In the U.S.: Goldman, Wells Cite SEC Enforcement Threat

29 February 2012

Sub-prime debacle revisited, as banks, fair-lending laws under review

Goldman Sachs Group Inc. (GS), Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM)are among banks warned by federal regulators that they may face civil claims tied to sales of mortgage-backed securities.

Goldman Sachs and Wells Fargo said yesterday that they received notices from the Securities and Exchange Commission, warning that agency staff may recommend enforcement. The SEC has issued such notices to multiple banks including JPMorgan, the nation’s largest, in probes focusing on mortgage securities, said people with knowledge of the matter who asked not to be identified because the communications weren’t public.

Douglas Burns, a former federal prosecutor, talks about the Securities and Exchange Commission’s investigation into the sale of mortgage-backed securities. Goldman Sachs Group Inc. and Wells Fargo & Co. said yesterday that they received Wells notices from the SEC, warning that agency staff may recommend enforcement. Burns speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

“It’s a big deal given the level of anticipation that has been in the markets about whether there would be further actions,” saidJacob Frenkel, a former SEC lawyer now with Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. “These cases were complicated and time-consuming and the government has said for a long time that its investigations were continuing. These Wells notices are the manifestation of these investigations coming to their conclusion.”

Almost four years after mounting mortgage defaults prompted unprecedented government bailouts of the financial system, regulators are still examining how banks packaged and sold home loans to investors. The SEC is looking for evidence that firms failed to disclose underlying credit weaknesses in mortgage pools and delinquencies, Jason Anthony, special counsel for the agency’s structured products unit, said last week. He didn’t identify companies under scrutiny.

Goldman Sachs

Goldman Sachs got a so-called Wells notice Feb. 24 relating to disclosures for a late-2006 offering of $1.3 billion in subprime residential mortgage-backed securities, the company said in an annual report. The New York-based firm said it “will be making a submission to, and intends to engage in a dialogue with, the SEC staff seeking to address their concerns.”

The notices show the enforcement staff has concluded that violations occurred, Frenkel said. They’re also the first time during the agency’s investigations that banks will have an opportunity to defend themselves, he said.

The investment bank paid $550 million in 2010 to settle SEC claims that it misled investors on a mortgage-linked investment in 2007. In that case, the company said it made a “mistake” in omitting disclosures.

Wells Fargo, which revealed the SEC’s warning in an annual report, said the government has been examining whether it properly described facts and risks in offering documents.

Fair Lending

Government agencies are also looking at whether San Francisco-based Wells Fargo may have violated fair-lending laws or other regulations when making home loans, the firm said. The company is providing information requested by various agencies conducting investigations, it said.

Spokesmen for Goldman Sachs, Wells Fargo, New York-based JPMorgan and the SEC either declined to comment on the investigations or didn’t respond to messages.

The SEC said in January it will help form a state and federal working group that will share information and coordinate inquiries involving residential mortgage-backed securities.

“We already have issued scores of subpoenas, analyzed more than approximately 25 million pages of documents, dozens and dozens of witnesses, and worked with our industry experts to analyze the terms of these deals and the accuracy of the disclosures made to investors,” the agency’s enforcement director, Robert Khuzami, said at the time.

Wells Fargo was among five mortgage servicers that agreed this month to a $25 billion settlement of state and federal probes into shoddy foreclosure practices. The deal allowed regulators to continue pursuing the industry over claims regarding the packaging of loans into securities.


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