More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Advertising Advisor Services and Credentials Section 206 of the Investment Advisers Act contains the anti-fraud provision of the statute and ensures that RIAs advertising and marketing practices are consistent with the fiduciary duty owed to clients and prospective clients.
Annie Bell Adams, who lost her home to foreclosure, and four co-plaintiffs have filed the first class-action suit by homeowners in New York against 12 banks, alleging that LIBOR manipulation made them pay more for their subprime mortgages between 2000 and 2009.
The Financial Times reported Monday that Alabama-based attorney John Sharbrough says that plaintiffs in the suit could number as many as 100,000. The class action alleges that traders at the 12 banks were incentivized to manipulate LIBOR to a higher rate on certain dates, resulting in homeowners having to pay more.
While class action suits have been brought over LIBOR manipulation already, they have been filed by municipalities and investors. Now homeowners are getting into the act. Plaintiffs in this case held LIBOR Plus adjustable-rate mortgages (ARMs). Adams, who was on a pension, and whose subprime mortgage was securitized into LIBOR-based collateralized debt obligations (CDOs) and sold by banks to investors, saw her home go into foreclosure.
According to the Office of the Comptroller of the Currency, at least 900,000 home mortgage loans tied to the LIBOR rate were originated between 2005 and 2009. Their unpaid balances total some $275 billion.
The suit claims that when LIBOR went up, banks were able “to raise the interest rates paid by the plaintiffs on their adjustable-rate notes.” It also says that most ARMs reset repayment rates on the first day of the month, and that statistical analysis indicates a first-of-the-month increase in LIBOR consistently for each month between 2000 and 2009. Not only that, the suit also alleges that between 2007 and 2009 LIBOR moved by as much as 7.5 basis points on certain reset days.
“This can’t just be dismissed as a kooky lawsuit,” said Dominic Auld in the report. Auld, a litigator at Labaton Sucharow and not involved in the case, added, “Referencing CDOs and subprime mortgages ... really ties together LIBOR manipulation with the kinds of behavior that caused the financial crisis in first place.”