Americas second largest bank has been charged with violating federal securities laws based on alleged overstatement of regulatory capital. The Securities and Exchange Commission (SEC) filed the charges in connection with the banks 2009 acquisition of a major brokerage house. They include allegations that inherited notes were permissibly misstated. The misstatements in regulatory filings reached into billions of dollars.
Regulatory capital refers to the amount of capital that a bank must hold pursuant to SEC and other applicable rules, and it is intended to serve as a buffer against adverse market conditions. In the course of acquiring the brokerage firm, the bank assumed a large portfolio of structured notes and other financial instruments. The bank recorded the assumed notes at discount to par, yet it redeemed the notes at par. Accordingly, it was required to realize losses on the notes as they matured and to deduct these on its reporting of regulatory capital as the losses occurred.
The SEC charged the bank with violating provisions relating to internal controls and record keeping. As of March 31, 2014, 90 percent of the notes had matured, but the bank had not deducted any of the realized losses from its regulatory capital. As more and more notes matured, each subsequent fiscal quarter and fiscal year from 2009 resulted in overstatement of regulatory capital by greater and greater amounts in the regulatory filings. Eventually, the overstatement reached into the billions of dollars. However, by April 2014, internal controls which had failed the bank in this area for five years in fact discovered the problem, and upon further analysis, the bank reported the overstatements in a Form 8-K filing on April 28, 2014.
The bank agreed to pay a $7.65 million penalty. In addition to correcting its report of regulatory capital, the bank cooperated with SEC staff during the investigation and voluntarily took steps to remediate its internal controls that caused the reporting deficiencies. According to Andrew J. Ceresney, director of the SECs Division of Enforcement, the self-reporting, quick remediation and overall cooperation were factors in determining the penalty:
[The bank] self-reported its regulatory capital overstatements, remediated the issues quickly, and cooperated in our investigation. This penalty reflects credit for that cooperation, which allowed us to conduct our investigation efficiently and effectively.
Accuracy of Records
The necessity of maintaining the integrity of records and filings was restated by Michael J. Osnato, chief of the SEC Enforcement Divisions Complex Financial Instruments Unit:
The federal securities laws require all public companies to maintain accurate books and records as well as a system of internal accounting controls sufficient to assure transactions are recorded as necessary.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI