Frontline: The Untouchables – Exposes how Wall Streeters Commit Fraud but Escape Jail

UPDATE 1-23-13 5pm: The Washington Post is reporting the DOJ’s Lanny Breuer, who was highlighted in The Untouchables, is stepping down. Now reporters had heard he was on his way out for a bit so WAPO could be reporting old news but it sure makes the Frontline film and my reporting seem to have made quite a stink at the DOJ today. Is this a case were great investigative journalism actually went to work for the American people?

1-23-13: There is a live chat with The Untouchables film maker Martin Smith today. I’d ask him if he thinks DOJ’s Lanny Breuer should still have his job.

Original Text
Tom Marano and his team of bandits at Bears Stearns mortgage trading desk took Wall Street for a ride in the last decade. I first broke news about them stealing billions from their own clients, which included pension funds, in January 2011 for The Atlantic. Tonight you’ll see how widespread their action went in a Frontline documentary film called The Untouchables.

Emmy winning documentary film maker Martin Smith contacted me this summer about my reporting on the Bear Stearns traders and the saga it entailed for JP Morgan. A bank who is now facing a Civil fraud suit by the NY AG, has $140 billion in civil RMBS fraud suits against them, and has setteled with the SEC for the double dipping scheme that attorney Eric Haas at Paterson Belknap first figured out.

When I first came about this story in early 2010 Reuters and Fortune, who asked me to pitch them, passed on it because they said the topic was too complicated. But it took only 24 hours for Dan Indivilgo (who is now writing for Reuters BreakingViews) to figure out this was a blockbuster piece of reporting and as a business editor at The Atlantic he convinced them to buy it. I only made $150 selling the story to The Atlantic instead of the few thousand dollars I’d make if I had sold it to a trade publication behind a paywall but I knew this story just had to printed online for the world to read. And they did.

Hundreds of Wall Streeters started to email or call me after they read it. People who might have never read my byline at the New York Post or Hearst Newspapers were calling to see what else I had on the outright fraud these financial titans committed. Their big takeaway was “I knew those Bear traders were always making too much money but I could not figure out how.” And the civil securities lawyers who called just wanted to play catch up to the sordid details the lawyers at Patterson Belknap had already figured out for their clients the mortgage bond insurers. Even the FHFA had an analyst call me to find out behind the scenes info and then copied Patersons Belknap’s suit when then filed for around $22 billion in civil fraud against JP Morgan.

You can see whistleblowers on camera tonight telling details I first reported about the level of due diligence Bear (and other banks) hired to mask the level of out right fraudulent loans the traders were aware of before they even put them into the mortgage securities they sold to the public.

Yet still we saw the NY AG only sue for civil fraud and not criminal fraud. Filmmaker Martin Smith got people to admit the DOJ was afraid if they actually charged these Wall Street bad boys with criminal fraud it would rock the financial system. An absurd notion for the DOJ to even consider. They are not bank regulators or butt boys for the banks like Tim Geithner. They are suppose to go after crime regardless of how it effects an industry. I consider this fraud against the American people– the DOJ didn’t do their job when the evidence was handed to them by reporters like me and Nick Verbitsky and sharp lawyers like the team at Patterson Belkanp.

But the real want-to-make-me-throw-up moment in the film came when I saw the DOJ’s Lanny Breurer tell Martin Smith he didn’t think journalist had found any whistleblowers who the DOJ hadn’t already interviewed. That’s was either an out right lie or he’s really in denial because as Nick Verbitsky said in the film he knows his unnamed whistleblowers were never contacted by the DOJ even though the lawyers at Paterson Belknap eventually got some them on the record for their civil suit against Bear Stearns/ JP Morgan. I second that…the DOJ has flat out not tried to reach a single whistleblower in my series of reporting on Bear Stearns/ EMC / JP Morgan.

The failure of the DOJ is the real crime we should never forget.

Editors Note:This news publication is funded by the generous donations of my readers. If you like what you saw in the Frontline Film or news report you see on this site please donate. You can do so via Paypal at teribuhl@gmail.com. Micro donations of $25 plus go a long way when readers like you contribute.

Dynamic Journalism

VERBITSKY AND BUHL

Me and doc film maker Nick Verbitsky are immortalized into art for our reporting on the Bear Stearns / JP Morgan double dipping scheme and RMBS investor fraud that has led to over $100bn in lawsuits and a NYAG securities fraud suit against JPM. Verbitsky is on biz TV show The Keiser Report today talking about main street’s frustration with the lack of criminal charges against bankers like the Bear Stearns team led by Tom Marano.

More Bear Stearns Executives get off without Paying Millions in Shareholder Settlement Cost

Bear Stearns lawyers at Paul Weiss are slapping them self on the back today after stockholders and pension funds who sued Bear executives for misleading them about the health of the company months before it failed agreed to a cash settlement of only $275 million on Wednesday. The suit’s settlement lead by Michigan’s retirement fund, who lost $61 million in the collapse of Bear’s stock in March 2008, is being hailed as the 5th largest class action suit by bank shareholders. But considering the evidence that has come out in the last for years regarding what Bear executives like Tom Marano and Alan Schwartz knew about the health of the firm in late 07 early 08 while they were pushing shareholders to buy more stock this settlement number and the terms tied to it is a joke!

Beside the fact that the Bear executives named in the suit didn’t have to admit guilt neither do they have to take a hit to their fat wallets. According to a person familiar to the settlement the Directors and Officers Insurance Bear held is picking up the whole damn tab. But even if JP Morgan, Bear’s successor owner, wanted to encourage the insurance company to pass on any settlement payment responsiblity to the likes of Tom Marano, Alan Schwartz, Jimmy Cayne, Sam Molinaro, & Ace Greenberg they can’t.

“At the time of the Bear Stearns merger with JP Morgan the Bear bylaws were changed so that the Bear executives have indemnification rights from JP Morgan,” says securities attorney Brett Sherman.

Some of the most damaging evidence about who at Bear knew what and when came out in the Monoline suits against Bear/JPM, led by attorneys at PBWT, for rmbs fraud and the FCIC report.

“It’s the scam that never ended” wrote Sherman on Wall St. Law Blog. “As late as October 2007, Bear mortgage chief Tom Marano bragged at the firm’s investor day that Bear had a ‘mortgage franchise for all seasons’. Remember that, mostly due to mortgages, Bear Stearns took a write-down of nearly $2 billion about a month later, and in December 2007, the company announced an $850 million loss for the quarter.”

An amended complaint filed by monoline Assured Guaranty against Bear/JPM last year showed Marano was shorting the stock of some institutional investors buying the very Bear issued RMBS because he knew the mortgage securities market was tanking and they’d be stuck with billions of worthless securities. Meanwhile lawsuits outline Marano was telling institutional investors that the Bear traders were invested in these securities also when in fact they were selling out of them.

In the case of Bear’s CEO Alan Schwartz the legal argument isn’t really about what he knew or didn’t know. The point is he had an obligation to know and instead went on TV (CNBC) to do damage control. Bear’s COO of fixed income describes it best in William Cohen’s book House of Cards – Paul Friedman on liquidity (remember that Schwartz was on CNBC wed):

“I had spent the first part of the week, Monday, Tuesday, open till Wednesday noon, almost every waking minute, talking to customers and lenders… I could take them through our whole liquidity profile.

But by Wednesday, I couldn’t do it with a straight face and feel I wasn’t breaking the law, and so I had a series of conference calls set up for Wednesday afternoon and I just canceled them all.”

Emails found in discovery have shown a mirror of double talk by multiple senior levels of executives at Bear. You can see some of this behavior in Nick Verbitsky’s documentary film, Confidence Game, about the failure of Bear Stearns that is currently being played on the international film festival circuit.

The crux of theses shareholders suits is really that Bear’s business model – which revolved around manufacturing and selling fraudulent mortgage bonds – was a sham. Because the revenues generated by this business model were a fraud, everything from Bear’s public statements about its risk-appetite to its financial condition were materially misleading to Bear shareholders. Securities attorneys point out the essence of securities fraud is that you cannot deprive investors of the right and ability to make informed decisions about whether to buy or sell stocks.

“When the main revenue driver of your business is a charade, how can investors possibly make informed decisions? They can’t. And that is fraud,” says Sherman.

The likes of Michigan Retirement Services fund might be willing to fold for pennies on the dollar in a toothless class action suit but keep in mind there is still an active SEC securities fraud suit/investigation against Bear. If there was an enforcement action lobbed on some of the players involved, who currently still make millions working on the Street (Schwartz is at Guggenheim Capital, Marano at ResCap/Alley Bank) the individual shareholders suing who opted out of a class action suit and are litigating Bear for selling a totally bogus image of the firm to the public could have a better recovery than what we’ve seen today.

Keep in mind a New York federal judge will still have to approve the settlement so it’s not a done deal yet.

According to Sherman, managing attorney of The Sherman Firm, “former Bear shareholders unwilling to participate in low-ball the class settlement are not stuck. They still have the right to opt-out of the settlement and pursue claims on their own.”

But for now the lawyers for Bear execs at Paul Weiss basically earned their clients another get of jail free card this week.

The case is: Bear Stearns Companies Inc Securities, Derivative and ERISA Litigation, U.S. District Court, Southern District of New York, No. 08-md-01963

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.