Securities Industry Commentator by Bill Singer Esq

November 10, 2017

Justice Department Sues Northwest Trustee Services, Inc. in Bellevue, Washington, for Illegally Foreclosing on Homes of at Least 28 Servicemembers (DOJ Press Release)

According to the Department of Justice's ("DOJ's") the Servicemembers Civil Relief Act ("SCRA") website "  

The SCRA is a federal law that provides protections for military members as they enter active duty.  It covers issues such as rental agreements, security deposits, prepaid rent, evictions, installment contracts, credit card interest rates, mortgage interest rates, mortgage foreclosures, civil judicial proceedings, automobile leases, life insurance, health insurance and income tax payments.

Pointedly, the DOJ SCRA website explains that:

Benefit and Protection No. 3 - Non-judicial foreclosures - Section 3953 of the SCRA (formerly Section 533)

Section 3953 of the SCRA (formerly Section 533) addresses the topic of mortgages and non-judicial foreclosures.  In order for a servicemember to receive the protections of Section 3953 of the SCRA, the "obligation on real or personal property" needs to have been taken out prior to the servicemember entering military service.

Under Section 3953 of the SCRA (formerly Section 533), during a period of military service, and for one year after a period of military service, a creditor must get a court order prior to foreclosing on a mortgage.  This is a strict liability section of the SCRA, and a person who knowingly violates this provision may be fined and/or imprisoned for up to one year.

On March 31, 2016, the President signed into law S. 2393, the "Foreclosure Relief and Extension for Servicemembers Act of 2015," that, inter alia, amended the Honoring America's Veterans and Caring for Camp Lejeune Families Act of 2012 to extend through 2017 the one-year tail coverage period after a servicemember's military service during which any covered foreclosure is invalid without a court order.

Under Section 3953 of the SCRA (formerly Section 533), a court may on its own - and shall upon application by a servicemember - stay a non-judicial foreclosure proceeding or adjust the obligation, provided that the servicemember's ability to meet the obligation is materially affected by reason of his or her military service..

Notwithstanding SCRA's requriements, the DOJ Press Release alleges that in response to a May 2016 complaint filed by United States Marine Corps veteran Jacob McGreevey of Vancouver, WA, an investigation was launched into his allegations that Northwest Trustee Services, Inc. had foreclosed on McGreevey's home in August 2010, less than two months after he was released from active duty in Operation Iraqi Freedom.  The DOJ Press Release explains that:

McGreevey sued both PHH Mortgage (his mortgage servicer) and Northwest in 2016, but a U.S. District Court Judge accepted PHH and Northwest's argument that McGreevy had waited too long to file his case, and dismissed the case on that basis.  The department's investigation revealed that, in addition to McGreevey, NWTS had foreclosed on other homes of SCRA-protected servicemembers in violation of the SCRA since 2010.

DOJ filed a Complaint in the United States District Court for the Western District of Washington, alleging that since 2010, Northwest foreclosed on at least 28 homes owned by servicemembers without obtaining the required court orders.against DOJ seeks injunctive relief and monetary damages, which the SCRA sets at up to $60,788 for the first offense and $121,577 for each subsequent offense. READ the FULL TEXT DOJ Complaint

Acting Manhattan U.S. Attorney Announces Initial Distribution Of More Than $770 Million To Victims Of Madoff Ponzi Scheme / Payments Are the Single Largest Distribution of Forfeited Funds in the History of the Department of Justice's Victim Compensation Program (DOJ Press Release

97 Year Old Client Names Stockbroker Executor And Beneficary ( Blog)

In today's Blog, publisher Bill Singer, Esq. considers yet another case in which a stockbroker is appointed both an executor and beneficiary of an elderly client's estate. Yeah, sure . . . roll your eyes and shake your head because such a circumstance should warrant concern. On the other hand, when you read the fact pattern, you'll see that there are some nuances to this particular matter that may dispel some of your first impressions.

Navnoor Kang, the former Director of Fixed Income and Head of Portfolio Strategy at the New York State Common Retirement Fund ("NYSCRF") (the nation's third largest public pension fund), pled guilty to one count each of:
  • conspiracy to commit securities fraud, which carries a maximum sentence of five years in prison, and 
  • conspiracy to commit honest services wire fraud, which carries a maximum sentence of 20 years in prison.  

Kang was responsible for investing over $53 billion in fixed-income for NYSCRF. The DOJ Press Release alleges in part that:

From 2014 through 2016, KANG and others participated in a scheme to defraud the NYSCRF and its members and beneficiaries, and to deprive the NYSCRF of its intangible right to KANG's honest services.  The scheme involved, among other things, an agreement among KANG, Deborah Kelley, a managing director of institutional fixed income sales at New York-based broker-dealer ("Broker-Dealer-1"), Gregg Shonhorn, a vice president of fixed income sales at a New York-based broker-dealer ("Broker-Dealer-2"), and others to pay KANG bribes - in the form of entertainment, travel, lavish meals, prostitutes, nightclub bottle service, narcotics, tickets to sports games and other events, luxury gifts, and cash payments for strippers and KANG's personal expenses - in exchange for fixed-income business from the NYSCRF.  Such bribes - which totaled more than $100,000 - were strictly forbidden by the NYSCRF, and were paid secretly and without any disclosure to the NYSCRF and its members and beneficiaries concerning the conflicts of interest inherent therein. 
When the Securities and Exchange Commission began investigating Kelley's relationship with Kang and subpoenaed the two, DOJ alleges that they agreed to coordinate their testimony in order to conceal their conduct. Their false testimony persisted before a federal grand jury. 
Kelley and Schonhorn pled guilty,  and Kelley was sentenced to three years of probation. 

Former Chief Financial Officer Of American Realty Capital Partners Sentenced For Accounting Fraud

Following a three-week federal jury trial,  Defendant Brian Block, the former chief financial officer  American Realty Capital Partners ("ARCP")(a publicly traded real estate investment trust ("REIT")), was convicted of submitting ARCP filings to the the U.S. Securities and Exchange Commission (the "SEC") that he knew included an inflated metric used to evaluate the  REIT's performance

Federal prosecutors alleged that Block, along with Chief Accounting Officer Lisa McAlister and others, knowingly filed with SEC documents that used an erroneously inflated Adjusted Funds From Operations ("AFFO"), which was designed reflect ARCP's cash flow and financial performance by presenting its income before consideration of non-cash depreciation and amortization expense and by excluding certain one-time charges and expenses. For the first quarter of 2014, for example, the erroneous AFFO was reported to the public as 26 cents a share instead of the correct 23 cents a share. Despite knowing of the error and its impact, Block, McAlister and others continued to disclose the same false, inflated calculations. 

As set forth in part in the DOJ Press Release: 

With regard to YTD 2014 specifically, the fraud resulted in an intended overstatement of AFFO by approximately $13 million and an intended overstatement of AFFO per share by approximately $0.03, or approximately 5 percent of total AFFO per share.  By reporting AFFO per share of $0.24 in the second quarter, after having reported AFFO per share of $0.26 in the first quarter, BLOCK and his co-conspirators misled ARCP's shareholders and the investing public by falsely representing that ARCP's AFFO per share for the first six months of 2014 was consistent with analysts' expectations and on track to meet ARCP's guidance for AFFO per share for calendar year 2014, when in fact, they were not. 

Block was sentenced to 18 months in prison, three years of supervised release, and fined $100,000. McAlister pled guilty to securities fraud and related charges and is awaiting sentencing.