Documents

Warren Letter to DOJ IG

Sep. 15 2016 — 3:56a.m.

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ELIZABETH WARREN UNITED STATES SENATE WASHINGTON, DC 20510-2105 P: 202-224-4543 MASSACHUSETTS COMMllTEES: BANKING, HOUSING, AND URBAN AFFAIRS HEALTH, EDUCATION, LABOR, AND PENSIONS tinitcd �tatcs �cnatc ENERGY AND NATURAL RESOURCES SPECIAL COMMITIEE ON AGING September 15, 2016 2400 JFK FEDERAL BUILDING 15 NEW SUDBURY STREET BOSTON, MA 02203 P: 617-565-3170 1500 MAIN STREET SUITE 406 SPRINGFIELD, MA 01103 P: 413-788 2690 www.warren.senate.gov The Honorable Michael E. Horowitz Department of Justice Inspector General 950 Pennsylvania Ave. NW, Suite 4706 Washington, DC 20530-0001 Dear Mr. Horowitz: I am writing to request an Inspector General review of the Department of Justice (DOJ) response to referrals made by the Financial Crisis Inquiry Commission (FCIC) for potential violations of securities laws identified during the FCIC's investigation of the causes of the 2008 financial and economic crisis in the United States. Thousands of FCIC documents were made public for the first time in March 2016. These documents reflect months of work by the FCIC, including hearings and testimony taken under oath, transcribed witness interviews, and thousands 9f documents collected voluntarily or under subpoena. A review of these documents conducted by my staff has identified 11 separate FCIC referrals of individuals or corporations to DOJ in cases where the FCIC found "serious indications of violation[s]" of federal securities or other laws. 1 Nine individuals were implicated in these referrals (two were implicated twice). The DOJ has not filed any criminal prosecutions against any of the nine individuals. Not one of the nine has gone to prison or been convicted of a criminal offense. Not a single one has even been indicted or brought to trial. Only one individual was fined, in the amount of $100,000, and that was to settle a civil case brought by the SEC. A second individual recently agreed to a civil settlement with the SEC in which he admitted no wrongdoing and paid no personal fine. 2 Similarly, my staff found that FCIC referrals identified potentially illegal activity at 14 corporations (including five that were implicated in multiple referrals). Not one of the 14 - or any of the individuals responsible for potential wrongdoing at these corporations - was criminally indicted or brought to trial. Five of these 14 corporations settled with DOJ - paying fines, but 1 Memo from FCIC Legal Staff to Commissioners of the FCIC, re: Confidential Referral Memorandum (Sep. 12, 2010) (https://www.dropbox.com/sh/ufck6e0dmytje66/AADoWsH GMFlsqHFaN iOC1kvla/BusMtgsAgnds_SCREENED/201O_09%20 (September)/9-14-201O_Agenda_for_BusMtng%20(1)_1.docx?dl=O). 2 Daniel Mudd, former Fannie Mae CEO, reached this settlement in August 2016, under which his former company paid a $100,000 fine, but Mr. Mudd expended no personal funds. Reuters, Former Fannie Mae CEO Settles Crisis-Related Lawsuit with SEC (Aug. 22, 2016) (http://www.reuters.com/article/us-sec-fanniemae-mudd-exclusive-idUSKCNlOXlZI). 1

suffering no additional consequences. Of the remaining nine, some were investigated or reached civil settlements, but none suffered any criminal consequences for their alleged violations. Not every individual or company accused of a crime is guilty of that crime and not every DOJ referral results in a conviction. But the failure to obtain any criminal convictions of any of the individuals or corporations named in the FCIC referrals suggests that the department has failed to hold the individuals and companies most responsible for the ?nancial crisis and the Great Recession accountable. This failure requires an explanation. I am therefore requesting that you conduct an investigation of the DOJ investigations related to these FCIC referrals. The remainder of this letter provides additional detail on my} concerns. The Financial Crisis Inquiry Commission The Financial Crisis Inquiry Commission (FCIC) was established by the Fraud Enforcement and Recovery Act of 2009 (PL. 111-21) to ?examine the causes, domestic and global, of the current ?nancial and economic crisis in the United States.?3 Over the next two years, ?the Commission reviewed millions of pages of documents, interviewed more than 700 witnesses, and held 19 days of public hearings in New York, Washington, DC, and communities across the country that were hard hit by the crisis.?4 The 633?page report was released in January 2011, ?nding that ?dramatic breakdowns of corporate governance, profound lapses in regulatory oversight, and near fatal ?aws in our ?nancial system. .. [and] that a series of choices and actions led us toward a catastrophe for which we were ill prepared.?5 One month later, the FCIC, having completed its statutory requirements, disbanded. However, the Commission report was not its only product. Under the Fraud Enforcement and Recovery Act, one of the functions of the FCIC was ?to refer to the Attorney General of the United States and any appropriate State attorney general any person that the Commission ?nds may have violated the laws of the United States in relation to such crisis.?6 3 PL 111-21. 4 Financial Crisis Inquiry Commission, Work of the Commission (viewed August 2016) 5 Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the Commission on Causes of the Financial and Economic Crisis in the United States (J an. 2011) 6 PL 111-21,

Little was known about these referrals and whether the Department of Justice (DOJ) took action based on them until March 2016, when the National Archives released large portions of the Commission?s records for the ?rst time.7 This release contained thousands of documents: 500 boxes of documents and 13 terabytes of data. Many of these documents were released online. These records included ?[m]inutes and notes of commissioner meetings, including internal deliberations concerning the causes of the ?nancial crisis and the drafting of the ?nal report [and] interview summaries and transcripts.? 8 My staff reviewed thousands of these documents and identi?ed new publicly released information on referrals to the DOJ by the FCIC. FCIC Referrals to DOJ of Individuals and Corporations Accused of Potential Wrongdoing The FCIC records released by the National Archives contain several important memoranda prepared by FCIC staff describing ll referrals of individuals or corporate entities to DOJ, the reasons for the referral, and the outcome of the commission?s vote on the referral. A September 12, 2010 memo prepared by FCIC Legal Staff and sent to all Commissioners of the FCIC contains information on the majority of referrals. The memo was prepared for discussion at the CIC business meeting to be held two days later, on September 14, 2010. The memo notes that the commission?s investigation has ?generated information that the Commission should consider referring to the Department of Justice. . .all of the referral matters will require further investigation by the Department of Justice. Nonetheless, the matters presented below constitute serious indications of violation of a number of laws.?9 The FCIC voted on each individual referral in this memo at a September 29, 2010 meeting. The records of the votes on these referrals are contained in the minutes of this meeting, which were approved at the October 12, 2010 FCIC meeting.10 The September 12 memo described seven recommended referrals. 1. Potential Fraud: False and Misleading Representations of Loan Underwriting Standards by UBS and Other Issuers. The FCIC memo describes how UBS and other mortgage holders provided disclosures about the quality of holdings ?designed to assure 7 National Archives, National Archives Opens Financial Crisis Inquiry Commission Records (Mar. 11, 2016) 8 National Archives, National Archives Opens Financial Crisis Inquiry Commission Records (Mar. 11, 2016) archives. gov/press/press-releases/20 6/an 9 Memo from FCIC Legal Staff to Commissioners of the FCIC, re: Con?dential Referral Memorandum (Sep. 12, 2010) (September)/9? 1? FCIC, Agenda Item 4 for Telephonic Business Meeting of October 12, 2010: Minutes of Business/Retreat Meeting of September 29, 2010 (Oct. 12, 2010).

the prospective investor that the mortgages were of high quality and reasonably secure,? but failed to disclose that a signi?cant number of those mortgages were actually highly risky.11 The memo described in detail actions taken by it also noted that ?our investigative record is not as complete for other companies,? but listed nine Credit Suisse, Citigroup, Freddie Mac, Goldman, JP Morgan, Lehman, Merrill, Societe Generale, and Washington Mutual that appeared to engage in similar activities as they had apparently ?waived their established underwriting criteria.?12 The memo continued, noting that ?there is ?a substantial likelihood that the disclosure [of this information] would have been viewed by the reasonable investor as having signi?cantly altered the ?total mix? of information made available.? The failure to disclose this information potentially violates both the 1933 and 1934 Securities Acts [and] may also constitute mail and wire fraud.?13 A supplement to the September 12, 2010 memo was sent to Commissioners by Gary Cohen, the FCIC General Counsel, on September 28, 2010.14 This supplemental memo contained additional information related to this referral obtained from Clayton Holdings (a ?rm hired by major ?nancial institutions to conduct third-party due diligence on mortgage loans), which reviewed the underwriting procedure used by many of these ?rms. The FCIC supplemental memo notes that ?Regulation AB promulgated by the SEC in late 2004 speci?cally requires that investors in mortgage backed securities be provided with underwriting criteria used to originate the loans in the pools.?15 But according to the CIC memo, Clayton Holdings used criteria that were not designed to provide customers with information about the overall quality of the securities. According to the staff memo, ?As testi?ed to by Clayton witnesses, Clayton's due diligence review was never designed to give investors in the total loan pool adequate information concerning a_ll the underlying loans in the [which] may have resulted in disclosure which was untrue.?16 The memo found that ?the pattern evidenced by our investigation of Clayton, one of Clayton's competitors, and a number of underwriters is indicative of two possible areas of misrepresentation? by the companies that hired Clayton: ?[?ailure to disclose the gross numbers waivers [sic] of underwriting standards, and inaccuracy in disclosing that not all waived loans had con?rmed compensating factors,? meriting consideration for a referral for a potential violation of Section 11 of the Securities Act, CIC Referral Memo (Sep. 12, 2010). 12 FCIC Referral Memo 13 FCIC Referral Memo (Sep. 12, 2010), citing Basic v. Levinson, 485 US. 224, 232 (1988). 14 FCIC, Supplemental to Referral Memo, at 24-26 (sent by Gary Cohen on 9/28/2010) w? SIS 20 00020] October) 1 2?20 0) . 15 FCIC, Supplemental to Referral Memo (sent by Gary Cohen on 9/28/2010). 16 FCIC, Supplemental to Referral Memo (sent by Gary Cohen on 9/28/2010). 4

which creates liability for the misrepresentation of material facts in registration statements. 17 On September 29, 2010, the Commission voted to transmit this referral to DOJ. The vote was 6-0-1-1 in favor, with Commissioners Angelides, Born, Georgiou, Graham, Murren, and Wallison voting Aye, Commissioner Thomas voting Present, and Commissioner Thompson Not Present. Commissioners Hennessey and Holtz-Eakin were absent.18 Potential Accounting Fraud and False Certifications: Fannie Mae, and Fannie Mae CEO {Daniel Mudd) and CFO (Stephen Swad). The FCIC memo describes a series of reports indicating that in the run-up to the ?nancial crisis, ?Fannie Mae may have overstated assets, earnings and capital through various accounting improprieties. . . [and] a failure to disclose accurate information about the state of risk management at Fannie Mae.?19 The memo notes that, ?[a]ssuming this information is material, this is a Violation of Section 10b-5 of the 1934 Act.?20 CIC staff noted a second potential violation of law to be referred to the DOJ: ?the CEO and CFO of Fannie Mae certi?ed the ?rm?s annual and quarterly ?nancial statements as disclosing all material information under section 302 of the Sarbanes-Oxley Act. These certi?cations presume that the CEO and CFO have reviewed and put in place adequate risk management systems? which they may not have done. The CEO of Fannie Mae that certi?ed these reports was Daniel Mudd, and the CFO was Stephen Swad.21 On September 29, 2010, the Commission voted to transmit this referral to DOJ. The vote was 6?0-2 in favor, with Commissioners Angelides, Born, Georgiou, Graham, Murren, and Wallison voting Aye, and Commissioners Thomas and Thompson Not Present. Commissioners Hennessey and Holtz-Eakin were absent. 22 Apparent Selective Disclosures of Imminent Ratings Downgrades by Moody's; Failure by UBS and ?Possibly Other Investment Banks? to Disclose Pending Downgrades to Purchasers of Their Securities. The FCIC memo notes that in July 2007, ?[i]nternal e-mails between UBS Investment Bank executives indicate that UBS and possibly other investment banks received advance notice of potential downgrades [of asset backed securities] by Moody?s.?23 The memo did not name other potential 17 FCIC, Supplemental to Referral Memo (sent by Gary Cohen on 9/28/2010). ?8 FCIC, Agenda Item 4 for Telephonic Business Meeting of October 12, 2010: Minutes of Business/Retreat Meeting of September 29, 2010 (Oct. 12, 2010). ?9 FCIC Referral Memo (Sep. 12, 2010). 20 FCIC Referral Memo (Sep. 12, 2010). 21 Fannie Mae, Annual Report (Form 10-K), for ?scal year ended Dec. 31, 2007, resources lilczir pdl?prog 22 CIC, Agenda Item 4 for Telephonic Business Meeting of October 12, 2010: Minutes of Business/Retreat Meeting of September 29, 2010 (Oct. 12, 2010). 23 FCIC Referral Memo (Sep. 12, 2010).

recipients of the advance notice. Five days later, Moody?s did announce the downgrade; but in the interim UBS had allegedly sold some of these over-valued securities to another investor. The memo notes that ?[t]hese facts potentially implicate three provisions of federal securities law?: SEC rule 10b-5, which UBS and other ?rms may have violated if they were informed of potential downgrades and failed to disclose this information; section 10 of the 1934 Securities Act, which could have been violated by any UBS employee who sold stock or other securities on the basis of the nonpublic information about their imminent downgrades; and SEC Rule FD, which Moody?s could have violated through its selective disclosure [to UBS or other bank employees] of the imminent downgrades.24 On September 29, 2010, the Commission voted to transmit this referral to DOJ. The vote was 5-1?2 in favor, with Commissioners Angelides, Born, Georgiou, Graham, and Murren voting Aye, Commissioner Wallison voting Nay, and Commissioners Thomas and Thompson Not Present. Commissioners Hennessey and Holtz?Eakin were absent.25 4. Potential Fraud and False Certi?cations: Citigroup, Citigroup CEO Chuck Prince and Citigroup Board of Directors Executive Committee Chair Robert Rubin, Citigroup CFO Gary Crittenden. The FCIC memo describes a 2010 SEC civil settlement with Citigroup, its former CFO and the head of investor relations arising from the company?s ?statements to the market in 2007 that the company had only $13 billion in subprime exposure when, in fact the company ultimately disclosed $55 billion in subprime exposure.?26 The memo notes that ?[b]ased on FCIC interviews and documents obtained during our investigation, it is clear that CEO Chuck Prince, and Robert Rubin, chair of the Executive Committee of the Board of Directors, knew this information no later than September According to the FCIC memo, the false representations made in October 2007 ?appear to have violated SEC Rule 10b?5, which makes it unlawful for ?any person directly or indirectly to omit to state a material fact necessary in order to make the statements made . . . not misleading? in connection with ?the purchase or sale of any security? . . .[and] the former CEO, Mr. Prince, the former chairman of the Board, Mr. Rubin, and members 24 FCIC Referral Memo (Sep. 12, 2010). 25 FCIC, Agenda Item 4 for Telephonic Business Meeting of October 12, 2010: Minutes of Business/Retreat Meeting of September 29, 2010 (Oct. 12, 2010). 26 FCIC Referral Memo (Sep. 12, 2010). 27 FCIC Referral Memo (Sep. 12, 2010).

of the Board may have been ?directly or indirectly? culpable in failing to disclosure material information to the markets in Violation of . . . The memo also notes another potential violation of the law related to Citigroup?s annual and quarterly reports. According to the memo, ?section 302 of the Sarbanes-Oxley Act requires the CEO and CFO to certify that annual and quarterly reports do ?not contain any untrue statement . . . or omit to state a material fact.?29 It notes that ?[s]ince the CEO and CFO are responsible under the Act for accurate quarterly and annual reports, as well as the adequacy of risk management systems needed to make those reports accurate, referrals for Violations of Section 302 of the Sarbanes-Oxley Act appear warranted.? 30 Mr. Prince was the CEO and Gary Crittenden was the CFO of Citigroup at the time those reports that the FCIC memo indicated were untrue were ?led.3 1 On September 29, 2010, the Commission voted to transmit this referral to DOJ. The vote was 6-0-2 in favor, with Commissioners Angelides, Born, Georgiou, Graham, Murren, and Wallison voting Aye, and Commissioners Thomas and Thompson Not Present. Commissioners Hennessey and Holtz-Eakin were absent.32 5. Potential Fraud by Goldman Sachs in Connection with Collateral Calls on AIG. The FCIC memo describes how, by the end of 2006, Goldman had a ?net short? or close to ?net short? position on real-estate related assets, putting itself in position to pro?t from reductions in the value of these assets. It also describes how Goldman was responsible for establishing the ?marks? (values) on CDOs because they could not be established by their value on an exchange. According to the memo, ?Goldman was consistently the most aggressive ?rm on Wall Street in setting low marks. In fact, in May 2007, Goldman?s CRO Craig Broderick wrote in an email to Dan Sparks that the ?rm was ?in the process of considering making signi?cant downward adjustments to the marks and that ?this will potentially have a big [pro?t and loss] impact on us, but also to our clients.? Other evidence indicates Goldman may have known its marks were too low.?33 The CIC memo notes two potential legal Violations as a result of Goldman?s behavior. ?First, with respect to the May 2007 email [i]f Goldman knew it was about to lower the values of the securities it was selling or if Goldman had a ?duciary relationship with any of the buyers, this could represent a violation of the 1934 Act or other laws 23 FCIC Referral Memo (Sep. 12, 2010). 29 FCIC Referral Memo (Sep. 12, 2010). 3? FCIC Referral Memo (Sep. 12, 2010). 3? Citigroup, Annual Report (Form 10-K), for ?scal year ended Dec. 31, 2007 cjli tin Llill?d 32 FCIC, Agenda Item 4 for Telephonic Business Meeting of October 12, 2010: Minutes of Business/Retreat Meeting of September 29, 2010 (Oct. 12, 2010). 33 FCIC Referral Memo (Sep. 12, 2010).

arising from failure to disclose this information to potential buyers. Second, this could also be a 1933 Act violation if this information was omitted from an offering document? for the securities.34 On September 29, 2010, the Commission voted to transmit this referral to DOJ. The vote was 6?0?2 in favor. The vote was a voice vote, with Commissioners Thomas and Thompson Not Present. Commissioners Hennessey and Holtz-Eakin were absent.35 6. Potential Fraud by AIG CEO Martin Sullivan and AIG CFO Stephen Bensinger in AIG Investor Calls, and PriceWaterhouseCoopers (PWC) Actions as Potential ?Aidelrl and Abettor? of Fraud. The FCIC memo describes a December 5, 2007 investor call with AIG CEO Martin Sullivan during which the company reported that they were ?highly confident? there would be ?no realized losses? on certain credit default swap portfolios despite the fact that the company had made ?undisclosed adjustments? including a ?negative basis? adjustment and a ?structured mitigant? adjustment that hid losses of $5.9 billion. The FCIC investigation revealed, according to the memo, that Mr. Sullivan, AIG CFO Stephen Bensinger, and auditors, PWC, were all aware of the ?negative basis? adjustment prior to the December 5, 2007 call, and that ?the failure to disclose? the adjustments and the ?material weakness in the company's risk management system? presents, at a minimum, a potential violation of Section 10b-5 [sic] of the 1934 Act.? The memo concluded that ?Mr. Sullivan and Mr. Bensinger may be an appropriate focus of an enforcement action because they (1) knew about the problems (2) they had the power to direct an adequate disclosure, but didn?t use that power; and (3) personally participated in the December call.? The memo continued, noting that, may also be exposed on these facts.? FCIC investigators also found that ?Mr. Sullivan and Mr. Bensinger may also be liable under Section 302 of the Sarbanes?Oxley Act [which] requires the certi?cation of accuracy and the certi?cation of an appropriate risk management section,? and that PWC ?may be liable as aiders and abettors of the false representations.? On September 29, 2010, the Commission voted to transmit this referral to DOJ. The vote was 6-0-2 in favor, with Commissioners Angelides, Born, Georgiou, Graham, and 3? FCIC Referral Memo (Sep. 12, 2010). 35 FCIC, Agenda Item 4 for Telephonic Business Meeting of October 12, 2010: Minutes of Business/Retreat Meeting of September 29, 2010 (Oct. 12, 2010).

Murren, and Wallison voting Aye, and Commissioners Thomas and Thompson Not Present. Commissioners Hennessey and Holtz-Eakin were absent.36 7. Potential Fraud by Goldman Sachs in Connection with Abacus 2007-18 CDO. The FCIC memo notes information provided to the Commission by a witness, Mr. Steve Eisman, who described a conversation in which Goldman Sachs? Jonathan Egol and David Lehman did not dispute Mr. Eisman?s characterization of Goldman?s pricing strategy for this CDO: ?the biggest issue with the rating is the correlation of loss, and you presented a correlation analysis that was lower than you actually thought it was, but the ratings agencies were stupid, so they?d buy it anyway.? The FCIC memo identi?es Mr. Egol?s response ?well, I wouldn?t put it in those terms, exactly? as an ?adoptive admission? of Goldman?s behavior.37 According to the FCIC memo, ?this could raise legal issues for Goldman. if Goldman did deliberately mislead the ratings agencies through the use of an inaccurate correlation, more of the security may have been rated than should have been this could be a material omission for the purposes of the 1934 Act. It could also implicate the 1933 Act if the offering documents for Abacus 2007-18 did not include material information that disclosed how much of the security should have been The memo continues, noting that the information provided by Mr. Eisman ?suggests that Goldman was expecting to lower the value of the security when it was created by [and] having other investors would allow Goldman to make the marks appear to be more genuine. If this was done deliberately by Goldman, it raises a potential 10b-5 violation ofthe 1934 Act.?38 On September 29, 2010, the Commission voted to transmit this referral to The vote was 5?1-2 in favor, with Commissioners Angelides, Born, Georgiou, Graham, and Murren, voting Aye, Commissioner Wallison voting Nay, and Commissioners Thomas and Thompson Not Present. Commissioners Hennessey and Holtz?Eakin were absent.39 The Department of Justice did not prosecute Goldman in this referred case. The SEC did ?le suit against Goldman over a different CDO, Abacus 2007-AC. That civil suit was settled for $550 million. But no DOJ action or case involved Abacus 2007?18. 36 FCIC, Agenda Item 4 for Telephonic Business Meeting of October 12, 2010: Minutes of Business/Retreat Meeting of September 29, 2010 (Oct. 12, 2010). 37 FCIC Referral Memo (Sep. 12, 2010). 38 CIC Referral Memo (Sep. 12, 2010). 39 FCIC, Agenda Item 4 for Telephonic Business Meeting of October 12, 2010: Minutes of Business/Retreat Meeting of September 29, 2010 (Oct. 12, 2010).

An additional supplement to the September 10, 2010 memo was sent to Commissioners by the FCIC Legal Staff on October 11, 2010.40 This ten-page supplemental memo contained one additional referral recommendation from FCIC staff. 8. False and Misleading Representations by Merrill Former Merrill CEO Stanley and Former CFO Jeffrey Edwards. The ten page FCIC October 11, 2010 memo is devoted almost entirely to a detailed discussion of potentially illegal behavior by Merrill and by O'Neal and Edwards. According to the memo, information obtained by the FCIC revealed that between August 2006 and June 2007, Merrill?s exposure to asset-backed collateralized debt obligations (CDOs) increased more than four-fold, from $7.2 billion to $32.2 billion, and that during this time certain senior executives were aware of the risks from these holdings and aware of potential problems with Merrill?s risk management strategy.41 The FCIC memo cites a summary of a Merrill meeting with the Federal Reserve that Edwards attended that stated that ?senior executives were involved in key determinations about the subprime-related business at Merrill throughout 2007.?42 However, according to the FCIC memo, during a series of earnings calls with investors in 2007, Mr. O'Neal and/or Mr. Edwards repeatedly provided information that indicated that the company had few risky holdings, or implied that the ?rm's risk management efforts had successfully mitigated potential losses. Ultimately, according to the FCIC, ?Merrill's ABS CDO exposures caused Merrill to record tens of billions of dollars in write?downs and related charges.?43 The CIC memo also describes ?nding ?evidence that Merrill may have violated the federal securities laws by misstating and omitting key facts regarding its issuance of a $1.5 billion ?hybrid? CDO called ?Norma? which was created and marketed in March 2007.?44 In this case, the key allegation was that Merrill failed to disclose to investors that assets in the Norma CDO were chosen by an investor that stood to pro?t if the value of the assets (and their investments in the CD0) declined.45 Based on these ?ndings, the FCIC determined that evidence indicates (1) ?that former CEO Stanley O?Neal and former CFO Jeffrey Edwards may have violated the federal securities laws by making materially false and misleading representations and omissions," (2) that "Merrill may have made materially false and misleading representations in the offering documents related to the $1.5 billion Norma CDO issued 40 FCIC, Con?dential Referral Memorandum Supplement (at 27-36) (Oct. 11, 2010) (11119.1: 20! 10-, 2-20 I :dou?fdl 0 4' FCIC, Con?dential Referral Memorandum Supplement (at 27-36) (Oct. 11, 2010) . 42 FCIC, Con?dential Referral Memorandum Supplement (Oct. 11, 2010). 43 FCIC, Con?dential Referral Memorandum Supplement (Oct. 11, 2010)). 4? FCIC, Con?dential Referral Memorandum Supplement (Oct. 11, 2010). 45 CIC, Con?dential Referral Memorandum Supplement (Oct. 11, 2010) 10

in March 2007;? and (3) that "Merrill may have aided and abetted fraud or breaches of ?duciary duty by collateral managers to the investors in the CD03 they managed because Merrill told the collateral managers that they would not be retained as collateral managers unless they purchased collateral from Merrill for the CDOs they managed.?46 On October 12, 2010, the Commission voted ?to make the ?nding and referral to Justice of the persons cited in the Merrill memo.?47 The vote was 6?1?1?1?1 in favor, with Commissioners Angelides, Thomas, Born, Georgiou, Murren, and Thompson voting Aye, Commissioner Hennessey voting Nay, Commissioner Wallison Present, Commissioner Holtz-Eakin Not Present, and Commissioner Graham absent. 48 A second supplemental memo regarding a referral for actions taken by Fannie Mae was also sent to Commissioners by the FCIC Legal Staff on October 11, 2010.49 9. Fannie Mae Subprime Disclosure. The FCIC memo addresses concerns raised by Commissioner Wallison regarding whether Fannie Mae appropriately disclosed the amount of holdings of subprime and Alt-A loans in the period from 2004?2008. The memo ?nds that ?it appears that Fannie Mae certainly could have made better disclosure of its exposure to subprime and Alt-A loans in 2005 through 2008 However, much of the information concerning Fannie Mae?s exposure to these types of loans was available in 2006 and 2007 [and] we have no information to indicate that their form of disclosure was intentionally deceptive or reckless (scienter) which is necessary for a claim under Section 10(b) of the Exchange Act.? 50 Based on these ?ndings, the FCIC staff concluded that ?we do not believe a referral is warranted in these circumstances. . .this issue does not rise to the level of other issues that the FCIC has referred to the Attorney General.? 51 Despite this conclusion by FCIC staff, on October 12, 2010, the FCIC Commissioners voted to ?make the ?nding and referral to 46 FCIC, Con?dential Referral Memorandum Supplement (Oct. 11, 2010) 47 FCIC, Minutes of Telephonic Business Meeting of October 12, 2010 (approved at FCIC Business Meeting on November 4, 2010) 1%20(November%203- 48 FCIC, Minutes of Telephonic Business Meeting of October 12, 2010 (approved at FCIC Business Meeting on November 4, 2010). 49 FCIC Memo to FCIC Commissioners from FCIC Legal Staff, Fannie Mae?s Subprime Disclosure/Commissioner Wallison?s Request, at 37-40 (Oct. 11, 2010) October)/ 5? FCIC Memo to CIC Commissioners from FCIC Legal Staff, Fannie Mae?s Subprime Disclosure/Commissioner Wallison?s Request (Oct. 11, 2010). 51 FCIC Memo to CIC Commissioners from FCIC Legal Staff, Fannie Mae?s Subprime Disclosure/Commissioner Wallison?s Request (Oct. 11, 2010). 11

Justice of the persons cited in the Fannie Mae memo.?52 The vote was 7-1-1-1 in favor, with Commissioners Angelides, Thomas, Born, Georgiou, Murren, Thompson, and Wallison voting Aye, Commissioner Hennessey voting Nay, Commissioner Holtz-Eakin Not Present, and Commissioner Graham absent.53 The FCIC also discussed two additional referrals at the February 9, 2011 meeting.54 10. Citigroup?s Purchase and Resale of Prime Mortgages: Breakdown in Internal Controls. Information provided to the Commissioners described allegations by former Citigroup Business Chief Underwriter Richard Bowen that ?Citigroup knowingly sold Fannie Mae and Freddie Mac loans that were not underwritten to GSE standards and/or failed to contain necessary documentation to support the quality of the loans.? 55 ?According to Mr. Bowen, 40-60% of the sample ?les for which his group performed diligence failed to meet the minimum contractual underwriting criteria of the respective loan originator and/or had documentation missing from the ?les. Moreover, the 40-60% fail rate was not accurately being reported within CitiMortgage.? Mr. Bowen testi?ed to the FCIC that he emailed Robert Rubin, Chuck Prince, and other senior Citigroup executives regarding these problems. The FCIC staff memo found that the ?allegations, if true, may evidence internal control Violations of the Securities and Exchange Act (section or fraud (section 1 The Commissioners voted to refer this potential violation to the DOJ by a vote of 5-2.56 Commissioners Angelides, Born, Georgiou, Murren and Thompson voted Aye; 52 FCIC, Minutes of Telephonic Business Meeting of October 12, 2010 (approved at FCIC Business Meeting on November 4, 2010) 1 1%20(November%203- 0-12- 20 10%20Meeting_1 .doc). 53 FCIC, Minutes of Telephonic Business Meeting of October 12, 2010 (approved at FCIC Business Meeting on November 4, 2010). 54 CIC, Agenda for Financial Crisis Inquiry Commission Telephonic Concluding Meeting (Feb. 9, 2011) (Impzx Ric: slgig. law .stgyilordxd ??ll 167-03- 02(y)(l5cb? 0209111? 020Busincss? 55 FCIC, Agenda Item 7 for FCIC Business Meeting of February 9, 2011, Discussion and Vote on Referral to Justice -1 (Feb. 9, 2011) 1 5? FCIC, Agenda for FCIC Telephonic ?Concluding? Meeting, Staff Notes (Feb. 9, 2011) (1113114119? I g'vo?cluding?? iLNlogt?olcs.? 020Agndri? 9201\11ug?f 0202-9120] The staffnotcs indicate that Commissioner Holtz Eakin voted aye, but email from Commissioner Holtz Eakin indicates he voted No. 12

Commissioners Thomas and Holtz Eakin voted no,57 Commissioners Graham, Wallison58 and Hennessey abstained.59 11. Redacted Referral. One other referral was discussed at the February 9, 2011 meeting.60 However, the identity of the entity that was referred and all background information on the referral was redacted from the document. The Commissioners voted to refer this potential violation to the DOJ by a vote of 5-2.61 Commissioners Angelides, Born, Georgiou, Murren and Thompson voted Aye; Commissioners Thomas and Holtz Eakin voted no,62 Commissioners Graham, Wallison63 and Hennessey abstained.64 The Outcome of FCIC Referrals to DOJ My staff has identi?ed eleven referrals from the FCIC to the DOJ. These referrals provided DOJ with evidence that nine individuals former Fannie Mae CEO Daniel Mudd, former Fannie Mae CFO Stephen Swad, former Citigroup CEO Chuck Prince, former Citigroup 57 Electronic mail from Douglas Holtz Eakin to Cassidy Waskowicz, Deputy General Counsel, FCIC (Feb. 9, 2011) 1 1 %20Cnc1dng%20Mtng_l .pdf). 53 Electronic mail from Peter Wallison to Cassidy Waskowicz, Deputy General Counsel, FCIC (Feb. 9, 2011) 1 Concluding%20Meeting)/ 201 1%20Concluding%20Meeting_1 .pdf). 59 Electronic mail from Keith Hennessey to Cassidy Waskowicz, Deputy General Counsel, FCIC (Feb. 9, 2011) 1 6? FCIC, Agenda Item 7 for FCIC Business Meeting of February 9, 2011, Discussion and Vote on Referral to Justice -1 (Feb. 9, 2011) 1 6? Agenda for CIC Telephonic ?Concluding? Meeting, Staff Notes (Feb. 9, 2011) (hllp: l'L?ic- I The staffnotes indicate that Commissioner Holtz Eakin abstained, but email from Commissioner Holtz Eakin indicates he voted No. 62 Electronic mail from Douglas Holtz Eakin to Cassidy Waskowicz, Deputy General Counsel, CIC (Feb. 9, 2011) (http stanford.edu/NARA.FCIC . 20 1 6-03 - - 63 Electronic mail from Peter Wallison to Cassidy Waskowicz, Deputy General Counsel, FCIC (Feb. 9, 2011) 1 201 1%20Concluding%20Meeting_l .pdf). 64 Electronic mail from Keith Hennessey to Cassidy Waskowicz, Deputy General Counsel, FCIC (Feb. 9, 2011) 1 13

Board of Directors Executive Committee Chair Robert Rubin, former Citigroup CFO Gary Crittenden, former AIG CEO Martin Sullivan, AIG CFO Stephen Bensinger, former Merrill CEO Stanley O?Neal, and former Merrill CFO Jeffrey Edwards may have violated securities or other laws. Mr. Prince and Mr. Rubin were each cited in two referrals. An CIC referral alone does not indicate guilt. And not every DOJ investigation results in a criminal conviction. Nonetheless, the DOJ record of action on these individuals, nearly six years after DOJ received the referrals, is abysmal. The DOJ has not criminally charged or taken any of these nine individuals to trial. None have been convicted or sent to prison. Not one paid a fine commensurate with their alleged actions. In fact, only one of these nine individuals Mr. Crittenden paid any penalty at all: a meager $100,000 civil ?ne as part of Citigroup?s 2010 civil settlement with SEC over securities fraud, 65 while a second, Mr. Mudd, recently agreed to a settlement in which he admitted no wrongdoing and paid no personal ?ne.66 The other seven individuals paid no personal ?nes, served no prison time, and appear to have gotten off soot-free despite the role they played in the ?nancial crisis. A summary of the FCIC referrals of individuals can be seen in Table 1. 65 SEC, SEC Charges Citigroup and Two Executives for Misleading Investors about Exposure to Subprime Mortgage Assets (July 29, 2010) 66 Mr. Mudd reached this settlement in August 2016, under which his former company paid a $100,000 ?ne, but Mr. Mudd expended no personal funds. Reuters, Former Fannie Mae CEO Settles Crisis-Related Lawsuit with SEC (Aug. 22, 2016) 14

Table 1: Summary of FCIC Referrals of Individuals to DOJ and Case Outcomes Individual Allegations Potential Legal Violation DOJ Outcome No DOJ Prosecution; SEC settlement required that Fannie Mae pay $100,000 ?ne, but imposed no Daniel Mudd, Fannie Mae Accounting Fraud and False Section 302 of Sarbanes? personal penalty CEO Certi?cations Oxley Act on Mr. Mudd. Stephen Swad, Fannie Mae Accounting Fraud and False Section 302 of Sarbanes- No DOJ CFO Certi?cations Oxley Act Prosecution Fraud and False Chuck Prince, Citigroup Certi?cations about SEC Rule 10b?5; Section No DOJ CEO Subprime Exposure 302 of Sarbanes?Oxley Act Prosecution Robert Rubin, Citigroup Fraud and False Board of Directors Certi?cations about No DOJ Executive Committee Chair Subprime Exposure SEC Rule 10b-5 Prosecution No DOJ Gary Crittenden, Citigroup Fraud and False Certi?cations about Section 302 of Sarbanes- Prosecution; SEC civil ?ne of CFO Subprime Exposure Oxley Act $100,000 Fraud in Investor Calls Section 10(b) of the Regarding ?Adjustments? to Securities Exchange Act of Credit Default Swap 1934; Section 302 of No DOJ Martin Sullivan, AIG CEO Portfolio Sarbanes-Oxley Act Prosecution Fraud in Investor Calls Section 10(b) of the Regarding ?Adjustments? to Securities Exchange Act of Stephen Bensinger, AIG Credit Default Swap 1934; Section 302 of No DOJ CFO Portfolio Sarbanes-Oxley Act Prosecution; Securities Act of 1933 and Securities Exchange Act of False and Misleading 1934, ?materially false and Stanley O'Neal, Merrill Statements About Subprime misleading representations No DOJ CEO Loan Exposure and omissions.? Prosecution Securities Act of 1933 and Securities Exchange Act of False and Misleading 1934, ?materially false and Jeffrey Edwards, Merrill Statements About Subprime misleading representations No DOJ CFO Loan Exposure and omissions.? Prosecution Purchase and Resale of Prime Mortgages: Section 13(b)(2) and 10(b) of Chuck Prince, Citigroup Breakdown of Internal the Securities Exchange Act No DOJ CEO Controls of 1934 Prosecution Purchase and Resale of Robert Rubin, Citigroup Prime Mortgages: Section 13(b)(2) and 10(b) of Board of Directors Breakdown of Internal the Securities Exchange Act No DOJ Executive Committee Chair Controls of 1934 Prosecution 15

The record of DOJ action based on the CIC referrals of banks and other corporations for potential violations of securities law and other laws is similarly bleak. The 11 FCIC referrals identi?ed by my staff name 14 corporate entities AIG, Citigroup, Credit Suisse, Fannie Mae, Freddie Mac, Goldman Sachs, JP Morgan, Lehman, Merrill Moody?s, PriceWaterhouseCoopers, Societe Generale, UBS, and Washington Mutual may have committed violations of securities or other laws. There were a total of 21 different allegations of potential legal violations; Citigroup, Goldman, and Merrill were each named in three different referrals and Fannie Mae and UBS were each named in two. But DOJ reached a settlement in only four cases, ultimately taking action against only ?ve of 14 corporate entities. Each settlement resolved civil, not criminal, claims. DOJ reached a $13 billion settlement in 2013 with JP Morgan to settle federal and state civil claims (this settlement also covered actions taken by Washington Mutual, which was taken over by JP Morgan in 2008) related to the company?s alleged false and misleading representation of loan quality?; a $7 billion settlement with Citigroup for similar federal and state civil claims in 2014;68 a $17 billion settlement with Bank of America/Merrill in 2014; and a $5 billion settlement with Goldman Sachs in 2016.69 Criminal violations of the law by large banks and ?nancial ?rms can result in the loss of privileges with ?nancial regulators (such as reductions in paperwork and ?ling requirements) and can even result in corporations losing their charters. But in the case of these settlements, the guilty parties agreed only to a variety of civil penalties, including paying federal and state civil ?nes; offering consumer aid; and agreeing to host independent monitors to assess their compliance with settlement terms while suffered no additional consequences. 1 While the civil ?nes paid by the companies appeared to be quite large, in reality they represented small amounts relative to the assets held and pro?ts earned by these large banks. And the ?ne print of these settlements - which can allow the companies to treat ?nes as tax deductions and receive monetary credits for other actions - can signi?cantly reduce the actual amount paid.70 67 DOJ, Justice Department, Federal and State Partners Secure Record $13 Billion Global Settlement with JPMorgan for Misleading Investors About Securities Containing Toxic Mortgages (November 19, 2013) (hung/m 3?bi 68 DOJ, Justice Department, Federal and State Partners Secure Record $7 Billion Global Settlement with Citigroup for Misleading Investors About Securities Containing Toxic Mortgages (July 21, 2014) (Imps: Injustice- "9 DOJ, Goldman Sachs Agrees to Pay More Than $5 Billion in Connection with its Sale of Residential Mortgage- Backed Securities (Apr. 2016) residential-mortgage-backed). 70 See, e. New York Times, In Settlement?s FIne Print, Goldman May Save $1 Billion (Apr. 11, 2016) 16

In addition to the DOJ settlements, reports indicate that DOJ opened investigations of several entities named in FCIC referrals that did not result in criminal prosecution, convictions or settlements. And SEC or FHFA reached civil settlements or non-prosecution agreements that imposed ?nancial penalties on Fannie Mae, UBS, Morgan Stanley, and others.71 But like the DOJ settlements, these settlements imposed no criminal liability. A summary of the outcome of the FCIC corporate referrals to DOJ can be seen in Table 71 Federal Housing Finance Agency update on Private-Label Securities Action (viewed Sep. 2016) 17

Table 2: Summary of FCIC Referrals of Corporate Entities to DOJ and Case Outcomes Entity Allegations Potential Legal Violation DOJ Case Outcome Fraud in Investor Calls Regarding ?Adjustments? to Credit Default Section 10(b) of the Securities AIG Swap Portfolio Exchange Act of 1934 No DOJ Prosecution Securities Act of 1933 and the Securities Exchange Act of 1934; Citigroup Loan Underwriting Standards Mail or Wire Fraud $7 billion DOJ Settlement Fraud and False Certi?cations about Same $7 billion DOJ Citigroup Subprime Exposure SEC Rule 10b-5 Settlement Purchase and Resale of Prime Mortgages: Breakdown of lntemal Section 13(b)(2) and 10(b) of the Same $7 billion DOJ Citigroup Controls Securities Exchange Act of 1934. Settlement Violation of Securities Act of 1933 and the Securities Exchange Act of Credit Suisse Loan Underwriting Standards 1934; Mail or Wire Fraud No DOJ Conviction Accounting Fraud and False Fannie Mae Certifications Violation of SEC Rule 10b~5 No DOJ Conviction Disclosure of Subprime Loan Section 10(b) of the Securities Fannie Mae Holdings Exchange Act of 1934 No DOJ Conviction Violation of Securities Act of 1933 and the Securities Exchange Act of Freddie Mac Loan Underwriting Standards 1934; Mail or Wire Fraud No DOJ Conviction Goldman Sachs Loan Underwriting Standards Violation of Securities Act of 1933 and the Securities Exchange Act of 1934; Mail or Wire Fraud $5.1 billion DOJ settlement. Fraud in Connection with Abacus Failure to disclose material information under Securities Act of 1933 and the Securities Exchange Act of 1934; violation of SEC Rule Goldman Sachs CDO lOb-S No DOJ Conviction Failure to disclose required information under Securities Act of Fraud in Connections with AIG 1933 and the Securities Exchange Goldman Sachs Collateral Calls Act of 1934 No DOJ Conviction Violation of Securities Act of 1933 and the Securities Exchange Act of $13 billion DOJ Civil JP Morgan Loan Underwriting Standards 1934; Mail or Wire Fraud Settlement Violation of Securities Act of 1933 and the Securities Exchange Act of Lehman Loan Underwriting Standards 1934; Mail or Wire Fraud No DOJ Conviction Merrill Violation of Securities Act of 1933 (acquired by Bank of and the Securities Exchange Act of $17 billion DOJ Civil America) Loan Underwriting Standards 1934; Mail or Wire Fraud Settlement. Securities Act of 1933 and "[M]aterially false and misleading Merrill False and Misleading Statements representations and omissions" (acquired by Bank of About Subprime Loan Exposure and under Securities Exchange Act of Same $17 billion DOJ America) in Loan Offering Documents 1934. Settlement. Failure to Disclose Pending Moody?s Downgrades SEC Rule FD No DOJ Conviction Fraud in Investor Calls Regarding ?"Aideors and abettors of false PWC ?"Adjustments? to Loan Portfolio representations?"; 18 US. C. 2 No DOJ Conviction Violation of Securities Act of 1933 and the Securities Exchange Act of Societe General Loan Underwriting Standards 1934; Mail or Wire Fraud No DOJ Conviction Violation of Securities Act of 1933 and the Securities Exchange Act of UBS Loan Underwriting Standards 1934; Mail or Wire Fraud No DOJ Conviction Violation of SEC Rule lob?5; Failure to Disclose Pending Violation of Section 10 of 1934 UBS Downgrades Securities Exchange Act No DOJ Conviction Violation of Securities Act of 1933 $13 billion settlement and the Securities Exchange Act of (WaMu taken over by Washington Mutual Loan Underwriting Standards 1934; Mail or Wire Fraud PMorgan) 18

Request for DOJ Inspector General Investigation The FCIC performed important work in the years after the ?nancial crisis. The commission conducted a detailed and thorough investigation, produced a 633-page report, and sent 11 separate referrals to DOJ. These referrals named 14 different corporations and nine different individuals (some multiple times) who the Commission believed may have violated securities or other laws. But the DOJ failed to bring criminal charges against and failed to obtain a single criminal conviction of even one of the nine named individuals. Similarly, the DOJ failed to obtain a single criminal conviction or settlement with nine of the fourteen named corporations and the settlements they did reach included large ?nes, but no other signi?cant adverse actions against these companies. And no individuals in these 14 corporations were criminally prosecuted for the potential crimes referred to DOJ by the FCIC. The FCIC reported that in some cases it had substantial evidence pointing to potentially guilty parties, while in others it was more limited. In one case, the FCIC staff recommended against referral, but commissioners voted in favor. Evidence can be dif?cult to obtain and interpret. Entities that appear to be in Violation of securities law may in fact have merely taken advantage of loopholes in the law and cannot be prosecuted. DOJ, like all federal agencies, has been operating with a limited budget. And corporations and their CEOs and CFOs have virtually limitless funds to ?ght DOJ and other enforcement agencies, giving them an advantage in costly, protracted litigation. But regardless of these mitigating circumstances, the outcome of the referrals by the CIC to the DOJ represents an abysmal failure. It means that key companies and individuals that were responsible for the ?nancial crisis and were the cause of substantial hardship for millions of Americans faced no criminal charges. This failure is outrageous and baf?ing, and it requires an explanation. I am therefore requesting that you conduct an investigation of the DOJ response to these FCIC referrals. The investigation should include an analysis of the process by which CIC referrals were obtained and analyzed by the a determination of whether DOJ and the responsible individuals at DOJ took appropriate actions and devoted appropriate resources to these referrals; and an analysis of whether DOJ obtained acceptable outcomes with regard to these referrals. I also ask that your review provides recommendations for both administrative and legislative action to ensure that, now and in the future, individuals and corporations responsible for systemic economic fraud can be held responsible for their actions. 19

It has been almost a decade since the subprime mortgage market began to collapse, and the individuals and corporations responsible for the resulting ?nancial crisis have still not been held reSponsible. It is not too late to do so; and I urge your of?ce to act quickly to open an investigation into the process by which DOJ handled FCIC referrals of corporate and individual misbehavior that harmed millions of Americans. Please contact Brian Cohen of my staff if you have any additional questions about this request. Sincerely, Sub ommittee on Economic Policy 20

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