Morgan Keegan Settles with the SEC For $200 Million Over Subprime MBS Fraud Charges

On June 22, 2011, the SEC announced that securities brokerage firm and investment manager, Morgan Keegan & Co. and Morgan Asset Management, agreed to a $200 million settlement. The SEC alleged that Morgan Keegan regularly inflated daily quotes in order to increase the net values of five separate RMBS bond funds and ignored lower values for the RMBS reported by the broker-dealers who were trading the securities. According to SEC, the company then sold and redeemed shares of those securities to investors based on inflated net asset values. MK Settlement.

National Credit Union Administration Sues JP Morgan, RBS In Connection With Over $800 Million In RMBS

On June 20, 2011, National Credit Union Administration, acting as the liquidating agent for five now-defunct credit unions, filed two separate lawsuits against JP Morgan and Royal Bank of Scotland, and various other depositors and issuers, in the U.S. District Court for the District of Kansas. The NCUA brings claims under Section 11 and 12(a)(2) of the Federal Securities Act as well as under the state securities laws of Kansas, Illinois, Texas and California. NCUA alleges that defendants misrepresented the risks associated with the sale of hundreds of RMBS, including in connection with representations concerning underwriting guidelines, loan-to-value ratios and credit enhancements, which caused the credit unions who bought the RMBS to suffer “unprecedented” losses. The NCUA is seeking $800 million dollars from the defendants. NCUA Compl. vs. JPM. NCUA Compl. vs. RBS.

JP Morgan Settles with the SEC for $154 Million Over CDO Disclosures

On June 21, 2011, the SEC announced that JP Morgan Chase & Co. agreed to pay $153.6 million in disgorgement and penalties to settle claims brought by the SEC in the Southern District of New York. The SEC alleged that JP Morgan structured and marketed a $1.1 billion collateralized debt obligation and failed to disclose that the hedge fund, Magnetar Capital LLC, whose economic interests allegedly were adverse to the CDO’s investors, played a significant role in the portfolio selection process with the knowledge of JP Morgan. According to the SEC, while participating in the selection of the investment portfolio, Magnetar shorted $600 million of the assets it helped to select. The SEC also filed a separate complaint against Edward Steffelin, the head of the registered investment advisory firm that the offering documents represented would select the investments in the portfolio. Steffelin has not settled. JPM Settlement Announcement. JPM Compl. Steffelin Compl.

SEC Final Rules for Private Fund Adviser Registration

On June 22, the SEC adopted final rules and rule amendments under the Investment Advisers Act of 1940 implementing provisions of Title IV of the Dodd-Frank Act. As anticipated, the SEC announced that it will extend the deadline for advisers that had been relying upon the “private adviser exemption” under Section 203(b)(3) of the Advisers Act to register with the SEC until March 30, 2012. (The private adviser exemption was rescinded by the Dodd-Frank Act, effective July 21.) We will provide an analysis of the final rules adopted and other actions taken upon reviewing them in their final form. SEC Release. Implementing Release Final Rules. Exemptions Release Final Rules.

Rating Agency Developments

On June 23, Fitch withdrew its Japanese servicer rating criteria. Fitch Release.

On June 22, Moody’s updated its approach to rating CLOs. Moody’s Methodology.

On June 20, Fitch updated its thermal power project rating criteria. Fitch Release.

On June 20, Fitch updated its internal liquidity criteria. Fitch Release.

On June 20, Fitch updated its revenue-supported rating criteria. Fitch Release.

Note: Free registration is required for Fitch and Moody’s releases and reports.

Extension of Comment Period on Swap Margin and Capital Proposed Rulemaking

On June 23, the Fed, Farm Credit Association, FDIC, FHFA, and OCC extended the comment period for a proposed rule to establish margin and capital requirements from June 24 to July 11. Joint Release. Proposed Rule.

HUD Emergency Homeowners’ Loan Program

On June 20, HUD, in connection with NeighborWorks America, launched the Emergency Homeowners’ Loan Program to help homeowners at risk of foreclosure in 27 states and Puerto Rico. The program will help assist homeowners who have experienced a reduction in income and are at risk of foreclosure due to involuntary unemployment, underemployment, economic conditions, or a medical condition. Eligible homeowners can qualify for an interest free loan which pays a portion of their monthly mortgage for up to two years or $50,000, whichever comes first. HUD Release.

CFPB Request for Comment on Definition of “Larger Participants”

On June 23, the Consumer Financial Protection Bureau released a request for comment on the statutory requirements to define who is a “larger participant” in certain consumer financial markets that will be supervised by the CFPB pursuant to Section 1024 of the Dodd-Frank Act. Comments must be submitted within 45 days after publication in the Federal Register. CFPB Release. CFPB Notice and Request for Comment.

S.D.N.Y. Judge Certifies RMBS Class Action by Institutional Investors Against Merrill Lynch

On June 15, 2011, District Judge Jed Rakoff of the S.D.N.Y. certified a class of institutional investors in an action against Merrill Lynch & Co. in connection with the purchase of certain RMBS. Plaintiffs bring claims under Sections 11, 12(a)(2), and 15 of the ’33 Act, alleging that the registration statements and prospectus supplements issued in connection with the certificates contained untrue statements of material fact concerning underwriting standards, LTV ratios, appraisals, debt-to-income ratios of applicants, and the credit quality of the loans underlying the certificates. Judge Rakoff issued this two-page order without an accompanying opinion, which will be released at a later date, so the reasoning behind this decision is unpublished. Order. Complaint.

Ninth Circuit Overturns Remand to State Court and Orders Lower Court to Consider Arbitration Motion

On June 15, 2011, the Ninth Circuit overturned a district court’s order to remand this declaratory judgment action to state court. The action was brought by Countrywide and BAC Home Loans Servicing LP against Mortgage Guaranty Insurance Co. (“MGIC”) and seeks a declaration concerning the terms of an insurance policy covering borrower defaults. The policy provides for a reduction in the claimed loss amount in cases of “fraud, misrepresentation, or negligence” on the part of Countrywide, and on the basis of this provision, MGIC denied coverage on several Countrywide claims. The insurance agreement also contains an arbitration clause, and MGIC argued that the district court was required to consider its motion to stay the action pending resolution in arbitration under the Federal Arbitration Act (“FAA”) before exercising its discretion to remand under the Declaratory Judgment Act (“DJA”). The Court of Appeals, in a question of first impression in the Ninth Circuit, agreed with MGIC and found that the FAA did require the district court to reach the merits of MGIC’s motion to stay before exercising its discretion to remand under the DJA. Decision.