Securities Bureau calls for further review, accountability in wake of FRM case
April 28, 2010
MEREDITH — The Bureau of Securities Regulation is calling for further review and legal clarifications in light of the case of Financial Resources Mortgage, which the Bureau said was the subject of errors and oversights in state regulation.
On Thursday, Mark Connelly, director of the state Bureau of Securities Regulation, issued a report on Financial Resources, the result of investigation and review since Financial Resources and CL and M closed in November of 2009. The report was done in anticipation of a legislative review, with which the Bureau said it would fully cooperate.
The report mainly addresses jurisdictional discrepancies between the BSR and the state Banking Department as well as actions and involvement by the Attorney General's Office.
"The report concludes the FRM matter is not within its jurisdiction at this time," the report stated. "Second, the BSR recommended a legislative inquiry late last year into this matter and is aware such an inquiry is immanent."
The report said in November of 2009, the State Banking Commissioner publicly stated that the state regulatory oversight of the company is the concern of state securities and the Banking Department had narrow jurisdiction over four residential mortgages.
The report said, however, that the Banking Department had sufficient authority and ability over the last five years to detect and address FRM's alleged violations and said the Banking Department "failed to adequately exercise its regulatory prerogative."
The Bureau said the Banking Department took part in several investigations and was made aware of alleged illegal activity occurring a FRM.
The BSR initially became involved in Financial Resources after a complaint was filed in 2000. The report said the Bureau had difficulty obtaining and coordinating records with the Banking Department.
After the company shut down in November, the report said the Banking Department denied access to certain records and the Bureau gained access after filing a subpoena. Additional disputes over access and documents did follow.
"A review of the record also suggests the SBD did not exercise its regulatory authority to the fullest extent," the report said. "Furthermore the SBD withheld records and is now exercising a confidentiality claim without a reasonable basis. A private claim of confidentiality concerning a failed state licensed mortgage company is not warranted and does not allow the public to judge what actually occurred. The state needs unfettered access to all the state regulatory records concerning FRM — the names of citizens can be redacted for privacy purposes — so a full assessment can be made of the matter and the state can consider possible financial services regulatory reforms."
The report also said that the Attorney General's Office could have initiated legal action against Financial Resources earlier than it did. The report said the AG's office is already familiar with Financial Resources by investigating at least one complaint and reviewing requests for assistance from the Banking Department and Securities Bureau. According to the report, the AG's office has said it had not identified anything to suggest liability.
"By virtue of its involvement in FRM and its stated role in protecting the state's interests, OAG is not a disinterested party — nor is the BSR and SBD," the report said. "This suggests a complete review of this matter by an impartial body is warranted."
The report said the state's response "should be about the people who have been defrauded as well as addressing how such fraud happened."
The report said this is the second alleged Ponzi scheme that has occurred in the state in addition to the Noble Trust Company case.
"A failure by the state government to thoroughly address what happened concerning FRM as well as Noble Trust could ultimately be framed as an economic development concern, as the flow of capital into the state may be affected if New Hampshire is viewed as having a deficient regulatory climate," the report read, recommending significant state review into the matter.
The report said the current banking and securities regulatory landscape provides no regulatory oversight by the Bureau of Securities and the majority of FRM's transactions are not covered by state securities laws.
"In those instances where there are transactions subject to the state's securities laws, enforcement efforts undertaken at this point would not provide any additional protection for investors/lenders or secure the return of their investments as the company and related entities are in bankruptcy," the report said.
The Bureau said it is working with federal regulators for ways to help individuals who were allegedly defrauded.
The report also recommends the creation of an Office of Inspector General as a disinterested party to determine compliance under state law.
"There does nor exist explicit direction to state agencies concerning the dissemination of information for the purposes of handling interdepartmental matters," the report said, saying how records should be accessed by state agencies is a public policy question.
Additionally, the report said the Right to Know for the public also needs to be clarified.
"The failure of FRM and its attendant harm is prima facie evidence the state needs to establish a minimum level of commercial mortgage regulation."