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Archives for August 2011

24 Aug

Report Says: Bear Stearns Executives Sold Illegal RMBS and Covered It Up

Former back office employees from Bear Stearns are coming out of the woodwork to explain how Tom Marano’s mortgage group cheated their own clients out of billions. This week I reported at The Distressed Debt Report, EMC insiders say they were told to make up the classification for whole loans, packaged into mortgage securities, to get them switched out of the trust. By classifying the loans as ‘prepaid’ or having ‘subsequent recoveries’ Bear employees were able to fool the trustee into giving them back loans they were not able to legally service. A move New York Attorney General Eric Schneiderman is actively investigating now.

In my latest Distressed Debt Report story we hear from EMC staffers who describe how subprime loans, that would have been sold by Bear Stearns trader Jeff Verschleiser’s team, never had a proper servicing license in West Virginia when they were packaged into the residential mortgage backed security. In 2003 Bear/EMC put $100 million of subprime loans from West Virginia into a few RMBS transactions. EMC, the banks wholly owned mortgage servicing shop, would service all of Bear’s RMBS after they were sold.

A year latter, after senior executies realized the mishap, instead of Bear Stearns going out and informing their regulator or applying for a license, they orchestrated a cover up and even threaten EMC employees not to talk about it. Verschleiser was the head trader for the subprime desk reporting directly to Tom Marano. Marano was the head of mortgages for the bank. Verschleiser now works for Goldman Sachs and Marano is CEO of ResCap a division of Ally Bank.

Bill Singer, a former federal regulator attorney, reviewed the whistleblower testimony for us and had a few choice words on the potential legal problems Bear/EMC has as a result of the subprime loan swaps.

“First off, the inclusion of West VA loans into the RMBS might constitute a material misrepresentation in written offering documents and would certainly raise questions as to whether the deal was properly “Blue Skied” if EMC was not licensed to service the West VA loans,” says Singer who also writes about legal issues at his popular blog Broke and Broker.

Singer sees the failure to timely disclose this to the Trustee could constitute fraud to the extent it was a material omission and that the law imposes an ongoing obligation upon Bear to timely notify the Trustee of any subsequently discovered noncompliant facts.

“What constitute a troubling twist and potentially exacerbating factor, is that upon recognizing the lapse, EMC (and possibly in “conspiracy” with Bear and/or others), may have willfully enlisted the assistance of an individual who was deemed pliable and vulnerable to pressure, and such pressure may have been directly or indirectly exercised in a manner that was calculated to conceal or to further the non-disclosure of the West VA issue. Such conduct could raise questions as to whether it was calculated to “obstruct justice” or to impede/interfere with regulatory/criminal investigations,” says Singer.

We need to recall that a few years ago Bear Stearns Companies, LLC and its subsidiary, EMC Mortgage Corporation paid $28 million to settle Federal Trade Commission charges that alleged unlawful practices in servicing consumers’ home mortgage loans, particularly misconduct pertaining to misrepresentations about sums owed, undisclosed/unapproved fees, and collection abuses.

Singer point out, “As such, Bear/EMC are not particularly lovable companies these days and given Bear’s demise and the upcoming election, we should expect that politicians and aspiring prosecutors may find firms such as Bear/EMC to be particularly popular targets.”

J.P. Morgan who bought Bear Stearns and EMC in 2008 also assumed litigation risk. It’s JPM’s deep pockets that institutional investors in Bear’s RMBS are counting on paying out billions in damages for the actions of these dubious Bear executives. Stay tuned because the New York A.G. questions don’t appear to be ones JP Morgan can delay or ignore. There’s an old saying that you don’t get in trouble so much for what you are doing as for what you have done — and this is a perfect example. These things have a way of catching up with you over time.

Editor’s Note: You can buy a single copy of my story at The Distressed Debt Report. If you are an investor in any of Bear Stearns RMBS I think it’s worth it.

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22 Aug

Michael Metter’s Spongetech Partner Makes Plea Deal with Feds

It looks like Michael Metter’s Spongetech partner is fessing up to the Brooklyn Dept. of Justice. Last week Steven Moskowitz plead guilty to a criminal charge of securities fraud. Aaron Elstein, of Crain’s New York, first reported the news on Friday. It’s unclear what monetary fines or jail time Moskowitz is facing. Robert Nardoza, DOJ spokesman, told me this morning the case has been sealed and they wouldn’t comment further.

Metter and Moskowitz were both charged by the DOJ last May for, amoung other things, obstruction of justice because the feds say they made up fake customers while the SEC was investigating the accuracies of their public statements about the revenue and sales of Spongetech. People familiar with the investigation say Moskowitz was able to get out of the obstruction of justice charge, which faced a five year jail term, in return for a plea deal. Given the lack of transparency from the DOJ and no documents filed in PACER yet we’ll have to wait and see how much Moskowitz gave up on Metter.

At the time of Metter’s arrest last May his lawyer vigorously denied all charges touting they look forward to their day in court to clear the penny stock CEO’s name. Metter has since gotten rid of his lawyers at Greenberg Traurig and hired Maranda Fritz at Hinshaw & Culbertson. I left a voice mail for Fritz asking what Metter had to say about his partners’ guilty plea but his legal team did not return a call for comment. Moskowitz lawyer, Michael Bachner, did call me back but said he just can’t talk about the case right now.

The feds getting a guilty plea out of Moskowitz is significant because it eases the burden of proof for the SEC. But now the securities regulator still needs to prove how much money Metter and Moskowitz defrauded investors in order to recoup the millions they alledgedly siphoned off shareholders . People involved in the SEC’s case confirmed for me there has been no settlement with Moskowitz yet but I expect one to follow soon. Still finding the millions these two scored could be another challenge. Federal Court documents show the SEC is asking $52 million in disgorgement fines plus $2.5 million in interest from Metter and Moskowitz’s shell company, RM Enterprises, which allegedly funneled money out of Spongetech for the benefit of Metter and Moskowitz.

Metter, who is also CEO and a founding shareholder in BusinessTalkRadio.net (which owns the local Greenwich, CT radio station), is still reaping a bi-weekly salary of $9,375.92. The SEC was able to get the court to put restrictions on how he can spend that money and he’s not allowed to use the revenue or assets of the radio business anymore to benefit himself or Spongetech which filed bankruptcy. Metter’s right hand man in the radio biz, Jeff Weber, is in control of signing all legal documents for the business now.

Greenwich Time reported last month the Greenwich Station, WGCH, is up for sale and Weber hopes to get a $1.25 million for it. You see according to court documents filed by the SEC in June, Metter and Moskowtiz used the radio biz to hide funds from Spongetech. The SEC has attached $5 million of a $6 million loan between the radio biz and RM Enterprise / 5M Marketing along with Metter’s Greenwich home and his yacht called The Phoenix. (The SEC says RM and 5M are both shell companies related to Spongetech) At first I thought Metter was trying to sell the station to pay his high-priced legal defense but it looks more like it’s a move to pay off some of the upcoming SEC fines.

In February 2010, I wrote a front page story at Greenwich Time explaining how Metter could be forced to give up or sale his FCC radio license if he was charged for a penny stock scam. At the time Metter threw a fit that his local paper, which he advertises in for WGCH, would even think of printing the story. When he called for comment the night before we went to print he threaten to call the local Hearst publisher, Michelle McAbee, and uses his influence to get the story pulled. It ran any way the next day. At the time Jeff Weber, Metter’s BusinessTalkRadio.net V.P., had commented he knew nothing about the investigation into Metter’s Spongetech business and it had nothing to do with the radio station. What’s odd about that comment is Federal court documents now show in June 2009 BusinessTalkRadio.net (the parent llc is Blue Star Media Group) had received a $6 million loan from a SpongeTech affiliate company. So either Metter kept Weber in the dark or he wasn’t telling me the truth.

Correction 8-30-2011: The SEC has attached the $5 million they believe Metter funneled through BussinessTalkRadio.net from SpongeTech illegal profits to Metter’s personal assets. There is not a $5 million lein on the radio station. The radio station assets were frozen by the local Greenwich banks it had an account with because Metter was the account signatoree but some of those fund were unfrozen to pay salaries and basic bills.

You can buy a single copy of my full story on the SEC accusing Spongetech of using a PIPE deal with BTR to hide funds at The PIPEs Report: http://pipes.dealflow.com/reports/article.cfm?id=xgsthxktydiaesc

Editors Note: Aaron Elstein has done a good job digging into Metter’s past stockbroker fraud charges. He’s even scored a video of Metter making a hard sell to the poor Spongetech penny stock investors. Elstein deserves a shout out for staying on the SpongeTech case while our local paper, Greenwich Time, is ignoring one of the biggest stock scams by a well know player in the Greenwich community.

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17 Aug

Best Trade: Todd Edgar says Goodby to Bank Prop Trading

Barclays Capital has been forced to layoff off its star commodity trading team because of Dodd-Frank legislation reports Patrick Jenkins at the Financial Times last night. Edgar became somewhat of a celebrity trader after my team at Trader Monthly discovered his talents for reading global macro trends and parlaying them into a killer gold trade in 2007. A ballsy bet that earned him best commodity trade of the year.

Edgar caught the eye of BarCap in 2009 and they offered him and his team of four prop traders an alleged pay package of $50 million to break their contracts with JP Morgan and come join the UK Bank. JP Morgan got really pissy about the Brits stealing their talent and I always thought they leaked the news in 2009 on Team Edgar’s pay just to be dicks about the whole thing. Edgar, an Aussie native who lives between London and his surf shack in the Hamptons, has fulfilled his two year deal with Barcap and because of the U.S. regulatory ban on commercial banks and prop trading Barclays had to lay the team off.

Edgar, a former trader for hedge fund legend Paul Tudor Jones, will surely land on his feet though. The FT thinks he’ll be starting a hedge fund of his own but Edgar hasn’t confirmed that for us yet. (Personally I was hopping he’d quit making other people money off his trading ideas and start a surf camp.)

London’s Evening Standard appears to have miss-understood the situation and is incorrectly following the FT’s story with a lede that Edgar has bailed on the bank to start a hedge fund when in fact he’s been laid off. I can’t tell if the writer just likes to make stuff up when he can’t source a story on his own or is not familiar with how bank trading works but I find it irresponsible when news gets twisted like this. Even Business Insider has the facts wrong headlining Edgar single handily got $50 million from BarCap to leave JP Morgan two years ago, when we can all read the FT story and understand that payout wasn’t only for one year and it was divided by at least five people.

I can confirm the FT report is spot on but what I never understood is why the people of London were so upset Edgar’s stellar trading team got a paypack that is at least three times less then what they could have made trading gold and silver for a hedge fund. In 2009 BarCap couldn’t predict prop trading would be banned in its stateside operations so what I really want to know is how much profit Team Edgar has returned for the bank in the last two years. Heck in 2007 alone myself and Leah McGrath Goodman reported at Trader Monthly he’d made JP Morgan at least $100 million betting the right way on gold prices. Lesson here is we don’t know all the facts to determine if BarCap broke even on its return on investment ( or is red faced from wasting money to attract short term talent) but we can see Edgar knows how to trade himself in and out of all kinds of situations.

UPDATE 8-18-2011: There are a few inaccurate reports coming out on how many people are in Team Edgar. I can confirm there were 5 total who left JPM and one joined latter. That means 6 people would be spliting the $50 million paypack. What we don’t know is how that got divided. Unfortunatley, it looks like the re-write reporters over at Business Insider are having a hard time reading reports like this one from The Telegraph because they would have you think Team Edgar split the paypack between 11 people. On a positive note we are finally seeing more journalist figure out the real story here is that BarCap can’t afford prop trading. No commercial bank that wants access to the Fed’s discount window can because congress thinks they can’t handle risk management. So for now we see the big money, risk taking traders head back out to hedge fund life and the banks loose a potential big revenue stream.

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10 Aug

UPDATE: JP Morgan is afraid of the RMBS Fraud Suits

JP Morgan is showing signs of fear. Yesterday, I updated Keiser Report viewers on the dirty tricks the bank’s lawyers and former Bear Stearns mortgage traders are pulling in an atempt to stop the truth coming out in the Bear Stearns/EMC fraud suit. A story I first began reporting a year ago at The Atlantic has now led to a very active New York Attorney General investigation for possible violations of the Martin Act and witness tampering.


Click here to see the full interview it starts at minute 13.

Nick Verbitsky, documentary film maker and founder of BlueChip Films, received a call from the NY AG’s office last month requesting all unedited footage of former Bear/EMC anaylst turned whistleblowers. Verbitsky’s film about the failure of Bear Stearns and how some players of the media, CNBC, failed to deliver reliable news is about to begin showings at business schools around the country. It’s a must see and you can watch the trailer here.

UPDATE 8-20-11: My former employer, Hearst CT Newspapers, has finally figured out Verbitsky has made an important film and it’s newsworthy. It’s nice to see they still follow my reporting — even if it took a year for them to write a good review this week. The Hearst writter gets a little confused on who the important players are in this film. The background detail Roddy Boyd provides highlighting what Tom Marano’s team of Bear traders saw regrading real liquidity issues is much more important to the story than anything Andrew Ross Sorkin (who did very little reporting on Bear in 2008) has to offer. Nick’s big finds in this film are really the EMC and Moody’s whistleblowers and it’s their testimony of fraud and negligence that makes this a must see film.

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5 Aug

Wachovia Executives lies About Health of Stock Leads to half a Billion Payoff

Pension funds who bought faulty Wachovia preferred securities and bonds between mid-2006 to mid-2008 scored a big win today. The commercial bank, who was taken over by Wells Fargo when it failed in 2008, agreed to pay over half a billion for misleading institutional investors as to the health of their option ARM portfolio. The class action suit lead by Pennsylvania law firm Kessler Topaz scored a $590 million payout from Wachovia (paid for by Wells Fargo) and even got its auditor KPMG to pony up $37 million.

Orange County Employees’ Retirement System, Louisiana Sheriffs’ Pension fund and the Southeastern Pennsylvania Transportation Authority were the court appointed plaintiffs in the class action suit. Unfortunately since this was a settlement, former Wachovia bank executives, like CEO Robert Steel, didn’t admit wrong doing but the discovery tied to the section 11 (negligence part of the 1933 Securities act) charges the pension funds brought forward clearly scared the pants off these bankers. Considering the common shareholders just had their similar case against Wachovia thrown out, this reads like the institutional investors out lawyered the bank.

“We estimated actual losses to be proven at trial to be around $1.5bn -2bn. So we think a 25-40% out of court recovery like this is very successful,” said attorney David Kessler of Kessler Topaz.

Of course if the pension funds had paid attention to mortgage expert Mark Hanson’s warnings about Wachovia’s pick-a-pay book back in 2007 they might have not gotten themselves into this big of a loss in the first place. It was Hanson’s self made u-tube videos about the accounting games Wachovia and Wells Fargo were playing that made him a cult classic among hedge funds shorting these banks during the financial crisis. CNBC’s Herb Greenberg was one of the first pundits to publish his views in December 2007 after Hanson wrote “The Hybrid-term ARM and Pay-Option implosion are all happening simultaneously and are about to heat up drastically”.

This settlement also highlights that eventually if investors stick with their convictions, and not just write off assets the banks mislead them on, lawsuits can help them get some of their money back. I knew in September 2008, when I was first to publish a New York Post story calling Robert Steel a liar for the low loss numbers he was claiming on Jim Cramer’s Mad Money show, that it could be a silver bullet in forthcoming investor lawsuits. Steel had said on CNBC only $10 billion out of $500 billion were problematic loans but when the FDIC finally seized the bank a much high number came to light and proved my reporting was spot on.

While it’s good that mom and pop investors in pension funds are getting millions back I have to wonder if the feds will ever go after the mega millions Wachovia executives pocketed for themselves. Or ever figure out how blatantly they lied to public investors while pumping the health of their faulty stock. It sounds like stealing to me and doesn’t that type of behavior usually equal jail time? Since this is a civil settlement, not litigated in conjuction with a criminal case, there is no reason the Feds can’t still charge former Wachovia executives for lying to stockholders and go take a look at some of that sealed discovery the Kessler Topaz lawyers are sitting on. I’m sure there are plenty of damaging emails that we’d all like to see.

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4 Aug

Now Playing in New Canaan: Hairy Penis

Elm Street in New Canaan, CT has been pranked this morning. In a location packed daily with wealthy housewives and their well dress kids in tow, now sits a movie sign inviting people to come see films with names like ‘Hairy Penis’. (You know instead of Harry Potter)

It looks like some creative senior high school pranksters are responsible but will the N.C.P.D. now try to charge the culprits with disturbing the peace? I heard a father with two reading age boys ask the Fire Marshal to get a ladder and take down the offending words but of course it’s on private property so he can’t legally do it himself. If you’re part of the crew who gave the rest of us a great laugh today email me. I’d love to hear how you pulled it off and of course will keep your identity secret.

What happens when New Canaan Teens use a Magic Wand

UPDATE: By 11:45 am the letters were removed. Let’s hope it was the theater owner who ordered the sign changed and not the local cops interfering with private property. Of course residents know it’s not THAT kind of playhouse but maybe someone is trying to encourage the owner to show more indy films.

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