters legal columnist Alison Frankel interviewed Blackrock’s Randy Robertson yesterday who summed up one of the key problems with Judges allowing the banks like JP Morgan to keep kicking the RMBS putback litigation down the road.
“Robertson’s view: Litigation — or, more precisely, the conflict that leads to litigation — stands in the way of an MBS revival because investors don’t believe issuers will live up to contract terms.”

We have no idea when Crotty will make his decision except he said the lawyers will “hear from him shortly”. That could be 10 days or a few months. But if we get a wishy-washy I don’t want to rule now brief from him then it’s back to watching what the more aggressive Judges are doing in New York State court. A judicial system that’s at least shown it isn’t afraid to stand up to big law pompous Wall Street lawyers like Sacks and have already ruled against Obama’s favorite banker Jaime Dimon.

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7 Jun

More Bear Stearns Executives get off without Paying Millions in Shareholder Settlement Cost

Bear Stearns lawyers at Paul Weiss are slapping them self on the back today after stockholders and pension funds who sued Bear executives for misleading them about the health of the company months before it failed agreed to a cash settlement of only $275 million on Wednesday. The suit’s settlement lead by Michigan’s retirement fund, who lost $61 million in the collapse of Bear’s stock in March 2008, is being hailed as the 5th largest class action suit by bank shareholders. But considering the evidence that has come out in the last for years regarding what Bear executives like Tom Marano and Alan Schwartz knew about the health of the firm in late 07 early 08 while they were pushing shareholders to buy more stock this settlement number and the terms tied to it is a joke!

Beside the fact that the Bear executives named in the suit didn’t have to admit guilt neither do they have to take a hit to their fat wallets. According to a person familiar to the settlement the Directors and Officers Insurance Bear held is picking up the whole damn tab. But even if JP Morgan, Bear’s successor owner, wanted to encourage the insurance company to pass on any settlement payment responsiblity to the likes of Tom Marano, Alan Schwartz, Jimmy Cayne, Sam Molinaro, & Ace Greenberg they can’t.

“At the time of the Bear Stearns merger with JP Morgan the Bear bylaws were changed so that the Bear executives have indemnification rights from JP Morgan,” says securities attorney Brett Sherman.

Some of the most damaging evidence about who at Bear knew what and when came out in the Monoline suits against Bear/JPM, led by attorneys at PBWT, for rmbs fraud and the FCIC report.

“It’s the scam that never ended” wrote Sherman on Wall St. Law Blog. “As late as October 2007, Bear mortgage chief Tom Marano bragged at the firm’s investor day that Bear had a ‘mortgage franchise for all seasons’. Remember that, mostly due to mortgages, Bear Stearns took a write-down of nearly $2 billion about a month later, and in December 2007, the company announced an $850 million loss for the quarter.”

An amended complaint filed by monoline Assured Guaranty against Bear/JPM last year showed Marano was shorting the stock of some institutional investors buying the very Bear issued RMBS because he knew the mortgage securities market was tanking and they’d be stuck with billions of worthless securities. Meanwhile lawsuits outline Marano was telling institutional investors that the Bear traders were invested in these securities also when in fact they were selling out of them.

In the case of Bear’s CEO Alan Schwartz the legal argument isn’t really about what he knew or didn’t know. The point is he had an obligation to know and instead went on TV (CNBC) to do damage control. Bear’s COO of fixed income describes it best in William Cohen’s book House of Cards – Paul Friedman on liquidity (remember that Schwartz was on CNBC wed):

“I had spent the first part of the week, Monday, Tuesday, open till Wednesday noon, almost every waking minute, talking to customers and lenders… I could take them through our whole liquidity profile.

But by Wednesday, I couldn’t do it with a straight face and feel I wasn’t breaking the law, and so I had a series of conference calls set up for Wednesday afternoon and I just canceled them all.”

Emails found in discovery have shown a mirror of double talk by multiple senior levels of executives at Bear. You can see some of this behavior in Nick Verbitsky’s documentary film, Confidence Game, about the failure of Bear Stearns that is currently being played on the international film festival circuit.

The crux of theses shareholders suits is really that Bear’s business model – which revolved around manufacturing and selling fraudulent mortgage bonds – was a sham. Because the revenues generated by this business model were a fraud, everything from Bear’s public statements about its risk-appetite to its financial condition were materially misleading to Bear shareholders. Securities attorneys point out the essence of securities fraud is that you cannot deprive investors of the right and ability to make informed decisions about whether to buy or sell stocks.

“When the main revenue driver of your business is a charade, how can investors possibly make informed decisions? They can’t. And that is fraud,” says Sherman.

The likes of Michigan Retirement Services fund might be willing to fold for pennies on the dollar in a toothless class action suit but keep in mind there is still an active SEC securities fraud suit/investigation against Bear. If there was an enforcement action lobbed on some of the players involved, who currently still make millions working on the Street (Schwartz is at Guggenheim Capital, Marano at ResCap/Alley Bank) the individual shareholders suing who opted out of a class action suit and are litigating Bear for selling a totally bogus image of the firm to the public could have a better recovery than what we’ve seen today.

Keep in mind a New York federal judge will still have to approve the settlement so it’s not a done deal yet.

According to Sherman, managing attorney of The Sherman Firm, “former Bear shareholders unwilling to participate in low-ball the class settlement are not stuck. They still have the right to opt-out of the settlement and pursue claims on their own.”

But for now the lawyers for Bear execs at Paul Weiss basically earned their clients another get of jail free card this week.

The case is: Bear Stearns Companies Inc Securities, Derivative and ERISA Litigation, U.S. District Court, Southern District of New York, No. 08-md-01963

3 Comments
25 May

Could JP Morgan be sued by Stockholders for Creative Mortgage Putback Accounting?

I was on Max Keiser’s show yesterday talking about JP Morgan’s triple-digit billion mortgage repurchase litigation problem that they refuse to accurately reflect on their financial statements. A problem that is now compounded by the fact their regulator, the SEC, has told them they want to sue Jamie Dimon’s bank for securities violations or bring an enforcement action against them, which could validate some of the RMBS fraud claims in the eyes of New York judges overseeing the $120 billion in litigation. What I didn’t realize was how much of a blatant accounting cover up this mortgage repurchase issue is –one that some analysts think could led to a massive accounting fraud suit against JP Morgan and their auditor PricewatershouseCoopers.

In a May 18th newsletter by Robert Christensen a senior advisor to Chicago-based financial forensics Natoma Partners he writes, “What I have found is that the reserves required for repurchase of loans that did not meet the reps & warranties have been consistently and massively underestimated.”

Christensen, a former head of audit for financial service companies at Authur Andersen, boldly points out, “These provisions have actually increased from the previous two quarters (for the major banks $C, $WFC, $BAC, $JPM he covers) for all the banks except for JP Morgan Chase.”

I had the chance to interview Christenson yesterday who helped me understand it’s not just the fact that the bank’s mortgage putback reserves are low (and thus they don’t have to set aside more capital) it’s the fact that accounting procedure called for the banks to actually set up putback reserves during the mortgage go-go years of 2005-2008. NOT after their customers got lawyers involved demanding they honor the security warranties and buy back these totally toxic garbage never-paid-their-mortgage loans. So while we are seeing banks lobe on billions of putback reserves this is really a game of catch up that the auditors watchdog (PCAOB) and the SEC could currently be investigating the banks and their auditors for not accounting for the problem right in the first place. You can see a hint of this in a correspondence letter filed by the SEC between them, BofA and their auditor asking questions about mortgage repurchase accounting and if their methods are in error. The banks response to the SEC is unfortunately redacted so we can’t see it but I have to question why they’d redact it if it was a bad news answer. If the SEC is asking BofA these questions I’d be interested in seeing if JP Morgan got similar questions.

JP Morgan’s auditor PwC does this whole other ‘creative accounting’ move to make it difficult for the SEC or their investors see what kind of real private label mortgage repurchase liability they think they have. They simply moved the whole category into litigation reserves. A lovely little accounting bucket Francine McKenna of retheauditors.com told us last week doesn’t have to be broken out. Now what’s interesting is Christensen told me of the four banks he covers JP Morgan is the only one who does this! Yep somehow PwC, who also audits Bank of America, has allowed JPM to sweep their massive private label rmbs putback risk under the table so main street investors can’t even see how many billions the bank thinks it will have to pay rmbs investors they allegedly stole billions from. It’s interesting to note that BofA has it’s own set of billion dollar RMBS fraud and putback lawsuits but PwC doesn’t follow the same kind of ‘creative accounting’ with their repurchase liability risk?

The only putback detail we get to see from JP Morgan, starting on page 38 of their Q1 10-Q, is all the GSE putbacks they had to pay back. They do mention the average loss severity on the resi mortgage loans in the securities is a whopping 58% but then that’s a self-determined number. And given the way their $2bn erroneous derivative trading loss keeps growing (reports now say it could be a $6bn trading loss) I don’t see how we can trust a lot of JP Morgan’s estimates these days.

McKenna who’s been warning about the banks underestimated putback reserves since 2007 told me, “We are seeing PCAOB citing auditors for not pushing back on banks on mortgage loan loss reserves and litigation contingencies. But their inspection reports are not timely and do not name the bank they are finding auditing faults with. So it’s worthless to outsiders or general investors.”

Now for JP Morgan to stop using this creative accounting to mask their mega billion rmbs putback problem the PCOB and the SEC would have to lay down an iron hand and publish some kind of public infraction or fine against PwC and JP Morgan. And if that happened well…I’d expect a bucket of class action stockholder lawsuits to pop up against JP Morgan and PwC. You know kind of like those Enron or the Telecom suits that labeled the auditors accomplices in financial crimes.

13 Comments
12 May

SEC Tells JP Morgan Enforcement Action Coming over Bear’s Mortgage Backed Securities Violations

Fallout from JP Morgan trading losses, which led to rater Fitch downgrading their debt yesterday, aren’t the only financial worries the banking behemoth is facing. Nestled in that shocking 10-Q filed Thursday is an admission that their regulator, the Securities and Exchange Commission, thinks some of the details that lead to the explosive Ambac mortgage security fraud suit against the naughty stepchild of JPM, Bear Stearns/EMC, are worthy of an enforcement action. Yep- the SEC is giving or finally gave them a Wells Notice, which means according to their 10-Q (and their 10-K) in January 2012 the SEC’s investigation into the sins of Bear’s Mortgage team run by Tom Morano, Jeff Verschleiser, Mike Nierenberg and the subsequent cover up by JPM was worthy of a civil suit along with some penalties.

JPM’s 10-Q states “In January 2012, the Firm was advised by SEC staff that they are considering recommending to the Commission that civil or administrative actions be pursued arising out of two separate investigations they have been conducting… In both investigations, the Firm has submitted responses to the proposed actions.”

We see JP Morgan admit one of the Wells notices relates to the fraud actions first brought forward in the Ambac suit with this line from the 10-Q, “The second involves potential claims against Bear Stearns entities, JPMorgan Chase & Co. and J.P. Morgan Securities LLC relating to settlements of claims against originators involving loans included in a number of Bear Stearns securitizations.”

They are talking about a phrase I first coined called the ‘double dipping scheme’.

It’s black letter law that Wells submissions to the SEC are discoverable in civil litigation. So lawyers in the monoline suits against JPM/BEAR will surely be trying to get a copy of the wells notice via discovery.

I first reported the SEC started an investigation into these alleged securities violations (and possible criminal actions) after I saw the securities regulator approach the lawyers and whistleblowers in my Bear Stearns investigative report at The Atlantic the day after the story came out. Now a year later it appears all the ‘shitty deal’ emails, internal Bear Stearns documents, and over thirty whistleblowers who’ve come forward in the monoline suits lead by the New York office of law firm PBWT was enough to get the SEC to stand up to JPM and hopefully say ‘what you did violated securities laws and harmed investors’. Talk about another wave that could lead to tsunami style damage to Jamie Dimon’s ‘fortress balance sheet’.

How many billions in damages JP Morgan will have to pay out is not yet determined but inside their Mortgage-Backed Securities and Repurchase Litigation note on the 10-Q the bank tells us “There are currently pending and tolled investor and monoline claims involving approximately $120 billion of such securities.”

WOW that means investors think there was a heck of a lot of very bad mortgage securities that were packaged and sold and they want their money back along with some fines and are willing to spend a few million to pay expensive lawyers to sue for it. When I first reported on the Ambac case and went on RT’s The Keiser Report to explain what kind of financial trouble JPM could be in the damages in the monoline suits against Bear were only around $1.2bn. I told Max Keiser if fraud claims survived the suit that means punitive damages get lobbed on and who knows many billions JPM will have to pay out because allegedly emails showed Bear mortgage traders stole billions from their own damn clients. I threw out a number, $10bn, that JPM could be looking to pay. Now according to JPM’s latest SEC filings there are now “seven pending actions commenced by bond insurers that guaranteed payments of principal and interest on approximately $5 billion of certain classes of 21 different MBS offerings.”

The face value amount of securities tied to the monoline suits against JPM are significant because there was a recent ruling in a Countrywide RMBS suit that ruled if plaintiffs can prove there were miss-representations in the bonds then the entire amount of the bond has to be bought back…not just the amount that defaulted or caused a loss. Reuters legal columnist Alison Frankel explains the judge’s decision and impact here. It has a lot to do with the way insurance laws are structured in New York State, which is where all the monolines suing have headquarters.

So far we haven’t seen JPM settle any of these mortgage putback suits including the government’s housing regulator’s whopper of a suit filed this winter against a bunch of banks including JPM. The government’s outside counsel who filed the FHFA suit literally copied the fraud and breach of contract claims Ambac had laid out against JPM and since then we’ve seen a multiple of big boy institutional investors file similar suits. Thus the alarming $120bn number of possible rmbs repurchase litigation damages JPM was forced to detail in their recent 10-Q. A number which accompanies a series of motions their expensive lawyers at Sullivan & Cromwell and Greenberg Traurig have filed to slow down discovery and deny, deny, deny these aggressive fraud claims in the triple digit billions.

And now that the SEC is about to come out and stamp a ton of merit to these civil investor lawsuits via an enforcement action that hopefully says – you guys broke the law, abused free markets, and seriously broke investor trust — then it’s looking harder and harder for JPM not to settle these investor lawsuits in the mega billions. Just think if Ambac actually got to trial and a main street jury who’s pissed very few bankers have gone to jail for the financial crisis heard some of the whistleblower testimony about senior Bear executives telling underlings to make up mortgage info for the raters. Or the third-party due diligence reports Bear got them to fudge – reports investors relied on as due diligence rubber stamping the quality of the rmbs securities. I’d image punitive damages up the yin-yang would be awarded.

But the most telling sign JPM will have to payout big time is that HUGE jump in litigation reserves they snuck in this week. In the bank’s first quarter earnings press release, filed on April 13th, JPM told investors they were adding $2.5bn to existing litigation reserves for mortgage-related suits. And then three weeks later while all my jurno peers are focused on writing stories about what JPM’s trading screw up means to their reputation, their master public relations spin machine figures lets thrown in all the bad news we can cause we know the market will punish our stock. So they added on another $1.7bn in litigation reserves for a total hit to income of $4.2bn in Q1 2012.

On top of that I’ve seen top housing analyst Mark Hanson tell hedges funds they might want look at how JPM repurchase risk will affect net income and thus the stock price. Francine McKenna, former Big 4 auditor and influential columnist for American Banker told me this is just the first phase. Accounting rules allow JPM to slowly add each quarter to litigation reserves and take smaller hits to net income than waiting for a big money suit to finalize and wipe-out a whole year’s earnings. Some financial editors like Joe Weisenthal at Business Insider allowed his team to write the $4.2bn addition to litigation reserves was due to trading loss but that’s not what the 10-Q explains. Number one these are reserve additions for events up to March 31st and JPM worrisome trading loss began in April. Number two the bank has to explain all the litigation that gets to that reserve number and there is not a word about suits from trading losses in their 10-Q litigation notes. Nope this big jump was from progress being made by rmbs plaintiffs and a looming SEC action which you see if you know how to read the litigation notes.

McKenna, founder of www.retheauditors.com says, “Banks tend to account in one lump litigation reserve number what they think they will have to payout from a suit but that’s really a disguise so that no one across the table from the litigation can see what they might be willing to settle for.”

There is another dirty accounting trick JPM is possibly playing with here. McKenna told me in an interview this week reserves are like a cookie jar, banks can increase and decrease this balance sheet number each quarter which shows up as a loss or earning to net income. So let’s say Jamie Dimon thinks the mark-to-market loss of $800 million he just took for the trading screw up is going to be a lot more when they are done unwinding the trade. The bank they could lower their litigation reserves and boom that trading loss doesn’t look so bad on next quarter’s net income. Then going into Q3, when say maybe they settle with the SEC and the rest of the Street wakes up to how many billions they will have to pay out for the sins of Bear Stearns RMBS fraud, JPM can just re-up the litigation reserves. Now of course their Big 4 auditor has to allow them do this by signing off on the SEC financial filings but part of the Abmac suit filed last January showed PricewaterhouseCoopers tried to stand up to JPM/Bear accounting tricks before and the bank just ignored it. A detail the lawyers at PBWT discovered for us. In that case it would be up to the SEC to say ‘Hey JPM your RMBS repurchase risk is more than you are accounting for and you’d better represent a more realistic number.” This in turn hurts JPM’s income and also can lead to additional downgrades by the raters, so an accounting scolding by the SEC on top of an enforcement action might not be something they’ll man up to. But clever analyst and hedge funds will see it and the result could be free market participants take a club to the CEO, who the financial press once hailed America’s angle banker, all on their own.

Editors Note: When my fellow financial reporters figure out I’ve reported JPM got a Wells Notice for mortgage securities no-no’s becuase of the Ambac ‘double dipping suit’ I’d like to remind them jurno standards mean you need to credit Teri Buhl for reporting this. Thanks in advance to Matt Taibbi at Rolling Stone and Max Keiser at RT who always link and mention the Bear RMBS fraud cheating their own clients news created a whopper of a problem for JPM, was a result of my original reporting at The Atlantic. Here is a shout out thanks from me to Daniel Indiviglio, my editor at The Atlantic, who understood the importantence of impact to the market in this story back in May 2010 and made sure it got published. And most important I’d like to recognize Nick Verbitsky, doc film maker of Confidence Game, a move now playing about the greed and fraud that lead to the downfall of Bear Stearns, for finding the first whistleblowers to speak out against the Bear Mortgage executives. Awareness of how these Wall Street titans cheated and stole damaging free markets was a result of investigative journalism and the PBWT attorneys not our regulators figuring it out first.

62 Comments
14 Jan

Now Main Street Knows how Bear’s Jeff Verschleiser made Millions off Cheating Others

One of the central bad actors in my reporting on the alleged fraud machine Bear Stearns mortgage department was running made headlines this weekend for spending an absurd amount of greenbacks to promote his daughter’s coming of age. Jeff Verschleiser, age 43, and his wife Amy, age 41, went and bought out a popular Aspen hotel during a special local weekend celebration called Winterskol and now have a lot of people offended. Media reports estimated the Jewish family is spending between $500k to $1 million for the four-day weekend + Bat Mitzvah party. Now spending tons of money to throw a religious celebration for your teen isn’t anything new for the New York Jewish set but Matt Taibbi of Rolling Stone picked up on the notion Jeffery didn’t exactly make the dollars he’s spending this weekend honestly.

The daughter’s name is Madison Rose Verschleiser and when she’s not buzzing around the Aspen slopes entering ski races or hanging in her parents huge 2nd home at Aspen’s Stillwater Ranch area, she lives in her parents mega million Central Park-view apartment on 5th Avenue. Aspen Daily News reporters told me they saw Madison’s parents had three big LCD’s placed in the hotel lobby with their daughters face in a circle jerk of photos running repeatedly on the screens – you know because its ‘All about Madison this weekend’. I found a website, madisonaspen2012.com, created in honor of Madison’s big weekend but it looks like the family took it down after news broke on their spending habits. (Of course a google cache of the website still works.)

Readers of mine know the story about Verschleiser and his Bear Stearns trader buddy Mike Nierenberg allegedly stealing billions from their own clients during the housing boom by packaging and selling totally dysfunctional mortgage securities that helped bring down the bank. But now with Taibbi revisiting about a years’ worth of my reporting on the Bear traders’ apparent securities fraud Verschleiser is officially labeled one of Wall Street’s biggest pricks.

Taibbi Wrote:

At first, I couldn’t remember how I knew that name. But then I looked it up and saw an explosive Atlantic magazine story, published last year, called, “E-mails Suggest Bear Stearns Cheated Clients Out Of Millions.” And then I remembered that piece, and it hit me: Jeffrey Verschleiser is one of the biggest assholes in the entire world!

In one of the latest civil fraud complaints against Bear Stearns, and their owner JP Morgan, about 30 whistleblowers came forward to explain Jeff and his fellow traders were known as ‘Bear Don’t Care’ for telling third-party due diligence firms to just ignore all the mortgage loans in the billions of securities they were selling when they put their stamp of approval on the deal. A stamp that got plenty of pension funds to buy their ‘sack of shits’. It’s this ‘Don’t Care’ attitude that seems to have upset a lot of people this weekend as the pitchforks and frustrated anger rang loud and clear in the comment section of every story written on Jeff’s daughter party (there are about 9 of them). The New York Post even got one Aspen weekender to call it “a disgusting display of ill-gotten gains.”

Because of the need for the Verschleisers to have a private event in a public place, the locals can’t use their favorite watering hole at Hotel Jerome, called the J Bar, and spend their hard-earned dollars watching the Broncos make a run at the NFL playoffs because Jeffrey is all about exclusivity. It’s unclear if the Verschleisers plan to compensate the bar staff for all the lost tips this weekend – locals tell me some bartenders can make up to $1k a night on a big weekend like this. The editor of the Aspen Daily News, Carolyn Sackariason, broke more news last night reporting Verschleiser spent about $7,000 to kick out anyone wanting to use the city-owned Aspen Family Rec Center tonight so his daughter Madison and her friends can privately run around in it.

As the world is soaking in what a douchebag Jeff Verschleiser is I’m wondering how his wife feels spending the millions he made off the backs of pension funds and the rest of Bear Stearns employees who lost sooo much money when the firm failed and their stock was sold for only few bucks. Taibbi writes that Jeff’s actions helped bring down the firm but for quite a few years he was actually the gold money maker for the bank with his hand in every part of the fee earning process a mortgage security could go through (the Ambac suit points out he just didn’t do it ethically or legally). It wasn’t until mid 2007 when he pigged out buying failed subprime lender Encore, that the bank got stuck with millions of very sick wholesale mortgage loans. Loans that sucked the life out the banks regulatory capital and eventually were a part of what led to a liquidity problem. Jeff’s wife Amy, a former private school teacher and Dalton 88’ grad, happens to be on a bunch of Jewish charity boards (such as the NYC United Jewish Association) and I wonder if the charity work (aka party planning) is to clear her conscious. It’s not like she can’t read the actions of her husband that are laid out in multiple civil fraud suits citing his own emails. Given she was also a Madoff investor who lost a few bucks, you’d hope there is some twinge of pain in seeing the rest of world want to throw up over their family’s obnoxious display of wealth this weekend.

Amy appears to have grown up in an influential upper east side jewish family. Her Aunt, Elaine Turner Cooper, was a huge patron of the Whitney Museum and her 1st cousin Steven Mnuchin is now the ex-Goldman guy who runs the carcass of failed IndyMac. (It might make sense that Mnuchin helped Jeffrey get the Goldman job when JP Morgan threw him out after the Bear take over.) During her husband’s boom earning years, 2006, online real estate records show the family moved out of a upper east side duplex they bought for $10 million on Park Ave and upgraded to a full floor Central Park apartment on 5th Avenue that has only 15 apartments in the building selling for at least $16 million (They live on the third floor of 944 5th Ave, New York, NY). Property records show they also spent $16.5 million for a new custom-built 5-bedroom Aspen home at 61 Stillwater Lane in the fall of 2006. This is the same time period billions of Bear mortgage securities were created by Jeff – securities that the Netherland’s largest state pension fund just sued Mr. Verschleiser individually for his role in fraudulent inducement and multiple violations of securities laws. The suit was filed on December 7th in New York State court.

Taibbi added an update to his story with a rant on why Verschleiser hasn’t been indicted yet for allegedly stealing billions from his own clients. But the colorful Rolling Stone writer must have failed to read my story this summer about NY Assemblyman Morelle pushing his friend the NY Attorney General to start a criminal investigation into the Bear mortgage team. The AG has asked civil attorneys suing Bear/JPM to share evidence with him and I’ve spoken with people his team has interviewed- they all say he’s serious about using the Martin Act against these bad boys. Given those facts, I’m not agreeing with Taibbi’s view these guys will never get charged although it will take some political balls to get it done.

So with the NY Attorney General having a keen eye on charging Jeffrey and his fellow mortgage traders for criminal acts, a federal housing regulator gunning for him individually in their mega-billion fraud suit, and locals in Aspen pissed off by his personal exclusivity needs; do you think the Hotel Jerome manager is looking a little foolish for telling the Aspen Times a ‘nice family’ had taken over the hotel?

UPDATE 1.16.12: It appears the Verschleiser had a like-minded friend write in to the Aspen Daily News about their weekend news story ‘Renter of Jerome Under Scrutiny for Wall Street Deals’ calling the coverage mean and nasty. His logic was Jeff’s civil fraud suits are old news and he couldn’t understand why the local paper would print news about the background of a part-time resident that had just made national news. Really? First off Jeff’s civil fraud cases are ongoing news and the subject of upcoming trials and just a few weeks ago he was sued again, as a named defendant, for fraud and securities violations. Second, it’s the local papers job to tell the reader who this colorful character is considering his actions, taking over public places for the private use of friends, effected their weekend. Third, it’s actually not the papers job to promote tourism for Aspen nor should they worry about how the reporting of factual events effects dollars spent on Aspen. When that happens then they should just shut the paper down.

Editor’s Note: The link to the 5th Ave apartment is not the Verschleisers but an apartment a few floors above theirs. It is used as an illustration of what apartments in this exclusive building look like. The party photo is a snapshot of the public homepage the Verschleisers used to promote their daughter’s event. It was taken down because I just learned the photographer owns the rights to the photo and thus I don’t have permission to publish it on this site.

29 Dec

Barclays Accused of Criminal fraud for Golden Key in Geneva

A criminal complaint has been filed against Barclays in Geneva, Switzerland this week for its role in a $1.4 billion structured investment vehicle (SIV) called Golden Key. The Barclays arranged and structured SIV blew up in spectacular fashion in 2007 and a French asset management firm, Oddo, tried to sue the British bank for fraud in a New York court but got the motion tossed, in 2009, on a technicality. So now one independent investor from Geneva has foregone the US court system and filed his own criminal complaint against the bank and the collateral manager they hand picked — Avendis Capital a Swiss asset management company.

Golden Key was considered a SIV-lite, meaning it would raise an amount of capital, borrow money in the short-term commercial paper debt market, and then invest all of this money in higher interest rate bearing instruments such as mortgage-backed securities, in its strategy for high returns. Investors in Golden Key originally sued, in 2008, because they believed BarCap was sitting on a bucket of rmbs they needed to off-load and the bank arranged for the SIV-Lites to expand their size by increasing their borrowings and use these borrowing to take the toxic securities off Barclays’ hands. The idea was collateral managers like, Avendis, were buddy-buddy with BarCap executives who were in charge of selling and creating the SIV, and would basically let BarCap pick the collateral for the SIV.

This is a method we’ve seen before in CDO fraud cases brought against Goldman and Merrill Lynch. But in the Barclays suit they didn’t have any hard evidence like emails from Avendis and Barclays’ executive, Kelsey Burr, detailing their cozy relationship or plan to screw investors in the name of saving Barclays’ balance sheet. Well now they do.

The Geneva investor, Philippe Rebourg of Coficap, just happen to get a hold of some damaging internal Barclays comunication, which are now evidence in his criminal complaint. You see in some European countries citizens can file their own criminal complaints when the local D.A. or prosecutor doesn’t do it first. Then a judge will decide if the criminal complaint goes forward. While the complaint is filed if any of these BarCap executives named in the claim show up in town they can be arrested. Rebourg told me he expects it will take two to three weeks for the judge to rule and the suit is currently sealed. Luckily there is also a changing of the guards in the Geneva A.G. office and incoming Attorney General Michael Lauber has told local papers he is gun hoe to file claims against the banks for financial crimes.

I’ve seen emails between Barclays and Rebourg for months now and he’s warned them he is going to file a criminal complaint and expose the damaging emails if they don’t settle with him. Well he clearly got sick of their cat and mouse litigation game and apparently called their bluff by filing the criminal complaint. The veteran Barclay’s executive who worked out of the Chicago office for years, Kelsey Burr, suddenly resigned or took a buyout package this summer. BarCap’s Chicago office confirmed for me in August he was no longer with the firm and Burr has not responded to emails for a request for comment.

Another alleged bad actor from BarCap was John Parker. I’ve seen an email chain from April 2007 between Parker and Avendis executive Katy Huang explaining that Avendis as the collateral manager was worried about owning the riskiest shares (capital notes) in Golden Key and their plan was to sell off the risky capital notes to investors (high yield chasers) Parker and team had lined up. Avendis also had a hedge fund that bought a ton of Golden Key notes but there were restrictions in the fund’s offering memorandum regarding how much they could buy. BarCap allegedly solved that little problem for them by simply giving the fund more leverage (borrowed cash) to buy more Golden Key notes. Then Avendis got stuck with all that Golden Key toxic paper, while the rest of The Street was shunning buying any SIVs in mid to late 07. The result was Golden Key investors lost their investment and Avendis got this neat loan from Barclays to cover it’s losses in 2007 but the hedge fund still ended up filing for bankruptcy. Ouch.

Barclay’s was smart in setting up the whole thing in offshore llc’s etc… to advert US securities laws thus the failed US lawsuits. The last time Barclays got caught up in a criminal complaint is when the US DOJ was not happy about them doing banking with countries the US had sanctioned and they paid the US a $300 million fine for their ‘special relationships’. But it will be interesting to see how the Swiss handle this new evidence and if other investors ,like Union Mutal Pension fund who sued BarCap in a French court this year, will join with Rebourg to file more suits given the nugget of internal emails he has. You see since bad faith has already been ascertained in September against Barclays by a Canadian judge in a similar situation (the Devonshire Trust case), Coficap hopes that the Swiss judge will recognize this time the criminal nature of Barclays’ misconducts under Swiss criminal law.

Stay tuned — once the case is unsealed I’ll be able to detail more on how the alleged plan by Barclays to screw their investors went down. Until then if you ever did deals with Barclays’ John Parker or Kelsey Burr I’d love to hear from you. I’m also interested in hearing from Golden Key investors regarding Jerry del Missier’s possible role in BarCap’s SIV strategy.

UPDATE 1/2/2012: John Ward a UK blogger has written an opinion piece on the news I broke. He details more about the history of the Avendis managers and points out one of them already went to jail for investor fraud.

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