The Commission filed two new market crisis cases, one in conjunction with the Department of Justice. Once action is against Bank of America, N.A. centered on the sale of interests in an entity known as BOAMS 2008-A. SEC v. Bank of America, N.A., Civil Action No. 3:130-cv-0447 (W.D.N.C. Filed August 6, 2013); see also U.S. v. Bank of America Corporation, Civil Action No. 3:13-cv-446 (W.D.N.C. Filed August 6, 2013)(similar action based on FIRREA). The second is a settled administrative proceeding against UBS Securities LLC focused on the sale of interests in a CDO. In the Matter of UBS Securities LLC, Adm. Proc. File No. 3-15407 (August 6, 2013).
Bank of America: This case is based on a failure to disclose the true nature of the collateral in the entity. In 2007 a Bank of America subsidiary originated $93.3 billion in first lien mortgage production. The mortgages were originated either directly by the subsidiary or through its direct or wholesale channels. The next year the bank’s mortgage subsidiary filed a prospectus supplement for BOAMS 2008-A with the Commission. A majority of the certificates were sold in a public offering. The remainder were sold in private placements.
BOAMS 2008-A was an RMBS backed by 1,191 residential mortgages. The loans were written between mid-July and late November 2007 and had an unpaid principle balance of about $855 million. All of the loans were “jumbo.” Most had been originated through either the bank’s direct or wholesale channels. The prospectus for the offering represented that the loans were written in accord with the bank’s general standards. In fact BOAMS 2008-A had a disproportionately high level of wholesale loans compared to earlier offerings.
At the time the BOAMS 2008-A offering was being sold to investors, the bank knew, according to the complaint, that the wholesale channel loans were significantly more likely to be subject to material underwriting errors, become delinquent, fail early in the life of the loan or prepay compared to those written directly by the bank. This factors negatively impacted investors.
The facts regarding the mortgages in BOAMS 2008-A were not disclosed as required by the Commission’s regulations in the filings. Rather, the materials filed with the SEC, and furnished to rating agencies, stated that the mortgages had been underwritten in accord with bank guidelines. This was a misrepresentation since the bank knew or should have known that a large percentage of the mortgage loans had significant deviation from its guidelines.
The bank, through its subsidiary, also provided investors and rating agencies with documents identifying key characteristics of the underlying mortgages. These documents falsely portrayed the mortgages as being less risky than in fact they were. In fact, only a few investors were told about the loan composition in the entity.
The Commission’s complaint alleges violations of Securities Act Sections 5(b)(1), 17(a)(2) and 17(a)(3). The case is in litigation.
UBS: This proceeding focuses on the failure to disclose certain fees in connection with the sale of interest in a largely synthetic collateralized debt obligation or CDO known as ACA ABS 2007-2. UBS structured the CDO and marketed it along with its collateral manager, ACA Management LLC. The collateral for the CDO was largely credit default swaps or CDS referencing subprime residential mortgage backed securities.
ACA was responsible for the price the CDO paid for the collateral. Typically the collateral manager would solicit bids. The counterparty selected would pay a spread to purchase protection against default on a designated reference obligation. That spread would be paid to the investment bank structuring the CDO. The investment bank would in turn agree to pay the notional amount to the counterparty in the event of default. The investment bank then would pay the spread the CDO which assumed the obligation to pay the default.
Here UBS and ACA agreed on a different plan. Under their agreement ACA had bidders split their bid. One part would be the spread that in the end would go to the CDO. The other part would be “upfront points,” a one time cash payment that would go to UBS.
At the launch of ACA 07-2, about $23.6 million in upfront points had been paid. The marketing materials did not disclose that UBS would retain those fees but only its transaction fee of about $9.7 million. Indeed, those materials represented that the CDO had acquired all the collateral on an arm’s-length-basis for fair market value or at the price the collateral was acquired by UBS. This representation was inaccurate, according to the Order, since it failed to mention the upfront points. The Order alleges violations of Securities Act Section 17(a)(3) and Advisers Act Section 206(2).
UBS settled with the Commission, consenting to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The firm also agreed to pay disgorgement of $34,408,183 (the upfront points and its disclosed fees), prejudgment interest and a civil money penalty of $5,655,000.