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The number of reports of suspected mortgage fraud in America rose by 5% last year, to a record annual high, according to the Treasury Department. But a new study by the LexisNexis Mortgage Asset Research Institute, which collects its own data on mortgage fraud, claims that cases of “verified, material misrepresentation” in the mortgage origination process fell by 41% over the same period.

A stricter definition of fraud explains some of the difference with the Treasury’s figures, as does a general decline in mortgage lending, LexisNexis says. More worryingly, the company notes that “fraud has become more complex and harder to verify using traditional methods.” More than 90% of the fraud submissions received in 2010 dealt with loans written in prior years; with time, more fraud perpetrated in 2010 will likely come to light. Among the cases reported to LexisNexis last year, Florida saw three times as many submissions as its share of the national mortgage market. Fraud volume in New York and California was more than twice those states’ share of overall mortgage originations.

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More bad news today from Kabul Bank, Afghanistan’s largest lender. The bank, which received a bail-out last year when suspicions of widespread fraud led to a run on deposits, is once again making headlines for all the wrong reasons.

Afghan authorities launched an investigation into Kabul Bank earlier this month, with news breaking today that losses at the bank could reach US$900m. If true, this would represent more than nine times the bank’s equity. Meanwhile, Mahmoud Karzai, a major Kabul Bank shareholder and brother of Afghanistan’s president, is quoted in the Guardian suggesting that losses are instead on the order of US$600m. During the run on deposits in September last year, it was thought that the bank faced losses of around US$300m.

The Afghan Central Bank disputes the new figures, and cites a much lower level of outstanding loans, US$540m, than suggested elsewhere (up to US$1bn). Whatever the case, once the true financial state of Kabul Bank becomes clear, it is likely that it will not make for pleasant reading.

The latest biannual data on euro banknote counterfeiting was recently released by the European Central Bank. In the second half of 2010, the number of counterfeit notes fell by around 6% from the first half of the year. Phoney notes remain exceedingly rare; they now comprise 0.003% of the outstanding euro bankotes in circulation.

As far as denominations go, clandestine printers produced more €50 notes in the second half than €20 notes, a reversal from the previous six months. Together, these denominations make up more than 80% of counterfeit bills. Interestingly, counterfeiters have been shying away from the €200 bill in recent years, with the stock of fake notes on a steep decline. At the same time, the number of forged €500 bills withdrawn in the second half of last year more than doubled from the first half. Fortune favours the bold?

To date, Irving Picard, the court-appointed trustee in charge of liquidating Bernard Madoff’s former hedge fund empire, has recovered around US$2bn for victims of the fraud. His latest victory, announced yesterday, is a US$500m settlement with Union Bancaire Privée, a Swiss private bank.

Image links to full complaint (2.2MB PDF)

Three other suits filed in recent weeks could net Mr Madoff’s former clients much, much more. On November 24th, the trustee filed a US$2bn suit against UBS, alleging misconduct and “collaboration in the Bernard Madoff Ponzi scheme.” On December 2nd, a suit seeking more than US$6bn was lodged against JPMorgan for allegedly “aiding and abetting Madoff’s fraud”. Most recently, a US$9bn suit was launched against HSBC on December 5th. Announcements of all suits and settlements can be found here; UBS, JPMorgan and HSBC all deny the claims.

The trustee’s 173-page complaint claims that HSBC was “always willing to play the lapdog” to Madoff. In filling in the details, the plaintiff unravels the byzantine structures of “feeder funds” linked to Mr Madoff’s firm. Mr Picard has filed suits seeking some US$35bn in damages, and some are growing bullish on his prospects for recovery.

Update (December 9th): Another seven banks were sued on Wednesday.

Jérôme Kerviel, the rogue trader that saddled French bank Société Générale with a €4.9bn (US$6.7bn) loss in 2008 was sentenced by a Paris court today. He received a five-year prison sentence (two years suspended) and, to make his former employer whole, he was ordered to repay SocGen no less than four-billion-and-nine-hundred-million euros. His current monthly salary as a technology consultant is around €2,300. An appeal is pending.

To put the size of the fine in context, here are some rough equivalents:

  • The nominal annual GDP of the Bahamas (at purchasing power parity), according to the EIU’s 2010 forecast
  • Twenty Airbus A380 “super jumbo” planes
  • The net worth of the world’s 107th-richest person, British retail tycoon Sir Philip Green
  • The market capitalisation of semiconductor company STMicroelectronics
  • On Mr Kerviel’s salary while at SocGen, it would take him 49,000 years to earn enough to pay the fine. At his current salary, 178,000 years. At the French minimum wage, 304,000 years

The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.

Earlier this week, Goldman Sachs announced US$3.5bn in net earnings for the first quarter of 2010. Normally, a 91% rise in profits from the previous year would be cause for celebration. But given the sensational announcement a few days earlier that the Securities and Exchange Commission was launching fraud charges against the bank, Goldman’s stellar quarter did little to help its case.

If the regulator’s action is only the first salvo in a wider campaign, what other banks could face similar charges?

Read more at Financial Services Briefing: “Widening the net” (April 21st)

The blockbuster case brought against Goldman Sachs on Friday by American securities regulators put a particularly exotic species of structured security—the synthetic collateralised debt obligation—in the public spotlight.

The CDO at the centre of the Goldman case was particularly toxic, with some 99% of the underlying assets downgraded by ratings agencies within a year of the deal closing. The suit focuses on the influence that a hedge fund, Paulson & Co, may have had on the CDO’s construction, and whether Goldman should have told prospective investors more about this influence. Paulson famously bet heavily against the mortgages of the sort that were packed into the CDO that Goldman sold to investors. 

However, it’s not as if other CDOs were performing well while Goldman’s tanked. Some 70% of CDOs rated by Fitch were downgraded during 2009. Less than half of the securities that began 2009 rated AAA ended the year that way, with 16% of formerly AAA securities plunging all the way to “junk” status in a matter of months.

The latest progress report by the watchdog for America’s US$700bn bailout plan is out. The auditor’s analysis of the Troubled Asset Relief Program, or TARP, is reasonably clear: “It is extremely unlikely that the taxpayers will see a full return on their TARP investments.”

Deeper in the 224-page report, a detail getting attention is the number of fraud investigations pursued against firms alleged to be gaming the bailout system. The bailout agency opened 25 new investigations in the fourth quarter of last year, roughly the same as the quarter before. Of the 86 cases opened since the bailout programme began, 77 remain ongoing. These investigations include—take a deep breath—“suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.” Most of the cases are based on tips to a confidential hotline, where calls range from “expressions of concern over the economy to serious allegations of fraud,” the agency says.

A detail that concerns this reader can be found in a curious line-item on page 132. Among the list of legal, financial and logistical contractors working with the watchdog, there is an unexpected “vendor”: NASA. Can it be that complicated?

Desperate times call for desperate measures. By this logic, an economic downturn should see a rise in financial crimes. The European Central Bank, for example, recently reported a multi-year high in counterfeiting.

In the US, however, the Federal Bureau of Investigation has been reporting a steady fall in the number of bank robberies over the past year. In the third quarter of 2009—the most recent data available—the number of robberies, burglaries and larcenies at banks fell for the third consecutive quarter.

Violations in the first nine months of 2009, at just over 4,000, were down 10% on the previous year. Criminals also made away with less: US$30.5m last year versus US$41.1m the year before. Finally, this lighter haul was more likely to be seized by the authorities, who recovered 19% of last year’s loot, up on the 15% share recovered from 2008’s heists.

Even if robberies continue to fall, the risk averse should aim to avoid visiting bank branches on Fridays between 9:00 and 11:00am, the most popular time for holdups. During normal weekday office hours, the FBI’s data shows that Thursdays between 3:00 and 6:00pm are the safest bet.

Stanford Law School published its latest report on US securities fraud class action lawsuits today. The always-interesting research notes that the number of filings fell by 25% in 2009. “Plaintiffs simply ran out of financial firms to sue, and the rising stock market made it harder for plaintiffs to assert claims,” said Joseph Grundfest, director of Stanford’s Securities Class Action Clearinghouse.

For the second consecutive year, financial firms were the most popular targets for lawsuits, accounting for around half of filings made last year.

The researchers also explain the recent drop in filings as a result of lower market volatility. The number of filings tracks the VIX index reasonably closely, as sharp movements in share prices lead investors to think that mismanagement is to blame, particularly when those movements are of the downward variety.

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