TIME Money

Bank of America To Pay Record $16.65 Billion Fine

Bank Of America Reports Loss Due 6 Billion Dollar Legal Charge
Spencer Platt—Getty Images

$7 billion of it will go to consumers faced with financial hardship

Updated: 10:14 a.m.

The Justice Department announced Thursday that Bank of America will pay a record $16.65 billion fine to settle allegations that it knowingly sold toxic mortgages to investors.

The sum represents the largest settlement between the government and a private corporation in the United States’ history, coming at the end of a long controversy surrounding the bank’s role in the recent financial crisis. In issuing bad subprime loans, some observers say, the bank helped fuel a housing bubble that would ultimately burst in late 2007, devastating the national and global economy.

“We are here to announce a historic step forward in our ongoing effort to protect the American people from financial fraud – and to hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy,” Attorney General Eric Holder said at a news conference announcing the settlement.

Since the end of the financial crisis, the bank has incurred more than $60 billion in losses and legal settlements. Of the latest settlement, $7 billion will go to consumers faced with financial hardship. In turn, the bank largely exonerates itself from further federal scrutiny.

However, not all is forgotten. The New York Times reports that federal prosecutors are preparing a new case against Angelo Mozilo, the former chairman and chief executive officer of Countrywide Financial, which Bank of America acquired in mid-2008. As the country’s largest lender of mortgages, Countrywide Financial purportedly played a large role in distributing toxic loans. Mozilo has already paid the Securities and Exchange Commission a record $67.5 million settlement.

MONEY financial advisers

Got a Beef With Your Broker? Wall Street, Attorneys Fight Over How to Fix Complaint Process

boxers in boxing match
Blend Images—Alamy

Wall Street and attorneys representing investors can't agree how to improve the arbitration system used to settle disputes between brokerages and their customers.

A proposal to strengthen the arbitration process that aggrieved investors use against securities brokers is running into obstacles just as the Securities and Exchange Commission prepares to consider it.

The plan, submitted in June by the Financial Industry Regulatory Authority, would ban securities industry veterans from serving as public arbitrators on the panels that decide cases filed by investors against their brokerages.

But now some investors’ attorneys who had pushed for the new rule are taking issue with the fact that it could apply to them as well. Other critics say the rule could be so stringent as to leave FINRA, an industry watchdog funded by Wall Street, without enough qualified arbitrators for the dispute resolution system it runs.

The SEC would have to approve the FINRA proposal for it to become a final rule.

FINRA arbitrators typically are considered “public” — those presently unaffiliated with the securities industry — and “nonpublic” — those with Wall Street ties. Many investors and their lawyers want a panel of three public arbitrators to hear their cases because non-public arbitrators may be biased in Wall Street’s favor, they say.

FINRA’s arbitration system has faced criticism for everything from not thoroughly vetting arbitrators to making it too easy for brokers for clean up their records. The plan addresses investor advocates’ criticisms that some arbitrators can be deemed “public” even if they previously worked in the securities industry for years.

The SEC solicited public opinions on the rule with a comment period that ended July 24. Separately, a new FINRA task force is conducting a broader review of the arbitration system.

Investors’ Lawyers Bite Back

One of Wall Street’s largest trade groups backs the proposal, but with a big condition.

In a July 24 letter to the SEC, the Securities Industry and Financial Markets Association said lawyers who represent investors should also be prohibited from acting as public arbitrators.

Firms and brokers would view arbitrators who have counseled investors as being biased against the industry, SIFMA wrote.

That view, already embodied in FINRA’s proposal, could hurt members of the Public Investors Arbitration Bar Association, a group of 450 lawyers who represent investors and a key force behind the push to weed out public arbitrators with Wall Street ties.

Under FINRA’s proposal, investors’ lawyers would not qualify as public arbitrators if they devoted more than 20 percent of their time within the past five years representing investors in disputes.

Similar restrictions would also apply to accountants and expert witnesses. They could become public arbitrators again, subject to certain restrictions, such as a hiatus from practice.

Lawyers and other professionals who have worked on behalf of the financial industry would be bound by similar rules.

But PIABA is already pushing back. The group has asked the SEC to reject language that would exclude lawyers and others who work on behalf of investors from being public arbitrators, according to its July 24 letter.

FINRA cites no evidence that professionals who serve investors would be biased, wrote Jason Doss, PIABA’s president. What’s more, the “non-public arbitrator” label has traditionally applied to arbitrators who have industry ties, he wrote.

FINRA declined to comment.

It is unclear how many of FINRA’s 3,560 public arbitrators would be deemed non-public. But too few arbitrators would strain the system. That is especially true when markets tank and claims spike, said George Friedman, an arbitration consultant and former director of FINRA’s arbitration unit.

“At the end of the day, we’re looking at fewer public arbitrators when we’re likely to need more going forward,” Friedman said.

MONEY investor protection

Why You Might Get Shut Out of Wall Street Deals

Exterior visual door security system
Rudi Tapper—Getty Images/iStockphoto

The SEC is reviewing its rules governing who can invest in privately traded securities.

A Securities and Exchange Commission review of its “accredited investor” rule could ultimately make it tougher for people to invest in privately traded securities — high-risk investments with potentially high rewards.

Under the rule, only well-heeled investors are permitted to buy these private placements — securities that are not registered with regulators or traded on exchanges. The idea is to protect Mom and Pop investors from the risks of these illiquid securities, typically issued by small or startup companies and sometimes found to be issued or sold fraudulently.

The criteria, in place since the rule was established in 1982 and never adjusted for inflation, generally require that investors have $1 million in assets or earn at least $200,000 a year to qualify to buy these securities.

But some critics want the SEC to impose other criteria, such as certain professions, arguing that net worth and income are not the best measures of investor sophistication. Others, including the U.S. Government Accountability Office, say the 1982 levels are too low.

The review marks the SEC’s first under the 2010 Dodd-Frank financial reform law, which requires one every four years. The SEC can develop new rules to change the standards but does not have to make any changes.

Investor advocates see the review as their chance to persuade the SEC to tighten requirements for buying the securities. In 2011, Dodd-Frank required the SEC to exclude the value of an investor’s primary residence from the net worth calculation, but the securities still are reaching investors who lack the financial sophistication to take on the risk, they say.

Companies that issue the securities worry that changes could limit their access to capital.

Small brokerage firms that often sell private securities can earn commissions of roughly between 7 percent and 9 percent.

The SEC’s Investor Advisory Committee discussed the issue at a July 10 meeting and expects to propose recommendations when it reconvenes in October.

SEC staff members have met directly with other groups, including the Angel Capital Association, a trade group for investors in start-ups, and the Public Investors Arbitration Bar Association, an organization of lawyers who represent investors in securities arbitration disputes.

JOBS Act Interactions

Consumer advocates have become more concerned about the accredited investor rule because of a related issue raised by the 2012 Jumpstart Our Business Startups Act, which loosened a long-standing ban on advertising the offerings.

Under that law, issuers may advertise their private offerings to mass consumers, such as in television commercials, even though their sale is still restricted to accredited investors.

“Thanks to the JOBS act, once private offerings are now essentially public offerings,” said Barbara Roper, investor protection director of the Consumer Federation of America, and a member of the SEC’s Investor Advisory Committee. Her concern: that unsophisticated investors who meet the requirements of “accredited investor” advertising will see those pitches and buy in.

The SEC could leave the financial thresholds in place but limit the percentage of total assets that someone can invest in private offerings, Roper said.

Another choice would be to deem some investors as “sophisticated” because of their professions. Accountants and certified financial analysts, for example, would be deemed savvy enough to take on the risk. SEC Chair Mary Jo White described the approach as possible “alternative criteria” in a letter to U.S. lawmakers last year.

The SEC declined to comment on its review and would have to vote on any changes.

MONEY financial advisers

Political Campaigns Can Be Hazardous for Financial Advisers

Political campaign supporters
Blend Images - Hill Street Studi—Getty Images

A Pennsylvania firm agreed last month to pay a $300,000 fine after the SEC alleged it had violated campaign-contribution rules.

Election season is under way, which means opportunities are mounting for public retirement plan advisers to do the wrong thing.

Investment advisers and certain employees who donate to many types of political campaigns are not allowed to advise state and local governments for two years, according to a 2010 U.S. Securities and Exchange Commission rule. Advisers who stray over that line can face tough consequences.

The SEC’s “pay-to-play” rule is in place to prevent advisers from using campaign contributions to persuade state and local governments to hire them. States, municipalities and government agencies typically have their own versions.

Advisory firms that fail to follow those rules can face hefty penalties.

In the SEC’s first such enforcement case against an investment adviser, TL Ventures Inc agreed on June 20 to pay nearly $300,000 to end charges that it received advisory fees from state and city pension funds after one of its associates had donated to a Philadelphia mayoral candidate and the Pennsylvania governor in 2011.

The Wayne, Pa., private equity firm neither admitted nor denied the SEC’s allegations.

The case is rattling advisers, said New York lawyer Jisha Dymond, who counsels companies and candidates about political law.


Advisers must also slog through other versions of pay-to-play rules from individual states and municipalities, Dymond said.

Among the concerns: conflicts between the rules. In New Jersey, for example, advisers to public pensions cannot contribute to state political party committees. But the SEC does not impose that restriction, Dymond said. Advisers can, however, get in trouble with the SEC for pushing others to contribute to political parties.

“In an election year, there’s so many different ways to hit a trip wire in terms of compliance,” Dymond said.

In the coming months, gubernatorial elections will be held in 36 states and U.S. three territories, according to the National Governors Association. That is in addition to state and municipal elections slated for November.

The SEC rule applies mainly to advisory firm executives and employees responsible for snagging business from state and local governments.

It typically does not involve federal elections, such as U.S. Senate campaigns for November midterm elections. But it could kick in when a state governor runs for a federal office. That is because he or she can still influence the selection of state financial advisers, said Ronald Jacobs, a Washington lawyer who specializes in political law.


Now is an ideal time for firms that advise pensions to review their campaign donation procedures and the various rules, lawyers say.

Remind employees who fall under the rule that the firm’s compliance staff must approve their contributions in advance, said Jacobs.

Some advisers simply ban contributions. “It’s easier than trying to figure out nuances,” said Stefan Passantino, a Washington lawyer who advises companies and candidates on pay-to-play issues.

But that might be overkill, Jacobs said. Many advisory firms limit their business to a specific state or municipality, or their employees live in a certain area. That makes it easy to decide which rules apply.


Does Anybody Need a Money-Market Fund Anymore?

New regulations are meant to protect money market mutual funds from another 2008-like panic.

On Thursday, the Wall Street Journal reported that the Securities and Exchange Commission is expected to approve new regulations for money-market mutual funds. Remember money-market funds? Before the financial crisis, these funds were very popular places to stash money because each share was expected to maintain $1 value. Your principal would remain the same, and the fund would pay substantially higher interest rates than a bank savings account.

But these days for retail investors, money-market mutual funds are something of an afterthought.

So why is the SEC intent on regulating them now? And will tighter rules push them further into irrelevance? Here’s what you need to know:

What going on?

A money-market fund is a mutual fund that’s required by law to invest only in low-risk securities. (Don’t confuse funds with money-market accounts at FDIC-insured banks. These rules don’t affect those.)

There are different kinds of money-market funds. Some are aimed at retail investors. So-called prime institutional funds, on the other hand, are higher-yielding products used by companies and large investors to stash their cash. The big news in the proposed rules affects just the prime institutional funds.

Prime institutional funds would have to let their share price float with the market, effectively removing the $1 share price expectation.

The SEC reportedly also wants to impose restrictions preventing investors from pulling their money out of these funds during times of instability, or discouraging them from doing so by charging a withdrawal fee. It’s unclear from the reporting so far which kinds of funds this would affect.

Why is the SEC doing this?

As MONEY’s Penelope Wang wrote in 2012 when rumors of new regulations were first circulating, the financial crisis revealed serious vulnerabilities to money-market funds. When shares in a $62 billion fund fell under $1 in 2008, it triggered a run on money markets.

In order to stabilize the funds, Washington was forced to step in and offer FDIC insurance (the same insurance that protects your bank account). That insurance ran out in 2009, and now the funds are once again unprotected against another run.

The majority of the SEC believes a primary way to prevent future panics is to remind investors that money-market funds are not the same as an FDIC-insured money-market account at a bank. Before the crisis, the funds seemed like a can’t-lose proposition. The safety of a savings account with double the return? Sign me up. But as investors learned, you actually can lose.

What does it mean for you?

Not much, at least not right away. The floating rate rules only apply to prime institutional funds, which the Wall Street Journal says make up about 37% of the industry.

The change also won’t be very important until money-market funds look more attractive than they do today. Historically low interest rates from the Federal Reserve have actually made conventional savings accounts a more lucrative place to deposit money than money-market funds. The average money-market fund returns 0.01% interest according to iMoney.net. That’s slightly less than a checking account.

Investors have already responded to money funds’ poor value proposition by pulling their money out. In August of 2008, iMoney shows there was $758.3 billion invested in prime money fund assets. In March of 2014, that number had gone down to $497.3 billion.

Finally, it appears unlikely that money-market funds will ever be as desirable as they were pre-crisis. As the WSJ’s Andrew Ackerman points out, money funds previously offered high returns, $1-to-$1 security, and liquidity. Interest rates have killed the returns, and the new regulations will limit liquidity and kill the dollar-for-dollar promise.

Don’t count the lobbyists out yet

Fund companies are really, really unhappy about the SEC’s proposed regulations. They’ve been fighting the rules for years, and until there’s an official announcement, you shouldn’t be sure anything is actually going to happen.

Others are worried the new regulations, specifically redemption restrictions, might actually cause runs on the market as investors fear they could be prevented from pulling money out if things get worse.

But the SEC may have picked a perfect time to do this. With rates so low, few retail savers care much about money-market funds. That wasn’t true back when yields were richer and any new regulation of money-market funds might have been met with a hue and cry from middle-class savers. Today? Crickets.

MONEY stocks

WATCH: Insider Trading is More Widespread Than You Thought

According to a new study, nearly 25 percent of all public company deals involve some insider trading.

TIME insider trading

Hedge Fund Manager Gets 3 Year Sentence for Insider Trading

Michael Steinberg SAC
Michael Steinberg, former SAC Capital portfolio manager, leaves Federal Court after sentencing in New York City on May 16, 2014. Andrew Gombert—EPA

Michael Steinberg was sentenced to 3 1/2 years in prison for insider trading on Friday. His prosecution was part of a decade-long federal investigation into former hedge fund giant SAC Capital and its billionaire founder Steven A. Cohen

Michael Steinberg, a top lieutenant to billionaire hedge fund mogul Steven A. Cohen, was sentenced to 3 1/2 years in prison for insider trading on Friday after being found guilty last year of securities fraud and conspiracy charges.

Steinberg’s sentencing is the latest black mark on Cohen’s former hedge fund, SAC Capital, which last fall pleaded guilty to securities fraud and agreed to pay $1.8 billion in the largest insider trading fine in U.S. history.

“Michael Steinberg traded on information from company insiders at Dell and NVIDIA to reap nearly $2 million in illegal profits,” Manhattan U.S. Attorney Preet Bharara said in a statement emailed to TIME late Friday. “Today he has learned the steep cost of those transactions.”

Steinberg, 42, was found guilty last December of conspiracy to commit securities fraud and four counts of securities fraud for insider trading involving two tech stocks, Dell and NVIDIA, that reaped $1.8 million.

“For most people on the planet, $1.8 million of gain is a lifetime of accumulated wealth,” U.S. District Judge Richard Sullivan said before he sentenced Steinberg to prison, according to Bloomberg. “Maybe in a hedge fund it’s no big deal but it’s a lot of money to most people.”

Prosecutors had urged Judge Sullivan to sentence Steinberg to more than six years in prison.

Steinberg’s prosecution was part of a decade-long federal investigation into SAC Capital. Last year, SAC was charged with securities and wire fraud for a scheme in which the fund engaged in a pattern of “systematic insider trading” that allowed it to reap hundreds of millions of dollars in illegal profits.

In April, a federal judge in New York accepted SAC’s guilty plea and approved a landmark $1.8 billion settlement with the government, effectively concluding a decade-long criminal investigation. SAC agreed to shut down its investment advisory business, but was allowed to continue to do business under a new name as a so-called “family office” managing Cohen’s $9 billion fortune.

Federal authorities have been investigating SAC for a decade — rumors of insider trading have been swirling around the hedge fund for years — and have secured guilty pleas or convictions from eight of its former employees. Cohen, who remains under investigation by the FBI, has never been charged with a crime.

It appears unlikely that Cohen will ever be personally indicted for his role leading a firm that was “riddled with criminal conduct,” according to federal prosecutors. Cohen does face civil charges from the Securities and Exchange Commission alleging that he failed to supervise his employees, and could ultimately be banned from the securities industry for life.

Steinberg has been granted bail, pending an appeal, according to Reuters.


Online Matchmaker Zoosk Files $100M IPO

While it has yet to log a profit, the popular dating site boasts 26 million members and a top iTunes App. It filed papers with the Securities and Exchange Commission Wednesday announcing a planned $100 million initial public offering

The online dating website Zoosk filed papers with the Securities and Exchange Commission Wednesday announcing a planned $100 million initial public offering.

The San Francisco startup was founded in 2007 and began as a website but has been particularly successful as a mobile app, grabbing the number one grossing dating app spot in the Apple app store. The 26-million member service, with users spread across 80 countries, saw revenues of $178 million last year for a net loss of $2.6 million in 2013, Techcrunch reports. In 2012, the site posted a significantly higher net loss of $20.7 million and revenues of just $109 million.

While Zoosk’s earnings have yet to hit positive territory, the service has been gaining users at a rapid pace. According to its IPO filing, by the end of 2013 Zoosk had a total of 26 million members and 650,000 paying subscribers — up 44% and 35%, respectively from 2012.

Bookrunners for the IPO include Bank of America Merrill Lynch, Citigroup, and RBC Capital Markets, according to Techcrunch.


TIME Newsmaker Interview

Exclusive: SEC Chair Mary Jo White On Not Sleeping, Money Markets And The Angry Left

In her first year at the Securities and Exchange Commission, Chair Mary Jo White has toughened enforcement, broken a partisan stalemate over post-crash regulation and launched studies of high frequency trading and market fragmentation. In a profile in this week’s magazine, available to subscribers here, TIME reports on how she has turned the agency around and where she is taking it.

Last month she sat down for an interview with TIME in her office overlooking the U.S. Capitol Building. An edited version follows.

One of the first things you did on arriving at the SEC was to change its settlement policy to require admissions of guilt in certain cases. How did you come to that position?

When I was U.S. Attorney I actually did the first deferred prosecution agreement and in that case I decided admissions really added to the accountability of the purported potential defendant.

The money market fund rule proposed last June broke a rule-making stalemate at the SEC but it was a compromise. Why should everyday Americans have faith that a rule produced by a political compromise will be effective?

Our proposal was based on a very important analysis and study by our economists, and that made a tremendous impact not only on me, but on the other commissioners [by showing that the 2010 reforms] didn’t completely address the phenomenon that we’d seen, the structural vulnerability that we’d seen,during the financial crisis. Second, this is an independent agency, we are deciding this on the merits.

Sen. Sherrod Brown [Democrat of Ohio] said he voted against you in committee in part because he thought you were too close to Wall Street. What do you say to those who say as a white collar defense lawyer you’re predisposed to Wall Street’s view more than the individual investor you’re charged with protecting?

My job here, my duty here, is to serve the American public, obviously, including investors in our markets, and that’s what I do. I started my career in the private sector and then became U.S. attorney. I think I was a stronger U.S. attorney, and I frankly think I am a stronger Chair of the SEC, because of that experience.

You said the policy of requiring admissions of guilt would evolve. What do you mean by that?

I would expect it to expand. There are lots of things you could put into the bucket of “particularly egregious conduct,” which is one of things we consider when seeking admissions. So far we’ve proceeded primarily with admissions against institutions, which I think is appropriate. But one must also think about appropriate cases for individuals too when the conduct was particularly egregious.

Sen. Elizabeth Warren famously grilled your predecessor for not prosecuting big banks.

I think what she was saying was, are they too big to try in court? The answer is they’re not too big to try. If you get everything you ask for in a settlement that the law allows you to have and they agree to it, there’s not going to be a trial. There is a premium that companies of all kinds place on putting the matter behind them. So that’s going to translate into not very many trials because they’re going to give us as the government all the relief we are seeking in a settlement.

Why have you proposed a review of company’s public disclosure procedures? The left is angry.

And they shouldn’t be. All you have to do is read the disclosures that are out there now and be struck by the fact that we can do this better and in a more meaningful way. The idea isn’t less disclosure, the idea is more meaningful disclosure for investors.

The left in general is unhappy. They see you as being overly solicitous to concerns of commissioners on the right and staffers here whom they perceive to be institutionally aligned with prior administrations.

I’m basically merits driven. I’m literally an independent. Apolitical. So that I am not always going to be with the left’s perceived interests or the right’s perceived interests. It’s going to be what I think the right answer is. Look, you have to decide over time, no matter who you are, what I’m about.

One of the things that’s interesting about this job is that it’s unlike being U.S. Attorney, where 90% of what you do, everybody loves. You’re going after bad guys. Here everything you do somebody’s going to dislike. That just kind of goes with the territory I think, and my job is to do what I think is the right thing. Carry out the mission the best way I can.

Is there anything about the market structure that worries you, that keeps you up at night? That makes you feel like there’s an imminent danger to the economy or the markets?

My usual answer to what keeps me up is I don’t sleep. Which is actually true.

How many hours of sleep do you get a night?

About four. That’s always been true. It serves me very well now.

But in terms of the market structure issues, each issue can undermine the confidence in our markets. The fragmentation of markets, dark pools and high frequency traders—it’s important to say that those phenomena are pretty well known.

The impacts, however, are not as well known and the theories about them are all over the lot. And so one of my primary focuses, really since before I walked in the door, was to make sure that we were doing everything we could to fully understand those issues. We do have a lot of safeguards. It’s just a matter of what else do we need to do, to make it even better, more resilient.

Even your friends say that while you’re an expert on enforcement, you’re a novice on market structure and rules.

Every chair and every commissioner has different expertise. The staff, however, has the full range of expertise. So you pick your staff well. You listen to them. You learn. I think I’m a quick study. I also, in my prior life, sat on the NASDAQ board for four years and was exposed to a number of these issues then, including many of the market structure issues. I made a decision about whether, given my particular background, I thought I could do a very strong job here and I certainly made the decision that I could. And I guess time will tell.

What’s your vision for the commission and what you can achieve while you’re here?

Overall vision is that it remains the very strong independent agency that it is, that oversees the fairness and safety of the markets on behalf of companies and investors and that’s really the heart of it. I’d like to see significant progress made on market structure issues. Being perceived as a strong cop on the beat I think is very important on the enforcement side, in terms of the confidence in the safety of our markets and the credibility not just of law enforcement but of government itself.

What does personal success look like?

Did a good job and was a strong leader of a strong agency.

Have you had any conversations with the White House or anybody else about being Attorney General if that job opened up?

I’m not going to talk about specific conversations.I’m here to do this job.


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