RBS Securities agreed to pay $44 million as part of a non-prosecution agreement covering allegations that the company’s mortgage-backed securities trading group defrauded its customers out of millions of dollars by lying about mortgage bond trades, the Department of Justice and the Special Inspector General for the Troubled Asset Relief Program announced Thursday.
The activities in question involved RBS’ now-defunct U.S. asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities trading group, which was shut down in 2015.
According to the DOJ and SIGTARP, an investigation found that RBS “perpetrated a to defraud its customers” in trades of residential mortgage-backed securities and collateralized loan obligations between 2008 and 2013.
“The purpose and effect of RBS’s fraud was to increase its profits on RMBS and CLO trades at the expense of victim customers,” SIGTARP said in a release. “RBS conducted this scheme by, through and with its employees, who acted with the knowledge, encouragement and participation of RBS supervisors or its compliance-related personnel.”
According to the DOJ and SIGTARP, RBS’ scheme involved several methods, all designed to increase the company’s profit at the expense of its customers.
First, RBS “misrepresented material facts to deceive and cheat its customers in trades,” the authorities said. Mortgage bond trades are typically conducted through a broker, who connects a willing seller with a willing buyer and negotiates the pricing on their behalves.
But in RBS’ case, 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”
In other deals, RBS “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.”
On other occasions, RBS both taught and made its RMBS and CLO traders use fraudulent trading practices.
Additionally, RBS lied to victims who detected or suspected that they had been defrauded. RBS also ignored or refused to act on complaints made by its own employees who did not take part in the scheme.
RBS also 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 hid its fraudulent conduct from its customers, and from its own employees, in order to prevent being discovered.
As a result of the investigation, RBS agreed to a non-prosecution agreement and will pay a fine of $35 million and pay more than $9 million of restitution to victim customers.
According to the DOJ, included among RBS’ victims are: Barclays Capital; Citigroup Global Markets; Goldman Sachs Asset Management; Jefferies & Company; Merrill Lynch Wealth Management; Morgan Stanley; Soros Fund Management; and others.
According to the authorities, RBS cooperated with the investigation and that cooperation played a significant role in lowering the fine the company will pay.
“For years, RBS fostered a culture of securities fraud. 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,” Deirdre Daly, United States Attorney for the District of Connecticut, said in a statement.
“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,” Daly continued.
“By entering into this agreement, RBS has admitted the seriousness of its past criminal conduct and made a clean break,” Daly added. “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.”
Specifically, the DOJ and SIGTARP said that 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 DOJ said that it did not require RBS to retain an independent consultant to review RBS’s compliance and ethics program because RBS’s ABS trading group “substantially ceased operations” in March 2015 and RBS “has already taken steps to reasonably prevent and detect further fraud.”
In a statement provided to HousingWire, a RBS spokesperson said that company has “zero tolerance” for the actions in question.
“Having identified misconduct and self-reported the matter to the authorities, RBS has extensively co-operated with this investigation,” the RBS spokesperson said. “Two former managing directors have pled guilty, and RBS has zero tolerance for market misconduct. We will pay restitution to all impacted customers. We are pleased to be able to resolve this issue as we continue to build a simpler, stronger bank that is fully focused on serving our customers well.”
As the spokesperson said, the DOJ and SIGTARP noted that Matthew Katke, a registered broker-dealer and managing director at RBS, pleaded guilty in March 2015 to conspiracy to commit securities fraud and began cooperating with the government.
Additionally, Adam Siegel, the co-head of U.S. asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities trading at RBS, pleaded guilty in December 2015 to that same charge and also began cooperating with the investigation.
“This investigation uncovered that RBS officials committed a long-running scheme to increase profits by defrauding customers, including TARP banks,” said Christy Goldsmith Romero, SIGTARP.
“I applaud RBS's prompt decision to cooperate fully with SIGTARP’s investigation that, in addition to this settlement, helped lead to the convictions of an RBS trader and an RBS supervisor,” Goldsmith Romero added. “RBS’s cooperation in SIGTARP’s investigation and subsequent actions to right this wrong are the correct response when federal law enforcement shows up.”
