Losses & Lawsuits


ZURICH, NEW YORK, SEATTLE & CHARLOTTE, NC - Wachovia, the fourth-largest US bank, has posted a second quarter net loss of $8.7 billion. It has also announced a reduction in quarterly common stock dividends and that it will close its general bank wholesale mortgage origination operations. The hit includes a $6.1 billion non-cash goodwill impairment charge, corresponding to falling asset values and market valuations. The North Carolina bank will reportedly cull 6,350 jobs. Earlier reports had suggested a $2.6 to $2.8 billion loss, according to incoming chief executive Robert Steel, formerly of the US Treasury.

Merrill Lynch has posted a $4.65 billion second-quarter loss, after a $9.7 billion credit market writedown. Merrill has now admitted over $40 billion in writedowns since the subprime crisis began. Merrill has already sold its 20% stake in media firm Bloomberg for $4.5 billion (previously valued at $6 billion), but has now reportedly dropped plans to sell its $10 billion stake in money manager BlackRock.

Seattle-based Washington Mutual has also posted a second-quarter loss, of $3.33 billion. The bank's retail lending unit accounted for $2 billion of the losses while its home loans group lost another $1.3 billion, drowning small profits in its commercial group.

Meanwhile, Swiss bank UBS has admitted it faces further writedowns and only an unexpected tax credit might yet save it from a Q2 loss. The Zurich bank has already written off $37 billion (£18.6 billion) of subprime debt, and reportedly faces around $7.5 billion of further exposure. The bank has highlighted profits in asset management but its troubled private banking business and monoline insurance positions have been underlined as particularly vulnerable. UBS shares rallied when news was received of a £1.5 billion tax credit, perhaps allowing the beleaguered bank to balance losses for the second quarter.


LONDON - The Financial Services Authority (FSA) has banned five mortgage brokers in the past month, since July 1. The UK regulator is tightening the screws on the UK mortgage industry, clamping down on the same issues that sparked the subprime crisis and continuing crisis in the US housing market. By removing incidences of mortgage mis-selling, fraud and industry incompetence, the FSA is also tightening enforcement of its Treating Customers Fairly (TCF) strategy.

Two brokers at Wakefield-based firm The Mortgage Exchange are the latest to be banned. Derick Whewall and Alan Hewitt failed to meet standards for competency or checks preventing mortgage fraud, while subjecting around 250 customers to unsuitable mortgage advice. Earlier in July the FSA banned and fined mortgage broker Sadia Nasir £129,000 for involvement in "numerous fraudulent mortgage applications". Nadir directed London Mortgage and Financial Services, trading as House of Finance and based in Ilford. She submitted mortgage applications containing false information on her own employment and earnings supported by falsified payslips, financial statements and accountants' certificates. She also entered her own bank details on clients' applications and then withheld mortgage application information from the FSA's investigators, in addition to hiding details of her personal assets and credit record.

In other actions, two further brokers were banned. In Scotland mortgage advisor Ian Sanderson was banned for deliberately entering false information on mortgage applications, while his Kilmarnock-based employer Mortgage Master was fined £11,900 for failure to supervise him. Robert Knox, managing director of north-east England-based firm Mortgage and Property Services was fined £17,500 and banned for incompetence for allowing his firm to give unsuitable advice and recommend unsuitable mortgage contracts to 500 customers. As problems mount and prices fall for the UK housing market, news of mortgage selling irregularities reminiscent of US examples, further fuelled by growing supervisory impatience with firms that have failed to implement its TCF standards, are spurring the FSA onto a policy of increased enforcement.


LONDON - The Financial Services Authority (FSA) has provisionally fined UK market-maker Winterflood Securities £4 million for market abuse. It is the UK regulator's biggest penalty handed out for market abuse to date.

The FSA alleges that Winterflood - owned by investment bank Close Brothers - failed to regard warning signs or ask questions about the propriety of third-party trades in dealings with an Alternative Investment Market-listed company, Fundamental E Investments (FEI) in 2004.

Winterflood is appealing against the penalty.

The FSA says it is not accusing Winterford of deliberate abuses, but insists that the failures involved were serious enough to warrant the fine.

It announced it had begun to investigate FEI in July 2004. The investigation was triggered by fluctuations in FEI's share price and centred on a series of trades made through small stockbroker SP Bell. SP Bell, owned by former commodities trader Simon Eagle, was placed in administration in 2004 after it emerged that dozens of its customers' accounts had been used without their approval to buy about £10 million worth of shares in FEI. Two Winterflood traders who have also been fined will also appeal to the tribunal. One of them faces a penalty of between £150,000 and £200,000 and the other a fine of up to £75,000.

Winterflood's £4 million fine would be the fourth largest ever levied by the UK's financial regulator. The Financial Services Authority's record fine of £17 million was awarded in August 2004 against UK oil firm Royal Dutch Shell, for mis-stating oil reserves.


BOSTON, MA - US banks are facing legal action from state regulators clamping down on auction-rate securities. Massachusetts secretary of state Francis Galvin is leading a multi-state regulatory probe into whether the banks unfairly marketed high-risk securities as low-risk alternatives to cash to retail investors.

UBS, in response to allegations relating to auction-rate securities last August, has offered clients their money back, buying up to $3.5 billion of auction-rate preferred shares. The offer includes shares issued by tax-exempt closed-end funds managed by asset managers such as BlackRock.

Galvin has described the Zurich bank's action as inadequate. His lawsuit has also alleged the managing director responsible for the securities, David Shulman, began liquidating his own holdings while encouraging their sale to investors unaware of the risks.

US bank Wachovia has been visited by several state regulators over auction-rate securities, and has been under investigation by Missouri regulators since April. The US Attorney's Office for New York's Eastern District has also launched a criminal investigation of two former Credit Suisse auction-rate brokers, and investor lawsuits have been filed against Morgan Stanley and Merrill Lynch regarding the investments.


ZURICH - UBS is being investigated by the US Department of Justice (DoJ) over allegations it created offshore accounts to allow clients to evade US taxes. The probe comes after a former UBS banker, Bradley Birkenfeld, admitted in June to helping wealthy US customers evade $7 million in tax. The DoJ is seeking approval from southern Florida's Federal District Court for the Internal Revenue Service to issue a summons requiring the bank to reveal key information. The Swiss investment bank says it is co-operating fully with the authorities and closed its Swiss service open to US clients after US Senate investigators published a report detailing the bank's attempts to market offshore accounts to affluent US clients.

Swiss officials held talks with US counterparts last week over the allegations. Birkenfeld claimed he concealed over $200 million in overseas accounts, robbing the IRS of more than $7 million in revenue. He added that at least $20 billion remains in undeclared Swiss accounts controlled by US residents, which the DoJ is attempting to uncover.


NEW YORK - A former employee of Morgan Stanley has pleaded guilty to stealing data relating to hedge funds. Ronald Peteka was a client service representative for the US bank's prime brokerage division. Before a US district judge, he admitted stealing information about hedge fund clients and the rates the bank charged for its services, and pleaded guilty to a charge of transporting stolen property. He could face 12-18 months in prison. Charges alleged Peteka directed accomplice Ira Chilowitz, who pleaded guilty to charges last year, to steal the information from the bank's internal database.


NEW YORK - New York attorney-general Andrew Cuomo has dropped his office's case against New York Stock Exchange (NYSE) chairman Richard Grasso's $187.5 million compensation package. The lawsuit, originally brought by former attorney-general Eliot Spitzer in 2004, requested that Grasso return over $112 million of the money. Spitzer stepped down as governor of New York in March after an international prostitution scandal.

New York's high court has said the attorney-general's case was based on the size of the compensation package and lacked legal authority under the state's not-for-profit law, because the NYSE has become a for-profit organisation since the launch of the lawsuit.

The New York Court of Appeals affirmed a 3-2 split decision made by the New York State Supreme Court's Appellate Division for the First Department in May 2007, throwing out four of Cuomo's six causes of action against Grasso. The ruling has also removed one of two causes cited by New York Supreme Court Justice Charles Ramos in his partial summary judgement in 2006 requiring Grasso to return some of the payout.

The two remaining statutory claims, for breach of fiduciary duty and the unlawful transfer of corporate assets, are still pending, but Cuomo's secretary has said the Grasso case is over.


LONDON - An HSBC bank clerk has been jailed for nine years for his part in a failed attempt to defraud the UK bank of almost £72 million.

Jagmeet Chana had worked at the bank's Canary Wharf headquarters for about a year, and during that time transferred £47.9 million to a Societe Generale account in Casablanca and a further £23.9 million to a Barclays branch in Manchester. Chana had been promised a cut of the money from co-conspirators, whose identity he has refused to divulge.

The fraud, which has been described as one of the largest of its kind, relied upon the weekend period to hide evidence of the transactions. However, the trading account involved was supposed to show a balance of zero, and when the massive debit was discovered by Malaysian HSBC staff, immediate internal inquiries were launched in London. HSBC contacted Barclays and Societe Generale, successfully freezing the accounts and returning the money.

The bank initially suspected Chana's two colleagues, whose passwords were used in carrying out the fraud, but both were released after initial questioning. Security camera footage and further inquiries subsequently incriminated Chana.

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