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30 May

Former Bank President was Afraid to Whistleblow on USA Bank’s DeCaro

Greenwich bankers, from once publicly traded USA Bank, are under criminal investigation for their role in lending abuse and possible securities violations. I detailed in an investigative report last week at Dealflow’s The Distressed Debt Report how Fred DeCaro Jr. and his son were allegedly allowed to violate the business plan that earned them a FDIC approval for years before they were seized on July 9th, 2010. Now we learn the bank’s founding president, Peter Keller of New Canaan, CT, backed out of whistle blowing with another board member, at the last minute because he was afraid of the DeCaro’s retaliation.

According to The Distressed Debt Report, one of the founding investors and board members, Sal Pane, went to the FDIC within the first year of bank operations (September 2006) with documented evidence of lending abuse and securities violations. We now learn according to Maurizio Carusone, a founding investor, and Sal Pane that Peter Keller and the banks V.P. of residential lending Tom Calabro, agreed to go with Pane for his whistle blower interview. They all met the night before to talk about their testimony but Pane says at around 9 a.m. ,while waiting outside the FDIC office, he received a message from Keller that he was backing out.

“Peter said I can’t, I’m sorry but you have more money than me and I can’t afford a lawsuit by DeCaro,” according to Pane.

Pane ended up attending the meeting as the sole board member (with his attorney) and brought with him 17 boxes of documents detailing bank fraud and securities violations. Still, it took the FDIC over a year to issue their first cease and desist order. A move that forced DeCaro Jr. out as chairman but allowed the bank to put his son Fred DeCaro III, with no banking experience, in to replace him. It’s unclear how much opperationally changed after the C&D. DeCaro Jr. was eventually fined $125,000 and Keller only $1,500 in mid-2008 but by then Keller had moved on to secure a job as Vice President of Retail Sales for another publicly traded community bank – The Bank of New Canaan.

According to an April 2006 proxy statement sent to shareholders, Keller was paid $117,769 plus an additional $100,000 consulting fee for services rendered in 2005 prior to the approval of the Bank’s organization certificate. Of the five people paid for services involved in founding USA Bank Keller received the highest payout. The proxy statement also shows he received the 2nd lowest amount of shares, 20,000, issued to founding board members. Keller’s salary, as President of the bank was $180,000 a year; equal to that of the Chairman Fred DeCaro Jr.

Keller did not return emails to his work and phone calls to his home for comment.

Investors in USA bank say Keller was lucky to get a bank license from Connecticut’s banking commissioner after his time at USA Bank; his FDIC fine was one of the smallest of all the board members. But according to his LinkedIn profile and publicly filed bank documents he was never made a member of the board at New Canaan Bank and took a lesser position. After three years, Keller left Bank of New Canaan, this April for undisclosed reasons, to do a similar job at First Niagara Bank. His LinkedIn profile omits his work at USA Bank.

Pane did sue USA Bank and DeCaro Jr. after he resigned as a non paid board member in November 2006. Court documents show he’d been granted discovery from USA Bank and depositions of DeCaro; he beat the Bank’s motion to dismiss. But after the FDIC seized the bank, in July 2010, his legal claims against USA Bank became null. Pane can still sue DeCaro Jr. personally and his attorney said that’s the game plan.

According to my story in The Distressed Debt Report, Keller was not named as a person of interest in the FDIC investigations but then I haven’t interviewed every single person the FDIC has. No charges have been filed yet against any of the executives or board of directors of failed USA Bank. The FDIC said they don’t comment on active investigations.

You can buy a single copy of my investigation at DealFlow Media here.

UPDATE 5-31-11: Peter Keller has finally written back to say he has no comment on USA Bank.

5 Comments
6 May

SEC Thinks Bear Stearns Mortgage Traders Need Investigating

It appears the Securtities and Exchange Commission has been reading my reporting on Bear Stearns mortgage traders cheating their clients out of bilions and double dipping on profits. Today, Jody Shenn at Bloomberg reports he’s heard J.P. Morgan received subpoenas asking for information on how Bear Stearns mortgage team sold back failed loans to mortgage originators and didn’t pass the monies back to the investors in their mortgage bonds.

J.P. Morgan won’t confirm the SEC subpoena for Bloomberg but I can confirm the regulator has been investigating the actions of the bank since I first broke news on the problems at TheAtlantic on Jan 25th. I even reported the SEC’s actions to Max Keiser the day my news broke after I received calls from people familar with the case saying the SEC office in Colorado had reached out to them because they wanted to know what kind of documents and whistleblowers they had accumlated to prove their accusations.

No charges have been filed against JP Morgan or the Bear Traders, now making millions at other banks, but let’s not forget they also have the Manhattan D.A. on their tail.

TheAtlantic’s Dan Indiviglio, a terrifc editor who worked on my Bear Stearns coverage, said it best :

As I stated before, these fraud allegations should actually be fairly easy to prove or disprove — unless evidence has been destroyed. If a double-dipping scheme took place or if securities provided were different than indicated, the process either did or did not violate deal covenants. There’s not a great deal of gray area allowed when actual money changes hands. We aren’t merely talking about insurers claiming they didn’t have all the information they needed; we’re talking about insurers claiming that deal documents specified that funds should have been provided to them that these Bear execs kept for their bank, or that the securities sold did not adhere to the criteria deal documents specified.

Unfortunately, I don’t see the Bear traders, led by Tom Marano, sweating these investigations until a federal regulator actually shows the strength to charge them for what most of you who write me think is very clear criminal fraud.

5 Comments
12 Apr

Former Bear Stearns Trading Executives Under Criminal Probe

The Manhattan District Attorney thinks Tom Marano and his star mortgage traders cheating their own clients out of billions constitutes criminal behavior. I reported today at DealFlow Media, an active investigation is under way and the D.A. plans to use the Martin Act to charge these former Bear traders.

I first reported in late January at TheAtlantic.com exactly how the Marano-led traders took profits onto their own trading books and withheld the funds from the investors who were contracted to receive the money. Since then, many of you have written in questioning how these actions did not constitute serious illegalities. Well, now we know it’s not just the D.A. but at least one elected official that agrees with you and is trying to do something about it.

Recently, Joseph Morelle, New York State Assemblyman and Chair of the State’s Insurance committee, went on the record for me. Morelle stated he believes that if the allegations in the Ambac suit against Tom Marano, Mike Nierenberg, and Jeff Verschleiser, are proven true, this would flat out constitute insurance fraud. Morelle has even gone so far as to contact the New York Attorney General and to ask him to look into this. You see for the insurers, like Ambac, to prove Bear Stearns (now owned by J.P. Morgan) committed insurance fraud it could be burdenson. The insurers have a higher standard to meet in a civil case because they have to prove they had justifiably relied on the representations Team Marano was spewing out to encourage them to insure and buy their toxic RMBS.

Defense lawyers will argue Ambac is a sophisticated party and should have done more homework before they jumped into bed with the Bear mortgage traders. And although the evidential standard in a criminal case is beyond a reasonable doubt- if you can prove that someone knowingly made materially false statements to get an insurance contract- you have virtually cleared the burden proof hurdle. Therefore as strong of a case they appear to have in the Ambac civil suit I think an ambitious D.A. or A.G would have an even better shot at criminal prosecutions.

Marano, Nierenberg, and Verschliser are all working executives now at ResCap, Bank of America, and Goldman Sachs, respectively. I’d imagine a criminal investigation would sting their reputations and cause some discomfort with their institutional clients. However, for now the SEC is not involved and their security licenses are not currently in jeopardy. In fact, I’d image guys like Nirenberg , who’s known on The Street as having a bloated ego and operating with sharp elbows, are breathing a collective sigh of relief that it’s only the State (not Federal) regulators who have a bulls eye on his back.

So for now we’ll have to wait and see if the political powers that be will be brow beaten by Wall Street lawyers and contributors into ignoring this alleged abuse of our financial system. Or, will they do the right thing and be the first one to slam the hammer and charge Marano and his cabal for making millions in personal fortunes illegally off the backs of their clients. I’m sure a few more Bear or EMC whistleblowers coming forward would help, but then again someone would have to explain to them that J.P. Morgan can not actually take away their severance for telling the truth about criminal behavior.

4 Comments
11 Feb

FDIC Silenced Whistleblower in IndyMac’s Executives Fraud Charges

IndyMac executives were individually charged for fraud by the Securities and Exchange Commission today but the FDIC has known about these problems since they took the bank over in July 2008.

Mike Perry, CEO and Chairman of IndyMac Bank, was sued for securities fraud by the S.E.C for misleading investors about the capital and liquidity levels of the bank before they issued preferred stock less than a year before the $8 billion dollar subprime lender was seized by the FDIC. They also nabbed his partner in the alleged accounting fraud, Scott Keys, EVP and CFO of the failed bank. Keys had prior experience with the inner workings of SEC filings when he was a partner for accounting giant – Ernst & Young. Both men claim the SEC suit is meritless. I had to laugh at that.

You see I witnessed the FDIC, while in-charge of facilitating the sale of IndyMac in 2009, force a whistleblower to resign when they found out this person was leaking news to me. Reports I first broke at the New York Post (2008) detailed what the FBI investigation was focusing on, how the bank’s regulator (the Office of Thrift Supervision) missed red flags and fraud Perry allegedly executed with his family in IndyMac’s construction lending business. The whistleblower shared detailed emails sent to IndyMac’s executive team warning about mortgage putback risk, lax due diligence process in RMBS securitizations, losses that would affect capital levels and more.

While I watched most of my peers in the main street media react in surprised shock to the news, I knew this charge was long time coming. In fact, the SEC charge only details a portion of the fraud insiders at IndyMac detailed for me in 2008.

What I am troubled by is the role the FDIC played in removing an internal whistleblower to stop the information flow to the media. They muscled this person with threats of an internal investigation if they didn’t resign and give up their severance. In fact I watched Evan Wagner, IndyMac’s press man who continued to work for the FDIC when they took over, brag to a Southern California journalist that they’d just ousted their internal leak. Wagner is now at Union Bank.

This is an event that’s bothered me for some time, but for fear of drawing up more controversy for the whistleblower and my duty to protect their identity I didn’t speak out. If the Dodd-Frank whistleblower laws were in place in 08 they could have sought refuge and reward for their truth seeking efforts, but this person wasn’t motivated by financial rewards. I find it troubling the FDIC didn’t keep them on staff to sort out who was lying and destroying evidence inside the failed bank. Based on what I saw, the evidence should have led to more charges against the executives of IndyMac.

While it’s interesting to see the SEC finally charge a CEO of the financial crisis with securities fraud there is so much more work for them to do. So here is a hint from emails and conversations I tracked from 2007-2009.

Ruthanne Melbourne – Chief Risk Officer
Rick Leiber – Chief Credit Officer
Kirk Johnson – Head of Investment Portfolio

How much did each of these individuals feed false or misleading information to their CFO and CEO which contributed to today’s charges? It’s likely if the case settles we will never know.

NOTE: Scott Reckard at the LA Times has links to the SEC complaint and quotes from the IndyMac executives trying to spin their innocence.

UPDATE 9-18-2011: Mike Perry creates a blog to combate the FDIC and SEC litigation against him. He even post interal communication between him and SEC as they negociated a settlement last year. Most market observers see Perry as another guy in total denial because he thinks ‘the crisis just happened to him’. Perry is known to fight back and fight dirty so I wouldn’t be surprised if this case actually makes it to trial.

36 Comments
25 Jan

Bear Stearns Nierenberg Doesn’t Think Cheating Emails are a Big Deal

That lawsuit JP Morgan really really didn’t want you to read has just been unsealed and now we see why they used their big bank status to muscle the courts and keep it out of the public eye. The suit shows Bear executives, who all made millions and got great jobs at other banks when Bear failed, out right stole from their own investors and clients. What‘s worse is JP Morgan covered it up for the last three years.

Today at TheAtlantic.com I report how seasoned traders Mike Nierenberg and Jeff Verschleiser would sell mortgage securities to institutional investors they knew were deafulting in the first few months. Then instead of fixing the bonds during the first 90 days and giving the investors the cash they contractually were owed to make up for the crap loans, they just kept the money for themselves. Last time I looked, that’s a criminal fraud offense and clear violations of securities laws.

When I reached out to Nierenberg, who now has a similar big executive job at Bank of America, and asked his thoughts on the lawsuit his response (via a press person) was – I’m not that worried about it. Yep, he didn’t think the emails from his team calling the bonds they sold pension funds and New York-based insurers like Ambac, a ‘shit breather’ or a ‘sack of shit’, were a big deal. His official response for the story was of course ‘no comment’ but I have to wonder what his Bank of America clients are thinking today. Or if he’s worried JP Morgan will fold to pressure from regulators and ask for a claw back on all the millions of dollars he took home after cheating his own clients. Cause you know he might be kind of bummed if he doesn’t have money to spend on model and bottles like this.

Of course Nierenberg didn’t act alone, Jeff Verschleiser who ran the other half of the Bear trading group, was making sure the bank was also shorting the stocks of the companies they sold products to that were designed to fail. And then bragged in 2007 to his risk committee, run by guys like Ace Greenberg and Waren Specter, that he’d just made double-digit millions off those shorts.

A few months after JP Morgan took over a near bankrupt Bear Stearns, Verschleiser landed in the mortgage department of none other than Goldman Sachs. According to a WSJ blog he even helped his new peers prepare for congressional testimony when it was their turn to defend selling products they thought were shit and designed to lose money.

I’m not sure how JP Morgan will let this case go to trial and not sign a big fat check over to the institutional investors who’ve been suing them for years. According to the unsealed lawsuit one of the Bear traders said in his deposition this summer that ‘shit breather’ was really a ‘term of endearment’ when referring to the toxic bonds. If that’s true then what did they call the financial products they actually liked?

18 Comments
26 Nov

Why Does JP Morgan Want This Fraud Suit Sealed?

JP Morgan is being sued by Ambac for allegedly selling the insurance company hundreds of millions of mortgage back securities while knowingly packing them full of loans they knew were bad. The loans stem from MBS created by Bear Stearns that JP Morgan took control of after they bought the failed bank in 2008. While this might sound like an ailing mortgage insurer trying to pass off blame for buying a financial product that didn’t work out, if we could look inside the lawsuit we’d likely see otherwise.

The problem is the bank, who’s known to have close ties to Obama’s administration, has somehow convinced a judge in the Southern District of New York to seal the complaint. Combing through the legal documents filed before the seal was ordered, we get a glimpse of what has JP Morgan so worried – although because the lawsuit is sealed we still don’t get to see how Ambac can claim these violations of securities laws were started.

Ambac accuses JP Morgan (NYSE:JPM) and the Proposed Individual Defendants of:
(i) “accounting fraud”
(ii) implementing a “bad faith” strategy to reject without justification insurers’ and investors’ demands for the repurchase of breaching loans
(iii) “arbitrarily” denying demands by investors and insurers to repurchase loans
(iv) “manipulating” its accounting reserves
(v) “obscene compensation” and “reckless pursuit of fees”
(vi) “encourag[ing]” the acquisition of defective loans

Talk about accusing them with the kitchen sink of bank fraud. Now here is what I find a weak excuse for why the investors in a publicly traded company (or anyone else who’s interested) shouldn’t be allowed to see this complaint. JP Morgan’s argument is because Abmac was able to get sworn testimony, about how they broke the law, from people working inside the mortgage security packaging division; that this information should be considered a trade secret. On top of that, JP Morgan argues that because ex-employees of these alleged financial criminals are testifying exactly who at the bank told them to skirt the law, this information must be suppressed because it might damage top JPM executives’ reputations.

Sound fishy? This week I went on financial TV journalist Max Keiser’s show to tell his international audience just what JP Morgan was up to. It drew hundreds of comments packed with fans of The Keiser Report screaming this shows just how connected JP Morgan is to a Federal government known to play favorites with American’s bulge banks.

Yet what’s going on behind the scenes is even more alarming. Abmac was able to add testimony to its complaint after I broke news at TheAtlantic.com about Bear Stearns falsifying some of the mortgage details they supplied the raters. You know — to get a better rating so firms like Ambac would buy and insure their mortgage securities. One of the ex-Bear employees quoted in my story, Matt Van Leeuwen, then offered to tell Ambac’s lawyers even more about the misconduct and fraud he witnessed. These Ambac lawyers were also able to see unpublished taped interviews in Nick Verbitsky’s upcoming documentary film ‘The Confidence Game’, which added more clues to who and how Bear Stearns was building RMBS with loans they knew were already in default. But eight days before Van Leeuwen was schedualed to appear in depositions he’d been lawyer’ed up by JP Morgan; claiming because he received a severance when he left the bank they had to represent him. Then according to Van Leeuwen’s deposition transcript, he testified that he’d embellished what he told the documentary film maker in a hour long interview and that some of the information he gave me for my The Atlantic story was taken out of context or only offered on background.

Wow talk about a bait and switch. Of course Verbitsky and I had interviewed other co-workers of Van Leeuwen who corroborated most of his original testimony. So to see him try and swear under oath that he made it up was not only shocking but a clear sign of how influential JP Morgan can be when someone wants to whistleblow. As for Van Leeuwen, he’s suddenly found the funds to attend Law School at the University of Texas; the Ambac lawyers are looking into possible payoffs to get him to change his testimony. They’ve also been granted a court order to get copies of emails from Van Leeuwen and the journalist he gave interviews with in an attempt to prove he lied under oath about not being a willing participant in our stories.

Luckily Van Leeuwen isn’t their only star witness; they have near half a dozen more insiders willing to speak out. Since my story at The Atlantic came out, the Financial Crisis Inquiry Commission got Verbitsky to show them his unpublished taped insider interviews, including – Van Leeuwen’s, and there is a chance they will subpoena Van Leeuwen to testify.

Ambac lawyers now wait for the good graces of a New York federal judge to let them submit their evidence in an amended complaint. A decision is expected by the end of the year. Although the American public, along with investors in JP Morgan, might be kept in the dark about who did what and how they did it, if a media company doesn’t pay to sue and unseal the case.

The Case is: AMBAC v EMC Mortgage Et Al New York Fed – USDC Southern District of New York – 110508 091754 – 08 CV

EMC was a wholly-owned sub mortgage company of Bear Stearns and is now owned and controlled by JP Morgan.

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