Bank of Montreal Unit Settles Charges with SEC, Agrees to Pay $40.7 Million Over Misleading Mortgage-Backed Bonds
A subsidiary of Bank of Montreal (BMO) has agreed to pay $40.7 million to settle charges with the U.S. Securities and Exchange Commission (SEC) regarding misleading sales practices involving mortgage-backed bonds. The settlement resolves allegations that BMO Capital Markets failed to properly supervise employees who misrepresented the attractiveness of certain bonds to investors.
The SEC announced on Monday that BMO would pay a $19 million civil penalty as part of the settlement. The charges stemmed from the bank’s sale of over $3 billion worth of Agency CMO (Collateralized Mortgage Obligations) bonds between December 2020 and May 2023. These bonds, backed by pools of residential mortgages, were issued by government-sponsored entities such as Fannie Mae, Freddie Mac, and Ginnie Mae, and are generally considered low risk due to government-backed guarantees.
The SEC’s investigation revealed that BMO Capital Markets employees used misleading offering materials and metrics that falsely suggested some bonds were backed by a larger portion of higher-interest mortgages, thus making the bonds appear more appealing to investors. In reality, only a small fraction of the mortgages in these bonds had higher rates, sometimes as little as $1,000.
While BMO did not admit or deny the allegations, it agreed to pay the civil fine, $19.42 million in disgorgement of ill-gotten gains, and $2.24 million in interest. The settlement also includes a formal censure. In a statement, the bank expressed its commitment to high standards of ethics and transparency, stating, “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 also highlighted that BMO employees had discussed altering the “cosmetics” of the bonds to boost their sales appeal. This raised concerns among market participants, with one investor reporting in June 2022 that BMO was “not selling what is advertised.”
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