Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Commentary February 7th

This is turning out to be a powerful week for the financial collapse of the new millenium. As Mortimer Zuckreman was quoted February 1st, "Quite simply, this financial crisis is the worst since the panic that led to the Great Depression". Not only are banks coming under more pressure, but monoline insurers are seeing more dangers ahead, plus the ratings agencies themselves are coming under scrutiny, as investors lose confidence in them. Structured investment vehicles have been declared dead (due to the Basel II talks), and hedge funds are about to make some shocking announcements. As Reuters quoted a a loan syndicator this morning: "The great unknown secret is about to be revealed". All this as the hedge funds look for opportunities amidst the chaos, and proclaim that they are "part of the solution".

Thre is some good news, though. The US federal government is finally showing interest in the activities of exotic financial instutions and the involvement of banks. First, a number of banks are being investingated by the FBI in connection with the sub-prime crisis. Next, the US as part of a group of ~40 other nations met in Cape Town, and all agreed to scrutinize the tax implications of structured investment activities. In addition, the US is investingating US implications of the Societe Generale fiasco (remember the "rogue trader" who bet Euro7 billion and lost?). On top of that the Justice department put forth an opinion that hedge funds were anti-competition by nature, causing a significant drop in value of some key funds.

It may be too litltle to late, but it is somewhat heartening to see some appropriate action being taken.

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Prosecutors Widen Probes Into Subprime -

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Thanks for the link. I do not have a subscription, but it is clear from the preview that this thing is getting bigger. Fasten your seatbelts.

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Complete article from WSJ:
Prosecutors Widen Probes Into Subprime
U.S. Attorney's Office Seeks Merrill Material; SEC Upgrades Inquiry

February 8, 2008; Page C1

Federal criminal prosecutors are stepping up their interest in Wall Street's mortgage-securities activities.

The Justice Department's U.S. attorney's office in Manhattan, based near Wall Street, has notified the Securities and Exchange Commission that it wants to see information the agency is gathering in its investigation of Merrill Lynch & Co., according to people familiar with the matter. The SEC is examining, among other things, whether the securities firm booked inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, the people say.

The move by the U.S. attorney's office comes as the SEC has upgraded its Merrill probe to a formal investigation, which requires approval of the full commission and gives the agency broad power to require firms and individuals to produce information.

The interest by the federal prosecutors is preliminary; it is unclear whether the SEC has turned over information. But the U.S. attorney's office request could be a precursor to a criminal investigation, these people say.

A spokeswoman for the Manhattan U.S. attorney's office declined to comment. A Merrill spokesman said the firm had no comment, except to say that Merrill cooperates on regulatory matters when asked.

The interest of the Manhattan U.S. attorney's office follows a series of investigations being pursued by state and federal regulators with criminal and civil enforcement powers around the nation into the financial industry in the wake of the mortgage-securities market collapse.

As reported by The Wall Street Journal last week, federal criminal prosecutors in another U.S. attorney's office in New York, this one in Brooklyn, have launched a preliminary criminal investigation into whether UBS AG improperly valued its mortgage-securities holdings; that comes amid a formal investigation by the SEC in the matter. The UBS probes are examining, among other things, an incident detailed in a page-one Journal article detailing how a trader at a UBS unit was confronted and then ousted after he valued mortgage securities at prices below the values assigned to the same securities elsewhere at UBS.

The federal prosecutors in Brooklyn also are examining the circumstances surrounding two failed hedge funds at Bear Stearns Cos. Those funds collapsed last summer because of losses tied to mortgage-backed securities. Meantime, the Federal Bureau of Investigation is looking at 14 companies involved in the subprime meltdown, and the New York attorney general's office, which can bring criminal securities-related cases, is investigating whether investment banks disclosed enough to investors and to credit-rating firms about the securities.

How much of a threat these investigations pose to Wall Street depends on what the probes turn up, lawyers say.

"Whether we will see a large number of criminal cases come out of this remains to be seen, because it's dependent on a lot of subjective information, such as how to value securities in an uncertain marketplace," says Michael McGovern, a former federal prosecutor and white-collar lawyer in New York.

"There's enough here to suggest that any case prosecutors might want to bring, they'll have pause because of the complexity, the availability of defenses and the difficulty of proving intent," he says.

In the investigations that the government has begun, prosecutors will likely try to find witnesses to help them learn more about who may have been involved in potentially improper valuations. "Witnesses can tell you where to go a lot faster than the documents," Mr. McGovern says.

U.S. attorney's offices frequently work closely with the SEC to coordinate efforts to gather information. The New York federal prosecutors haven't issued subpoenas in either the Merrill or the UBS matters, the people familiar with the situation say.

"When federal prosecutors begin an early-stage investigation of a securities firm, they almost always coordinate with the SEC, often reviewing documents that the commission obtains," says David C. Esseks, a New York white-collar lawyer and former chief of the securities and commodities fraud unit at the U.S. attorney's office in Manhattan.

During the past several months, financial firms have announced more than $100 billion in write-downs on mortgage-related assets. Merrill has announced write-downs of mortgage-securities assets totaling $22.4 billion. Last week, UBS took its third write-down in four months, bringing its total to an estimated $18.4 billion for 2007.

Meantime, Merrill is among the firms facing a number of civil regulatory probes into its mortgage-securities activities. Last week, the Massachusetts secretary of state accused Merrill of fraud in a civil administrative proceeding over its sales of subprime-related debt to the city of Springfield.

Authorities in other states are investigating Merrill's sale of so-called structured investment vehicles, or SIVs, which often use subprime mortgages and other troubled asset-backed securities among their collateral.

Maine securities officials are examining the circumstances surrounding Merrill's role in the sale of commercial paper issued by a SIV known as "Mainsail II," an affiliate of London hedge fund Solent Capital Partners LLP, to the state treasury department in August for $20 million. Shortly after, Standard & Poor's Corp. downgraded Mainsail from the highest rating to "junk" status, and the issuer defaulted on an interest payment that same month. "We are looking at all aspects of the transaction to determine whether any laws or rules were violated," said Bonnie Russell, the state's securities administrator.

Ms. Russell added that she has also spoken with the office of Massachusetts Secretary of State William Galvin, who had asked Merrill to turn over all "sales and marketing materials" related to sales of Mainsail II to Massachusetts investors, according to a letter Mr. Galvin's office sent to Merrill. Mr. Galvin also requested a detailed breakdown on sales commissions related to Mainsail transactions.

Mark Herr, a Merrill spokesman, said Mainsail had the highest possible credit rating when it was sold to the Maine treasurer. "The investments were in line with the investment policies that Maine developed for itself," Mr. Herr said. "When we executed these sales for Maine, we provided Maine with the relevant information."

Merrill bought back Springfield's mortgage securities last week at the original sales price of $13.9 million. Mr. Herr said the firm repurchased the securities because a review showed that Springfield officials never gave formal permission to invest in them.
2008-02-08 08:24:24
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