Tag: Law and legal issues

Credit Suisse client in tax dodge case gets $15 million bail

Dan Rotta, a Brazilian-American businessman charged with dodging U.S. taxes for decades using accounts at Swiss banks including Credit Suisse, was granted a $15 million bail package on Tuesday. UBS Group AG, which now owns Credit Suisse, has said it’s cooperating with U.S. authorities on the case.

A Brazilian-American businessman charged with dodging U.S. taxes for decades using accounts at Swiss banks including Credit Suisse Group was granted a $15 million bail package on Tuesday.

Dan Rotta, 77, who was arrested March 9 at Miami International Airport as he prepared to fly to Barcelona, must remain under house arrest with electronic monitoring, a federal judge in Miami ruled. Prosecutors had sought to keep Rotta locked up, arguing he’s lied to the Internal Revenue Service for 35 years and has a motive to flee the U.S. before his trial on tax charges.

During the hearing in Miami federal court, prosecutors elaborated on their claims in an arrest complaint that Rotta had hidden more than $20 million from the IRS, using “pseudonyms, complicated corporate structures, and nominees” to conceal offshore assets and income. Rotta has a net worth of $38.5 million, prosecutors told the judge.

Even before Rotta’s arrest, the Justice Department was weighing whether Credit Suisse breached a 2014 plea agreement in which it paid $2.6 billion, admitted helping thousands of Americans evade taxes, and promised to identify other tax cheats. Rotta hid assets from the the IRS in two dozen secret bank accounts between 1985 and 2020, according to prosecutors.

Rotta must post 20% of the $15 million bail package or $3 million in cash, and he’s required to place a corporation holding nine properties in escrow, U.S. Magistrate Judge Jared Strauss ruled.

Rotta, a citizen of the U.S., Brazil, and Romania, relied on decades of deception, prosecutors said during the hearing. They said he lied to authorities, shifted money between himself and his cousin in Brazil, and used his passport from Brazil to avoid disclosing his U.S. citizenship to Swiss banks. Prosecutor Sean Beaty told a judge that IRS agents estimate Rotta owes at least $9.25 million in back taxes, $10 million in interest and $6.9 million for a fraud penalty.

IRS Special Agent James O’Leary, who wrote the arrest affidavit, also testified about the case against Rotta, who recently moved from Fisher Island, Florida, to Aventura. Rotta was charged with conspiring to defraud the U.S. and making false statements to the IRS. He faces as many as five years in prison on each count if convicted.

A spokesperson for UBS Group AG, which now owns Credit Suisse, didn’t respond to a request for comment. In a regulatory filing last month, UBS said: “Credit Suisse AG has provided information to U.S. authorities regarding potentially undeclared U.S. assets held by clients at Credit Suisse AG since the May 2014 plea. Credit Suisse AG continues to cooperate with the authorities.”

At the hearing, Rotta was shackled in a prisoner’s jump suit, accompanied by a U.S. marshal. He didn’t speak but whispered with his lawyers, jiggled his legs and occasionally shook his head while the government presented its evidence.

Prosecutors cited another Rotta brush with the law amid a rancorous divorce more than a decade ago. In 2012, a family court judge ordered him to take his 16-year-old son to a Utah boarding school. Instead, Rotta took him to Las Vegas to marry his housekeeper’s 18-year-old daughter, a move which legally emancipated the son. Rotta was convicted of contempt of court and ordered to serve 180 days in jail.

O’Leary’s arrest affidavit said that after public reports surfaced in 2008 that UBS was under investigation for helping U.S. taxpayers evade taxes, Rotta closed his account at the bank and moved assets to another Swiss bank. He was a client of Beda Singenberger, a Swiss financial adviser charged a decade ago with helping 60 people in the U.S. hide $184 million in secret offshore accounts with names like Real Cool Investments Ltd. and Wanderlust Foundation.

In the U.S. tax case, Rotta used entities like a British Virgin Islands corporation called Edelwiss Corporate Ltd. and the Putzo Foundation in Liechtenstein, according to the complaint. The IRS began auditing Rotta in 2011 after obtaining evidence he had unreported foreign financial accounts, and he denied owning them.

He claimed that hundreds of thousands of dollars in transfers from foreign accounts were nontaxable loans, and enlisted a cousin from Brazil to tell the IRS he made or facilitated the fake loans, the US said.

After the IRS assessed additional taxes and penalties against Rotta, he petitioned the U.S. Tax Court and denied having any foreign accounts. The cousin came to the U.S. to “retell the false loan story to IRS attorneys,” the U.S. said.

Rotta settled the Tax Court case with the IRS, which agreed he didn’t owe more taxes or penalties for 2008 through 2010, according to the affidavit. He also settled an audit with the IRS, which said he owed no more taxes or penalties for 2011 through 2013. Both were based on phony documents and fraudulent testimony, the US said.

In 2019, Rotta tried to make a voluntary disclosure to the IRS to limit his exposure to criminal prosecution and limit his exposure to a potential $10 million penalty. But his application was full of false statements, according to the complaint.

The case is US v. Rotta, 24-mj-2479, US District Court, Southern District of Florida (Miami).

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March 13, 2024
Morgan Stanley suit isn’t about money, billionaire Mike Ashley says

Retail tycoon Mike Ashley says his lawsuit against Morgan Stanley is in part because the bank acted out of “snobbery.”
Chris J. Ratcliffe/Bloomberg

Billionaire Mike Ashley said he brought his lawsuit against Morgan Stanley because he was concerned with how “grotesquely and unfairly” the bank had acted during a margin call rather than the potential damages.

The retail tycoon made the comments as a witness in a London court, where his firm Frasers Group Plc sued the U.S. bank for imposing a $995 million margin call on his derivatives trade positions in Hugo Boss AG shares in May 2021. The deposit demand hit him like a “nuclear bomb,” leaving him in disbelief and frustration, he told the court during two days of testimony. The bank acted in part on account of “snobbery,” he said.

It was “horrific, just unthinkable, impossible,” Ashley said referring to the margin call. Ashley’s firm has sought about $50 million in damages.

Morgan Stanley has sought to counter the lawsuit, calling Frasers’ claim divorced from reality. The retailer didn’t suffer any loss when it transferred the trades away from Morgan Stanley, the U.S. bank’s lawyers said. “Frasers has embarked on lawfare against Morgan Stanley on an extraordinary scale,” the lawyers said.

Ashley denied he derived pleasure from litigating and said the case was not personal. Before the dispute arose in May 2021, Morgan Stanley was unwilling to offer corporate and advisory services to Frasers because of Ashley’s reputation, “deserved or otherwise,” for being litigious among other reasons, the bank’s lawyers have said.

“I can assure you there is no pleasure in litigation,” Ashley said responding to a question. “If you end up in a position that you own one of the country’s biggest football clubs it comes with the territory,” he said.

Ashley and his firm have been involved in court cases ranging from defamation against a national newspaper to drunken promises over a bonus worth millions made in a London pub. He also fought his former friend over a Dubai bar-room incident and funded a court challenge to unravel a deal to save a department store chain’s operator.

“I don’t think I’m an over-litigious person,” he said. “If anything I would try to avoid it. It’s not a pleasant experience.”

A spokesperson for Morgan Stanley declined to comment on the testimony. “Frasers has never been a client of Morgan Stanley. This claim is contrived and without merit and we will defend it vigorously,” he had previously said. Lawyers for Frasers declined to comment.

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February 22, 2024
TD Bank to pay $15.9 million over duplicate NSF fees

TD Bank has agreed to pay more than $15.9 million Canadian dollars to settle a lawsuit alleging that the bank charged customers multiple nonsufficient funds fees per transaction.
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TD Bank has agreed to pay more than $15.9 million Canadian dollars to settle a lawsuit alleging that the bank charged customers multiple nonsufficient funds fees per transaction.

The settlement stems from a class-action lawsuit filed on behalf of TD customers who were charged the duplicative fees starting in February 2019.

“[TD Bank]’s practice of charging multiple NSF fees on each subsequent attempt to process the same already rejected transaction is a breach of its contract,” lawyers for the plaintiffs said in a 2021 complaint.

Fees charged to consumers by banks large and small have come under increased scrutiny in recent years. The Federal Deposit Insurance Corp. has called nonsufficient funds fees “unfair” and “deceptive.” Banks are pushing back on the efforts to punish them for assessing the fees, and the Minnesota Bankers Association sued the FDIC and its chairman, Martin J. Gruenberg, over guidance the agency has issued on NSF fees.

Consumers eligible for payments from the TD settlement include those who are Canadian residents, hold deposit accounts with TD and were charged multiple $48 Canadian fees on a single transaction. Payments will be directly deposited into the accounts of TD customers who meet these requirements, according to the settlement agreement.

The settlement agreement is scheduled to go before a Canadian court for approval in February 2024, according to a press release from Koskie Minsky, the law firm representing the plaintiffs. The agreement includes the stipulation that TD doesn’t admit liability in the case.

“It took a lot of work, on both sides, to get this deal done,” said Adam Tanel, a partner at Koskie Minsky. “We’re pleased with the outcome.”

The settlement isn’t the first TD has agreed to this year. In September, a judge approved TD’s $8.7 million settlement with more than 5,000 off-duty New York City police officers. The officers claimed they went unpaid for shifts as security guards at TD branches across the city.

Orla McCaffrey

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December 22, 2023
Bankman-Fried struggles on stand in rare dress rehearsal before testimony

Former FTX CEO Sam Bankman-Fried’s team is trying to show that many of the transactions that are the subject of criminal charges were conducted in the full view of lawyers.
Stephanie Keith/Bloomberg

Sam Bankman-Fried struggled on the witness stand in a rare dress rehearsal of what he wants to tell the jury in his trial, the first time in months the world has heard from the former King of Crypto as he attempts to defend the fraud charges against him.

Bankman-Fried spent almost three hours trying to persuade a judge to allow him to testify about the role FTX lawyers played in the lead up to the collapse of the crypto-exchange and the alleged mismanagement of customer funds. U.S. District Judge Lewis Kaplan had previously ruled the 31-year-old couldn’t discuss the legal advice during opening arguments, but delayed his expected testimony to decide whether his lawyers could ask him about it in on the stand.

Over the past three weeks, close friends and colleagues have testified that Bankman-Fried orchestrated a fraudulent scheme that led to FTX’s collapse. On the stand, he told the judge that lawyers were aware of some decisions, including loan requirements, customer deposits and terms of service. But he dodged questions by prosecutors, often saying he couldn’t recall events.

Bankman-Fried “has an interesting way of responding to questions,” Kaplan said after one digression. He told him to “listen to the question and answer the question directly.”

The once-respected crypto mogul is facing decades in prison on charges that he directed the transfer of FTX customer money into Alameda Research, an affiliated hedge fund, for risky investments, political donations and expensive real estate before both companies spiraled into bankruptcy last year.

Kaplan on Thursday morning said he needed to hear Bankman-Fried’s testimony about advice he’d gotten from lawyers before he can decide whether to let the jury hear it. So in a surprise move, he sent jurors home after lunch and let both sides question him on the topic. Kaplan said he’ll rule on the issue Friday morning.

Bankman-Fried’s team is trying to show that many of the transactions that are the subject of criminal charges were conducted in the full view of lawyers. They’re hoping jurors will conclude that he didn’t intend to defraud anyone.

Under questioning from his lawyers, Bankman-Fried testified that he believed based on the terms of service that in “many circumstances” Alameda was permitted to borrow funds from FTX and engage in futures trading.

After direct examination, Bankman-Fried received a thumbs-up from his father, Joseph Bankman. But he struggled during cross-examination to remember specific conversations with lawyers he’d been asked about by prosecutors on cross-examination, often following up his answers with further questions about what specific issues they were asking him about.

When prosecutors pushed Bankman-Fried about customer funds, he avoided answering many questions directly, arguing that he doesn’t recall specific conversations or decisions that were run by him. By May 2022, Bankman-Fried said he was “aware of some speed bumps in place on Alameda’s account” to delay liquidation but didn’t know the “exact nature of them.”

Bankman-Fried insisted that customer assets were kept separate from the corporate assets. He told the judge that between 2020 and 2021 it was normal for customers to wire money to accounts a bank account held by a subsidiary of Alameda called North Dimension, because FTX was having a hard time getting its own accounts. He confirmed that funds for investments would come from Alameda Research. Sometimes, he said, it was preferable for the money to come from an individual so loans would issued to him and others to make those investments.

“I was thinking about it from a business perspective of trying to find a solution that would check all the boxes,” Bankman-Fried said. “I was glad we had found one.”

“Yeah, of course,” Bankman-Fried said when asked if he took comfort in the fact that lawyers had signed off on those loans.

During the hearing, Bankman-Fried pushed back on prosecutors’ arguments that he and other FTX executives used apps that automatically deleted messages to cover up wrongdoing. He said that he actually tried to disable such features around the time the company went bankrupt in November 2022. He said he discussed it with FTX lawyers Ryne Miller and Can Sun, the corporate general counsel who testified at the trial last week.

“My big picture takeaway was that there were certain classes of data that we had very clear retentional policies around,” Bankman-Fried said. “Those tended to be regulatory.”

Bankman-Fried said he didn’t think drafts of documents, including the drafts of seven versions of Alameda balance sheets shared by Caroline Ellison on Signal, needed to be preserved. While he said he did think it was important to memorialize routine company documents and decisions, he was concerned about employees saying something informally on chats that could be taken out of context and be potentially damaging or embarrassing if made public.

He also said that Sun was “heavily involved” in drafting new terms of service released in May 2022, which were updated after FTX moved to the Bahamas and was regulated by the securities commission there. In response to the judge asking whether he read full updated terms of service, Bankman-Fried said he read some parts “in depth” and others he “skimmed over.”

Hearing Bankman-Fried’s testimony in advance is an unusual procedure in criminal cases, but one that can make sense for all sides, lawyers said.

Prosecutors “don’t want the jury to be exposed to these issues if they’re going to be out of the case,” said Harry Sandick, a former federal prosecutor in New York with the firm Patterson Belknap Webb & Tyler. And it allows the defense to present Bankman-Fried’s testimony without getting sidetracked by continual objections, he said.

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October 26, 2023
Wells Fargo-SEC settlement on advisory fees underscores M&A challenges

Wells Fargo overcharged nearly 11,000 accounts about $26.8 million in advisory fees from 2002 to 2022, the SEC said. The problem was said to have begun at Wachovia before Wells Fargo bought it in 2008 and was not caught until a decade after the acquisition.
Cooper Neill/Bloomberg

Wells Fargo is paying a $35 million fine and nearly $40 million in restitution to settle Securities and Exchange Commission allegations that its investment advice arm overcharged customers for years.

The company overcharged nearly 11,000 accounts about $26.8 million in advisory fees over the years, the SEC said in a news release Friday. The overcharging occurred from 2002 to 2022 and is partly connected with its crisis-era acquisition of Wachovia Corp., according to an SEC order outlining the settlement.

Wachovia and AG Edwards, an investment firm that Wachovia had acquired just before the crisis, gave certain customers discounts to their standard advisory fees — yet they sometimes failed to enter the discounts into Wachovia billing systems.

Wells Fargo did not catch the discrepancies for years after the acquisition, the SEC said, and its advisors continued to offer discounts that weren’t reflected in customer billing. The company learned about the issue in 2018 after Connecticut banking regulators asked about it, prompting a review at Wells Fargo that uncovered nearly 11,000 accounts nationwide were overcharged.

“Today’s enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection,” Gurbir S. Grewal, director of the SEC’s enforcement division, said in the release.

The Wachovia acquisition was far from ideal. It was part of the shotgun marriages of banks during 2008, as troubled mortgage portfolios at Wachovia and elsewhere helped bring the global financial system to its knees.

But the deal helped massively extend Wells Fargo’s reach and brought Wachovia’s expansive advisor network to the San Francisco bank.

Wells Fargo didn’t have much time to do due diligence on the deal during 2008, noted John Gebauer, chief regulatory officer at the risk advisory firm Comply. “But they had plenty of time after that transaction to run a smooth integration and to review what they bought,” Gebauer said.

The order highlights the importance of conducting extensive compliance checks on billing and other issues as the advisor industry continues going through a wave of consolidation, Gebauer added.

The process that advisors at Wells Fargo and its acquired firms used to offer discounts on preset fees for certain clients stopped in 2014. But some customers who opened up accounts before 2014 continued to be overcharged until last December, the SEC said.

In a statement, the company — which did not admit or deny the SEC charges — said it was pleased to resolve the issue.

“The process that caused this issue was corrected nearly a decade ago,” the company said. “And, as noted in the settlement documents, Wells Fargo Advisors conducted a thorough review of accounts and has fully reimbursed affected customers.”

Wells Fargo has reimbursed affected customers more than $26 million from the fees it overcharged and $13 million in interest, the SEC said.

The order said that staff had to manually input agreed-upon discounts to a new customer account setup tool, which “did not automatically populate” those one-off discounts. That was then transferred to a legacy Wachovia billing system that the order said is still in use today.

While Wells Fargo advisors could review the finalized information for discrepancies, the company “did not have policies or procedures” that required them to review and confirm the accuracy of charges, the SEC order said.

The company did have a quality control process in place from 2009 to 2014 aimed at flagging discrepancies — but it was only for accounts with more than $250,000 when they were opened, the SEC order said.

The quality control process spread to smaller accounts starting in 2014, but the company did not do a historical lookback to examine past discrepancies, the SEC said.

In Connecticut, where banking regulators first flagged the issue, Wells Fargo found that it overcharged 145 out of more than 57,000 accounts. Most of those dated back to the AG Edwards and Wachovia days.

Last year, Wells Fargo began using a tech-enabled process to identify errors for roughly 2.2 million accounts across the country. In all, the bank found it overcharged 10,800 other accounts.

The fine is one of a number of penalties the $1.9 trillion-asset company has paid in recent years, some much larger ones tied to consumer-abuse scandals.

Last December, the Consumer Financial Protection Bureau fined Wells Fargo $1.7 billion for shortcomings in auto loan, mortgage and deposit products. The company also agreed to pay $1 billion to shareholders in May to settle claims that its past leaders were overly optimistic on how quickly it would solve its outstanding issues with regulators.

CEO Charlie Scharf, who joined the company in late 2019, has said overhauling the company’s risk and control framework remains Wells Fargo’s “top priority and will remain so.”

Dan Shaw contributed to this article.

Polo Rocha

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August 25, 2023
Change Lending loses federal certification for non-QM originations

Non-bank originator Change Lending has apparently lost a certification by the U.S. Treasury Department to issue non-qualified mortgages for underserved borrowers.

The lender isn’t included on an updated list of firms certified with the Community Development Financial Institution Fund, according to a report by Barron’s Friday. The company, founded by banker Steve Sugarman, was accused in a June lawsuit of mischaracterizing the borrowers it serves.

The lender, whose parent company is The Change Company CDFI did not respond to requests for comment Friday afternoon. The CDFI Fund declined to comment.

The government certifies CDFIs to serve Black, Hispanic and low-income communities and allows the lenders to be exempt from certain regulations, like the Consumer Financial Protection Bureau’s ability-to-repay rule. The “no-doc” lenders, who do not have to collect borrower income documentation, are required to provide the Treasury with data to prove 60% of their loans, both in number and dollar volume, are in compliance with CDFI goals.

Under its CDFI certification since 2018, Change Co. has become one one of the nation’s largest non-QM originators, with $4.2 billion in volume last year.

A former Change Co. employee who filed the lawsuit in June in a California court claims he has documentation showing the company was “mischaracterizing the race, ethnicity, and income level of borrowers.” The complaint also alleges the lender made false representations to the buyers of its mortgage-backed securities. The Change Co. in June announced a $307 million securitization of its home loans.

A Barron’s investigation found the company in 2022 failed to meet its underserved lending requirements, although it told the publication it was exceeding its requirements. Barron’s reporting also revealed Change’s business with wealthy borrowers, including actor Johnny Depp.

The publication also noted the lender has removed CDFI logos and references from its website.

The company’s founder, Sugarman, was the former chairman and CEO of Banc of California before resigning amid a Securities and Exchange Commission probe in 2017. He touted Change Lending’s top non-QM status earlier this week in a LinkedIn post, and two weeks ago posted an apparent defense against some of the lending accusations, suggesting the lender was meeting its CDFI requirements.

“We believe that Black and Hispanic/Latino borrowers who are credit-worthy should get the exact same loans from the exact same lender as wealthy white borrowers,” he wrote. “Change does not discriminate… it serves all who qualify.”

Andrew Martinez

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August 25, 2023
U.S. Bancorp’s CEO, other top officials sued over unauthorized accounts

U.S. Bancorp CEO Andy Cecere is among the defendants in a shareholder suit filed this month in Delaware state court.

U.S. Bancorp is contending with the latest fallout from a 2022 regulatory settlement over unauthorized customer accounts: a shareholder lawsuit that names CEO Andy Cecere and various other top leaders as defendants.

The suit alleges that U.S. Bancorp executives and board members allowed compensation and incentive practices that led to the opening of fake accounts and profited from the concealment of the misconduct, keeping shareholders in the dark after the Consumer Financial Protection Bureau opened an investigation.

It also argues that U.S. Bancorp investors were misled when — in the wake of the Wells Fargo fake-accounts scandal — U.S. Bancorp officials touted the firm as a leader in corporate ethics.

“Little did unsuspecting customers and investors know,” the complaint alleges, “that U.S. Bank employed a strikingly similar scheme to Wells Fargo’s that incentivized and encouraged U.S. Bank employees to open unauthorized accounts to increase the company’s sales and revenues.”

A spokesperson for U.S. Bancorp, the parent company of U.S. Bank, denied the allegations, saying in an emailed statement that the lawsuit contains “inaccuracies.”

“Of the millions of accounts opened between 2010 and when additional sales practice controls were put into place in 2016, a very small number were confirmed as opened without authorization, and after 2016, that number decreased even further,” the statement read. “We deny the lawsuit’s allegations and intend to defend ourselves vigorously.”

Blake Bennett, a lawyer who represents the lawsuit’s plaintiff, a shareholder named P. Michael Read, did not respond to a request for comment.

In July 2022, the CFPB hit U.S. Bank with a $37.5 million fine after finding that bank employees opened unauthorized checking, savings and credit card accounts.

The lawsuit against top officials at the Minneapolis-based company, filed this month in Delaware state court, is an example of what’s known as a shareholder derivative suit. Such cases are brought by shareholders who are seeking to recover money not for themselves, but rather for the company in which they are part-owners.

Shareholder derivative suits can be filed when a company has a valid claim against corporate insiders but has refused to pursue it.

In addition to Cecere and nine other members of the U.S. Bancorp board, the lawsuit lists Chief Financial Officer Terry Dolan, Chief Risk Officer Jodi Richard and then-Chief Administrative Officer Kate Quinn as co-defendants.

The suit follows a securities class action case filed last year by investors in connection with the unauthorized accounts at U.S. Bancorp.

The most recent suit alleges that the defendants breached their fiduciary duties and unjustly enriched themselves.

Specifically with regard to Cecere, the lawsuit alleges that he sold nearly 350,000 shares of U.S. Bancorp stock for proceeds of $20.1 million between November 2019 and April 2021, which was after the CFPB opened its investigation but before penalties against the bank were announced.

The U.S. Bancorp spokesman said Friday that the lawsuit mischaracterizes Cecere’s stock transactions.

In the wake of the fake-accounts scandal at Wells Fargo, onetime executives and board members at the San Francisco bank also faced a shareholder derivative lawsuit. That suit ultimately settled for $240 million.

The proceeds of the Wells Fargo settlement, which were paid by insurance companies, were split between the bank and the plaintiff’s lawyers.

Jordan Stutts

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August 11, 2023
Directors of failed Chicago bank plead guilty to conspiracy

William Mahon, George Kozdemba and Janice Weston conspired to falsify bank records shared with the Office of the Comptroller of the Currency, according to the pleas lodged in federal court.
Andrew Harrer/Bloomberg

Three former board members of Chicago’s failed Washington Bank for Savings have pleaded guilty to trying to deceive the bank’s regulator to conceal rampant embezzlement.

William Mahon, George Kozdemba and Janice Weston conspired to falsify bank records shared with the Office of the Comptroller of the Currency, according to the pleas lodged in federal court for the Northern District of Illinois this month.

The pleas are the latest legal moves in a yearslong case that stems from Washington Federal’s failure in December 2017, shortly after regulators learned the bank was insolvent and carrying at least $66 million in nonperforming loans. Since then, federal authorities have charged 16 high-ranking former employees of the bank with crimes ranging from fraud to conspiring to embezzle $31 million in bank money.

After the Office of the Comptroller of the Currency began to evaluate the bank’s loan portfolio before its failure, Mahon, Kozdemba and Weston made false entries in bank records in an attempt to obstruct the agency’s examination, according to a statement from the United States Attorney’s Office for the Northern District of Illinois issued after the pleas were entered.

“They also falsified records to make it appear Washington Federal was operating in compliance with banking rules and internal policies and controls,” the U.S. attorney’s office said in the statement.

The directors provided incorrect information on a range of topics, including loan approvals, loan maturity dates and borrower identities, according to the indictment of 14 defendants handed down in 2021.

Sentencing hearings are set for October and December, where Mahon, Kozdemba and Weston could each receive up to five years in prison, according to the U.S. attorney’s office. Mahon is also facing an additional three years for the willful filing of false income tax returns.

Attorneys for the defendants did not immediately respond to requests for comment.

Washington Federal’s former accounting firm, Bansley & Kiener, in 2020 agreed to pay $2.5 million to the Federal Deposit Insurance Corp. to resolve claims that it was liable for the bank’s collapse. Jan Kowalski, another defendant in the case, received three years in prison for fraud related to the bank failure earlier this year.

Prior to its failure, Washington Federal Bank had about $166 million of assets, $144 million of deposits and two branches in the working-class Bridgeport neighborhood of Chicago.

Orla McCaffrey

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August 11, 2023
Wells Fargo, BNP to pay millions in U.S. fines in WhatsApp probes

Wells Fargo and BNP Paribas will pay millions of dollars in penalties for employees using unofficial communications like WhatsApp to conduct business as the Securities and Exchange Commission deepens its crackdown on how Wall Street keeps records.

Wells Fargo units agreed to pay $125 million to settle the cases and BNP will pay $35 million, the SEC said on Tuesday. In all 11 firms agreed to pay penalties, including a Bank of Montreal unit and a Mizuho Financial Group securities arm, to Wall Street’s main regulator.

In a separate actions, the Commodity Futures Trading Commission announced settlements in similar cases with units of four lenders including Wells Fargo and Bank of Montreal worth an additional $260 million.

Over the past several years the SEC and CFTC have been cracking down on firms skirting regulatory scrutiny by using services such as WhatsApp or personal email addresses for work-related communication, regulators said at the time.

Last September, the SEC announced $1.1 billion in fines against firms including Bank of America, Citigroup and Goldman Sachs Group.

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August 8, 2023
FHFA rule change could expand the number of suspended counterparties

The Federal Housing Finance Administration is looking to make it easier to put entities and people into its Suspended Counterparty Program, a proposed rule change states.

This would require Fannie Mae, Freddie Mac and the Federal Home Loan Banks to report to the FHFA any individual or company they do business with that committed “certain forms of misconduct” in the past three years. The current program was established by FHFA letter in June 2012 and amended in December 2015.

Today, the SCP list is limited to those that have committed and are convicted of criminal offenses. “However, in FHFA’s experience of administering the SCP, it has determined that this standard is too narrow; specifically, it does not authorize suspension of counterparties that have been found to have committed various forms of misconduct in the context of civil enforcement actions,” the proposed amendment to the rule said.

It is looking to broadly expand the definition of misconduct “to all manner of civil enforcement proceedings,” including cases before administrative law judges, as well as qui tam actions (also known as whistleblower cases) such as those brought under the False Claims Act.

While many of those civil cases are settled without an admission of misconduct, the proposal noted, the change could allow the FHFA to put those entities on the SCP list. “FHFA has determined that it is appropriate to permit suspension where enforcement claims are resolved without admission of misconduct,” the proposal said.

For example, in the most recent qui tam settlement involving Movement Mortgage, the company specifically did not admit any legal liability for the False Claims Act violations.

Other changes would allow for placement on the SCP for criminal or civil misconduct in connection with the management or ownership of real property.

“Amending the Suspended Counterparty Program will help strengthen FHFA’s ability to protect its regulated entities from business risks presented by individuals or institutions who engage in misconduct,” said Director Sandra Thompson, in a press release. “The proposed rule will strengthen FHFA’s ability to ensure the regulated entities remain safe and sound so they continue to serve as reliable sources of liquidity.”

The changes would also create an ability to vacate suspension orders in certain circumstances.

Currently, the SCP list has 170 individual or company names, most of which have a definitive end date for the suspension. The person on the list the longest time, starting on April 15, 2013 with an indefinite suspension, is Lee Farkas, the convicted mortgage fraudster who ran Taylor, Bean & Whitaker.

First Mortgage and its convicted founder and chairman Ron McCord — a former Mortgage Bankers Association chairman — are both also on the list. Live Well Financial, the defunct reverse mortgage lender, was the most recent addition.

This proposal will be opened for a 60-day comment period once it is published in the Federal Register.

Brad Finkelstein

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July 7, 2023
Frank founder Charlie Javice says JPMorgan documents will exonerate her

Charlie Javice was charged criminally in April in Manhattan federal court, where she faces charges including conspiracy, wire fraud affecting a financial institution and bank fraud in connection with the sale of her company to JPMorgan Chase. The bank has also filed a fraud suit against her.
Bob Van Voris/Photographer: Bob Van Voris/Bloo

Frank founder Charlie Javice is seeking access to JPMorgan Chase documents she says will exonerate her in the bank’s fraud suit against her, as well as in the criminal and Securities and Exchange cases she’s also facing.

In a court filing Thursday, Javice asked the Delaware federal judge overseeing JPMorgan’s lawsuit to allow her to demand documents from the bank and firms that advised it on the $175 million acquisition of her college loan planning site.

All three cases against Javice — by JPMorgan, Manhattan federal prosecutors and the Securities and Exchange Commission — allege that she falsified data to vastly inflate the number of Frank users during deal negotiations with the bank.

She has pleaded not guilty in the criminal case and is free on $2 million bond.

Pretrial evidence-gathering in JPMorgan’s lawsuit is on hold under a law governing civil securities fraud cases. In her Thursday filing to U.S. District Judge Maryellen Noreika in Delaware, Javice said her lack of access to documents has left her unable to counter JPMorgan’s narrative of the case.

The bank’s “cherry-picked snippets of documents have been repeated aggressively in the press and, more tellingly, provided by JPMC to governmental authorities for use in those authorities’ investigations,” Javice said. Meanwhile, she’s faced “increasing monetary constraints and reputational damage with each passing day,” Javice added, noting that prosecutors have frozen her accounts.

“Defendants should not be put in a position of fighting the weighty allegations against them with their hands tied behind their backs,” Javice said.

JPMorgan sued Javice and another Frank executive, Olivier Amar, in December, alleging they used fake customer accounts to exaggerate the number of people using the Frank site, in a scheme to dupe the bank. She allegedly engaged an outside data scientist to create fake user data when Frank’s own engineering director refused to do it.

Lawyers for Javice have called the suit “nothing but a cover” and said JPMorgan was just trying to “retrade the deal.” She is also countersuing JPMorgan.

Javice was charged criminally in April in Manhattan federal court, where she faces charges including conspiracy, wire fraud affecting a financial institution and bank fraud. Amar was not charged.

She was set to make $45 million from the deal, prosecutors said.

JPMorgan has also sought to lift the stay on document production, asking the court to give it access to Javice’s financial records. The bank said it was worried she had moved her money into accounts tied to shell companies in Nevada.

Javice has said the government’s freezing of her accounts negates any fears about her moving money. She said she wanted to move her money out of JPMorgan after the bank accused her fraud, though she noted that she initially transferred her funds to the ill-fated Signature Bank.

Javice founded Frank in 2017 as an online platform to help college students fill out the Free Application for Federal Student Aid, or Fafsa. Forbes named her to its “30 Under 30” list for finance in 2019. JPMorgan shut down the site earlier this year.

The case is U.S. v. Javice, 23-cr-251, U.S. District Court, Southern District of New York (Manhattan).

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June 2, 2023
Chapter 3: Heads in the sand

In July 2011, Wells Fargo agreed to pay an $85 million fine to the Federal Reserve — a little-noticed enforcement action that served as a precursor to the fake-accounts scandal. Salespeople at a subsidiary called Wells Fargo Financial had allegedly inflated prospective borrowers’ incomes so that they would qualify for loans.

Specifically, the employees created and printed false W-2s, according to testimony by James Strother, who was Wells Fargo’s general counsel at the time of the settlement. Employees also put false information into a model that funneled applicants who should have qualified for prime mortgages into higher-cost subprime loans.

“So there were two sets of conduct there that were dishonest and wrong,” Strother testified. “And we ended up terminating a bunch of people.” The Fed concluded that the cheating was motivated by employees’ desire to meet sales performance standards, qualify for incentive pay and avoid losing their jobs.

Inside Wells Fargo’s headquarters at 420 Montgomery Street in San Francisco were the 12th-floor offices of CEO John Stumpf, retail banking head Carrie Tolstedt, wholesale banking head Tim Sloan, Chief Administrative Officer Pat Callahan, Human Resources Director Hope Hardison and Chief Risk Officer Mike Loughlin.

In the aftermath of the settlement with the Fed, Wells Fargo formed a new committee — composed of high-level executives — to address employee misconduct. The Team Member Misconduct Executive Committee was to meet semiannually. Its seven members shared responsibility for the management of employee misconduct and internal fraud.

They included Strother; Pat Callahan, the chief administrative officer; Hope Hardison, the human resources director; David Julian, the chief auditor; Mike Loughlin, the chief risk officer; and Deputy General Counsel Christine Meuers. The committee’s chair was Michael Bacon, the bank’s chief security officer, who saw an opportunity finally to bring high-level attention to the sales integrity problem.

“We put this committee together to comply with the consent order,” Bacon said in an interview. “These are the individuals that can make a change.”

Bacon used numbers in an effort to persuade the committee members to take more forceful action. He presented data on the number of sales integrity cases, the types of cases, the regional distribution of the cases, the number of employees fired, the number of instances of confirmed fraud, and more.

One problem with the data — and Bacon was aware of this shortcoming at the time — was that the corporate investigations unit could only count the cases that came to its attention. “I made it clear that it was the tip of the iceberg, because we’re so reactive as a company,” Bacon said in an interview.

The cases that did get investigated often grew out of consumer complaints or calls by employees to the bank’s ethics hotline. “I had even made the comment in several meetings that to me it was a sad statement to say that we’re sitting back for an employee to tell us something’s wrong,” Bacon said. “Or we’re waiting for a customer to tell us something’s wrong, when we have all of the industry-leading information technology.”

Bacon had been advocating for detection measures to find sales abuses that didn’t get reported, but he was repeatedly rebuffed. For instance, he wanted the bank’s retail unit to run a report that could help identify employees who had set up accounts in the names of friends, relatives or fictitious individuals, using the same address. “Not too difficult. To my knowledge, that report was never run,” Bacon said in a 2018 deposition.

In 2013, Bacon believed that the sales integrity problem was getting worse, and he saw the Team Member Misconduct Executive Committee as the ideal venue to raise the issue to the top echelon of leadership at the bank.

In late August, Bacon gathered with other committee members in the executive conference room on the 12th floor at Wells Fargo’s San Francisco headquarters. He presented data, but he also spent time educating his colleagues about the motives of employees who cheated. This time, Bacon didn’t get pushback.

“We talked about it. They all nodded their head. They all, I mean, got it. There was no ‘I don’t understand,’ ” he recalled. “They all knew it’s a problem. They knew it’s gotten worse.”

Loughlin shared an anecdote that demonstrated his understanding. The chief risk officer was an approachable executive who, like numerous other members of the bank’s operating committee, had an office on the 12th floor of the headquarters building. He had joined Wells Fargo in 1986 and been the risk chief for five years.

During this meeting, Loughlin said that his wife wouldn’t even go to a local branch anymore because the staffers made such aggressive sales pitches, Bacon recounted in an interview. It was not the first time that Loughlin had raised concerns about his wife’s negative experiences with the bank.

Earlier in 2013, a Wells Fargo colleague recalled Bacon recapping a similar story from Loughlin. “He mentioned that on a recent call, Mike Loughlin mentioned his wife went into a store to do a transaction and came out with 5 products,” the colleague wrote in an email.

In a Jan. 3, 2013 email, a colleague of Chief Security Officer Michael Bacon recapped a meeting in which Bacon spoke about Chief Risk Officer Mike Loughlin sharing an anecdote involving sales pressure that Loughlin’s wife experienced at a Wells Fargo branch.

Loughlin had also told retail banking chief Carrie Tolstedt that his wife received two unauthorized debit cards, according to court papers filed by the government. Tolstedt’s response was to tell Loughlin to stop telling that story, since it reflected poorly on Wells Fargo’s retail banking unit, according to the court filings.

During the same Aug. 26, 2013, meeting of the Team Member Misconduct Executive Committee, Bacon proposed that Wells Fargo start doing monitoring of its own executives’ accounts for signs of irregularities. Other banks were already doing the same thing, he later testified. It would have required adding just one full-time-equivalent employee, according to Bacon.

But Callahan, the bank’s chief administrative officer, rejected the idea, Bacon said. “And she stated verbatim: ‘We’re not going to approve it. We’ve got too many investigations and we’re terminating too many team members,’ ” he testified.

Before the meeting wrapped up, members of the committee agreed that someone needed to discuss the sales integrity situation with Tolstedt, according to Bacon. Callahan volunteered to do so, he said.

As Bacon left the conference room, he felt a sense of accomplishment. He had escalated the problem to senior executives who were in position to take meaningful action. “I walked out of there with a V for victory,” he recalled. But over the next year, Bacon again became frustrated by the lack of change.

Loughlin, the former chief risk officer, testified that he did not recall attending the August 2013 meeting. His lawyers did not respond to requests for comment. Likewise, attorneys for several other onetime Wells executives who sat on the Team Member Misconduct Executive Committee either declined to comment or did not respond to requests for comment.

Chief Risk Officer Mike Loughlin was a member of both the Team Member Misconduct Executive Committee and the bank’s operating committee.

Hardison, the former HR director, also testified that she did not recall attending the August 2013 meeting. She declined to comment for this article, but a person familiar with her thinking, who spoke on condition of anonymity, said the data that Bacon presented did not die at the Team Member Misconduct Executive Committee.

In November 2021, Hardison testified at an administrative law hearing that it was not until 2015 that Wells Fargo executives began to understand that sales abuses were causing financial harm to consumers. “Customer harm, I think, significantly increased the urgency and focus of what we needed to do,” Hardison testified.

After Bacon left Wells Fargo in 2014, the Team Member Misconduct Executive Committee stopped meeting. The inactivity didn’t sit well with Loretta Sperle, who was then a manager in the unit that included the company’s corporate security and corporate investigations teams.

Although the Team Member Misconduct Committee was supposed to be replaced with an existing ethics oversight committee, the latter committee did not have as many members from the top echelon of the bank’s leadership, and employee misconduct was to become just one component of its jurisdiction, Sperle said in an interview.

There was also the fact that the Team Member Misconduct Executive Committee had been formed in response to the 2011 consent order, and it was effectively being disbanded without informing the Fed, according to Sperle.

She recalled telling senior bank executives, ‘You’ve got to talk to the Federal Reserve,’” arguing that Wells Fargo was not allowed to take this action without first informing its regulator.

When Wells eventually told the Fed about what had happened, Fed officials required Wells Fargo to write an explanation, Sperle recalled. “They weren’t happy, because the requirement of that consent order was, any changes you need to discuss with them,” she said. A Fed spokesperson declined to comment.

Looking back on what happened, Sperle sees the decision to suspend the committee as part of a pattern of indifference to regulatory requirements. She chalks it up to arrogance. The prevalent attitude, Sperle said, was: We can do what we want. We’ll resolve it later. We’re not going to let the regulators drive our business.

Read the other installments in this series:

Kevin Wack

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February 2, 2023