Hacked By XwoLfTn

Hacked By XwoLfTn – Tunisian Hacker

UPDATE 2.7.17 6pm – Well it looks like someone hacked my publishing platform and took down a story in the last 24 hours. Luckily I have a paper copy of the story and will be re-reporting the original story within the week.

Hacking a business site and trying to steal my assets (the reporting) is a federal crime. I have reported it to the FBI office in NYC and have a security company looking into the IP addresses that entered the site.

I’m asking readers for $300 in donations to help pay for a private server to host this site and extra firewall protection. The reporting that was hacked was about Barry Honig and his deal lawyer’s financial interest in a stock transfer company. I need your help to keep the reporting visible for everyone to read. You can donate via the Paypal button on the top right of the homepage. Thanks in advance for your support.

Investor Barry Honig Subject of SEC MGT Capital Subpoena

This story has been updated

Microcap investor Barry C. Honig is a lead subject of an SEC investigation for his role in trading and investing in shares of MGT Capital ($MGT). MGT Capital is trying to complete a reverse merger with famed tech entrepreneur John McAfee. I am reporting exclusive news today for Growth Capitalist on what’s inside the Securities and Exchange Commission subpoena MGT Capital announced was lobbed against them late last week.

News of the SEC formal demand for answers from the company delighted short sellers to the tune of a 40% drop in MGT’s stock. The company, currently run by CEO Robert Ladd, says it does not believe the SEC is targeting any of the company executives. But shareholders have expressed doubt this week given the lack of details the company was allowed to disclose about the regulatory investigation. On top that the NYSE, where MGT trades, announced it wouldn’t accept the new shares that are set to be issued in the reverse merger with John McAfee’s cyber security companies. The national stock exchange was kind of a jerk about it because they didn’t offer up a reason for the share issuance halt. Unfortunately, it’s a big clusterf–k of unknowns for the company and shareholders right now.

But one thing that my reporting makes very clear is the SEC wants to make sure Barry Honig isn’t’ doing anything shady (or out right illegal) with this company. According to insiders who saw the SEC subpoena, a large portion of the regulator’s questions are about Honig, his company GRQ Consultants, and people who invest with him. I can also confirm Honig has been calling SEC enforcement defense lawyers this week looking for representation. I first reported on Honig’s alleged illegal actions in my “Attorney Gregg Jaclin blew up his life and got busted for creating a shell factory scheme” story this Spring. The central theme of alleged bad behavior is Barry uses other people to run a company he is secretly controlling and indirectly pays stock pumpers to tout the company without disclosure.

You can see here in a DOJ plea deal made by one of Honig’s alleged puppet CEOs how Honig allegedly runs things behind the scene. This plea deal was first reported and unearthed by me in a story for Growth Capitalist in May.

The SEC has never been able to pin anything on Honig. We do see a FINRA action settled against him as a young trader in 2000 when he was working for a questionable PIPE financing firm called Ramius Capital (or Ramius Securities). On June 14, 2000 FINRA said Honig had acted as an affiliate trading with others and hid it by running the trade through two people instead of one.

Barry Charles Honig (CRD #2362713, Registered Representative, New York, New York) submitted a Letter of Acceptance, Waiver, and Consent in which he was fined $25,000 and suspended from association with any NASD member in any capacity for 10 business days. Without admitting or denying the allegations, Honig consented to the described sanctions and to the entry of findings that he sought to inappropriately coordinate a trade report to ACT with another market participant as two separate trades instead of one.

Honig has a SEC deal lawyer, Harvey Kesner at www.srff.com , who apparently has been able to keep the SEC at bay in tons of questionable pump and dump deals Honig invested in. I know from interviewing MGT’s executives and reviewing Honig’s financing transactions that he wasn’t a control person at MGT. CEO Rob Ladd, who used to run a hedge fund, put blockers in Barry’s finance deal that don’t allow him to own a certain percent of the company. What we don’t know is whether Barry teamed up with his favorite investing partner Michael Brauser and acted as an affiliate in trading MGT stock, which blew up to a 700% gain when news of a John McAfee merger was announced in May. Affiliate trading without disclosure is a big SEC no-no, which I explain my story today at www.growthcapitlist.com. Honig through his attorney did not return a request for comment.

For now it’s a wait and see as MGT scrambles to get the SEC to clarify to stock exchanges that the reverse merger deal is clean. And market participants sit on the side line to see if the SEC can get the goods to finally charge Barry Honig.

Clarification 9.23.16: Barry Honig is pulling out the big legal guns apparently worried about anyone reporting on what’s inside that SEC subpoena. As of 5:30pm I was contacted by a California attorney, Charles Harder (who repped Hulk Hogan), for Honig demanding to have the story taken down and to write an apology. I refused and stand by the sourcing in this story. I have spoken with people who have seen the subpoena again and clarified a sentence in the story that relates to a large portion of the SEC’s questions are centered on Barry Honig, his company and people he invest with. The original sentence said “90% of the SEC questions are about Barry Honig.” Additionally, Honig had two days to respond to questions about the subpoena before the story ran and refused to return a call and email for comment.

Update 10.7.16: One of the sentences in this story that Barry Honig has denied through his attorney Charles Harder is that he invest with Michael Brauser. Harder wrote in item #9 in his demand letter they sent me to get the story taken down:
“Implication that Mr. Honig “teamed up with his favorite investing partner Michael Brauser”. False; the two have not teamed up.

I’d like to take the chance to remind readers of this 2012-2013 litigation against Barry Honig, Michael Brauser, and the Brauser Honig Frost Group for their role in Biozone Pharmaceuticals, Inc. It was filed by the company’s former founder Daniel Fisher. This is from Fisher’s amended complaint filed in Northern California District Court on 11.22.12 . Case number 3:12-cv-03716-WHA

“In January 2011, Plaintiff Fisher met with a group of investors, the Defendant representing
itself as Brauser Honig Frost Group (“BHFG”). Over the course of the following six months, this
group of investors misled Plaintiff Fisher through an investment scheme designed to divest
Plaintiff of all of the economic rights and goodwill he had built through his company over the
course of the previous 22 years.”

After Fisher beat their motion to dismiss and the case moved into discovery we see the case was settled with the defendants paying Daniel Fisher half a million dollars.

And that’s just one reason why I stand behind my reporting, opinion, and sourcing in this or any story of mine on Barry Honig!

UPDATE 11.4.16 : I have filed a letter to the federal judge in Honig’s lawsuit against me that you can read here. Honig used a process server who lied in an affidavit that he served me. I have video to prove he is lying. Additional, I informed the judge Honig asked MGT Capital CEO Rob Ladd to call me and set up a private ‘off books’ meeting. A move that is pretty much a no-no legal tactic given he sued me. His lawyers are supposed to be the ones to contact me. I obviously said no to the meeting and told Rob Ladd if Mr. Honig wants to speak to me and comment on any of my reporting he can call me through his attorneys – he has enough of them. This secret meeting tactic is something I have learned he has used in other litigation…it feels like the purpose is to try and figure out if I am going to give up names of my story sourcing.

I still need a pro bono lawyer to go up against Hulk Hogan’s attorney Charles Harder. Honig apparently tried to hire Harder (an expensive lawyer who has been in the news for his anti-journalism legal work) to scare me into stoping reporting and it didn’t work. If you are interested in this easy to win suit please email me at teribuhl@gmail.com. I’ve been told NY laws make it favorable to sue back for attorney fees in NY court and this is an easy case to win given my sourcing and the fact a lot of what I wrote here is opinion. Donations are also helpfully now in case I have to defend my self pro se.

UPDATE 1-10-17: I’ve secured a top first amendment lawyer to represent me pro-bono. Chuck Tobin of Holland & Knight filed last week in Manhattan Federal Court to be lead counsel. We have till February 10th to file a response to Honig’s claim. I would like to thank Holland & Knight for stepping up and defending the rights of a freelance journalist.

UPDATE 2-21-17:Barry Honig voluntarily withdrew his lawsuit against me on February 8th. This was two days before my attorneys were due to file our motion to dismiss and we were given no warning or notice of why the suit was being dropped. I thought the litigation was over but now it looks like Honig and his attorney Charles Harder were just making a move to judge shop because today I got a repeat retraction letter asking again to take down my reporting and apologize. It’s my expectation that team Honig will just refile their suit in another court or another state which means the bullying of this journalist for reporting on a matter of public concern continues.

Microcap Attorney Jaclin fights SEC fraud case by Blaming Everyone Else

A veteran microcap deal lawyer is trying to blame the young lawyers who worked for him for his alleged role in a Shell Factory scheme that spanned nearly a decade. I am reporting for Growth Capitalist today on the continued saga of the once well-respected attorney, Gregg Evan Jaclin, who plans to the fight the SEC enforcement action brought down on him in May. Jaclin has since been removed from his New Jersey-based law firm Szaferman, Lakind, Blumstein & Blader and some of the lead associates under his wing are now employed at a competitive New Jersey firm called Lucosky Brookman LLP.

According to the SEC, Jaclin worked with a L.A. based man, Imran Husain, to take fake start-up companies public so that they could later be sold for a ransom fee to real microcap companies that wanted to avoid the high cost of going public by doing what’s called a reverse merger. When in reality what was being filed with the SEC were shell companies (not real businesses) and Jaclin is now in trouble because he issued what the SEC considers ‘false opinion’ letters vouching that these deals were legit. This was done over and over from 2006 to at least 2013.

Jaclin’s motion to dismiss the SEC case is the first time we are hearing from the now disgraced lawyer who ironically admits in court documents that the companies in the SEC complaint were in fact shell companies. This is important because Jaclin signed documents that told the SEC when he first began filing the companies legal documents to be approved to go public that they were legitimate businesses with real CEOs and a diverse investor base. Having a diverse investor base is one of the parameters that allows stock in reverse merger deals to be unrestricted to trade right away. With the shell companies Jaclin allegedly co-created only a few people actually owned the stock and the public didn’t know this. This is bad because it allows the stock to be easily manipulated for pump and dumps which is exactly what happen with one of the shells in a company called YESdtc/PR Complete. The CEO of YESdtc plead guilty to criminal charges related to stock manipulation in 2014.

To top off the odd legal logic in his response Jaclin also says he didn’t really supervise his associates who drafted the SEC filing so of course the SEC can’t charge him. I call utter hogwash on the notion that the head of a law firm’s capital markets practice didn’t supervise the lawyers under him. And lets not forget that I was first to report on a secret plea deal his co-conspirator, Husain, made with the Dept. of Justice back in 2014 that says Jaclin was wide-eyed involved in the scheme. So much so that he helped Husain find a former SEC enforcement lawyer, Mark Hunter, to represent one of the puppet CEOs when the SEC started to investigate who was actually running these companies. And according to Husain coached him on how to lie to the SEC and destroy emails.

Husain has since plead guilty to one count of criminal conspiracy for basically interfering with an SEC investigation. Attorney Mark Hunter of NYC-based Hunter Taubman Fisher & Li has now agreed to be co-counsel in defending Jaclin in the SEC case.

During my reporting on this story I heard some industry players say Jaclin had been given office space in his former protegé’s law firm Lucosky Brookman LLP and that there could be fee-sharing going on. Joe Lucosky and Seth Brookman, the firm’s founders, said that’s absolutely not true. I was able to find Jaclin’s new office phone number through a person that was answering phones in Joe Lucosky’s New Jersey office though. A GPS search shows the new office number, 609-245-0732, is somewhere near the Princeton NJ area. I also learned after the SEC case was announced Jaclin, who hasn’t lost his law license, is still taking meetings with players in the microcap space and apparently trying to still practice emerging growth companies. It’s not clear what clients stuck with him but we did confirm a recent equity crowdfunding deal that was all set to go public on the OTC Markets, BeautyKind, had to not only fire Jaclin as their SEC lawyer but also pulled the whole deal while it was closing. I reported for Growth Capitalist BeautyKind has since said in SEC filings they hope to redo the deal and list on the NASDAQ this time.

We’ll be watching to see if Jaclin backs down and settles with the SEC or if the DOJ brings criminal charges against him like they did his co-conspirator.

*The names of the former Jaclin associates hired by Lucosky Brookman LLP are Steven Lipstein and Jason Ye.

Plainfield Asset Mgt Investors Insulted by Ex- Hedgie Executive’s Cheap Cash Offer

A former top dog portfolio manager at hedge fund Plainfield Asset Management, Marc Sole, is using the funds of his new hedge fund to try and buy out remaining investors in the now defunct Plainfield for a discount. According to offer documents seen by this reporter Sole, who now works for $4 billion Hudson Bay Capital, offered investors in four liquidating Plainfield funds 52 cents on the dollar. The problem is investors say they never received a transparent valuation from Plainfield, or the liquidator PwC Cayman, of the remaining amount of their interest in the funds.

Plainfield made international headline news in 2008 for gating their $5 billion hedge fund and locking investors from cashing out. The fund founded by Max Holmes, who now teaches at NYU’s Stern school of business, was investigated by the SEC for inflating investors assets to receive excessive fees. The SEC cleared the fund of its investigation in June 2012, according to a letter from the SEC, but Holmes was extremely slow in winding down the fund. Plainfield 2008 Liquidating Ltd. and Plainfield 2009 Liquidating Ltd. were put into voluntary liquidation in the Cayman Islands on December 31st 2013 according to public filings at gazettes.gov.ky According to investors, the portion of assets in these funds is only a sub/residual piece of what Plainfield had originally invested in.

Plainfield was also investigated by the Manhattan D.A. for its loan to own practices with small cap companies but was never charged by the D.A. for wrong doing.

Sole started with Hudson Bay in 2011, he was one of Max Holmes right hand guys helping pick investments for the failed fund. The Hudson Bay Absolute Return Credit Opportunities Fund made the offer to Plainfield investors, who are mostly institutional money, on December 16th 2014. Investors were given only 30 days to decide if they want to take the deal. Ian Stokoe and David Walker are running the Plainfield liquidation at PwC Cayman.

Sole chose to enlist the help of Plainfield’s former General Counsel Thomas X. Fritsch who is now an attorney for white-shoe Wall St. law firm Boies, Schiller & Flexner LLP. Fritsch is known for his dirty tactics defending Plainfield after the media was questioning the ethics of the hedge fund leadership. In 2011 I published a story showing Max Holmes caught on camera encouraging his staff how to avoid possibly incriminating emails by cc’ing Fritsch on the communication to claim attorney client privilege.

Unlike investors, Sole and Fritsch who worked as senior executives at Plainfield through its hype and downfall should have some sense of what assets are being liquidating and judge what value they could fetch on the open market.

One institutional investor who received the Hudson Bay offer told this reporter in an email, “Needless to say as an LP I find this offer in extremely poor taste and offensive. Are Sole and Fritsch that desperate to make a buck that the only way they can do it is to use inside info to screw over LPs? Shameful.”

Fritsch and Sole did not return a request for comment at press time.
The same Plainfield investor said, “We don’t have any visibility/transparency from Plainfield to ascertain current value. Our firm wrote off significant amounts in prior years. This is a stub/residual piece. We didn’t even dignify the offer [from Hudson Bay] with a response.”

It’s unclear how many Plainfield investors took the Hudson Bay offer which expired on January 15th 2015.

Plainfield’s website says, “At the end of May 2012, Plainfield substantially completed the liquidation of the funds which it managed and deregistered, in good standing, from the S.E.C.” Legal filings in the Cayman’s obviously show there is more liquidation to be done. Why Marc Sole is now offering investors some discounted cash for the fund’s remaining investments is unclear.

Hudson Bay Offer Docs Plainfield 2008 Lidquidating LTD by Teri Buhl

Social Rejection?: Hedgie Steve Cohen Wants Out of East Hampton

The world’s most infamous trader wants to get out of East Hampton, NY. Yesterday I reported for the New York Observer that Stevie Cohen, of SAC Capital, is trying to broker a private deal to sell a $60 million ocean front home he bought less than a year ago. His reasoning, according to a person on the deal, is East Hampton is ‘too Jewish’ and he has instructed people to start looking for another home in other Hampton enclaves.

This one real estate transaction has fueled a social media debate about what he’s really doing. Having lived and worked among Cohen-ites and his SAC Captial traders for the last decade out in Connecticut’s gold coast I don’t think his comment is a signal of anything anti-Jewish. Instead I believe it shows his social network could be failing since the hedge fund he founded plead guilty to supporting a culture of massive inside trading.

Cohen paid the highest fees to broker dealers who moved his trades for over a decade but according to people who worked with him, starting from his early days a Gruntal & Co, they hated him because of the way he did business. I’ve been told stories of dealers at Lehman leaking other funds trade volume to Cohen and Cohen even funding smaller hedge funds to use them to create liquidity when he wanted to short a stock. The years of alleged cheating to beat the markets has left sour grapes in mouth of many on Wall Street. And now that he’s shutting down his large hedge fund his volume of fee paying to The Street will shrink. This could mean people aren’t as motivated to play friendly with the Cohens in their social time.

Stevie Cohen Family photo

Before we ran the story about why he wants to sell his East Hampton home I had multiple conversations with Cohen’s outside pressman (aka his block and tackle Flack) Jonathan Gashalter about what was going to be reported and he expressed anger at the idea we’d print the ‘too Jewish’ comment. He also would not go on the record to say neither house is up for sale before he went to print. No one knows what’s really in this hedgie’s mind when he said it and I’m sure Cohen never thought it would get repeated. Stevie Cohen has gotten stories held or changed for years through Gashalter but as the market ( and my peers in the media) are apparently waking up to how he operates it was refreshing to see the New York Observer stand by the news report and my reporting.

The news on anything Cohen, or what his family, does isn’t going to stop. Nick Verbitsky, director of Frontline’s new blockbuster film ‘To Catch a Trader’, told me the FBI even admitted that have three stock trades they are still investigating that could lead to criminal charges against Cohen. It’s my understanding one of them has a whistleblower willing to flip on Cohen; which is something we have yet to see in the DOJ’s seven plus years of trying to nail Cohen for inside trading.

Even if the DOJ is never able to get a criminal charge against Stevie, how the markets and his social network respond to what ‘they think’ he’s done is much more of a barometer for how The Street will or won’t police itself.

Biotech Firm NanoVircidies Sued For Executives Abuse of Assets

A Biotech company whose stock is soaring this year has caught the eye of short sellers after recent SEC filings showed possible self-dealings with company assets by its founders. I reported for Growth Capitalist last week, NanoViricides ($NNVC), was sued by a group of early angel investors in a shareholder derivative suit, filed in Colorado federal court, claiming company executives Anil Diwan and Eugene Seymour are abusing company assets and have breached their fiduciary duties. Yet last month the budding development company was still able to raise over $10 million through Midtown Partners with a private after market stock sale called a registered direct offering.

The RDO was offered to institutional investors at a discount of 26% percent. This means they can buy the stock after the close at the discounted price and then sell it into the market the next day at a profit. It creates trading volume in the stock but not necessarily long term value for main street investors because the hedge funds who buy the deal usually just dump the stock. Midtown Partners has done multiple RDO’s for NanoViricides raising over $30 million before fees in the last three years. But the recent offering apparently needed some help getting sold because Midtown, the placement agent, also had to offer 5 year stock warrants at $5.25.

When I asked Midtown Partners, Prakash Mandgi, about the pricing on the deal he tried to spin the terms explaining it was done at “a 20% discount to the 20 day volume weighted average price at closing and the warrants were issued at 120% of the 20 day vwap at closing”. Now here is why that is a suspect answer.

Instead of giving me the discount from the market price at the close of the day of the deal, he gave me the discount from the 20 day volume weighted average price. But, and this is important, traders do not compute NAV at 20 day VWAP prices, they mark to the closing market price. He was comparing apples to oranges.

So the units for $NNVC’s recent capital raise were priced at a deep discount (no matter how you spin it). The deep discount stock was not enough, however, and the deal also included warrants. The strike price of the warrants was at a premium to the “20 day VWAP”. Now, in the same way that the discount on the stock looks smaller if you use “20 day VWAP” instead of market price, the premium of the warrants looks greater when you use the “20 day VWAP”.

Here is an example of how this spin pricing works:

$NNVC Market price: 4.76
20 day VWAP price: 4.25
Deal/RDO Price: 3.50

So in this scenario the discount to the market price is 26.4% 1-(3.5/4.76)
The discount to the 20 Day VWAP price is 17.6% 1-(3.5/4.25)

To spin the deal as not being as bad, the bucketshop bankers like to talk about the discount from the VWAP price. Watch out if you hear your small cap stock broker or banker talk this way.

Now lets add the warrant pricing.

$NNVC Warrant Strike Price: $5.25
Market Price: 4.76
20 Day VWAP: 4.25

The strike price of the warrant computed using market price is 110% (5.25/4.76)
The strike price computed using VWAP price is 123% (5.25/4.25)

So using the VWAP price makes the warrants look less valuable. The lower the strike the more valuable the warrant. Bankers using VWAP pricing is a way to make the deal look less egregious than it really is.

Now NanoViricides CEO Eugene Seymour is fully aware of this magic math. Short sellers like Joe Spiegel of Dalek Capital Management, say they remember Seymour from a 90’s biotech stock that pumped up its share price but left long term investors in a dump. When Spiegel saw stock promoter, Patrick Cox, pumping the stock in 2010 he thought that signaled an opportunity to short it. One of the reasons listed in the investor lawsuit was that Cox had allegedly received inside information about a special biotech credit the company ‘might’ be able to get which would be worth millions of dollars. Cox allegedly published this info in his investor newsletter and the stock took a ride up. It also crashed latter when the info didn’t pan out. The suit also alleges there is a new stock promoter named ‘DrFeelGood’ who uses $NNVC stock message boards to rally interest in the stock with inside information. A look at the trading volume right before the biotech company files a press releases is something a regulator could be inspecting if they learn the stock promoters did not disclose they were getting paid to promote the stock or if they really did get inside info and traded against it.

NanoViricides hasn’t filed a response in Federal court yet to the investor claims and did not return a request for comment.

The medical technology they are working to build out, using plastic to attach to diseased cells and flush them through the blood stream, is possible but so far reads like a science project. Instead of news about the company completing medical trials investors keep hearing about their recent listing on the NYSE Mkt (the old AMEX or Scamex as some traders called it).

The details of how co-founder Anil Diwan is using $NVCC’s stock and balance sheet for side deals that benefit him personally can be found in my Growth Capitalist story.

Mastercard Hates Bitcoins

The new boss in charge of giving out a MasterCard licenses has no intention of allowing the brand or any bank that does private label cards to use Bitcoins. In fact, he nearly bragged to me about killing the BitInstant deal with a U.S. bank for the first planned $BTC card this year.

Stephen Ruch, the MasterCard executive, is just a year into his job with the company, and while he monitors the Bitcoin space he told me he is still under the impression it’s one big Ponzi scheme. Even after meeting with this person socially multiple times, where I explained the mechanics of how digital currencies actually work, he still had a blind eye to its legitimacy. His biggest fear was it would ‘hurt the MasterCard’ brand.

RT’s most popular TV journalist, Max Keiser, weighed in on MasterCard’s fearful attitude telling me, “We can say without equivocation that firms like MasterCard, Visa and the TBTF banks like JPMorgan and Goldman hate the idea of ever having to compete for business again. They have grown comfortable in their corrupt world of writing laws for themselves without any regulatory oversight. They enjoy the exorbitant privilege of bilking the American economy with extortionary transaction rates. They are scared of Bitcoin. And they should be. It offers transparency, cost efficiency and anonymity.”

Now Ruch isn’t blind to helping MasterCard make every penny it possibly can but it appears it’s going to take the likes of someone like Jon Matonis to have a little sitdown to open this man’s mind. On October 18th Ruch sent me a link to a story on ‘Why Bitcoin will fail’ that his staff pulls together for him to monitor the Bitcoin space. I thanked him for the link and responded I was a little behind on $BTC news. Ruch then said responded he thought a lot of people involved in the Bitcoin business were not on the up and up.

I thought WOW he is really afraid of this thing. Whenever I hear anyone think the digital currency is a Ponzi scheme it makes me realize they are just not educated on the subject or they are close minded to the viability of a currency outside the paper money sphere. Now Ruch is an intelligent person but this is also a man who told me he thinks Fox News in the morning is a credible source of information.

Peter Vessenes of CoinLab has often drilled into me that $BTC has to get accessible to scale, to get in the hands of mass main street, and draw the interest of institutional money. But if we’ve got a major road block, at one of the two most powerful institutions who could open the floodgates for Bitcoin accessibility with a debit-like BTC card, then the digital currency space could have problem.

Well at least there is always Visa right?

Editor’s Note: I met Ruch socially and not in an official interview but he knew he was speaking with a journalist who has written about Bitcoins. This is just one of those factual events I felt was important to publish and didn’t think getting MasterCard’s permission to go on the record was needed. The Stamford, Conn. resident, Ruch, official title is SVP/Global Head of Growth Innovation & Planning- Franchise Development

SunTrust Pays a Billion for cheating Fannie & Freddie on Mortgage Loans

This week we learned SunTrust had to pay around a billion dollars to settle with the government over the mortgage fraud they committed against the GSEs. News of this investigation detailing how the bank committed the fraud was first reported by me at finance trade publication Growth Capitalist in November 2012. This means there is a high probability SunTrust knew for over a year they would have to pay a large fine for these actions but instead they kept telling shareholders their legacy mortgage problems with Fannie Mae and Freddie Mac were behind them.

Original news report Nov 2012 for Growth Capitalist:

November 5, 2012 by Teri Buhl

SunTrust under SEC Investigation

Atlanta-based SunTrust Banks (STI) is under investigation by regulators for alleged mortgage fraud against Fannie Mae. Whistleblowers who worked in SunTrust’s residential mortgage underwriting group filed a whistleblower suit with the Securities and Exchange Commission this spring. After the Washington, D.C. office of the SEC received the complaint a director of the SEC’s Atlanta office and a forensic accountant were assigned to begin an immediate investigation in the bank. Three people involved in the case told Growth Capital Investor interviews with SunTrust employees who worked in the bank’s mortgage unit started in May, along with an inspection of the methods SunTrust used to qualify prime loans sold to Fannie Mae.

SunTrust saw its stock price fall off a cliff in the financial crisis, and subsequently participated in the federal TARP program aimed at shoring up distressed banks. Investors who held the stock valued at $73 a share in October 2007 watched their investment wiped out when it fell to $7 by February 2009. Distressed investors who bought the stock in the high-teens at the end of 2011 have now witnessed a near 50% rise in the stock as the bank paid off its TARP funds and increased mortgage lending. Analysts started to boast buy ratings on the stock this year and Jefferies currently has a $32 price target on SunTrust.

But as bank executives have worked to clean up the troubled balance sheet created during its go-go lending years, 2005 to early 2008, the prior actions of its mortgage team could still place a dent in future profitability.

SunTrust financials show since 2005 they sold $233 billion of loans, with the bulk being bought by the GSEs (Fannie Mae and Freddie Mac). SunTrust built a special relationship with Fannie Mae who allowed them to have a custom underwriting system that connected to Fannie’s automated mortgage buying program. The Desktop Underwriter program, or DU, was designed to buy prime residential loans from banks like SunTrust who were heavy volume mortgage originators. The Federal Housing Finance Agency Office of Inspector General reported in an audit of Fannie’s lending standards that more 1,500 banks originated loans through the DU program in 2010, comprising 71% of all loans bought by the GSE. All SunTrust had to do was meet the right mix of income and personal asset qualifiers, enter them into Fannie’s DU system, and the loan was swiftly bought off the bank’s books, freeing up reserves for new loans. Fannie would then book these loans as ‘lender selected’ prime loans, even though there was little human inspection of the documents that qualified the borrower.

The SunTrust whistleblower complaint says bank executives then taught underwriters how to ‘trip the DU system’ to make it accept loans that were actually less than prime quality. All SunTrust had to do was make sure they were scored right and their custom DU Fannie Mae program even allowed them to re-enter borrower data multiple times until they got the right score. Internal documents from SunTrust management show how to avoid red flags or “beat the Fannie Mae DU system.” One whistleblower explains how they re-entered a borrower’s income ten times until they got the right acceptance score. Snapshots of these repeated DU data runs were turned over to the SEC in the whistleblower complaint along with internal memos that encourage underwriters to “get loans” into the DU systems.

“We knew we were making Alt-A loans but Fannie thought they we were selling them prime,” said one former SunTrust employee. “Then the bank would also book the loan as Prime because that’s what Fannie bought. This amounted to billions of Alt-A loans booked as Prime.”

Regulators are now looking at how SunTrust learned to beat Fannie’s underwriting system.

Bill Singer, a former regulatory attorney who reviewed the whistleblower claims, told Growth Capital Investor, “Given the allegations involving Fannie Mae’s auto-underwriting system, one truly has to wonder just what oversight and controls Fannie had in terms of the integrity of the data entered into its system, and, further, for the data entry interface itself. Beyond the necessary due diligence inherent in vetting the underwriting data, Fannie was also obligated, I would think, to make sure that its interface was not being gamed.”

The SEC is currently working with the mortgage task force, set up by the Obama administration, to investigate and prosecute individuals and financial institutions who contributed to criminal or civil violations that led to the financial crisis. The national watchdog includes prosecuting attorneys from the Department of Justice, state attorneys general, and securities enforcement attorneys.

“If it turns out that not only was fraudulent qualification data repeatedly submitted to Fannie but that the computerized interface was routinely over-ridden by laddering an applicant’s net worth, income, and assets in increasingly higher levels during a data-input session, the wrongdoing is no longer sourced solely from the originating bank but the finger must also be pointed at Fannie,” says Singer.

A third quarter earning presentation says the bank had $6.4 billion of mortgage repurchase requests – put-backs of under-performing or deficient mortgages by Fannie to the mortgage originator – with repurchase demand increasing 9% in Q2. Of that number only $1.4 billion have been recognized as a charge-off on SunTrust books.

In September SunTrust told investors the amount of money they reserve for repurchase requests was going to increase. The bank’s leadership claimed the increase was a direct result of conversations with Fannie Mae and Freddie Mac along with a review of full loan files, conversations that appear to have happened after the SEC began its investigation this May. When a bank adds to repurchase reserves it affects a bank’s capital levels, regulatory ratios and bottom line. SunTrust claims the 140% increase to repurchase reserves over the previous quarter should be the last significant increase to reserves.

Aleem Gillani, SunTrust CFO, told investors during its third quarter earnings call this month, “Our third quarter mortgage repurchase provision was $371 million. Consistent with last month’s announcement, we expect the resulting mortgage repurchase reserve to be sufficient to cover the estimated remaining losses from pre-2009 vintage loans sold to the GSEs.”

But analysts doubt the residential mortgage repurchases are over for SunTrust considering they also added another $400 million of repurchase requests in the third quarter. Repurchase requests are made on loans from 2005 to 2012. Ken Usdin, a Jefferies senior equity analyst, wrote on October 22 the downside scenario for SunTrust is, “mortgage repurchase losses are not done and litigation expense remains elevated.” SunTrust says of the third quarter repurchase demands, $78 million are from 2006, $213 million are 2007 vintage, and $68 million are 2008 vintage.

“If SunTrust was sued for not disclosing risk to its shareholders or civil mortgage fraud the SEC would ask for damages and three times those damages as a penalty,” says Singer.

SunTrust isn’t the only one regulators think gamed the GSE’s mortgage buying system. On October 25the Department of Justice filed a civil suit against Bank of America’s Countrywide unit for similar actions against the GSEs described in the SunTrust whistleblower suit. The DOJ claims the GSEs suffered at least $1 billion in losses from loans Countrywide sold that didn’t actually meet the standards they said they did.

In an email sent by one of the SunTrust whistleblowers after he read the Countrywide fraud suit, he said, “Two pages into reading this complaint it’s the same as ours just under a different name.”

A SunTrust spokesperson would not comment on the whistleblower claim or an SEC investigation. The SEC said it doesn’t comment on investigations. Former Fannie CEO, Daniel Mudd, is currently fighting a SEC securities suit that alleges the Fannie executive knew the bank was buying billions of less than prime loans in 2006 and 2007 but didn’t disclose this risk to shareholders.