Trust, Trustees, Constructive Trust, Fiduciary Duties

Editor’s Note: I am currently working on the issue of fiduciary duty, so I would appreciate receiving material from any of you that have submissions on the subject.
There is an article in the Florida Bar Journal this month on this topic. “If a fiduciary has special skills or becomes a fiduciary on the basis of representations of special skills or expertise, the fiduciary is under a duty to use those skills” . P. 22 Florida Bar Journal March, 2010 , “Understanding Fiduciary Duty” by John F Mariani, Christopher W Kammerer and Nancy Guffey Landers. So if a party presents itself to a borrower as a “lender” one would reasonable presume that they employed one or more underwriters who would perform due diligence on the loan, property and viability of the transactions including borrower’s income, affordability etc. A borrower would NOT reasonably presume that the “lender” didn’t care whether or not they would make the payments now or at some time in the future when the loan reset.
It is a fascinating subject, but the area I am centering in on, is the presumption of a trusted relationship giving rise to a fiduciary duty where (1) the superior party takes on MORE tasks than called for by the contractual relationship between the two would normally imply, and (2) where the transaction is so complex and the knowledge one of the parties so superior, that the injured party is virtually forced to rely on the superior party.
It doesn’t hurt either where the borrower is told not to bother with an attorney (“You can’t change anything anyway,” or “These documents are standard documents using Fannie Mae, FHA, HUD, Freddie Mac forms” etc.). Trust me, nobody who wrote those forms had nominees or MERS in mind when they were prepared.
The issue is particularly important when we look at the layers of Trustees (implicit or explicit) in each of the securitized transactions. Whether it is the Trustee on the Deed of Trust who obviously has duties to both the Trustor (homeowner) and beneficiary (?!?), the Trustee for the aggregate pool under the pooling and service agreement, The Trustee of the Structured Investment Vehicle which typically off shore, the so-called Trustee for the SPV (REMIC) that issued the mortgage backed securities, each of whom presumptively is the successor to the “Trustees” before it, we are stuck with layers upon layers of documents that contain discrepancies within the documents and between the provisions of the documents and the actions of the parties.
You also have the key issue that the true chronology of events differs substantially from the apparent chronology, starting with the fact that the mortgage backed securities were sold prior to the funding of the loan, the assignment and assumption agreement was executed prior to the borrower being known, and the pooling and service agreement also executed prior to any transaction with the borrower.
The use of “close-out” dates and the requirement that assignments be recorded or in recordable form creates another layer of analysis. On the one hand you have clear provisions that explicitly state that the “loan” is not accepted into the alleged “trust” while on the other hand you have the parties acting as though it was accepted into the “trust.”
You have entities described as trusts that have no property, tangible or intangible in them, and “trustees” named where the enabling documents chips away relentlessly at the powers and duties of the trustee leaving you with an agent whose powers are so limited they could be described as a candidate to be an agent rather than one with actual agency powers.
The laws allowing the borrower to claw back undisclosed fees and profits are obviously based upon the presumption that the party who received those fees had some duty toward the borrower to act in good faith, knowing that the borrower was relying upon them to advise them correctly. Steering them into a loan that is likely or guaranteed to put them into foreclosure is obviously a breach of that trust, and taking compensation to act against the interest of the borrower is exactly what Truth in Lending and deceptive lending laws are all about.
The article below clearly highlights the issues. The agent or broker gets paid only upon “closing the sale.” The agent gets paid a standard industry fee for doing so. But when the fee is a yield spread premium or some other form of kickback or rebate undisclosed to the borrower, the debtor ends up in a product that is not easily understood and is probably better for the “ledner” than the loan product that would have been offered if the “lending parties” were acting in good faith.
So this article should be read with an eye toward applying similar fact patterns to the securitized loan situation where the loan originator was in many cases not even a bank but looked like a bank to the borrower.
In the securities industry the issue is in flux more than the laws applying to mortgages where the investment represents the entire wealth of many borrowers. The stakes are usually much higher than in an individual stock purchase transaction.
March 4, 2010

Trusted Adviser or Stock Pusher? Finance Bill May Not Settle It

You have probably seen the television commercial, the one where you seem to be watching an intimate conversation between family members. But at the end, you learn that the conversation was actually between a broker and his client.

The advertisement is meant to evoke the idea of financial adviser as confidant, and is part of brokerage firms’ broader effort in recent years to recast their image — from mere stock pushers to trustworthy advisers.

But in interviews, former and current brokers said the ad told only part of the story. All said their jobs depended less on giving advice and more on closing sales. The more money they brought in, the more they, and their firms, would earn.

“I learned a lot about being a good salesman at Merrill,” said David B. Armstrong, who left Merrill Lynch after 10 years and with partners started an advisory firm in Alexandria, Va. “The amount of training I sat through to properly evaluate investment opportunities was almost nonexistent relative to the training I got on how to sell them.”

While the issue of broker responsibility is not new, it has resurfaced as Congress has been considering financial overhaul legislation. In his original draft, Senator Christopher J. Dodd, chairman of the Senate Banking Committee, proposed requiring brokers to put their customers’ interests first — what is known as fiduciary duty — when providing investment advice. But in recent weeks, the chances of this proposal’s making it into the bill began to dim.

Senator Tim Johnson, a South Dakota Democrat on the Banking Committee, has proposed an 18-month study of the brokerage and investment advisory industries, an effort that would replace Senator Dodd’s provision.

Imposing a fiduciary requirement could have an impact on investment firms’ profits. Guy Moszkowski, a securities industry analyst at Bank of America Merrill Lynch, said that the impact of a fiduciary standard was hard to determine because it would depend on how tightly the rules were interpreted. But he said it could cost a firm like Morgan Stanley Smith Barney as much as $300 million, or about 6 to 7 percent of this year’s expected earnings, if the rules were tightly defined. “It’s very nebulous, but I think that is a reasonable estimate,” he added.

In a research report about Morgan Stanley last year, Mr. Moszkowski wrote, “Financial advisers will be expected to take into account not just whether a product or investment is suitable for the client, but whether it is priced favorably relative to available alternatives, even though this could compromise the revenue the financial adviser and company could realize.”

Technically speaking, most brokers (including those who sell variable annuities or the 529 college savings plans) are now only required to steer their clients to “suitable” products — based on a customer’s financial situation, goals and stomach for risk.

But Marcus Harris, a financial planner who left Smith Barney 10 months ago to join an independent firm in Hunt Valley, Md., said the current rules leave room for abuse. “Under suitability, advisers would willy-nilly buy and sell investments that were the flavor of the month and make some infinitesimal case that they were somehow appropriate without worrying,” he said.

Kristofer Harrison, who spent a couple of years at Smith Barney before leaving to work as an independent financial planner in Clarks Summit, Pa., said the fact that brokers were paid for investments — but not advice — also fostered the sales mentality.

“The difficulty I had in the brokerage industry” he said, “is that you don’t get paid for the delivery of financial advice absent the sale of a financial product. That is not to say the advice I rendered was not of professional quality, but in the end, I always had the sales pitch in the back of my mind.”

Mr. Armstrong, Mr. Harris and Mr. Harrison all said they had decided to become independent because they felt constrained by their firms’ emphasis on profit-making and their inability to provide comprehensive advice.

A current branch manager of a major brokerage firm who did not want to be identified because he did not have his employer’s permission to speak to the media, confirmed that “you are rewarded for producing more fees and commissions.” While he said that “at the end of the day, I think that the clients’ interests are placed first and foremost by most advisers,” he added that “we are faced with ethical choices all day long.”

Brokers are typically paid a percentage of fees and commissions they generate. The more productive advisers at banks and big brokerage firms could collect 50 percent of the fees and commissions they generate, said Douglas Dannemiller, a senior analyst at Aite Group, a financial services research group.

The firms may also make money through other arrangements, including what is known as revenue sharing, where mutual fund managers may, for instance, agree to share a portion of their revenue with the brokerage firm. By doing this, the funds may land on the brokerage firm’s list of “preferred” funds. Some brokerage firms, including Merrill Lynch and Morgan Stanley Smith Barney disclose their revenue sharing information on their Web sites, or at the point of sale. Edward Jones discloses it as well, as the result of a settlement of a class-action lawsuit. UBS and Wells Fargo Advisors declined to comment on whether it discloses this information.

Unlike fiduciaries, brokers do not have to disclose how they are paid upfront or whether they are have incentives to push one investment over another. “The way the federal securities law regulates brokers, it does not require the delivery of information other than at the time of the transaction,” said Mercer E. Bullard, an associate professor at the University of Mississippi School of Law who serves on the Securities and Exchange Commission’s investment advisory committee.

The legislative language on fiduciary responsibility was one part of the financial overhaul bill aimed at protecting consumers’ interests. Another part, setting up an independent consumer protection agency, may also be watered down.

The study proposal by Senator Johnson may be included in the actual bill, which means it would not be subject to debate. And consumer advocates contended that the study would stop regulators from making any incremental consumer-friendly changes until the study was completed. The study would also require the S.E.C. to go over territory already covered in a 228-page study, conducted by the RAND Corporation in 2008 at a cost of about $875,000, the advocates said.

“In my opinion, the Johnson study is a stalling tactic that will either substantially delay or totally prevent a strong fiduciary standard from being applied,” said Kristina Fausti, a former S.E.C. lawyer who specialized in broker-dealer regulation.

“The S.E.C. has been studying issues related to investment-adviser and broker-dealer regulation and overall market conditions for over 10 years,” she said. “It’s puzzling to me why you would ask an agency to conduct a study when it is already an expert in the regulatory issues being discussed.”

Even after the study was completed, legislation would still need to be passed to give the S.E.C. authority to create a fiduciary standard for brokers who provide advice. “As we all know, the appetite for doing this in one or two years is certainly not going to be what it is today,” said Knut Rostad, chairman of the Committee for the Fiduciary Standard, a group of investment professionals advocating the standard. His group circulated an analysis that tried to illustrate where answers to the study’s questions could be found.

Credit Default Swaps as Insider Trading Violation

“Yet on a wholesale basis, Goldman Sachs and others not only had the inside information, they had created it. That is why Goldman started trading against the the interests of its clients to whom it was selling mortgage backed securities that were designed to fail”

“Both the investor and the borrower would have understood that sometimes very little of the investors’ money was actually being used to fund mortgages, with the rest being sued to buy insurance, credit default swaps, pay fees, profits, kickbacks and commissions.”

As this article points out from NY Times Mark HulBert, the insiders always make money. That is the game when the people minding the store get to know everything about the inventory and push the old produce on you so you don’t realize that it will turn brown by the time you get home. Martha Stewart went to jail for a tiny arguable violation of using inside information.
Yet on a wholesale basis, Goldman Sachs and others not only had the inside information, they had created it. That is why Goldman started trading against the the interests of its clients to whom it was selling mortgage backed securities that were designed to fail.
Nobody is in  jail for that — at least not yet. Goldman made money selling the securities to investors, made money selling the loans into esoteric (impossible to audit) pools, made money underwriting securities, made money trading in credit default swaps — all of which required the signature of some hapless borrower who thought the people who had procured this loan were acting in accordance with law and good faith.
While nobody knew about credit default swaps when the Truth in Lending Act was passed, it was precisely this kind of behind the scenes shenanigans that TILA was designed to prevent. With transparency the borower would understand that fees, profits, insurance policies and credit default swaps were being created and purchased out of the proceeds of a transaction between the borrower and an investor who was advancing the money.
Both the investor and the borrower would have understood that sometimes very little of the investors’ money was actually being used to fund mortgages, with the rest being sued to buy insurance, credit default swaps, pay fees, profits, kickbacks and commissions. Both of them would have understood that the quality of their investment was secretly being undermined by the people selling them this wonderful opportunity.
Bottom Line: The loan was sold most of the time as a passive investment that would enable the homeowner to profit from increasing value of real property that was overleveraged (without the homeowner knowing that the appraisal was suspect believing that it had been confirmed through normal underwriting procedures). Forward this article to any securities attorney and see if he doesn’t agree that what was sold to homeowners was a security and that the rules regarding rescission, damages, disclosure etc. under securities laws, rules and regulations apply.
February 28, 2010

More Often Than Not, the Insiders Get It Right


CORPORATE insiders are sending fairly positive signals about the market.

When stocks began to fall in mid-January, insiders cut back on sales of their companies’ shares and increased their purchases, according to David Coleman, editor of the Vickers Weekly Insider Report.

That adds up to at least a “neutral” stance, he wrote to clients, and implies that the recent decline won’t turn into a full-blown bear market.

But, as a market indicator, how reliable are the sell-and-buy decisions of insiders like corporate officers, directors and big shareholders?

While these insiders have a long history of correctly anticipating the market’s direction, they haven’t done all that well in the last few years. As a group, insiders failed to recognize the top of the bull market in October 2007, and didn’t anticipate the depth of the decline that followed.

After these missteps, have insiders’ trades outlived their usefulness as a basis for market timing?

Probably not, says H. Nejat Seyhun, a finance professor at the Stephen M. Ross School of Business at the University of Michigan, who has studied the behavior of corporate insiders for many years. In an interview, Professor Seyhun said that insiders were not infallible, and that their recent failures were hardly their first misreading of the market’s direction.

But since 1975, the earliest year he has studied, insiders have been correct far more often than they’ve been wrong, and this is still likely to be the case, he said.

And there is no evidence, he added, that insiders have lost their ability to tell when their own companies’ stocks are undervalued. In the late 1970s and early ’80s, for example, he found that the average stock bought by an insider outperformed the overall market by three percentage points in the 50 days after the purchase.

For the most recent 10-year period in his sample, through 2008, the comparable 50-day advantage for the insiders was 3.3 percentage points. That’s striking because it includes the bulk of the 2007-9 bear market.

Given the variability of the year-by-year results, Professor Seyhun cautions that it’s not clear whether insider purchases are more profitable today than they were 30 years ago. But, he argues, his results show that insiders by no means are losing their touch.

Though the professor’s analysis extends only through 2008, data collected by the Vickers Weekly Insider Report show that even though the insiders missed the bear market, they can nevertheless take credit for anticipating the market rebound that began a year ago. Leading up to the market’s low in March 2009, for example, insiders as a group behaved more bullishly than they had in more than a decade.

Consider an indicator that Vickers calculates each week, representing the ratio of the number of shares that insiders sold over the previous eight weeks to the number they bought. That ratio dropped to as low as 0.45 to 1 in the weeks just before the bear market ended. That was the ratio’s lowest level since December 1990, at the beginning of the great ’90s bull market.

The more recent low, of course, was followed by a 10-month rally in which the Standard & Poor’s 500-stock index gained some 70 percent.

By November, in contrast, this sell-to-buy ratio had risen as high as 5.21 to 1, according to Vickers, more than double its long-term average of around 2.5 to 1. That signaled to Mr. Coleman that the market was vulnerable to a decline — and, indeed, the market did start to fall in mid-January. At its lowest point, the S.& P. 500 was down nearly 9 percent from the mid-January high.

But in recent weeks, insiders have been cutting back on sales and increasing their purchases. As a result, the sell-to-buy ratio has fallen back to 3.52 to 1, according to Vickers.

Though that is still higher than the long-term average, the trend suggests to Mr. Coleman that the recent downturn is likely to be “only a near-term correction.” He said that his firm was “increasingly optimistic about the future performance of the overall markets.”

Had the sell-to-buy ratio increased in the wake of the market’s pullback, Professor Seyhun added, we would have had reason for worry. It would have meant that insiders had no confidence that their shares would be recovering anytime soon, he said.

“Fortunately, and at least for now,” he said, “insiders are not exhibiting such eagerness” to sell.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail:

Foreclosure Defense: Financial Insitutions Attempt to Cure an Uncurable Position Through BuyBacks



Dear Mario:

Both you and Dawn brought up the question about the buy-back of certificates on asset-backed securities. Dawn feels there is added urgency since the investment banks are buying these back to settle claims of fraud coming from the investors who purchased them in the first place. She might be right. The faster you get into court the less likely they are able to come up with documentation to counter your claim regarding assignments, holder, and holder in due course (see today’s blog posts).

I think Dawn has it right that at least part of the motivation for doing this is to at least give themselves the argument that says “Well, even if the borrower WAS right, we have taken care of the problem and so we can foreclose now.” Dawn is most likely correct in her assessment of the intentions of the lenders to use and anything else they can lay their hands on to (1) at least force the burden of proof onto the borrower and (2) maybe convince a judge that this is an easy way out of what would otherwise be complex litigation.

However, a holder in due course is one by definition holds title without taint of wrongdoing or defenses. Legally, my opinion (in Florida where I am licensed) would be that

  • (1) the buyback only removes the one (and ONLY) class of possible claimants who might be bona fide purchasers for value without notice of wrongdoing and therefore holders in due course — which gives rise to our argument that there might have been a holder in due course but the “lender” or foreclosing party never was a holder in due course and now the only class of people who could have been holders in due course are gone, according to the latest position now asserted by the lender
  • (2) the purchase by a person who committed part of the wrongful behavior that tainted title to the negotiable instruments does not remove the taint
  • (3) the buyback is suspect because the Seller might have reassigned, pledged or otherwise diminished his capacity to sell the certificates on asset backed securities
  • (4) the actual owner of the assignments and notes is not known and could be the Special Purpose Vehicle Corporation that issued the securities but also could could be one of half a dozen other entities — thus they may have purchased the wrong thing from the wrong people
  • (5) any of these entities might have and probably did enter into cross agreements, insurance agreements, and guarantee agreements including credit default swaps and insurance on the revenue flow from the notes
  • (6) the “lender” still must trace the specific note to a specific set of certificates on asset backed securities that are specifically backed by notes and mortgages including the one in this case and that no other series of asset backed securities and no other SPV issued certificates indicating they were backed by a pool of loans whose description included this particular note and mortgage and
  • (7) they would have to show by someone who can be cross examined and who actually states in his affidavit of “personal knowledge” that ALL of the certificates on ALL of the asset backed securities that are backed in part by ANY portion of the this Note and Mortgage are accounted for by the buyback. To say that I doubt that they will ever be able to do that is an understatement.
  • (8) Is this just another scheme (like the write-down scheme forcing the loss on investors) whereby the investment bank will make even more profit and fees that were and are undisclosed to the borrower ad which should be credited to the borrower?
  • (9) Why would ANYONE purchase worthless paper (certificates on asset backed securities) whether it was a buyback or anything else? This is a question asked in many cases by many judges in many opinions. The obvious answer is that the transaction is a mask for something else on someone’s agenda.
%d bloggers like this: