Investment Fraud Lawyer Blog

Bond insurers MBIA and Ambac may lose $11.6 billion (each) on guarantees of mortgage-backed debt and other related securities, as predicted recently by Managing Partner of Pershing Square Capital Management LP, William Ackman, and as reported by Bloomberg.com's Christine Richard and Mark Pittman (1/30). Such losses could have far reaching effects by increasing investor losses in municipal securities and raising future borrowing costs for states and municipalities.

Using a model supplied by an unnamed bank, Ackman recently posted a list of asset-backed collateralized debt obligations and other securities guaranteed by MBIA and Ambac that allow readers to create their own loss predictions.

Ackman sent his findings to the Securities and Exchange Commission as well as the Superintendent of New York Insurance, Eric Dinallo, who is currently in talks with unnamed banks regarding raising new capital for bond insurers, stabilizing the bond insurers, and bolstering financial markets.

Continue reading " Bond Insurers MBIA And Ambac To Incur Predicted Subprime-Related Losses Of $11.6 Billion Each " »

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According to Bloomberg.com's Christine Richard, Financial Guaranty Insurance Co. (FGIC), the world's fourth largest bond insurer, lost its AAA credit rating after it failed to boost capital by $1 billion before a deadline issued by Fitch Ratings.

Like other bond insurers who ventured into insuring subprime debt, home-equity loans, and collateralized debt obligations, FGIC is feeling the pinch of such investments.

Continue reading " Bond Insurer FGIC Misses Deadline And Loses AAA Fitch Rating " »

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Losses linked to subprime mortgages led New York based- Israel Discount Bank to sue Metropolitan Life Insurance Co. and investment management firm BlackRock Inc.

According to the Bank, losses, which amount to $2 million, resulted from a breach of contract as well as breach of fiduciary duty. The Bank also noted MetLife’s refusal to honor the bank’s request to move its investments out of risky subprime investments.

Continue reading " MetLife And Investment Firm BlackRock Sued Over Subprime-Linked Losses " »

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According to BusinessWeek's Mar Der Hovanesian (1/28/08), home-equity lending is another big problem lurking behind the subprime mess. Previously rising property values and housing prices enabled subprime borrowers to tap into equity on their properties to finance the purchase of necessities and perhaps even luxuries. When housing market prices plunged, the business of home-equity lending soured. By the end of September 2007, at least $14.7 billion in home equity loans and lines of credit were delinquent.

Until recently, the majority of home equity lending was issued in the form of lines of credit. Home equity loans allowed borrowers to convert their equity into cash to pay down credit-card and other debt. As the boom mushroomed and housing prices soared, banks started offering piggyback loans, enabling subprime buyers to finance down payments on houses they could not afford.

Continue reading " Home Equity Crisis: Banks That Dodged Subprime Bullet Still Face Loss " »

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Two of the nation's biggest banks, Citigroup and JPMorgan Chase, announced that they are setting aside almost $6 billion between them to cover potential defaults on consumer loans. The news caused markets to cloud and rekindled fears that the economy is on the verge of a recession.

Prompted by a wave of home foreclosures and nearly $100 billion in write-downs, the mortgage crisis was initially contained to the financial services and home construction sectors. The bad news is that consumers (those likely affected by foreclosure) are also struggling under credit card debt, auto and other loans.

Falling home prices means consumers can no longer draw from the equity in their homes for extra cash. Fearful bankers are making matters worse by tightening lending standards, thus making consumer loans both expensive and scarce.

Continue reading " Citigroup/JPMorgan Chase React To The Subprime Crunch " »

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An old Wall Street adage says that you should never plan to bring a new offering to market right after a three-day weekend because you never know what could happen from Friday night to Tuesday morning. US markets were closed today for the Martin Luther King, Jr. holiday but it was an event-filled weekend that will cause further market turmoil on Tuesday when the markets re-open.

On December 18, 2007, The Wall Street Journal wrote “Credit Crunch Could Worsen if . . . Bond Insurers Sink, ‘Buck Breaks’.” According to Dennis K. Berman of the Journal, the two events that are of most concern to Wall Street bankers, traders, and regulators are ratings downgrades of bond insurers and money market funds losing value below $1. Unfortunately, recent events suggest that this very scenario may be playing out.

First, on Saturday, January 19, 2008, Christine Richard of Bloomberg.com reported that Fitch Ratings announced that it had downgraded the credit rating of Ambac Assurance Corporation from AAA (the highest rating available) to AA after Ambac abandoned plans to raise new equity. This in turn caused a downgrading by Fitch of approximately 140,000 municipal and non-municipal bonds insured by Ambac.

Continue reading " Is The Market's Doomsday Scenario Here? " »

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On January 17, 2008, while most of us in the securities litigation and arbitration field were focused on the Supreme Court’s decision in Stoneridge, the Wall Street Journal Law Blog kept its eye on all the balls in the air and reported on the 7th Circuit decision in the remand of Tellabs.

In an opinion written with Judge Posner’s customary felicity of language, the 7th Circuit held that the plaintiffs had adequately pled scienter in conformity with the requirements of the Private Securities Litigation Reform act. The issue before the 7th Circuit was whether plaintiffs’ allegation of securities fraud created the “strong inference” of scienter, as defined by the Supreme Court in its Tellabs opinion, under the PSLRA.

Continue reading " Securities Fraud Class Action Pleading Victory For Plaintiffs " »

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On January 12, 2008, Vikas Bajaj and Jenny Anderson of the New York Times reported that active investigations by New York, Connecticut and the Securities and Exchange Commission have zeroed in on apparent withholding by Wall Street investment banks of material information about the risks posed by investments linked to high-risk “exception” and other subprime loans. Exception loans are a subset of subprime loans that failed to meet even the lax credit standards of subprime mortgage lenders and Wall Street firms.

The investment banks hired outside “due diligence” consultants to examine the loans being considered for purchase, pooling and resale by the banks, but routinely ignored red flags raised by these consultants, and even told the consultants to drastically scale back the number of loans they examined. “Common sense was sacrificed at the alter of materialism,” one such consultant said. “We stopped checking.” Interestingly, credit rating firms said that they were generally not provided due diligence reports, even when they asked for them, but they rated the securities anyway, often as investment grade.

Some industry officials say that these exception loans comprised 25% to 50% of the portfolios they saw, and, in some cases, as much as 80%. While the prospectuses filed by the investment banks contained “boilerplate” disclosures, they were really just “overbroad, useless reminders of risks,” Connecticut’s attorney general, Richard Blumenthal, was quoted as saying, that may not be enough to shield the banks from legal liability. “…[A] company that knows in effect that the disclosure is deceptive or misleading can’t be shielded from accountability under many circumstances,” Blumenthal said.

Continue reading " Wall Street Firms Investigated For Withholding Material Information On Riskiest Subprime Loans " »

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Anticipated liquidations by managers of collateralized debt obligations (“CDOs”) are likely to put more downward pricing pressure on the already depressed prices of subprime securities. Managers of several CDOs announced that they are liquidating over $5 billion of distressed securities from their portfolios over the next few days, as reported by Reuters on January 8, 2008. It is anticipated that these fire sales are likely to fetch bottom prices and may force holders of many similar securities to reprice their investments based upon market prices. These securities are illiquid, meaning that there is no ready market to establish pricing. In many cases, these securities have been carried on the books of brokerage firms, money managers, mutual funds, and others at so-called “fair value,” which is an estimate usually far in excess of any true market value for these securities.

Over recent months, similar liquidations have realized only a small fraction of the original face value. For example, on December 3, 2007, in a Wall Street Journal article entitled A CDO Floor of 27 Cents on the Dollar?, David Reilly, Gregory Zuckerman and Serena Ng reported $3 billion dollars of mortgage-linked debt was purchased from E*Trade Financial Corp. for an average price of 27 cents on the dollar. Sixty percent of those assets were rated double-A or higher, and $1.35 billion of the assets were residential-mortgage securities consisting of loans made to borrowers with good credit histories, according to the article. More recently, on January 4, 2008, Bloomberg.com reported that a $500 million CDO managed by Credit Suisse Group liquidated its mortgage bonds and related derivatives at prices of less than 25 cents on the dollar, wiping out all but its most senior class, according to Standard & Poors. These transactions reflect the true market value of the securities.

Continue reading " Subprime Liquidations -- More Chaos Ahead " »

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As more baby boomers approach retirement age, the demand for high-quality financial advice has been on the rise. To meet this demand for competent advice, brokerage firms began touting themselves through advertisements and other marketing mediums as “full service” firms capable of providing sound financial advice on a wide array of issues from retirement planning to tax advice. In recent years, it also seemed like every day a new credential popped up next to the names of these so-called “financial professionals.”

This marketing campaign has served to confuse investors. Experts in the industry have long believed that ordinary investors have no idea that there are different types of financial advisers and, more importantly, that each may owe different legal duties to their clients. Because of the anticipated confusion among consumers, the SEC requested that RAND Corporation conduct a study to examine the public’s understanding between the two main types of financial professionals, brokers and investment advisers.

In a nutshell, according to the RAND study, a broker is defined as someone who conducts transactions in securities on behalf of others, while an investment adviser is someone who provides advice to others regarding investments. According to the RAND study, consumers discern absolutely no difference between the two, believing that both types of financial professionals are acting in their best interest.

Continue reading " Financial Advisors vs. Investment Advisers vs. Brokers: Rand Corporation Study Concludes That Investing Public Sees Them All The Same " »

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The US securities industry employed a record 848,600 people as of September 2007, according to the "Back of the Envelope" graph in the January 4, 2008, New York Times Business Section. This eclipsed the previous peak set in March 2001. But as the Times noted, Wall Street firms are expected to make deep job cuts in 2008.

Such job cuts are not unexpected – given the present state of the financial industry—especially since 2007 saw the heads of Citigroup and Merrill Lynch lose their jobs and the heads of Bear Stearns and Morgan Stanley forego their bonuses because of the subprime crisis.

When people in the executive suite lose their jobs or their bonuses, everyone further down the line – such as brokers, operations people and even compliance types – have to be getting nervous. We will be keeping our eye on employment developments on Wall Street as the year progresses.

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On January 4, 2008, Vikas Bajaj of the New York Times reported that the State Street Corporation – the manager of $2 trillion for pension funds and other institutions – had ousted a senior executive and set aside $618 million to cover five legal claims filed by clients for losses related to mortgage–backed securities. The five clients sued over losses of tens of millions of dollars invested in State Street funds that were supposed to hold risk-free debt such as U.S. Treasuries. One of the funds lost 28% of its value over the summer after it placed big bets on mortgage–related securities.

According to the report, four of the lawsuits were brought by pension fund clients – Prudential Retirement Insurance and Annuity Company, and pension funds at Nashua Corporation, a New Hampshire manufacturing firm, Unisytems, a publisher, and Andover Companies, an insurance company. It is unclear who brought the fifth suit.

The Prudential suit alleges that its clients – 165 retirement plans covering 28,000 people – lost $80 million by investing in State Street funds. According to the suit, State Street borrowed money to invest in subprime mortgages and related derivative contracts in a fund that was supposedly limited to investing only in Treasuries and corporate bonds, and, when Prudential sought more information about the investments, it received evasive and incomplete answers. The complaint alleges that one State Street executive told Prudential that its strategy had changed and it “forgot there was a lot more risk in the strategy.” State Street declined to discuss the allegations of any of these lawsuits for the article.

Continue reading " State Street Corporation Hunkers Down Over Suits For Pension Fund Losses, According to New York Times " »

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New York Times columnist Gretchen Morgenson reported on December 30, 2007, in an article entitled The Debt Crisis, Where It’s Least Expected, that the Indiana Children’s Wish Fund settled its subprime case against Morgan Keegan less than a month after the claim was filed. A coalition of law firms represented the Wish Fund: Page Perry, LLC, of Atlanta; Maddox Hargett & Caruso, P.C. of Indianapolis and New York; Aidikoff, Uhl & Bakhtiari of Beverly Hills, California; and David P. Meyer & Associates Co., L.P.A. of Columbus, Ohio.

These law firms filed the case on the Wish Fund’s behalf in November as an arbitration with the Financial Industry Regulatory Authority (FINRA). The Indiana Children’s Wish Fund is a charity that grants the wishes of children with life-threatening illnesses. The arbitration statement of claim describes how the Wish Fund invested approximately $220,000 in the Regions Morgan Keegan Select Intermediate Bond Fund. The funds had been previously invested in money market funds and a certificate of deposit. A Morgan Keegan agent recommended the bond fund as a completely safe and a smart business decision. “[T]he Wish Fund said it had lost $48,000 in a mutual fund from Morgan Keegan that had been invested in dicey mortgage securities,” according to the Morgenson article.

“The [subprime] crisis has generated almost $100 billion in losses or write-offs at the world’s largest financial institutions, cost a couple of Fortune 100 chief executives their jobs, wiped out billions of dollars in stock market value and hammered the reputations of the nation’s top credit rating agencies,” said Morgenson. “Still, the Wish Fund’s experience is instructive because so little has emerged about the losses that investors have incurred in these securities, perhaps because few holders have wanted to disclose them. Some investors may still not know how much they have been hurt by the crisis,” continued Morgenson. “As this debacle unfolds, accounts of investor losses in mortgage securities will come to light. And Wall Street’s role as the great enabler – providing capital to aggressive lenders and then selling questionable securities to investors – will be front and center,” concluded Morgenson.

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