Holland & Hart Securities Blog

The Subprime Crisis: A Major Shift in Priorities for the SEC

            Caught flatfooted by the meltdown in the subprime mortgage market, the SEC belatedly is investigating whether any wrongdoing occurred.  The origin of the subprime crisis is worth revisiting.  In a business environment featuring increasing home prices and significant demand for homes, “prime” borrowers with good credit locked in their rates.  Mortgage lenders extended credit to “subprime” borrowers with poor credit, who, due to poor underwriting practices, often were allowed to borrow more than they could repay.   This practice was facilitated by the issuance of asset-backed securities.   Mortgage lenders sold the loans to third parties who packaged them into pools and sold the cash flows to investors in the form of mortgage-backed securities. In turn, these third parties resecuritized the mortgage-backed securities to create collateralized debt obligations or "CDOs."

HOW TO ACHIEVE A LENIENT SETTLEMENT WITH THE SEC

A recent settlement in an SEC case against an attorney accused of engaging in an illegal scheme to “pump and dump” the shares of a microcap company demonstrates the value of persistence and good lawyering in litigation against the agency. In an earlier article posted on this blog, I wrote that SEC v. Packetport.com, Inc., Civ. No. 3:05-CV-1747 (D. Conn.) (Nov. 16, 2005), a civil injunctive action filed in the U.S. District Court, was consistent with previously announced factors that the SEC stated it would apply when considering when to bring charges against lawyers. 

SEC Examinations: A More Hostile Approach?

            The SEC examination staff’s use of a new letter request directed to registered investment advisers signals a more hostile approach to industry participants, and raises the risk of unjustified adverse findings of deficiency.  There are two important aspects of the letter, which was sent to an unidentified firm by the SEC’s New York Regional Office sometime in August 2007. See http://nscp.org/media/sec_request_list-aug2k7.pdf.

Brookstreet Securities Collapse: Where Were the Regulators?

The recent collapse of Brookstreet Securities raises serious questions about the efficacy of  regulation by the SEC, the NASD and state regulators.  In late June, Brookstreet fell below net capital requirements and shut it doors after its clearing firm, National Financial Services (“NFS”) suddenly wrote down the price of extremely risky and illiquid collateralized mortgage obligations (“CMO’s”) that Brookstreet had sold to its retail customers.  Brookstreet’s headquarters in Orange County, California provides an ironic backdrop for this sordid story, since Orange County itself lost millions buying CMO’s in the early 1990’s. 

Is Your Qualified Intermediary a Thief?

           Someone once asked Jesse James why he robbed banks, to which he responded “because that’s where the money is!”  Recent events demonstrate that, like James, certain qualified intermediaries involved in so-called “1031 Exchanges” are unable to resist the temptation to rob investors.  The activities of these modern-day bank robbers are facilitated by the unregulated nature of the qualified intermediary industry.