Articles Posted in Financial Crisis

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Citigroup, Inc. has agreed to resolve a class action lawsuit filed in 2008 by investors who purchased Citigroup bonds and preferred stock between May 2006 and November 2008. Last year, Citigroup settled a similar class action lawsuit brought by stock investors.

The class plaintiffs alleged that Citigroup made material misstatements and omissions concerning the loss reserves for its high-risk residential mortgages and the credit quality of its assets. According to Bloomberg, some of the plaintiffs in the case include the Louisiana Sheriff’s Pension and Relief Fund, Minneapolis Firefighters’ Relief Association and the City of Philadelphia Board of Pensions and Retirement.

During the subprime mortgage crisis, Citigroup almost collapsed. According to CNBC, a report by the Congressional Oversight Panel that oversees the TARP program reflects that Citigroup received a grand total of $476.2 billion in cash and guarantees from various federal bailout efforts. CNBC reports that Citigroup’s federal assistance included $25 billion from the TARP’s CPP program, $68.6 billion from the FDIC’s TLGP debt issuance program, and $88 billion from the Federal Reserve’s TAF liquidity program.

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In what appears to be an unprecedented move for a public defined-benefit plan, a government employee pension plan has filed for bankruptcy protection. The Northern Mariana Island Retirement Fund (“Fund”) filed for Chapter 11 Bankruptcy protection in the U.S Bankruptcy Court for the Northern Mariana Islands on Tuesday.

The Fund was established in 1980 to provide retirement, disability, death and other benefits to employees of the Commonwealth of the Northern Mariana Islands, its autonomous agencies and public corporations, and their spouses and dependents. The Northern Mariana Islands is a U.S. Commonwealth made up of three major islands in the Western Pacific. Its capital is in Saipan.

According to the bankruptcy filing, the Fund holds $268.4 million in assets but faces $911 million in liabilities. According to a press release by the Fund, at current spending levels, the Fund could be depleted by September 2014. The Fund’s website states that the Fund will continue to issue payments for at least the next two months at the present level. The Fund indicated that the primary goal of the restructuring process is to adjust benefit payments to meet the current funding level so the Fund can make some level of payments to all plan beneficiaries for the remember of their lives.

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Stanley Brooks (“Brooks”), founder of defunct brokerage firm Brookstreet Securities (“Brookstreet”), was assessed a penalty of $10 million for securities violations in connection with the sale of collateralized mortgage obligations (“CMOs”) from 2004 to 2007.

The penalty is believed to be one of the largest assessed against an individual for activities related to the subprime-mortgage crisis. Judge David O. Carter, U.S. District Court, Central District of California, entered the final judgment against Brooks after Brooks failed to respond to a motion for summary judgment filed by the Securities and Exchange Commission (“SEC”) at the end of December.

The SEC alleged that Brooks, and his firm Brookstreet, promoted the sales of particularly risky and illiquid CMOs to more than 1,000 retirees with conservative investment goals for whom the securities were unsuitable, and in some cases, made even more unsuitable through the use of margin. The SEC also alleged that Brooks continued to promote and sell the risky CMOs, despite several warnings to Brooks about their danger.

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MF Global Holdings Ltd. and its broker-dealer arm MF Global, Inc. filed for bankruptcy protection earlier this week in New York after dealings with the firms were suspended by the Federal Reserve Bank of New York and the major exchanges. JPMorgan Chase was listed in the bankruptcy filing as the largest unsecured creditor with $1.2 billion in outstanding debt.

MF Global, formerly part of Man Group Plc, was founded in England in 1793 and is lead by Chief Executive Officer Jon S. Corzine, the former head of Goldman Sachs, prior U.S. senator and past governor of New Jersey.

Prior to Corzine’s arrival in 2010, MF Global’s business was largely limited to arranging and processing trades for banks, corporations and investors. Corzine began to diversify the firm in pursuit of his vision that MF Global be a junior version of Goldman Sachs. To accomplish this, MF Global borrowed $40 for every $1 in capital, according to Egan Jones, a rating service. That is more leverage than Lehman Brothers Holdings had at the time of its demise in 2008. MF Global made large bets on commodities, European sovereign debt, futures and derivatives.

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The SEC has settled with prior Countrywide Financial CEO Angelo Mozilo for $22.5 million in penalties to settle claims that he and two other former Countrywide executives misled investors about the subprime mortgage crisis. The settlement permanently prohibits Mozilo serving as an officer or director of a publicly traded company.

Mozilo’s financial penalty is the largest ever paid by a public company’s senior executive in an SEC settlement. Mozilo also agreed to $45 million in disgorgement of unjust profits to settle, totaling $67.5 million that will be returned to harmed investors.

The SEC alleged that Mozilo and Countrywide failed to disclose to investors the significant credit risk that Countrywide was taking on as a result of its efforts to build and maintain market share. Investors were misled by representations assuring them that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors. In reality, Countrywide was writing increasingly risky loans and its senior executives knew that defaults and delinquencies in its servicing portfolio as well as the loans it packaged and sold as mortgage-backed securities would rise as a result.