%1

BlackRock Inc., the world’s biggest money manager, is accused in a lawsuit by two pension funds of reaping “grossly excessive” compensation from securities-lending returns associated with iShares Inc., Bloomberg News reported yesterday. “Defendants have systematically violated their fiduciary duties, setting up an excessive fee structure designed to loot securities lending returns properly due to iShares investors,” representatives of the funds, which invest in iShares, said in a complaint in federal court in Nashville, Tenn. The pension funds allege that BlackRock affiliates collected 40 percent of revenue earned from securities lending transactions as compensation. Blackrock said that the suit is without merit and will contest it.

New documents filed in New York Supreme Court on Friday by three Federal Home Loan Banks, in Boston, Chicago and Indianapolis, and Triaxx, an investment vehicle that bought mortgage securities, contend that a proposed $8.5 billion settlement that Bank of America struck in 2011 to resolve claims over Countrywide’s mortgage abuses is far too low and shortchanges thousands of ordinary investors, the New York Times reported today. Among the new details in the filing are those showing that Bank of America failed to buy back troubled mortgages in full once it had lowered the payments and principal on the loans — an apparent violation of its agreements with investors who bought the securities that held the mortgages. An analysis of real estate records across the country, the filing said, showed that Bank of America had modified more than 134,000 loans in such securities with a total principal balance of $32 billion. Even as the bank’s loan modifications imposed heavy losses on investors in these securities, the documents show, Bank of America did not reduce the principal on second mortgages it owned on the same properties. The owner of a home equity line of credit is typically required to take a loss before the holder of a first mortgage. Read more.

A lawyer for the creditors' trustee in America's biggest municipal bankruptcy on Friday said that the trustee would not make a Feb. 1 payment to owners of $3.14 billion of sewer debt issued by Alabama's Jefferson County, Reuters reported on Friday. Gerald Mace, an attorney for creditors' trustee Bank of New York Mellon, told a bankruptcy court hearing that the distribution could not be made because of a "lack of funds." In a document filed on the Electronic Municipal Market Access on Friday, BNY Mellon lists as outstanding approximately $3.1 billion in principal of sewer revenue warrants affected. The notice explains that "certain holders of bank warrants are not willing, at this time, to consent the trustee making distributions of principal with respect to Sewer Warrants coming due at maturity or resulting of mandatory sinking fund redemption in February and early March 2013." The county continues to make payments from sewer-system revenues to Bank of New York, which distributes the money to debt owners that include Wall Street banks, insurance companies and hedge funds, Jefferson County Manager Tony Petelos said.

A committee of bondholders who have gone unpaid by Ampal American Israel Corp. received the power to lead collection efforts on a $20 million loan the company made to an affiliate to construct a sugarcane ethanol-producing plant in Colombia, Dow Jones DBR Small Cap reported today. The struggling plant failed to repay the loan by a Dec. 31 deadline, leading the bondholder committee to pressure the Ampal American leaders to begin collection efforts that could recover money for Ampal American, a holding company for energy investments and real estate holdings throughout the Middle East.

Former customers of Jon Corzine's collapsed brokerage MF Global would recover most, and probably all, of their money under the latest projections by the trustee liquidating its bankrupt parent company, Reuters reported yesterday. In a court filing late on Friday, trustee Louis Freeh outlined an amended version of a plan for how to divvy up MF Global's assets and distribute them among various creditor classes. Freeh projected MF Global's U.S. broker-dealer unit could have up to a $120 million surplus, which would mean full payback for the traders whose money was frozen when the brokerage went bankrupt in October 2011. But Freeh also said the broker-dealer unit could wind up with a $6 million shortfall. While that is a small number in the context of the $1.6 billion hole customers were thought to face at the beginning of the case, and one that could likely be bridged through other sources of recovery, it is a less certain forecast than the version of the payout plan released last month.

Russell Wasendorf Sr., the founder of the bankrupt commodities firm Peregrine Financial Group Inc., was sentenced to 50 years in prison for what prosecutors said was a theft of more than $215 million from customers, Bloomberg News reported yesterday. Wasendorf used a printer, software and a post office box to create false bank statements and other documents to hide the evidence of his 20-year embezzlement starting in the early 1990s, prosecutors said. Assistant U.S. Attorney Peter Deegan told U.S. District Judge Linda Reade in court filings that Wasendorf deserved the maximum 50-year penalty because of the amount customers lost and the sophisticated nature of the crime. Wasendorf started stealing customer funds within two years of Peregrine’s original financing, using a copying machine to conceal his theft of $250,000 to keep his company afloat, the government said.

Bankruptcy Judge Martin Glenn yesterday approved a settlement under which many former MF Global customers would get back 93 percent of the value of their accounts, a major step in the wind-down of former New Jersey Governor Jon Corzine's collapsed brokerage, Bloomberg News reported yesterday. The approval comes nearly six weeks after trustees for MF's UK and U.S. broker-dealers, as well as its parent, announced the deal to resolve billions of dollars in intercompany claims. The agreement avoids litigation in the UK that could have dragged out MF Global's liquidation for years. It will allow James Giddens, the trustee for MF's U.S. trader customers, to return another $500 million to $600 million to those customers. That would increase total payouts to about 93 percent of the value of their accounts, from the 80 percent or so most have recovered so far.

Lehman Brothers Holdings Inc., which is still liquidating after exiting court protection last year, paid advisers and managers $153.8 million in December, putting total fees over the $2 billion mark in the more than four years since it filed for bankruptcy, Bloomberg News reported yesterday. December’s outlays included $84 million in incentives for a plan that will pay creditors an average of 18 cents on the dollar, according to yesterday's court filing. Restructuring firm Alvarez & Marsal LLC, which runs the defunct investment bank, has made almost $583 million so far, including incentive payments. Lead bankruptcy law firm Weil, Gotshal & Manges LLP has earned $454 million.

Federal authorities are scrutinizing private consultants hired to clean up financial misdeeds like money laundering and foreclosure abuses, taking aim at an industry that is paid billions of dollars by the same banks it is expected to police, the New York Times DealBook blog reported yesterday. The consultants operate with scant supervision and produce mixed results, according to government documents. The pitfalls were exposed last month when federal regulators halted a broad effort to help millions of homeowners in foreclosure. The regulators reached an $8.5 billion settlement with banks, scuttling a flawed foreclosure review run by eight consulting firms. In the end, borrowers hurt by shoddy practices are likely to receive less money than they deserve, regulators said. Sen. Elizabeth Warren (D-Mass.) and Rep. Elijah Cummings (D-Md.) announced yesterday that they would open an investigation into the foreclosure review, seeking "additional information about the scope of the harms found."

Chief Bankruptcy Judge Christopher Klein ruled yesterday that Stockton, Calif., does not need court approval to settle a $55,000 claim, a plan contested by capital market creditors and backed by the state's pension fund, Reuters reported yesterday. Judge Klein said that chapter 9 of the Bankruptcy Code does not allow courts to tell cities seeking protection from their creditors how to use their property and revenues. Judge Klein also said that Stockton maintains financial independence, which includes opting to pay to settle a claim against its police department, a blow to creditors seeking his help to influence the broke city's financial choices.

Judge Klein was a panelist recently on an ABI teleconference examining chapter 9 trends and municipal financial distress. To listen to the teleconference, please click here.