SEC alleges company misled investors over mortgage-backed bonds
A Bank of Montreal (BMO) subsidiary has agreed to pay $40.7 million USD to settle charges from the US Securities and Exchange Commission (SEC) over allegations of misleading investors about the appeal of mortgage-backed bonds.
The settlement, announced Monday, includes a $19 million civil fine and addresses claims that BMO Capital Markets employees misrepresented the underlying collateral of more than $3 billion worth of Agency collateralized mortgage obligation (CMO) bonds between December 2020 and May 2023.
Agency CMO bonds, considered low-risk investments, are backed by pools of residential mortgages and issued by government-affiliated entities like Fannie Mae, Freddie Mac, and Ginnie Mae, a report from Thomson Reuters noted. They carry guarantees of principal and interest payments, making them attractive to investors.
Allegations of misrepresentation
The SEC accused BMO of structuring some bonds with small portions—sometimes as little as $1,000—of mortgages with higher interest rates, creating the illusion that the bonds were predominantly backed by high-yield mortgages. This tactic allegedly made the bonds appear more appealing than they were in reality.
Additionally, BMO employees reportedly discussed altering the bonds’ “cosmetics” to enhance sales. A market participant raised concerns in June 2022, complaining to a BMO banker that the bank was “not selling what is advertised,” according to the SEC.
Settlement terms and BMO’s response
Without admitting or denying the allegations, BMO agreed to the settlement, which includes the $19 million civil fine, $19.42 million in disgorgement, and $2.24 million in interest. The bank also accepted a censure as part of the resolution.
In a statement, BMO reaffirmed its commitment to ethical standards, saying, “We hold ourselves to the highest standards of fair and ethical conduct and continuously review and enhance our controls and supervisory framework. We’re pleased to have this matter behind us.”
The SEC emphasized the importance of accurate disclosures in bond sales to protect investors.
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