Penalties imposed on financial institutions totaled more than $7.8 billion in the first quarter of 2015, up 73 percent from the prior quarter, according to data released last month by the Committee on Capital Markets Regulation. There were four mega-settlements of more than $1 billion that led the pack. The most recent total eclipsed the fourth-quarter 2014 clip of $4.5 billion, which concluded a record $61.7 billion in penalties last year, the highest recorded by the nonprofit group since it began researching such matters. “Data show that financial institutions in the U.S. continue to face historically unprecedented public financial penalties,” the committee said in a news release.
Public financial penalties include class action settlements that arise from suits brought by the government and regulatory penalties that follow enforcement actions. The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are typically the agencies most active in enforcing such actions. Many settlements reflect continued fallout from the financial crisis. In February Morgan Stanley paid $2.6 billion to end a U.S. Department of Justice investigation into its mortgage-backed securities deals. That accord, which was the largest first-quarter deal, followed the investment bank’s tentative $275 million settlement to resolve an SEC investigation into subprime residential mortgage-backed securities, (RMBS), that Morgan Stanley sponsored and underwrote in 2007.
German financial giant Deutsche Bank AG in April agreed to pay $2.5 billion globally — about $2.1 billion to U.S. agencies — and entered into a deferred prosecution agreement to settle claims with United States and United Kingdom regulators that its traders helped rig the London Interbank Offered Rate (Libor) and other key benchmarks.
Much like previous Libor settlements, no individuals at Deutsche Bank entered a guilty plea or were named in court documents; however, the New York regulator forced Deutsche Bank to terminate seven employees and install an independent monitor. Deutsche Bank agreed to pay $600 million to the N.Y. Department of Financial Services, $800 million to the CFTC, $775 million to the Justice Department and £227 million ($357 million) to the Financial Conduct Authority.
In February, Standard & Poor’s Financial Services LLC also agreed to pay $1.375 billion to settle lawsuits brought by the Department of Justice (DOJ) and 20 attorneys general over the rosy ratings it assigned to large securities that turned toxic and exacerbated the financial crisis. Additionally, Commerzbank AG, in March agreed to enter into a deferred prosecution agreement and to pay $1.45 billion to New York and federal regulators and law enforcement agencies, in addition to firing five employees implicated in the processing of transactions for Iranian and Sudanese entities and enabling a $2 billion fraud at Olympus Corp.
The Cambridge, Mass.-based Committee on Capital Markets Regulation, which advocates improved regulation of capital markets, consists of 36 members across finance, investment, business, law and accounting and academic circles. It’s led by Harvard Law School professor Hal Scott. The research group has previously called on the Federal Reserve to better coordinate its stress test rules on financial institutions required under the Dodd-Frank Act with other regulators, including the Federal Deposit Insurance Corp., and with its existing stress testing procedures.
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