States, USDOJ Alleged Moody’s Inflated Ratings and Contributed To Market Crash.

Attorney General Matt Denn joined the U.S. Department of Justice and 20 other attorneys general in announcing a settlement resolving an investigation into Moody’s Corporation, Moody’s Investors Service, Inc., and Moody’s Analytics, Inc. (collectively “Moody’s”) over the companies’ misrepresentations regarding the independence and objectivity of its ratings of structured finance securities, securities which contributed to the 2008 market crash and economic recession that followed.

The settlement includes required business reforms by Moody’s and payments totaling $863 million to the federal government and states.

The residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) examined in this investigation are structured finance securities that derive their value from the monthly payments consumers make on their mortgages. Despite repeated statements emphasizing its independence and objectivity, Moody’s allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients, and assigned inflated credit ratings to toxic assets packaged and sold by the Wall Street investment banks. This alleged misconduct began as early as 2001, and became particularly acute between 2004 and 2007. These securities, particularly those backed by subprime mortgages, were at the center of the financial crisis. The state does not allege that Moody’s committed any wrongdoing against any individual homeowner with respect to a mortgage.

Moody’s represented to consumers that its Aaa rating carried a specific level of risk, and the investigation found evidence that Moody’s altered its process so that the Aaa rating with respect to certain structured finance securities represented a greater risk than Moody’s disclosed to investors and consumers. Delaware’s investigation found evidence that Moody’s deviated from certain of its published methodologies related to its rating of structured finance securities through the end of 2013. The investigation also found evidence that Moody’s gave in to pressure from big banks, which were powerful, repeat customers that paid Moody’s millions of dollars to rate these securities. The banks needed Aaa ratings in order to sell these securities to institutional investors, such as pension plans and retirement plans.

In addition to the monetary settlement, Moody’s has agreed to a detailed statement of facts in connection with the way it rated RMBS and CDOs leading up to the financial crisis, and significant compliance terms – including an annual certification by the CEO of Moody’s Corporation, which will be provided to the settling states every year for the next four years, certifying that Moody’s is following certain compliance requirements. Delaware’s share of the financial component of the settlement is $6,768,533.

Delaware was represented by Deputy Attorneys General Matthew Lintner, Gregory Strong, and Jillian Lazar in this matter.

Read the U.S. Department of Justice press release, which includes links to the settlement documents, here.

LPL will provide restitution to Delaware investors related to suitability and supervision violations

Wilmington – Delaware Attorney General Matt Denn announced that LPL Financial, LLC (LPL) has finalized a settlement with the Delaware Attorney General’s Investor Protection Unit and the Massachusetts Attorney General’s Office to resolve an investigation into LPL’s use of Leveraged Exchange Traded Funds.

“State law requires investment professionals to fully disclose the risks associated with complex financial products and to ensure they are suitable investments for their clients,” Attorney General Denn said today. “We’ve acted to hold LPL accountable to Delaware’s Securities Act to ensure all investment professionals are meeting those requirements and are properly supervised so that we can continue to safeguard the investments, pensions, and retirement funds of Delawareans.”

Leveraged ETFs are exchange traded funds that seek to return, on a daily basis, two hundred percent or, negative two hundred percent, of a particular index, commodity, currency, or economic sector. Leveraged ETFs typically do not invest directly in the underlying index or asset class but rather attempt to accomplish this daily objective by using financial derivatives, such as futures and swaps contracts. When Leveraged ETFs are held for periods longer than a day, compounding (among other factors) typically causes the Leveraged ETFs return to diverge from that which might be expected from simply multiplying the change in the underlying index by the relevant factor. This potential divergence is magnified in periods of greater volatility.  Due to this divergence, an investor can lose money when holding Leveraged ETFs over long periods, even if the investor bets correctly on the direction of the relevant index over the same term.

LPL operates as a broker-dealer and a federally covered investment advisor in Delaware. The State’s investigation found that certain LPL investment professionals failed to disclose risks associated with Leveraged ETFs, including the risks described above, and failed to ensure that Leveraged ETFs were suitable investments for their clients. In addition, the investigation found that LPL failed to adequately supervise those investment professionals whose clients held leveraged ETFs for extended periods of time.

LPL settled the investigation by entering into a Consent Order and agreeing to make full restitution to eligible Delaware and Massachusetts investors. In addition, the agreement requires LPL to enhance its oversight of investments in Leveraged ETFs by revising training for their financial advisors, enforcing restrictions on the number of Leveraged ETFs that may be offered to LPL clients, and notifying financial advisors when Leveraged ETF hold periods in client accounts exceed 30 days.

The Attorney General’s Investor Protection Unit enforces the Delaware Securities Act and seeks to prevent the public from being victimized by fraudulent, unscrupulous or overreaching practices by those offering investments and investment services within the state. Attorney General Denn urges investors who believe they have been the victims of such practices to call the Investor Protection Unit Hotline at 302-577-8424 or email the Unit at investor.protection@delaware.gov.

Delaware’s investigation was primarily handled by Investor Protection Director Gregory Strong and Assistant Attorney General David Casler.

Wilmington – Attorney General Beau Biden announced Thursday that J.P. Morgan Securities has paid the Delaware Department of Justice $51,400 as a result of a settlement with the Attorney General’s Investor Protection Unit. The settlement resolves a multi-state investigation which found that J.P. Morgan Securities failed to ensure that its agents were properly registered in Delaware and other states, and failed to properly record data on trades executed in Delaware and other states.

“Our financial system only works when everyone plays by the rules, and there must be accountability when the rules are broken,” Biden said. “State law requires those who sell stocks and securities to Delaware investors to be registered with our Investor Protection Unit, and to record their trades properly. Ensuring that J.P. Morgan Securities follows the law and its agents register with us gives my office the ability to protect the investments, pensions, and retirement funds of Delawareans.”

J.P. Morgan Securities functions as a broker-dealer in Delaware. The states’ investigation found that a flaw in J.P. Morgan Securities’ order entry system allowed agents not registered in Delaware to accept orders from investors in Delaware. J.P. Morgan Securities settled the multi-state investigation, coordinated by the North American Securities Administrators Association and led by the New Hampshire Board of Securities Regulation, by agreeing to pay up to a total of $2,790,625 in civil penalties among the 50 states, District of Columbia, Puerto Rico and the U.S. Virgin Islands. In addition to its payments to the states, J.P. Morgan Securities revised its client transaction processes and supervisory procedures to address the violations. Delaware’s payment was made to the Attorney General’s Investor Protection Fund which supports securities fraud investigations and investor education initiatives.

The Attorney General’s Investor Protection Unit enforces the Delaware Securities Act. Ensuring proper registration of investment professionals is an important part of the Unit’s mission to ensure that Delawareans are not victimized by fraudulent, unscrupulous or overreaching practices by those offering investments and investment services within the state. Biden urged investors who believe they have been the victims of such practices to immediately contact the Investor Protection Unit Hotline at 302-577-8424.

Delaware’s participation in the multistate investigation that led to the settlement was handled for Delaware by Investor Protection Director Owen Lefkon and Assistant Attorney General David Casler.

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Wilmington – Delaware’s Investor Protection Unit is participating in a nationwide project to gauge the strength of Delaware investment advisers’ cybersecurity systems, Delaware Attorney General Beau Biden announced today.

Delaware law requires investment firms to register with the state’s Investor Protection Unit, which is in the Fraud Division of Biden’s Department of Justice. Recently, Investor Protection Unit Director Owen Lefkon sent surveys to 44 investment companies. The surveys, which are due to be returned by October 31, cover areas such as whether the investment adviser has experienced a cybersecurity event in the past year, experienced loss or theft because of a cybersecurity breach and when the adviser last underwent a cybersecurity threat assessment.

“Financial information is some of our most-sensitive private, personal data,” Biden said. “Financial services firms have a responsibility to protect personal data, and the results of these surveys will help our Investor Protect Unit ensure the data is protected as strongly as possible.”

The survey was developed by the North American Securities Administrators Association (NASAA), of which the Delaware Investor Protection Unit is a member. The survey project is designed to help regulators better understand the technology and data practices of state-registered investment advisers; how these advisers communicate with clients; and what types of policies and procedures these advisers currently maintain. The pilot project also focused on specific uses of technology and Web sites, with a goal of understanding the safeguards used by state-registered investment advisers to protect client information; to inform state examination programs; and to identify national cybersecurity trends relevant to state-registered investment advisers.

“As the investment business is increasingly conducted over the Internet, the potential for identity theft and other security breaches has risen as well.” IPU Director Lefkon wrote in the letter to investment firms. “It is thus ever more important to ensure that registered firms and individuals take reasonable and adequate precautions to protect the security of information stored in computers and communicated over the Internet.”

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Biden has now secured at least $180 million from banks for conduct that caused mortgage crisis; Delaware is one of four states to participate directly in past three major settlements

Wilmington – Bank of America has agreed to pay $45 million to Delaware and provide significant financial benefits to Delaware homeowners to settle allegations that it misled investors about the riskiness of mortgage-backed securities, Attorney General Beau Biden announced today.

The settlement is the latest development in Biden’s wide-ranging effort to ensure accountability by financial institutions responsible for the mortgage crisis. Including the $45 million that Bank of America will pay, Biden has secured at least $180 million in mortgage-related settlements.

Delaware’s settlement with Bank of America is part of a $16.7 billion settlement announced Thursday between the bank, the United States Department of Justice, Delaware and five other states – California, Illinois, Kentucky, Maryland, and New York.

“Our financial system only works when everyone plays by the rules, and there must be accountability when those rules are broken,” said Biden, who secured nearly $20 million in a settlement with JPMorgan Chase in November and $17 million from Citigroup in a settlement last month.

“The mortgage crisis wrecked our economy and devastated families and neighborhoods throughout Delaware and the nation,” Biden said. “We cannot allow the mortgage crisis to be a man-made disaster for which there is no accountability. The funds we have secured in these settlements are being put to work helping thousands of Delaware families avoid foreclosure, strengthening communities hit hard by the fallout from the housing crisis, holding banks accountable and reimbursing government losses. Our work is not done.”

Delaware’s settlement comes in three parts:

• Bank of America will pay $31.6 million to the State. As with previous settlements, the funds must be used to remediate the harm Delaware’s communities suffered as a result of the housing crisis;
• Bank of America will pay $13.4 million to reimburse government entities for losses suffered on Bank of America, Merrill Lynch and Countrywide investments that were wrongly marketed as being low-risk; and
• Bank of America will make direct financial benefits, such as mortgage modifications and forgiveness of second mortgages, available to homeowners. Under the terms of the settlement, Bank of America must provide at least $150 million in benefits to consumers in Delaware, Maryland and Kentucky (the three smallest states participating in the settlement). Homeowners with mortgages serviced by Bank of America may be eligible for these benefits. To determine eligibility, homeowners should contact Bank of America at 877-488-7814 or Biden’s Office of Foreclosure Prevention at 1-800-220-5424.

This settlement with Bank of America, along with the two recent settlements with JPMorgan Chase and Citigroup, resolves allegation centering on the bank’s bundling and sale of mortgages to investors. These investments – bought by pension funds, mutual funds and other investors – were represented as low risk but were in fact much riskier than advertised. The resulting losses were disastrous for the economy.

Delaware has become a national leader among states in pursuing accountability for actions that contributed to the housing crisis during Biden’s tenure. Biden is a member of the U.S. Department of Justice’s Residential Mortgage-Backed Securities Working Group, and Delaware is one of just four states (along with California, New York and Illinois) to be part of that group’s past three major mortgage-crisis settlements with some of the nation’s largest banks.

Delaware’s success in holding banks accountable has been possible due to Biden opening investigations into the conduct of financial institutions, the state’s strong enforcement laws, such as the Delaware False Claims and Reporting Act and the Delaware Securities Act, and Biden’s decision to direct a portion of prior settlement funds to pursue future enforcement initiatives.

Biden also played an important role in the February 2012 National Mortgage Settlement that as meant more than $75 million in financial benefits for Delaware homeowners, $11.7 million for the State and important new protections for military personnel and their families that Biden championed in negotiations with the nation’s five largest mortgage-servicing banks.

The Bank of America matter was handled for Delaware by Investor Protection Director Owen Lefkon, Deputy Attorney General Timothy Worthington and Fraud Division Director Matthew Lintner.