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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Nye Lavalle

Bear Stearns
Draws Probe
On Fund Trades
Massachusetts Looks
At Possible Conflicts
Before Vehicles Failed
October 19, 2007; Page C1
Massachusetts securities regulators are investigating whether Bear Stearns Cos. improperly traded with two in-house hedge funds that collapsed this summer, saddling investors with added losses.

Regulators in the office of Secretary of State William F. Galvin specifically are examining whether Bear Stearns traded mortgage-backed securities for its own account with the hedge funds without notifying the funds' independent directors in advance, people familiar with the investigation said.

Advance disclosure of so-called principal trades is a "longstanding principle" for investment companies, said Howard Schiffman, a securities lawyer and former enforcement lawyer at the Securities and Exchange Commission. He said a fund could be accused of breaching fiduciary duty if proper disclosure was not made. "You need assurances that you're going to deal fairly from the fund's point of view," he said.

Investigators are attempting to determine whether the trades were priced fairly and whether troubled securities positions were offloaded onto investors in the two funds, among other things, people familiar with the probe said. Such mortgage securities are priced by dealers who do not publish quotes; it's often difficult to determine their market values.

The failure of the two mortgage-related funds, Bear Stearns High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Enhanced Leverage Fund, cost investors $1.6 billion. The state believes it has standing on behalf of Massachusetts investors in the funds.

Federal prosecutors and the SEC each are examining the circumstances surrounding the funds' collapse. The Massachusetts investigation appears to be the first suggestion that potential conflicted trading at Bear Stearns is being scrutinized. Massachusetts regulators have found "a material number of principal transactions," between Bear Stearns and the two funds, a person familiar with the investigation said.

A Bear spokesman, Russell Sherman, said the firm doesn't comment on investigations but is cooperating with all inquiries about the two funds.

The case underscores the myriad conflicts facing diversified Wall Street securities firms that sponsor their own hedge funds. When acting for the firm's own account, for example, Bear Stearns traders have a primary responsibility to make money for Bear Stearns, not for the mostly investor-owned hedge funds, and they routinely seek the best prices for the firm.

The Bear Stearns funds' offering memorandums listed 12 other types of arrangements that could lead to conflicts, including handling brokerage business for the funds, allocating positions between the funds and other entities managed by Bear Stearns, valuing the assets of the partnerships, and lending to the funds.

As the memorandums note, federal securities law mandates that any investment adviser whose affiliates engage in principal trading with clients must obtain their consent in writing in advance. Bear Stearns Asset Management, the unit that sponsored the two funds, promised in the memorandums that it would do this by obtaining the consent of the funds' independent directors, who act on behalf of investors.

The Bear Stearns hedge funds each had the same five directors, three of whom were affiliated with Bear Stearns. The independent directors were identified in the memorandums as Scott P. Lennon, and Michelle Wilson-Clarke, both executives at Walkers SPV Ltd., a fund administrator in the Cayman Islands, where both funds were incorporated. Mr. Lennon didn't return a phone call seeking comment. Ms. Wilson-Clarke referred calls to the funds' legal counsel, Mark Parrott, also at Walkers, who declined to say whether the funds had adhered to the disclosure requirements.

The two funds, one launched in 2003 and the other in 2006, had reaped a string of quarters with positive returns. When the market for subprime home loans went downhill, so did many of the funds' holdings. Prominent in the funds were pools of securities made up of bonds backed by subprime mortgages, which are extended to borrowers with poor credit.

"I was in disbelief" about the losses, said investor Ronald Greene, a 79-year-old retired metals engineer who lives near San Jose, Calif. Mr. Greene said he invested in High-Grade Structured Credit last year during a window that let in investors with only $250,000, compared with the typical $1 million entry fee.

Mr. Greene, who has filed an arbitration claim with the Financial Industry Regulatory Authority against Bear Stearns, said his financial adviser, a hedge-fund broker in Iowa, told him the fund was conservative and dealt in "high-grade" securities. Mr. Greene said he lost his entire initial $250,000 investment, plus $43,000 in gains, when the fund collapsed.

"I couldn't believe it; this was really supposed to be a top Wall Street firm," he said. His lawyer, Jacob Zamansky, of New York, said he is representing 25 Bear Stearns hedge-fund investors, four of whom have filed arbitration claims.

Bear Stearns's Mr. Sherman said the allegations in the arbitrations are "unjustified and without merit," adding that "the accredited, high-net-worth investors in the fund were made very aware this was a high-risk, speculative investment vehicle."

As previously reported, Massachusetts regulators are looking at why Bear Stearns research analysts upgraded subprime lender New Century Financial Corp., a real-estate investment trust based in Irvine, Calif., from "sell" to "neutral" on March 1, just before New Century filed for bankruptcy proceedings.

The state is examining whether Bear Stearns made loans to New Century that may have affected the stock recommendation, people familiar with the inquiry said. A subpoena in that inquiry elicited responses that led investigators to the area of principal transactions, these people said.

Mr. Sherman said Bear Stearns is cooperating fully with investigators looking into New Century.
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When are they going to see MSF as integral part of the Fraud, that Investors lost money in part because homeowners got $crewed by I Banks' servicing companies?

From Jake Zamanky's Blog:
Interestingly, though I cannot at the moment give specifics, it’s becoming clear to me that regulators are primed for action. The scuttlebutt around here is that should federal authorities lack the wherewithal to curb hedge fund fraud, there are certainly others who will make it their mission to protect the interest of investors.
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Nye Lavalle
I can tell you that the number of lawyers and regulators calling is getting crazy. It seems that the well heeled investors and pension funds are going to start going after the crooked bastards! Keep your eyes open and see the market drop even bigger this coming week!
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Galvin Probe Widens as Hub Investors Roar

By Jay Fitzgerald  |   Saturday, October 20, 2007  

As Secretary of State William Galvin expands his probe into Bear Stearns’ alleged role in the subprime-mortgage fiasco, a New York attorney said he hopes to represent a number of Boston-area investors who claim they lost big bucks after two Bear Stearns hedge funds collapsed along with the subprime market.

A spokesman for Galvin, whose office oversees the securities industry in Massachusetts, confirmed yesterday that investigators are looking into what happened at the two now-defunct hedge funds that had heavily invested in mortgage-related securities.

Investigators are reportedly zeroing in on whether improper trades were made between Bear Stearns and its two in-house hedge funds, without telling investors.

Earlier this year, the two funds failed, costing investors $1.6 billion.

Galvin’s probe into the hedge funds, first detailed yesterday in the Wall Street Journal, is a significant expansion of the scope of his original investigation.

Last March, Galvin announced his office had subpoenaed documents from Bear Stearns and UBS Securities over their “positive” research reports about subprime lenders even though those lenders faced increasing defaults on subprime loans.

Meanwhile, securities attorney Jacob Zamansky, who says he represents 25 investors who lost money in the two Bear Stearns funds, told the Herald that he’s in contact with a number of affluent individual investors in the Boston area who lost money in the two hedge funds.

He said he may represent them in any arbitration proceedings against Bear Stearns, which he said “misrepresented” investors about the risky nature of the two hedge funds’ investment strategies.

A Bear Stearns spokesman could not be reached for comment.

But a spokesman told the Wall Street Journal that investors were made “very aware” of the risks involved.


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Joe B

I think we are going to see more and more investors (both large and small) going after the servicing companies for various misdeeds. I fear, I mean really really fear that MSFraud will get swept under the rug in all of this litigation.

I suspect they (the investors) will get all the headlines, press, exposure, and the end user on the other end of this problem (MSFraud victims) will get forgotten.

The funny thing in all of this is that I believe that many of the investor suits will point to the same issues that we are talking about, only from their perspective; i.e., while many of us have or will in the future lose their homes, and/or spend thousands (tens of thousands) in legal fees, the investors will claim they have lost money.

However, it is the same action that has caused this similar problem; servicing fraud! The problem with these investor suits is that it looks like they are organizing themselves and mobilizing to take action, while we are attacking as one and two isolated cases...

I don't have a solution, I am just concerned...

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