Investment Fraud Lawyer Blog

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.