Investment Fraud Lawyer Blog

On November 20, 2007, Matt Phillips of the Wall Street Journal reported that the Freddie Mac (the Federal Home Loan Mortgage Corp.) reported a third quarter loss of $2 billion. The loss reflects $1.2 billion to cover its guarantees of bad home loans and a $3.6 billion write-down of assets. Freddie Mac, like its sister Fannie Mae, and cousins, the Federal Home Loan Banks, is a government-sponsored corporation established to support home ownership and rental housing. Freddie purchases mortgages and mortgage-related securities, thus priming the credit pump for homebuyers. It also acts as a credit guarantor. It finances purchases primarily by issuing a range of securities in the capital markets. Some observers say that Freddie and Fannie helped fuel the increase in subprime loans associated with the current credit woes.

The losses left Freddie Mac with approximately $34.6 billion, just $600 million more than regulators require. According to the article, Freddie Mac is “seriously considering” cutting its dividend by 50% in the fourth quarter and has hired investment bankers to help it raise capital needed to fund its mortgage investment activities.

In an Associated Press article published in the Atlanta Journal Constitution, also on November 20, it was reported that Freddie Mac’s $3.29 per share loss far exceeded Wall Street analysts expectations of 22 cents per share. This result, along with a recent report by Fannie Mae, has increased investor anxiety over government-sponsored companies, thought by many to have less exposure to high-risk, subprime mortgages, according to the article.

Continue reading " Freddie Mac Loses $2 Billion in 3Q 2007; More Losses Forecasted; Senator Shumer Worried About Soundness of Federal Home Loan Banking System " »

On November 15, 2007, Jennifer Levitz and Kate Kelly reported in the Wall Street Journal that the Commonwealth of Massachusetts filed an administrative complaint against Bear Stearns accusing the firm of fraud for improperly trading mortgage-backed securities with the two internal hedge funds – the Bear Stearns High-Grade Structured Credit Strategies Fund and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund – that collapsed this past summer. Secretary of State William F. Galvin’s office says that Bear employees made hundreds of principal trades for the firm’s own account with the hedge funds without giving the funds’ independent directors the required advance notice.

Under the federal securities laws, financial firms that engage in principal trades with affiliated funds must notify the funds’ investment advisors in advance of the trading. According to the Bear funds’ offering documents, the approval of two independent directors was required before the entities could trade with Bear to ensure fair prices.

The administrative complaint alleges that 47% of the principal trades conducted by one of the funds between 2003 and 2006 did not secure the necessary approval. The current independent directors of the two funds, both executives at Walkers SPV Ltd., a fund administrator in the Cayman Islands where both funds were incorporated, refused to respond to a subpoena from Massachusetts seeking information about potential conflicted trades.

Bear declined to comment for the article.

Investors in various Morgan Keegan Bond Funds have suffered huge losses over recent months. Many of these Morgan Keegan Bond Funds have experienced losses in their net asset values of more than 50% since the beginning of 2007, most of these losses coming in the past five months.

Specifically, the following Morgan Keegan Bond Funds have been adversely impacted:

All of these funds are managed by Morgan Keegan Asset Management Inc. and James C. Kelsoe. The abysmal performance of these funds is largely attributable to management's decision to concentrate the funds' investments in high risk mortgage- backed securities and CDOs. Recent Bloomberg reports on these funds establish that mortgage-backed securities and CDOs constituted more than 50% of each funds portfolio. This investment strategy appears to have been highly imprudent in light of the many concerns about the mortgage-backed securities and CDO markets that existed in 2005 and 2006.

Continue reading " Investors Suffer Large Losses in Morgan Keegan Bond Funds " »

Thousands of mortgage-backed securities holding subprime loans and related collateralized debt obligations (CDOs) were sold to the public as being far safer investments than they actually were.  Over the past few months, securities ratings agencies (Moody’s, S&P and Fitch) have downgraded thousands of these investments, establishing that they were far riskier than originally represented.  Unfortunately, the problem will almost certainly get far worse.  Investors in these securities need to prepare for this development.

Since the beginning of 2007, the business press has reported extensively on the nature and extent of problems attributable to the subprime mortgage market.  These problems have already had a swift and dramatic impact on many investments and losses already run into the billions of dollars.

The problems in the subprime mortgage market will almost certainly get worse for several major reasons.  

First, over the next 18 months, the interest rates on hundreds of billions of dollars of adjustable rate first mortgages will reset to higher, in many cases much higher, levels.  The higher mortgage payments resulting from these resets will place heavy financial burdens on subprime borrowers who are already financially strapped and will significantly increase the probability of default.  The following table shows the approximate amount of first mortgages that will reset to higher interest rates in 2007 and 2008.

Continue reading " Why Mortgage-Backed Securities And CDO Problems Are Getting Worse " »

On October 26, 2007, the Wall Street Journal reported that insurance product marketers are tricking seniors into waiving their rights under the national Do Not Call List.  The Do Not Call law allows companies to call people on the list if they have agreed in writing to receive calls.  Because of this loophole in the law, companies that generate insurance product sales leads have mushroomed.  

It works like this.  Postcards offering information on subjects of interest to seniors are mass mailed by marketing companies to generate sales leads.  These “lead cards” are often imprinted with American flags, have a Washington, D.C. return address, and appear to have been sent by the government or AARP.  The cards often have warnings such as “changes in your Medicare benefits,” or “new legislation passed by Congress that will affect you and your heirs,” or an “AARP study found that probate taxes are hurting seniors.  They offer purportedly helpful information to those who send back the card with their contact information.  The cards do not mention that they were actually sent by a marketing company or that the recipient’s name and contact information will be sold and turned over to insurance salespeople.

Insurance salespeople use the information to sell variable annuities with high surrender charges and lengthy pay-out deferrals, and living trusts that provide no benefit to those who return the card.  They typically present themselves with trumped-up credentials such as “Senior Estate Advisor,” and employ high-pressure and misleading sales practices.  The Wall Street Journal article related a number of specific cases involving elderly people who were persuaded to invest most or all of their nest egg in complicated variable annuities that effectively locked up most of their money for years by imposing substantial charges on withdrawals. The victims were led to believe that they could withdraw their money at any time. The sales commission on such products is typically 9.5%, according to the article.

Such improper sales practices have prompted some state attorneys general to take legal actions against several of these lead generators, charging them with falsely suggesting endorsements by the government or AARP.  Regulators in as many as 20 states have opened fraud investigations.  AARP sued ChoicePoint, Inc., an Alpharetta, Georgia-based seller of personal data, and obtained a court order prohibiting Choicepoint from referring to AARP on its lead cards and from using a Washington, D.C. return address unless it had an office there, according to the article.  AARP has filed similar lawsuits against other marketing companies.

If you believe that you may have been a victim of such a scam, or were sold a variable annuity or other investment that is unsuitable for you, Page Perry, LLC may be able to help.  Our firm will review your situation and advise you on how best to proceed at no charge.  Page Perry, LLC is a nine lawyer Atlanta-based law firm with over 125 years collective experience representing investors in securities related litigation and arbitration.  Page Perry attorneys have successfully handled variable annuity and variable life insurance cases for over 20 years.  The firm is currently involved in a number of variable product cases.