The broker-dealer, owned by the Royal Bank of Scotland (RBS), is also paying more than $9 million in restitution.
RBS Securities Inc., a securities firm facing charges that it perpetrated a long-running securities fraud scheme — primarily from its Stamford, Conn. office — will pay a monetary penalty of $35 million, plus more than $9 million in restitution to its customers, including firms affiliated with recipients of federal bailout funds through the Troubled Asset Relief Program (TARP), which was intended to mitigate damage to the financial system resulting from the 2008-2009 crisis.
Specifically, RBS has agreed to “pay a penalty of $35 million and make restitution to victims of at least $9,091,317.14,” according to the U.S. Department of Justice (DoJ).
In return, RBS will receive a one-year “non-prosecution agreement” from the DoJ relating to “RBS’s fraudulent trading through its now-defunct U.S. asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities trading group.”
The agreement calls for RBS to bring to the attention of the U.S. Attorney’s office for the district of Connecticut “any and all conduct by RBS, its present and former directors, officers, employees and agents acting within the scope of their employment that violates federal law, or any investigation of any such conduct that comes to the attention of RBS’s board, management, or legal or compliance personnel, as well as any administrative proceeding or civil action brought by any United States governmental authority that alleges fraud or corruption by RBS.”
The DoJ says that the federal investigation “revealed that RBS — principally from its trading floor in Stamford, Connecticut — perpetrated a scheme from 2008 to 2013 to defraud its customers in trades of residential mortgage-backed securities (RMBS) and collateralized loan obligations (CLOs).”
The non-prosecution agreement was unveiled jointly by Deirdre M. Daly, United States Attorney for the district of Connecticut; Christy Goldsmith Romero, special inspector general for TARP; and Patricia M. Ferrick, special agent in charge of the New Haven division of the Federal Bureau of Investigation (FBI).
A list of the scheme’s “victim-customers” is contained in an Oct. 25, 2017 letter from Connecticut U.S. Attorney Daly to Jonathon M. Moses, RBS Securities’s counsel at Wachtell, Lipton, Rosen & Katz. A complete list of firms impacted can be found here.
“RBS’s victim-customers included investment advisors and hedge funds investing as fiduciaries on behalf of pension funds, charitable and educational endowments, insurance companies, and others,” the U.S. Attorney’s letter states.
“The purpose and effect of RBS’s fraud,” says a joint statement issued by the DoJ, was to “increase its profits on RMBS and CLO trades at the expense of victim customers.”
The scheme was carried out by RBS “employees, who acted with the knowledge, encouragement and participation of RBS supervisors or its compliance-related personnel,” the DoJ says in a statement, which points out that “RBS conducted its scheme in various ways.
“First, RBS misrepresented material facts to deceive and cheat its customers in trades,” according to the DoJ. “For instance, in certain transactions, RBS lied to the buyer about the seller’s asking price (or vice versa), keeping the difference between the price paid by the buyer and the price paid to the seller for RBS.”
RBS also “misrepresented to the buyer that bonds held in RBS’s inventory were being offered for sale by a fictitious third-party seller, which allowed RBS to charge the buyer an extra, unearned commission.”
In addition, DoJ officials say RBS “instructed its RMBS and CLO traders in, and caused them to use, fraudulent trading practices.
“Third, RBS lied to victims who detected or suspected that they had been the victims of fraud.
“Fourth, RBS ignored or refused to act on complaints by its own employees who were not part of the scheme.
“Fifth, RBS used its purportedly independent proprietary trading operation, known as its ‘prop desk,’ as an arm of its RMBS and CLO trading desk in order to deceive rival broker-dealers in trades, including by allowing its RMBS and CLO traders to direct the prop desk’s negotiations in the sale of bonds.
And finally, RBS “concealed its fraudulent conduct from its customers, and from its own employees who were not participants in the scheme, in order to prevent or delay discovery.”
According to the DoJ, the agreement “takes into account RBS’s voluntary self-reporting, extensive and continuing commitment to cooperate, acceptance of responsibility for its and its employees’ conduct, and remediation efforts. The U.S. Attorney’s Office did not require RBS to retain an independent consultant to assess and improve RBS’s compliance and ethics program because RBS’s U.S. Asset-Backed Securities, Mortgage-Backed Securities and Commercial Mortgage-Backed Securities Trading group substantially ceased operations in March 2015 and RBS has already taken steps to reasonably prevent and detect further fraud.”
The agreement “addresses only the corporate criminal liability of RBS Securities Inc., not potential criminal charges for any individual. The criminal investigation of individuals associated with RBS’s trading activities remains open.”
The latest RBS development follows separate 2015 guilty pleas by Matthew Katke, a managing director at RBS, and Adam Siegel, the co-head of U.S. asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities trading at RBS. Both men pled guilty to conspiracy to commit securities fraud and began cooperating with the RBS investigations.
“For years, RBS fostered a culture of securities fraud,” U.S. Attorney Daly says in the DoJ statement. “Those in a position of authority taught and encouraged fraudulent trading practices. Worse, those supervisors and compliance personnel then took steps to prevent victims and honest RBS employees from discovering and exposing the scheme. After our joint investigation into fixed income trading began, RBS saw the error of its ways. RBS was able to avoid criminal charges in this case only because of its voluntary self-reporting and extraordinary cooperative efforts.
“By entering into this agreement, RBS has admitted the seriousness of its past criminal conduct and made a clean break. This is another step in our continuing joint effort to make clear to broker-dealers that lying to customers to increase profits is a crime, and that only by rooting out and reporting such misconduct on their own trading floors can they avoid significant criminal liability,” according to the Daly statement.
FTF News attempted to contact, via LinkedIn, two media representatives of parent company RBS Group for comment. By deadline there had been no response.
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