On Friday, hedge fund manager Philip Falcone filed two motions to dismiss SEC charges against him and his firm, Harbinger Capital.  (A prior post on the charges is here.)  One set of charges accuses Falcone of a “short squeeze” — buying up securities to “squeeze” short sellers into paying more to cover their shorts — and Falcone argues there is nothing fraudulent about that:
Continue Reading Falcone Says “So What” to SEC Allegations

Last Friday, Judge Crotty denied the attempt of three former Fannie Mae executives to dismiss the SEC’s charges that they mislead investors about the company’s exposure to subprime mortgages. Judge Crotty found that the SEC had adequately alleged that Fannie Mae’s “quantitative subprime disclosures were misleading” because “they failed to include all loans that fell within [Fannie Mae’s] subprime and Alt-A description.” In allowing the SEC’s civil fraud suit to proceed, Judge Crotty rejected the defendants’ argument that they were exempt from liability because the Securities Exchange Act of 1934 does not apply to employees of any “independent establishment of the United States,” and Fannie Mae, as a government-sponsored enterprise chartered by the federal government, qualifies as such an establishment. Although Judge Crotty held that Fannie Mae is a government instrumentality, he concluded that it is not an “independent establishment” within the meaning of the Act given that it is a publicly-traded corporation managed and controlled by a Board of Directors elected by its shareholders.
Continue Reading Judge Crotty Rejects Ex-Fannie Mae Executives’ Bid to Dismiss SEC Charges

Judge Crotty today mostly denied Goldman Sachs’s motion to dismiss a shareholder class action relating to various CDOs allegedly designed to fail, including the transaction which led to a $550 million settlement with the SEC. The motion was granted to the extent Judge Crotty found Goldman had no duty to disclose the SEC’s Wells notice: “At best, a Wells Notice indicates not litigation but only the desire of the Enforcement staff to move forward, which it has no power to effectuate. This contingency need not be disclosed.” The remainder of the claims concerned various statements by Goldman in public filings and elsewhere concerning its loyalty to clients, and procedures to avoid conflicts of interest — statements the plaintiffs claimed were false in light of the undisclosed conflicts in the CDOs at issue.  Judge Crotty found the statements were not, as Goldman argued, non-actionable “puffery”:
Continue Reading Judge Crotty Allows Shareholder Class Action Against Goldman to Proceed Relating to CDOs Designed to Fail, Except Finds No Duty to Disclose Wells Notice

In a key decision that will likely boost similar claims by bond insurers against banks, Judge Crotty ruled that bond insurer Syncora could force EMC, a former Bear Stearns business unit now owned by JP Morgan, to buy back home equity loans that were pooled together and used as collateral for notes sold to investors, when those loans did not meet the standards warranted, even without a showing that the breaches caused the loans to default:
Continue Reading Judge Crotty Rules Bond Insurer Need Not Show Actual Losses to Force Bank to Repurchase of Loans That Were Not As Warranted