Justice Department and State Partners Secure $864 Million Settlement With Moody’s Arising From Conduct In The Lead Up To The Financial Crisis

Historic Settlement Involves Commitment by Moody’s to Improve Business Practices

NEWARK, N.J. – The U.S. Department of Justice, 21 other states, and the District of Columbia reached a $864 million settlement agreement with Moody’s Investors Service Inc., Moody’s Analytics Inc. and their parent, Moody’s Corporation, the Department announced today. The settlement resolves allegations arising from Moody’s role in providing credit ratings for Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDO), contributing to the worst financial crisis since the Great Depression.

The agreement resolves pending state court lawsuits in Connecticut, Mississippi, and South Carolina, as well as potential claims by the Justice Department, 18 states and the District of Columbia.

The settlement follows an investigation by the U.S. Attorney’s Office for the District of New Jersey and the Justice Department’s Consumer Protection Branch into potential claims pursuant to the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and investigations conducted by various State Attorneys General pursuant to state law.

“Moody’s touted a particularly robust analytical framework for rating RMBS and CDOs,” U.S. Attorney Fishman said. “Moody’s now admits that it deviated from its methodologies and failed to disclose those changes to the public. People making decisions on how to invest their money thought they could rely on the ratings Moody’s assigned to these products. When securities are not rated openly and honestly, individual investors suffer, as does confidence in all parts of the financial sector.”

 

“Moody’s failure to adhere to its own credit rating standards misled investors, played a significant role in the collapse of housing markets across the country and contributed mightily to the Great Recession,” said Principal Deputy Associate Attorney General Bill Baer. “Today’s settlement contains not only a significant penalty and factual admissions of its wrongdoing, but also a commitment by Moody’s to new and continued compliance measures designed to ensure the integrity of credit ratings going forward.”

“Our investigation revealed, and Moody’s has now acknowledged, that Moody’s used a more lenient standard than it had itself published,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “Investors relied on Moody’s credit ratings to be objective and independent, and they naturally expected Moody’s to follow its own published methods.”

The multi-faceted settlement includes a Statement of Facts in which Moody’s acknowledges key aspects of its conduct, and a compliance agreement to prevent future violations of law. The Statement of Facts addresses Moody’s representations to investors and the public generally about: (1) its objectivity and independence; (2) its management of conflicts of interest; (3) its compliance with its own stated RMBS and CDO rating methodologies and standards; and (4) the analytic integrity of certain rating methodologies.

The Statement of Facts addresses whether Moody’s credit ratings were compromised by what Moody’s itself acknowledged were the conflicts of interest inherent in the so-called “issuer pay” model, under which Moody’s and other credit rating agencies are selected by the same entity that puts together and markets the rated securities and therefore stands to benefit from higher credit ratings.

Among other things, Moody’s acknowledges in the Statement of Facts:

• Moody’s published and maintained online its “Code of Professional Conduct” for the stated purpose of promoting the “integrity, objectivity, and transparency of the credit ratings process,” including managing conflicts of interest that it publicly acknowledged arose from the fact that RMBS and CDO issuers determined whether to retain Moody’s to rate these securities.

• Moody’s acknowledges that it passed these conflicts on to the managing directors of the business units, who were then asked to resolve the “dilemma” between maintaining ratings quality and the need to win business from the issuers that selected them.

• Moody’s publicly stated that its ratings “primarily address the expected credit loss an investor might incur,” which included its assessment of both the “probability of default” and the “loss given default” of rated securities.

• Starting in 2001, Moody’s RMBS group began using an internal tool in rating RMBS that did not calculate the loss given default or expected loss for RMBS below Aaa and did not incorporate Moody’s own rating standards. Instead, the tool was designed to “replicate” ratings that had been assigned based on a previous model that calculated expected loss for each tranche and incorporated Moody’s rating level standards. In October 2007, a senior manager in Moody’s Asset Finance Group (AFG) noted the following about Moody’s RMBS ratings derived from the tool: “I think this is the biggest issue TODAY. [A Moody’s AFG Senior Vice President and research manager]’s initial pass shows that our ratings are 4 notches off.”

• Starting in 2004, Moody’s did not follow its published idealized expected loss standards in rating certain Aaa CDO securities. Instead, Moody’s began using a more lenient standard for rating these Aaa securities but did not issue a publication about this practice to the general market.

• In 2005, Moody’s authorized the expanded use of this practice to all Aaa CDO securities and, in 2006, formally authorized the use of this practice, or of an even more lenient standard, to all Aaa structured finance securities. Throughout this period, although “[m]any arrangers and issuers were aware” that Moody’s was using a more lenient Aaa standard, Moody’s did not issue publications about these decisions to the general market.

The Statement of Facts further addresses other important aspects of Moody’s rating methodologies, including its “inconsistent use of present value discounts” in assigning CDO ratings and its selection of assumptions about the correlations between assets in CDOs.

Under the terms of the compliance commitments, Moody’s agrees to maintain a host of measures designed to ensure the integrity of its credit ratings. These include:

• Separation of Moody’s commercial and credit rating functions by excluding analytical personnel from any commercial related discussions and excluding personnel responsible for commercial functions from determining credit ratings or developing rating methodologies;

• Independent review and approval of changes to rating methodologies by maintaining separate groups to develop and review rating methodologies;

• Changes to ensure that specified personnel are not compensated on the basis of the company’s financial performance;

• Enhancing Moody’s oversight functions to monitor the content of press releases and the timeliness of methodology development;

• Deploying new technological platforms and centralized systems for documentation of rating procedures; and

• Certifications of compliance by the President/CEO of Moody’s with these commitments for at least five years.

“The Department of Justice is committed to working with companies that are willing to admit what they did and take steps to enhance compliance,” said Deputy Assistant Attorney General Jonathan Olin for the Department’s Consumer Protection Branch. “Non-monetary measures such as those agreed to today are part of the Department’s comprehensive approach to protect the American people by promoting a culture of compliance across industries.”

The settlement includes a $437.5 million civil penalty, which is the second largest payment of this type ever made to the federal government by a ratings agency. The remainder will be distributed among the settlement member states in alignment with terms of the agreement. The states involved in today’s settlement include Arizona, California, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina and Washington as well as the District of Columbia.

The matter was handled by Consumer Protection Branch Director Michael S. Blume, Senior Litigation Counsel Sondra L. Mills, and Trial Attorney James T. Nelson; and by the U.S. Attorney’s Office District of New Jersey Deputy Chief, Civil Division Leticia Vandehaar and Assistant U.S. Attorneys Thomas G. Strong and Alex S. Weinberg.

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Investment Advisor Sentenced to Five Years for Defrauding Investors of $1.725 Million

Owner Of Day Trading Firm Charged In Worldwide Simulator Trading Account Scheme

Scheme Targeted Hundreds of Investors in Over 30 Countries, Including the United States

NEWARK, N.J. – A Thai man was arrested and charged with allegedly orchestrating a scheme to defraud hundreds of investors worldwide of at least $1.4 million through his operations of a purported online day trading firm, U.S. Attorney Paul J. Fishman announced today.

Naris Chamroonrat, 33, of Bangkok, Thailand, is charged by complaint with one count of conspiracy to commit securities fraud and one count of wire fraud. Chamroonrat was arrested by special agents of the FBI on Dec. 20, 2016, at the Los Angeles International Airport in California. He is scheduled to appear later today before U.S. Magistrate Judge Frederick Mumm in Los Angeles federal court.

According to the complaint:

From December 2013 to June 2015, Chamroonrat and his conspirators allegedly solicited individual investors to open day-trading accounts with his company, Nonko Trading, and to wire thousands of dollars to the company to fund those accounts. Instead of using the money to fund the accounts, he and his conspirators allegedly stole $1.4 million from more than 260 investors in more than 30 countries. To cover up the theft, Chamroonrat provided the victims with online trading simulator, or “demo,” accounts, but told the investors they were real accounts to be used to trade securities. The majority of those funds were transferred to foreign bank accounts controlled by Chamroonrat and used for personal expenses or other unauthorized transactions. The victims of the scheme included at least 180 investors from the United States, including several in New Jersey.

Chamroonrat and others chose as victims those customers they believed would not make money day trading, and would therefore be less likely to try to withdraw funds from their accounts. These inexperienced, unsophisticated “losing” traders would simply believe they lost their money trading in the open markets.  If traders on the demo accounts started to appear profitable, Nonko would switch them to real accounts.

Chamroonrat and his conspirators discussed the scheme in detail in email and online chat communications.  In one online communication between Chamroonrat and a conspirator on Feb. 3, 2014, Chamroonrat allegedly discussed the scheme, which he commonly referred to as Nonko’s “TRZ Program.”  He stated, “We also have the trz program, where instead [of] a live account it’s a trz account and if they blow it all up, then great, firm still profits.”  The conspirator responded: “and thing with TRZ that freaks me out … THE ONLY THING … someone … will make money … what happens when they do make money?” Chamroonrat replied, “bump them off of trz, put them on a real account[,] give them more leverage in exchange for a profit split.”

The conspiracy count with which Chamroonrat is charged carries a maximum potential penalty of five years in prison and a $250,000 fine, or twice the gain or loss from the offense.  The wire fraud count carries a maximum potential penalty of 20 years in prison and a $250,000 fine, or twice the gain or loss from the offense.

In a separate civil action, the Securities and Exchange Commission today filed a complaint in Newark federal court charging Chamroonrat with violating and aiding and abetting violations of the antifraud provisions of the securities laws. The complaint seeks a permanent injunction as well as the return of ill-gotten gains plus interest and penalties.

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Timothy Gallagher, with the investigation leading to today’s charges. He also thanked the SEC for its valuable assistance in the investigation.

The government is represented by Assistant U.S. Attorney Nicholas P. Grippo of the Economic Crimes Unit.

The charge and allegations contained in the complaint are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

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Mecklenburg Co. Man Facing Federal Charges In Connection With $19 Million Investment Fraud Scheme

Defendant Misused Victim-Investors’ Funds to Pay for Vacation Homes, Vehicles, a Chef and Other Personal Expenses

Manhattan U.S. Attorney Announces Charges Against Six Individuals In International High-Yield Investment Fraud Scheme

Scheme Participants Impersonated Federal Reserve Officials to Swindle Over $50 Million from Investors in the United States and Foreign Countries

Preet Bharara, the United States Attorney for the Southern District of New York, Angel M. Melendez, Special Agent In Charge of the New York Field Office of the Department of Homeland Security, Homeland Security Investigations (“HSI”), and Deirdre L. Fike, Assistant Director in Charge of the Los Angeles Field Office of the Federal Bureau of Investigation (“FBI”), announced the unsealing of an Indictment charging six defendants with conspiracy, wire fraud, impersonation of Federal Reserve Bank of New York (“New York Fed”) officials, money laundering, and other crimes in connection with a fraudulent high-yield investment scheme that resulted in the theft of over $50 million from investors in the United States and around the world.

Manhattan U.S. Attorney Preet Bharara said:  “Edwards and his co-defendants allegedly concocted and carried out an audacious scam, promising investors exponential returns on investments they claimed were overseen by the New York Federal Reserve and backed by the U.S. government.  In reality, it was all a lie; there was no government-backed program and no plan to invest, only an alleged plan to steal the investors’ money.”

HSI Special Agent in Charge Angel M. Melendez said: “Using forged and counterfeit Federal Reserve documents, these individuals allegedly orchestrated a complex international scheme that cost unwitting investors both here and abroad over $50 million dollars. This indictment shows the great length that criminals will go to steal the money of hard working individuals. HSI is up to the challenge to uncover these schemes and bring the participants to justice.”

FBI Assistant Director Deirdre L. Fike said: “The defendants in this case allegedly used complicated terminology and claimed to have international sophistication as they swindled their victims. Skilled investigators with the FBI and with the HSI will continue our joint efforts to mitigate the threat to capital markets around the world.”

According to the allegations contained in the Indictment:

From at least June 2013 through August 2016, RIENZI EDWARDS, MICHAEL JACOBS, RUBY HANDLER-JACOBS, F.K. HO, LAWRENCE LESTER, and RACHEL GENDREAU orchestrated and executed a fraudulent high-yield investment program known as the “Cities Upliftment Program,” or CUP, which the defendants falsely told investors was operated by the New York Fed.  The scheme was principally designed and operated by EDWARDS, with the assistance of JACOBS and HANDLER-JACOBS, and was marketed to investors around the world through brokers, including HO, LESTER, and GENDREAU.

The defendants pitched the CUP to investors as a highly exclusive, invitation-only, public-private investment partnership designed to raise capital and generate large returns through a purported “trading program” run by the New York Fed.  The defendants promised investors that the CUP would generate extremely high returns on their investments, in some cases as much as $150 million for every $1 million invested.  The defendants claimed that half of the returns would be used to help revitalize American cities recovering from the 2008 financial crisis, and that the other half would be returned to the investors at the rate of $1 million per day for 75 banking days.  The defendants told numerous other lies to victims to convince them to invest, including that their funds would be held in a trust account established by the New York Fed and that CUP investments were risk-free because they were “guaranteed” by the United States government.  In truth, and as the defendants well knew, the CUP was a complete scam.

One of the primary ways in which the defendants tricked victims into investing millions of dollars in the CUP scheme was the use of forged and counterfeit New York Fed documents.  On numerous occasions, the defendants sent, or caused to be sent, investment contracts, guarantees, correspondence, and other CUP-related documents printed on what appeared to be New York Fed letterhead and bearing the names and purported signatures of New York Fed officials, including the president, certain board members, and other senior officials of the New York Fed.  In addition, EDWARDS, JACOBS, and HO, with the assistance of HANDLER-JACOBS, pretended to be New York Fed officials during in-person meetings and phone calls with investors to convince them to invest in the CUP.

Instead of holding investors’ funds in the purported trust accounts as promised, the defendants simply stole the money.  EDWARDS, JACOBS, and HANDLER-JACOBS caused the bulk of the funds to be laundered through various domestic and overseas bank accounts in Hong Kong, Barbados, the United Kingdom, and Sri Lanka held in the names of shell companies that they controlled.  A portion of the proceeds was then kicked back to the brokers who had recruited the investors.  Altogether, the defendants stole over $50 million from investors in the United States and several foreign countries.

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JACOBS was arrested at Los Angeles International Airport in California on December 11, 2016, and was presented in federal court before a U.S. Magistrate Judge in Santa Ana, California, on December 12.  HANDLER-JACOBS was arrested in Albuquerque, New Mexico, on December 11, 2016, and was presented in federal court before a U.S. Magistrate Judge in Albuquerque on December 12.  LESTER was arrested in Mount Vernon, Washington, on December 12, 2016, and presented the same day in federal court before a U.S. Magistrate Judge in Seattle, Washington.  GENDREAU was arrested on December 12, 2016, in Savanna, Illinois, and was presented in federal court before a U.S. Magistrate Judge in Rockford, Illinois, earlier today.  EDWARDS and HO are currently at large.

The case is assigned to U.S. District Judge Paul G. Gardephe.  Arraignment is scheduled for December 20, 2016, in federal court in Manhattan.

EDWARDS, 55, of Sri Lanka, JACOBS, 64, of Albuquerque, New Mexico, and HANDLER-JACOBS, 64, of Albuquerque, New Mexico are each charged with one count of conspiracy to commit wire fraud and one count of wire fraud, each of which carries a maximum sentence of 10 years in prison; one count of conspiracy to commit money laundering and two counts of money laundering, each of which carries a maximum sentence of 20 years in prison; one count of conducting monetary transactions in unlawful funds, which carries a maximum sentence of 10 years in prison; one count of conspiracy to impersonate employees of the United States, which carries a maximum sentence of five years; one count of impersonating employees of the United States, which carries a maximum sentence of three years; and aggravated identity theft, which carries a maximum sentence of two years in prison.

HO, 80, of Singapore, LESTER, 71, of Mount Vernon, Washington, and GENDREAU, 46, of Savanna, Illinois, are each charged with one count of conspiracy to commit wire fraud and one count of wire fraud, each of which carries a maximum sentence of 10 years in prison; and one count of aggravated identity theft, which carries a maximum sentence of two years in prison.   In addition, HO is charged with one count of conspiracy to impersonate employees of the United States, which carries a maximum sentence of five years; and one count of impersonating employees of the United States, which carries a maximum sentence of three years.

The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencings of the defendants will be determined by the judge.

Mr. Bharara praised the investigative work of HSI and the FBI.  Mr. Bharara also thanked the Federal Reserve Bank of New York for its ongoing cooperation in this investigation.

The case is being prosecuted by the Office’s Complex Frauds and Cybercrime Unit.  Assistant United States Attorney Daniel S. Noble is in charge of the prosecution.

The charges contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

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Two Securities Traders Charged In Scheme That Netted $26 Million In Illicit Profits

Manipulated $10 Billion Worth of Securities in Tens of Thousands of Transactions

NEWARK, N.J. – Two New Jersey-based securities traders were arrested today and charged with orchestrating a massive, long-running market manipulation scheme that netted them more than $26 million in illegal profits between 2014 and 2015, U.S. Attorney Paul J. Fishman announced.

Joseph Taub, 37, of Clifton, New Jersey, and Elazar Shmalo, 21, of Passaic, New Jersey, were each charged by complaint with one count of conspiracy to commit securities fraud. They are scheduled to appear later today before U.S. Magistrate Judge Steven C. Mannion in Newark federal court.

“As outlined in today’s complaint, Taub, Shmalo and others engaged in a scheme to place numerous buy and sell orders for specifically targeted, lightly traded securities in a coordinated fashion that allowed them to manipulate the price to their advantage,” U.S. Attorney Fishman said. “Over a period of years, they manipulated $10 billion worth of securities in this way, pocketing $26 million in illicit profits at the expense of other investors. The charges we filed today are part of our continuing effort to hold accountable those who would try to illegally tilt the playing field in their own favor.”

“The FBI is diligent in ensuring that anyone intent on corrupting the free market will be brought to justice,” Special Agent in Charge Timothy Gallagher of the FBI’s Newark Division said. “This type of behavior cheats the average investor and has a terrible impact on the securities industry.”

According to documents filed in this case and statements made in court:

From December 2013 to December 2016, Taub, Shmalo, and other conspirators allegedly orchestrated a sophisticated scheme to manipulate the prices of securities of numerous public companies by coordinating trading in dozens of brokerage accounts that the conspirators controlled. The defendants and their conspirators looked for companies whose securities had low trading volumes because it was easier to manipulate their prices. In this way, they injected false information into the market about the supply and demand of these securities, artificially inflating their prices. They then profited by selling at the artificially inflated prices the shares they had accumulated at lower prices.

In 2014 and 2015 alone, Taub, Shmalo and their conspirators engaged in more than 23,000 instances of manipulative trading, buying and selling $10 billion worth of securities and making more than $26 million in illegal profits.

The defendants and their conspirators relied on pre-arranged and coordinated trading among dozens of brokerage accounts they controlled. These accounts were held in the conspirators’ own names, the names of their family members, and the names of entities the conspirators controlled. Many of the accounts were opened in the names of individuals who neither controlled the accounts nor traded the securities held in the accounts (straw account holders). Taub funded many of the accounts that were not in his name and used the straw account holders to conceal the scheme from regulators and law enforcement.

The manipulative trading generally involved two or more trading accounts that bought and sold the same lightly traded stock on the same day during the same period of time. At least one account was primarily used to place multiple smaller orders to create upward or downward price pressure (the “helper account”) and at least one other account was primarily used to buy and sell larger quantities of stock (the “winner account”). The winner accounts profited by buying and selling at prices affected by the manipulative orders in the helper accounts. The helper and winner accounts were almost always held at different brokerage firms. The helper accounts frequently broke even or lost money, but in conjunction with the winner accounts, the conspirators profited overall.

The trading manipulations usually lasted just a few minutes each, during which time the conspirators sometimes controlled at least 80 percent of the volume of a targeted stock and traded in several accounts simultaneously. Most of the coordinated trading events involved dozens of orders and the purchase and sale of thousands of shares of targeted stocks. The defendants and their conspirators generated a net profit from these events more than 80 percent of the time.

The count of conspiracy to commit securities fraud with which the defendants are charged carries a maximum potential penalty of five years in prison and a fine the greater of $250,000 or twice the gain derived from the offense or twice the loss caused by the offense.

The U.S. Attorney’s Office is also planning to file a separate civil action seeking forfeiture of brokerage accounts in which the manipulative trades were executed, bank and brokerage accounts funded with proceeds of the scheme, and Taub’s interest in companies in which he invested the proceeds of the scheme. Civil forfeiture cases are “in rem” proceedings – proceedings against things. The forfeiture claims in this case are based on allegations that the forfeitable property is proceeds of the securities fraud scheme or is property involved in laundering the proceeds of the scheme.

In a separate civil action, the Securities and Exchange commission today filed a complaint in Newark federal court charging Taub and Shmalo with violating and aiding and abetting violations of the antifraud provisions of the securities laws. The complaint seeks a permanent injunction as well as the return of ill-gotten gains plus interest and penalties.

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Gallagher, with the investigation which led to today=s charges. He also thanked special agents of IRS-Criminal Investigations, the SEC and investigators from the U.S. Attorney’s Office – District of New Jersey, for their roles in the investigation.

The government is represented by Assistant U.S. Attorneys Daniel Shapiro and Zach Intrater of the U.S. Attorney’s Office Economic Crimes Unit in Newark; and Assistant U.S. Attorneys Sarah Devlin and Barbara Ward, Acting Chief of the office’s Asset Forfeiture and Money Laundering Unit.

The charge and allegations contained in the complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

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