Earlier in January, BMO settled SEC charges in a matter of alleged deceptive structuring and marketing of CMOs, agreeing to pay a US$19-million fine as well as US$21.7-million in disgorgement of profits, plus interest.Christopher Katsarov/The Globe and Mail
Bank of Montreal BMO-T has terminated a New York-based managing director who was part of a U.S. regulatory probe into the bank’s debt-marketing practices.
Records filed with the U.S. Financial Industry Regulatory Authority (FINRA) show Doo Sik Lew left the bank on Jan. 17. A disclosure, filed Dec. 18 and classified as an “employment separation after allegations,” noted the Securities and Exchange Commission delivered what’s called a “Wells notice” to Mr. Lew in September, 2023, recommending an enforcement action against him. However, the SEC has not launched a case against Mr. Lew.
The FINRA disclosure says the SEC said its allegations against Mr. Lew were connected to an investigation of potentially deceptive structuring and marketing of fixed-rate residential collateralized mortgage obligations (CMOs). The FINRA disclosure said “Mr. Lew is co-operating with the investigation and is contesting the staff’s preliminary determination through the Wells process.”
Earlier this month, BMO settled SEC charges in a matter of alleged deceptive structuring and marketing of CMOs, agreeing to pay a US$19-million fine as well as US$21.7-million in disgorgement of profits, plus interest. The SEC said the latter amount will be distributed to harmed investors “to the extent feasible.” The SEC allowed BMO to settle without either admitting or denying the agency’s findings.
BMO spokesperson Jeff Roman declined to comment, describing the situation as a “personnel matter.” Bloomberg News first reported Mr. Lew’s departure from BMO.
Mr. Lew was not a listed defendant in the SEC settlement with BMO, nor did the settlement order name him in its allegation of facts. Instead, it referred to a “senior” BMO employee “who was primarily responsible for the structuring” of the debt products.
The products, called Agency CMO bonds, are created by pooling residential mortgages into trusts and issuing bonds that pay a rate of return to investors based on the repayment of those mortgages. The CMOs are generally considered lower-risk investments than others because they are backed by full-faith guarantees from U.S. government-sponsored agencies such as Fannie Mae, Freddie Mac and Ginnie Mae.
BMO sold more than US$3-billion worth of Agency CMO bonds from December, 2020, to May, 2023, the SEC said. During that time, according to the SEC’s investigation, the senior employee “discovered that when millions of dollars of mortgages from lower-interest mortgage pools were combined with a tiny sliver – usually just US$1,000 – of mortgages from higher-interest rate mortgage pools” the bond would appear to be backed by a much higher proportion of high-interest mortgages than was really the case.
In June, 2022, another employee of BMO’s bond desk received a complaint from a market participant that the collateral information “needs to be disclosed better” and accused the lender of “not selling what is advertised.” The complaint was never escalated to BMO’s compliance department or to more senior management, the SEC said.
Mr. Lew joined BMO in September, 2018, when the bank purchased KGS-Alpha Capital Markets LP, a New York-based fixed income broker-dealer specializing in U.S. mortgage and asset-backed securities. Mr. Lew had spent eight years as a trader at KGS-Alpha Capital Markets prior to the BMO acquisition.
With files from Jameson Berkow