5 Financial News Stories You May Have Missed: Wakey-wakey

5 Financial News Stories

Below are news stories from the week that were easy to miss, but may have some lasting impact.

FDIC Lawsuits Still on the Rise

The credit crisis is over you say? It’s true, fewer banks are failing. But the fallout continues. As the receiver of failed institutions, the FDIC may sue bankers who played a role in their bank’s failure. Their goal is to maximize recoveries. The regulator says they will only proceed with a suit if it is both meritorious and cost-effective. Generally, the FDIC will attempt to settle with the responsible parties; if settlement fails they will generally file a complaint in federal court. The complaints are generally for gross or simple negligence. (The Supreme Court ruled in Atherton v. FDIC that the FDIC may pursue simple negligence claims against directors and officers, FDIC D&O Lawsuits Filed, 2009-Todaybut only if allowed by state regulations – for gross negligence federal law preempts and the FDIC can sue regardless of state law.) But the consequences of so many failed banks in 2008-2010 are still being felt. The pace of FDIC D&O lawsuit filings has increased in the fourth quarter of 2012 compared to earlier in the year. FDIC lawsuits filed in 2012 exceeds the total number filed in 2010 and 2011, and 2013 is on pace to be their biggest year yet.

Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions


Okay Fund Directors, Time to Wake Up!

U.S. Securities and Exchange CommissionThere are 2,200 independent mutual fund directors who may sleep a little less soundly tonight. Recently the SEC filed a civil enforcement action against eight directors of Morgan Keegan mutual funds. (The brokerage was owned by Regions but was bought last year by Raymond James.) Yes, the funds performed horribly in the wake of the market’s 2008 meltdown, but normally that wouldn’t fall on the directors. What’s different here? The funds held illiquid assets. The directors were responsible for determining the fair value of such securities. The SEC has claimed that the directors delegated that valuation to a committee without providing meaningful guidance or making substantive effort to learn how the values were being determined. (The directors settled with the SEC this week but the terms were not disclosed.) But as my old law professor, Tamar Frankel, told the Wall Street Journal this week, “the directors, until now, were out of it”. This matter may be quite alarming for fund directors. Wakey-wakey.

Fund Directors Are Feeling the Heat

Ex-Morgan Keegan Fund Directors to Settle SEC Claims


 Imputing Fraud: Investment Firm “Agent” of Ponzi Schemer?

An investment management firm employee perpetrated fraud on investors by selling them interests in a hedge fund.  Fraud, because what he failed to mention to investors was that he personally controlled the hedge fund and, unbeknownst to his investment management employer, the hedge fund was actually a Ponzi scheme.  An Appellate Court this week ruled that the firm itself may have violated Rule 10b-5.  The rule, promulgated under the Securities Exchange Act of 1934, prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. The general understanding has been that in order for Rule 10b-5 to be invoked, there must be intentional fraud or deceit by the party charged with the violation. This week’s ruling (Belmont v. MB Investment Partners, Inc.) may expand that interpretation to include negligent supervision. If negligent supervision of fund employees equals fraud, it’s likely we will see more 10b-5 cases–and scared investment firm insurance underwriters.

Third Circuit Holds Rule 10b-5 Violations May Be Imputed to Investment Management Company on Basis of Apparent Agency


Lord Willing and the Flood Don’t Rise…The Uncertain Future of Flood Insurance

National Flood Insurance ProgramWill the flood, or at least the flood insurance, rise? Not clear. Besides washing much of my neighborhood away, Superstorm Sandy has stripped much of the veneer away regarding the inviolate nature of the National Flood Insurance Program (NFIP). In January Congress increased NFIP’s borrowing authority from $20 billion to $30 billion – and it still appears to be insufficient. The head of the NAIC Property Casualty Insurance Task Force estimated that with the $7 billion in Sandy Settlements the NFIP will be facing a $28 billion deficit. The program has its supporters and detractors. Some are pushing for the privatization of the program – which would unquestionably cause flood insurance rates to rise from their current subsidized levels. Others are calling for increased subsidies and lower rates. We may see a short-term fix in the coming months. I believe structural changes in the program are not far away – or I could be all wet.

As NFIP Faces Deepening Debt, Some Call for More Subsidies and Lower Rates


Electronic Money-Laundering

In bizarre news, clever individuals may have found a new way around those pesky financial transfer regulations: Bitcoin. For the uninitiated, Bitcoin is an online company that sells an electronic form of money. That’s right: electronic money. No gold backing, no central bank support – just nerds with computers. Initially the “currency” launched in 2009 was used to pay for online services and games. But Bitcoin is now quoted against most major currencies, and Bitcoin has collected approximately $1 billion from purchasers. While that is hardly a lot of money in foreign currency terms (foreign exchange markets trade $4 trillion a day) what makes it particularly intriguing, and topical, is that when Cyprus imposed restrictions on moving money offshore this week, it is believed that certain enterprising Cypriots bought Bitcoin with their restricted Euros. Bitcoin is transferable anywhere with the touch of button. While it is unclear what impact the Cyprus announcement had on the e-currency, Bitcoin values rose 20% …this week!  It’s not clear if regulators can, or plan to try to, control this rather odd market– but, trust me, Cyprus is already doing the homework.

Bitcoin Bonanza: Cyprus Crisis Boosts Digital Dollars

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
Categories: Directors & Officers, Financial Services | Tags: , , , , , ,

One Response to 5 Financial News Stories You May Have Missed: Wakey-wakey

  1. Pingback: Cyprus bailout = money shift to tangible assets (gold, silver, etc...) - Page 8

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