Investment Fraud Lawyer Blog

On December 4, 2007, Wall Street Journal reporter Shefali Anand reported that some money market funds may be invested in risky debt securities issued by structured investment vehicles, or SIVs, that were recently downgraded or put on review for possible downgrade by Moody’s Investors Service. These money market funds include Charles Schwab Advisor Cash Reserves, as well as similar funds from Morgan Stanley, Barclays PLC, UBS AG, Deutsche Bank AG, and others, according to the article. While these funds hold only 1% to 2% of their investments in such debt, even a small amount poses a risk that has analysts paying attention. If a SIV debt obligation held by a money fund lost all its value, that could cause the money fund to “break the buck” – i.e., violate a requirement to maintain a $1 per share value.

The review and downgrade of SIV debt was reported by Carrick Mollenkamp in the December 1st edition of the Wall Street Journal. Moody’s downgraded $14 billion in SIV debt and placed under review another $105 billion, according to the article. Moody’s said this action reflected “the continued deterioration in market value of SIV portfolios combined with the sector’s inability to refinance maturing liabilities,” reported Mollenkamp.

The liabilities in question are commercial paper. Commercial paper is a short-term debt obligation sold by banks and other businesses to investors. The proceeds are commonly used to meet short-term operating needs. Commercial paper is generally bought by money funds and has been regarded as very safe. SIV commercial paper is another matter, though.

Continue reading " Moody's Downgrades SIVs; Money Market Funds At Risk; SIVs Unable To Meet Debt Obligations Without Selling Assets At Fire-Sale Prices " »

Back in July 2007, Bear Stearns “burned up $1.6 billion” of money that was invested in two of its hedge funds: High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund, according to a December 6, 2007 article by Darla Mercado in Investment News. The hedge funds were invested in risky mortgage-backed securities that contain subprime debt. Bear Stearns halted redemptions and the funds collapsed. The first investor claims involving these funds were filed this summer. Now a second wave has hit.

On December 5th, 11 investors with combined losses of $62 million in the funds filed securities arbitrations claims against Bear Stearns with the Financial Industry Regulatory Authority (FINRA), according to December 6 articles in the New York Times and Reuters as reported in the Daily News (White Plains, NY), as well as the Mercado article. Attorneys for the investors said that Bear Stearns continued selling the funds this spring as the subprime mortgage market imploded, the articles reported.

Long considered as one of Wall Street’s savviest underwriters of mortgage-backed securities, Bear Stearns knew or should have known that the market for these securities had become extremely unstable, said attorney Ryan Bakhtiari of Aidikoff, Uhl & Bakhtiari, as reported by Reuters. “Officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at both of these hedge funds for an extended period of time before they imploded,” said Steve Caruso, a New York-based attorney at Maddox Hargett and Caruso P.C.

Continue reading " Bear Stearns Hit With Eleven New Claims Involving Tanked Funds " »

On December 5, 2007, Wall Street Journal reporter Kara Scannell reported that New York Attorney General Andrew Cuomo has subpoenaed three Wall Street investment banks seeking information about their conduct in securitizing mortgages, including risky subprime mortgages, their knowledge of true risk of these securities, and their relationships with the firms that rated these securities as investment grade. The subpoenas were sent to Merrill Lynch & Co., Bear Stearns Cos., and Deutsche Bank AG, according to the article. Credit rating firms that have issued ratings on these securities include Standard & Poors, Moody’s, and Fitch. The article also says that the role of credit rating firms is being examined by federal and state regulators.

The article compared Mr. Cuomo’s actions to those of his predecessor, Eliot Spitzer (now the Governor of New York), who exposed “buy” ratings issued by a number of Wall Street investment banking firms that were ultimately confirmed by regulators to be fraudulent. In those cases, the fraudulent “buy” ratings were issued by investment banks seeking to generate fees from underwriting initial public offerings of the over-rated securities. In this case, Attorney General Cuomo appears to be seeking to uncover evidence that may show whether the investment banks ignored (or even conspired with the credit rating firms to produce) inflated credit ratings in order to generate fees by packaging and selling the risky securities to investors who thought they were buying safe, investment-grade bonds.

It was Deep Throat, in Woodward’s and Bernstein’s All The President’s Men, who said, “Follow the money.” In the Scannell article, Mr. Cuomo says, “The ‘follow-the-money’ expression is ‘follow the mortgage’ into the secondary market.”