Investment Fraud Lawyer Blog

A report released on February 6 entitled, "An Empirical Study: Perception of Fairness of Securities Arbitration," concludes that 55.1% of respondents were dissatisfied with the outcome of their arbitration cases. Many of those surveyed also viewed the arbitration system as unfair and their arbitration panels as biased. The report was based on responses from more than 3,000 customers, lawyers and representatives of brokerage firms. (This blog reported on this study on February 7th).

Sara Hansard of Investment News recently revisited this study in a February 25th article. Although the Securities Industry and Financial Markets Association (SIFMA) and the Financial Industry Regulatory Authority Inc. (FINRA) participated in the survey, both claim that the 13% response rate was too low and therefore conclusions were "mixed."

Managing director and associate general counsel of SIFMA, Kevin Carroll, said that it was unfair to highlight only investor dissatisfaction with the arbitration system. In a statement about the survey, SIFMA said that 58% of respondents characterized arbitrators as competent and 73% said they listened to arbitrators. "The [survey] results don't show a system that's broken," Carroll said.

Continue reading " Controversy Continues Over Arbitration Study Findings " »

On January 30, 2008, the North American Securities Administrators Association Inc. (NASAA) released a list of 11 "pro-investor legislative priorities" that it plans to support this year.

Investment News journalist Bruce Kelly reported that “state securities regulators are worried that the recent emphasis on making U.S. capital markets more competitive could lead to the pre-emption of their power by federal regulators.” Thus, NASAA’s first priority is to “support a strong and effective regulatory structure for capital markets."

NASAA's second priority is to "restore fairness and balance in the securities arbitration system."

Continue reading " NASAA's 2008 Legislative Agenda " »

Believe it or not, some states are actually “partnering” with marketing firms to convince low- and middle-income seniors to buy long-term care insurance policies that they do not need and cannot afford, according to an article in today's Wall Street Journal by Jennifer Levitz and Kelly Greene entitled States Draw Fire for Pitching Citizens On Private Long-Term Care Insurance.

LTC insurance is one of the most complex and expensive forms of insurance around. It also provides agents some of the highest commissions in the business – between 30% and 65% of the first-year premium payments plus 3% to 5% a year after that. The benefits for many targeted customers are nonexistent because their income and assets are low enough that they would qualify for free long term care under Medicaid.

To add insult to injury, some of these insurance companies play “hardball” with their customers, jacking up LTC premiums by as much as 700% after the first year, and refusing to pay legitimate claims. The National Association of Insurance Commissioners (“NAIC”) reported a 74% increase in complaints to state regulators relating to claim denials on LTC policies from 2003 to 2006. NAIC also said that more than 70% of those denials are reversed after complaints were made – a “pattern of error” not found with other types of health insurance.

Continue reading " "We're From The Government ... And We're Here To Sell You Long Term Care Insurance" " »

Washington Post staff writer Carrie Johnson reported on February 14, 2008 that the probes by investigators into dozens of companies for fraud and insider trading in connection with the subprime mortgage crisis are progressing slowly. The FBI currently has 16 criminal investigations pending while the Securities and Exchange Commission is investigating close to 24 additional companies. Attorneys general in at least four states have issued subpoenas and private class-action lawsuits have been filed targeting banks, homebuilders, lenders, and credit-rating agencies.

FBI section chief Sharon E. Ormsby said that policing mortgage and credit-related fraud is the FBI Financial Crimes Unit’s "number one priority." The SEC has since assigned 100 lawyers to participate in a nationwide subprime mortgage-working group, which has made criminal referrals to other government agencies. Part of the challenge of these investigations is that they concern complex accounting and business decisions and investigators must sift through mountains of paperwork and trading records.

Continue reading " Subprime Probes Slowed By Complexity " »

According to BBC News, Germany’s HSH Nordbank plans to sue UBS to recover “significant” losses attributable to UBS’s mis-selling of subprime investments and failure to manage subprime securities in line with “prudent investment objectives.” HSH Nordbank, one of German’s largest financial institutions, said it plans to file suit in the State of New York.

This announcement further adds to UBS’s subprime woes. Not only has UBS suffered billions in losses from the subprime debacle, but both criminal authorities and the SEC are investigating UBS’s valuation and pricing of subprime investments. UBS is also being investigated over the adequacy of disclosures to investors to whom it sold subprime securities.

In a Page One story in the Wall Street Journal on February 12, 2008, reporters Ellen Schultz and Theo Francis alerted us to one of the latest financial schemes targeting seniors, veterans, and the disabled. This is the latest twist for the fast growing payday loan industry – lenders who make high interest loans that are secured by the borrower’s future paychecks. The industry is now targeting recipients of monthly government benefits, including social security, disability, and veteran’s benefits.

Since federal laws bar the government from sending benefits directly to lenders, the lenders create relationships with banks that arrange for prospective borrowers to have their government benefits electronically deposited into an account. The banks then transfer funds to respective payday lenders who subtract the debt repayments, fees and interest before giving recipients the balance, which seniors often refer to as their “allowance.”
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With effective annual percentage rates as high as 400% or more, payday lenders can completely control a Social Security recipient’s finances. No statistics are publicly available on the proportion of payday loans that are backed by Social Security and other government benefits. An analysis of data from the U.S. Department of Housing and Urban Development revealed that payday lenders are located around government-subsidized housing for seniors as well as the disabled.

Continue reading " High Interest Payday Lenders Trap Seniors, Veterans And The Disabled " »

The fallout from the subprime mortgage contagion continues to spread to other parts of the credit markets. Wall Street Journal reporter Robert Frank recently (Feb. 14, 2008) recounted the story of Brian and Basil Maher who sold their family's shipping business last summer for more than $1 billion. The brothers then put the some of these proceeds in what should have been a safe investment with Lehman Brothers Holdings Inc., with strict orders to “make only the most conservative, cash like investments.” Instead, the brothers lost $286 million within weeks.

Unbeknownst to the Mahers, Lehman Brothers invested more than two-thirds of their money in auction rate securities, which are an obscure type of bond now sending shock waves through the economy. Auction rate securities are an unusual type of long-term bonds that behave like short-term bonds. Auction rate securities are used to fund a wide variety of programs, including college student-loan programs and municipal road and bridge projects. These securities became popular with investors looking for cash-like investments because they offered better returns than traditional money-market investments but were just as easy to buy and sell.

Continue reading " $286 Million Auction Rate Securities Loss? " »

According to a February 14, 2008 story by Christine Richard and James Tyson at Bloomberg.com, bond insurers may be split into two separate businesses in what would be the biggest overhaul since the industry was created almost 40 years ago. In prepared testimony to the House Financial Services Subcommittee on Capital Markets, New York Insurance Department Superintendent Eric Dinallo said that such separation is one of the proposals regulators have been discussing with struggling bond insurers, FGIC Corp., MBIA Inc., and Ambac Financial Group Inc. Dinallo, whose main goal is to protect borrowers and debt holders, said, ``One would have the municipal bond policies and any other healthy parts of the business. The other would have the structured finance and problem parts of the business.''

New York Governor Eliot Spitzer told the subcommittee that although the split is not seen as “optimal,” it may be necessary if the insurers cannot raise the capital needed to avoid credit-rating downgrades. Losing the AAA ratings bond insurers use to guarantee $2.4 trillion municipal and mortgage-backed debt lowers confidence in the rankings of thousands of hospitals, schools, and local governments around the country.

Since demand for AAA rated securities currently exceeds supply, New York has invited new companies to provide bond insurance. ``We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses. Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects,'' Dinallo said.

Several years ago bond insurers branched out from their traditional business of insuring municipal bonds to insuring collateralized debt obligations (CDOs) and other securities relating to subprime mortgages. Now, with the subprime contagion sweeping the world, the bond insurers are facing significant losses. The bond insurers have begun to lose their own AAA credit ratings as the ratings of many of the CDOs related to subprime mortgage securities have been downgraded or put on watch with the threat of downgrading.

In a February 19, 2008 article posted at Bloomberg.com, Mark Pittman and Christine Richards reported that the plan of Eric Dinallo, the New York Superintendent of Insurance, to split the bond insurers into two companies – one of which would insure the municipal bonds and the other which would insure the CDOs and other subprime mortgage securities – may preserve the AAA rankings of municipal securities but allow the continued slide of the rankings of asset-backed securities. This could cause the credit ratings on $580 billion of asset backed securities to be cut and spark further losses for investors and writedowns by financial institutions of their subprime mortgage securities. Oppenheimer & Co. analyst Meredith Whitney estimated last month that the investment banks might have to record additional writedowns of $70 billion if the bond insurers fail.

Continue reading " New York's Rescue Plan For Bond Insurers May Cause Additional Subprime Losses " »

The credit crisis triggered by the collapse of the subprime mortgage market has claimed its latest victim: auction-rate securities. These complex debt instruments are long-term corporate or municipal bonds or preferred stock on which the interest rates are reset periodically, typically every seven, 28 or 35 days. Assuming there are buyers, holders of these instruments can sell them on the reset days. The problem is that lately buyers have been few and far between. The $330 billion auction-rate securities market is experiencing turmoil and uncertainty it has never seen before.

Auction-rate securities have been popular with issuers like state and local governments, colleges, universities, hospitals, charitable organizations, cultural institutions and other non-profit entities because financing costs are low, no third-party bank support is required and there are usually fewer parties involved in the financing process.

Continue reading " The Subprime Crisis Strikes Again: Auction-Rate Bond Market Now Vulnerable " »

In an article in the February 19, 2008 Atlanta Journal-Constitution, Associated Press reporter Mark Jewell noted that regulators are trying to punish Wall Street for its mortgage finance practices. While these practices have expanded homeownership and spread risk among new players, they came at the cost of duping the borrowers and investors who supplied cash to fuel the housing bubble that has burst.

State securities regulators and some individual cities have brought lawsuits trying to prove that investment banks and big mortgage lenders are not just guilty of making poor business decisions and failing to foresee the looming mortgage troubles but rather of engaging in fraud. The FBI is also investigating possible criminal conduct based upon what Wall Street firms knew about the risks of securities backed by subprime mortgages and whether they hid those risks from investors.

Observers do not expect the regulators to extract massive financial penalties in the civil cases they are bringing against Wall Street firms and mortgage lenders. But they could uncover evidence that will force Wall Street on the defensive as the government seeks to ease the subprime-related financial strains on the bond insurers. Evidence of bad behavior by Wall Street could also fuel the filing of even more lawsuits by private investors. Already 278 subprime cases were filed in federal courts in 2007.

Continue reading " Credit Crunch Causes A Myriad Of Regulatory And Legal Actions " »

Andrew Frye of Bloomberg.com has reported that the North American subsidiary of Allianz, Europe’s largest insurer, has agreed to a settlement with California’s insurance regulator under which it will pay $10.1 million and change its annuities sales practices. California alleged that Allianz misled investors and pushed unsuitable products onto thousands of elderly persons. In a statement, Commissioner Steve Poizner noted, ``The fact that Allianz used deceptive practices and high-pressure sales tactics to lure and cajole seniors into buying unsuitable products is appalling.''

Page Perry has reviewed the California settlement document. In sum, the settlement requires Allianz to (1) pay a $3,000,000 monetary penalty, (2) pay $300,000 in attorneys fees, (3) make a $3,750,000 contribution over five years to the Life and Annuity Consumer Protection Fund special account within the California Insurance Fund, (4) make a $3,000,000 "High Impact" investment in the California Organized Investment Network, (5) establish annuity suitability systems, standards and procedures, and (6) conduct a claims review process for current or former owners of certain annuities. The claims review process will give policyholders (regardless of age) the opportunity to request rescission of their policies or receive "other specified restitution" from Allianz.

Continue reading " Allianz Agrees To $10.1 Million Settlement With California Insurance Regulator But Still Faces Class Action Claims " »

Moody’s Investors Service downgraded the insurance units of FGIC Corp., the fourth-largest bond insurer, six levels from Aaa to A3 and announced that further downgrades were possible. This downgrade occurred as a result of FGIC’s expansion into guaranteeing CDOs backed, in part, by subprime mortgages. FGIC, which is owned by Cypress Group, PMI Group, Inc. and Blackstone Group LP, had its rating cut eight levels to below investment grade.

As a result of Moody’s downgrade, the New York Insurance Department has reported that FGIC is seeking to be split in two to protect the municipal bonds it insures from the problems attributable to its guarantees of subprime-related securities. Essentially, FGIC is seeking to separate its “good” business (insuring municipal bonds) from its “bad” business (insuring subprime structured finance products.) FGIC reportedly insures $220 billion of municipal bonds and another $94 billion of other debt.

Continue reading " Bond Insurer FGIC Downgraded Again, Seeks To Split--Litigation Likely To Follow " »

In prepared testimony before Congress last week, New York Governor Elliot Spitzer acknowledged that losses from the subprime crisis may threaten the U.S. economy. During his presentation, Spitzer pointed out that many were to blame for the subprime problem.

Spitzer complained that inadequate federal regulation of the mortgage markets and of the conversion of subprime mortgages into securities contributed heavily to problems in the U.S. economy. Spitzer pointed out that federal regulators should have been more proactive in dealing with the subprime situation and the abuses that occurred in the subprime market.

Continue reading " Spitzer: Subprime Crisis May Cause A "Tsunami" For U.S. Economy " »

An article from Bloomberg.com by David Mildenberg reported that the nation’s biggest mortgage lender, Countrywide Financial Corp., announced that overdue mortgage loans were at their highest level in six years during January 2008. The amount of unpaid principal on loans more than 60 days late substantially increased to 7.47% from 4.32% in January 2007.

Unfortunately, the number of delinquencies is likely to increase significantly as the year progresses. Analysts at Citigroup have reported that payments on $460 billion of adjustable-rate mortgages nationwide will be re-set this year, with an additional $420 billion expected to re-set for 2011. The increased mortgage payments required by these re-sets is likely to result in additional defaults by borrowers.

The news is no better on the home price front. Some experts are expecting that in some bubble markets – such as California and Florida – 2008 will bring another 20% to 25% decline in home prices, which may create another cycle of delinquencies.

These developments do not bode well for investors in subprime-related securities. Further deterioration of this market appears likely.

On February 7, 2008, the American Equity Investment Life Holding Company reached a settlement of a lawsuit over variable annuities with the Minnesota Attorney General. Hennepin County District Court Judge Kevin S. Burke approved the settlement that resolved all the issues raised in the lawsuit.

The settlement’s two primary components are (i) a defined suitability process for Minnesota consumers and (ii) a claims process for the past sales of certain variable annuity products where the senior consumers were either misinformed or received an unsuitable product.

Continue reading " American Equity And Minnesota AG Settle Annuity Lawsuit " »

On Thursday, February 14, 2008, correspondent Sarah Krouse reported in the Atlanta Journal-Constitution on testimony given before the Senate Special Committee on Aging regarding mortgage scams that are targeting seniors.

According to Krouse, three of the common types of fraud are:

Title Transfer – A scammer convinces a homeowner to sign a fraudulent document that serves to sign the house over to the scammer;

Home Sale – A foreclosure “rescue” company buys the house with the promise that the senior can remain as a renter and repurchase the house in a few years. Needless to say, these promises are unenforceable; and

Mortgage Negotiation – A fake rescue firm tells the homeowner that it will negotiate an extended and/or lower payment of the mortgage. The senior makes the mortgage payments to the firm, but none of the money reaches the mortgage company.

Continue reading " Common Mortgage Scams Target Seniors " »

Today’s Wall Street Journal reported in an article by Kate Kelly that the criminal investigation into the collapse of two internal Bear Stearns hedge funds could hinge on whether the funds’ managers misled investors during a conference call in the Spring of 2007.

In an investor call held on April 25, 2007, Ralph Cioffi, the funds' manager, said that he was “cautiously optimistic” about Bear’s ability to hedge its securities tied to subprime home loans. One month earlier, however, Cioffi had moved $2 million of his own money out of one of the two troubled funds and into a newer and less risky Bear internal fund. At the same time, Cioffi was engaging in discussions with colleagues – some of which were conducted by email – about the worrisome state of credit markets and whether the declines in the subprime securities would be trouble for his funds.

Prosecutors in the US Attorney’s Office in Brooklyn, New York are examining whether any disparity between the public and the private comments of Cioffi and others could constitute fraud. No grand jury subpoenas have yet been issued.

Continue reading " Criminal Probe Of Bear Stearns May Center On Investor Call " »

The credit crisis precipitated by the ongoing subprime debacle is likely to result in billions of dollars in additional losses for investors and investment banks. Fitch recently reported that writedowns for CDOs and subprime related losses already totaled $150 billion, but various experts believe that reported losses don’t begin to reflect the true extent of losses actually sustained in the recent downturn.

Now, UBS estimates that the world banks face the risk of up to an additional $203 billion in writedowns. Specifically, UBS has reported that CDOs could result in an additional $120 billion in losses for the banks and that the banks have an additional $83 billion in losses from structured investment vehicles (SIVs), commercial mortgage backed securities, and leveraged buyouts.

For institutional and individual investors, the situation may be even more serious. Recent investigations begun by criminal prosecutors and the SEC have raised serious questions about the valuations that various investment banks have placed on CDOs and subprime related loans. This, in turn, has raised questions about whether institutional and individual investors are really aware of what their holdings are worth.

Continue reading " Subprime Investors And Investment Banks Face Billions Of Additional Losses " »

According to a Page One story by David Enrich in today’s Wall Street Journal, Citigroup has barred investors from withdrawing their money from a Citigroup hedge fund named CSO Partners.

CSO, which specializes in corporate debt, was closed to withdrawals after investors sought to withdraw 30% of the funds’ approximately $500 million in assets. The fund lost 11% last year and Citigroup injected an additional $100 million into the fund last month to stabilize it. John Pickett, the fund’s former manager, has left the firm amidst a bitter dispute with senior executives and a complaint that he put too much money into a single investment.

In June 2007, Pickett placed an order for several hundred million dollars of leveraged loans offered by a consortium of banks on behalf of a German media company. At the time, CSO had $700 million in assets – so Pickett wanted to commit more than half of the fund’s assets to this one deal.

Continue reading " Citigroup Bans Investor Withdrawals From Hedge Fund " »

State Street, the Boston-based financial services giant, marketed its Limited Duration Bond Fund, Intermediate Bond Fund, Enhanced Intermediate Bond Fund, Government Credit Bond Fund, Daily Bond Market Fund and Yield Plus Fund, among other bond mutual funds, as safe, conservative investments and sold them to institutional investors seeking high quality and low risk investments. Much to the chagrin of pension plans, non-profit organizations and other institutional investors, who relied on these representations, these Funds have proven to be just the opposite. Indeed, investigations have revealed that they are anything but safe.

State Street assured investors that the Funds would provide stable, predictable returns in line with a U.S. government and corporate bond index, and touted the Limited Duration Bond Fund “as a way to generate better results than those of money-market funds with only slightly more risk.” In reality, however, upon our initial investigation, all the Funds appear to have been loaded with subprime debt from home-equity loans, mortgage-backed securities, swaps, derivatives and other exotic products.

Continue reading " Losses In State Street Bond Funds Take Heavy Toll On Pension Plans, Non-Profits and Institutional Accounts " »

In its February 2008 issue, Smart Money magazine noted that, while the options for investing beyond mutual funds may be more attractive than in the past, there are still choices that most investors should avoid. Four such products are:

1. Variable Annuities (VAs)

Brokers and insurance companies tout the tax advantages of VAs, which grow tax free like IRAs. But distributions from VAs are taxed at ordinary income rates – roughly double the capital gains taxes that would be owed if the assets were held in a taxable account. Once you add in payments for the underlying investments and insurance protection fees, a VA could cost an investor five times as much as an investment held in a taxable account. Put $20,000 in a low-cost annuity for 20 years, for example, and you could still have earned $15,000 less than if you had made the same investment in a taxable account.

Continue reading " Four Investment Options To Avoid " »

According to an article in Business Week in the Fall of 2007, equity-indexed annuities – which lets the investors share in the stock market gains with a minimal risk of loss – are getting the worst press and the most regulatory scrutiny of any financial product pitched to individual investors. Most of the regulatory scrutiny focuses not on the investment itself but on the hardball sales pitches that fail adequately to explain the fee structure, especially the early withdrawal penalties.

In 2007, attorneys general in two states filed suits against equity-indexed annuities insurers for inappropriate sales tactics. Likewise, a federal judge in Minnesota certified a class action against the largest purveyor of such annuities, Allianz Life Insurance Company of North America, for faulty disclosures. (Page Perry is serving as one of the colead counsel for the plaintiffs in that class action).

Continue reading " Complex Annuity Products Make Retirement Investing Difficult " »

Every couple of years, a rogue trader, such as Jerome Kerviel of Societe Generale, bursts on the scene when losses in the billions are uncovered. Such a person is always considered a fluke, since normal people would not take such risks. According to a recent article by Jenny Anderson in The New York Times, however, the emerging field of neurofinance, combining psychology, neuroscience, and economics, reveals that there may be a bit of a rogue trader in each of us. Scientists in this field have discovered that people are hard-wired for money. People respond to high-stakes trading just as they would to the lure of sex or even drug addiction. The riskier the trades get, the more the brain craves the activity.

Brian Knutson, a professor of psychology and neuroscience at Stanford University, is a pioneer in neurofinance who is examining how the brain makes decisions. Knutson’s studies reveal that people sometimes get high on making money. “The more you think you can gain from the risk, the more you take the risk and the more activation in the circuitry,” Knutson said.

Continue reading " Risky Trading As An Addictive High, Say Researchers " »

In an article in the February 7, 2008 Wall Street Journal, Susanne Craig and Liam Pleven reported that New York Insurance Superintendent Eric Dinallo is pressuring Wall Street’s top firms to formulate a plan to rescue troubled bond insurers. In a January 23rd meeting with 30 senior officials at top Wall Street firms, including Citigroup, Goldman Sachs, Merrill Lynch, and Morgan Stanley, Dinallo left no doubt who he thought was responsible for the mortgage meltdown that has caused a loss in value of the securities guaranteed by the insurers as the housing market weakens. "You created this mess," Dinallo told senior officials of Wall Street's top firms. “And the headline on this is going to be: ‘How Wall Street Ate Main Street.’”

Not surprisingly, Dinallo's aggressive approach is apparently ruffling some Wall Street feathers. Not all of the attendees agreed with Dinallo’s assessment that the failure of bond insurers could “pose a systemic risk to the financial markets.” Some of these attendees appealed to senior officials at the Treasury Department and the New York Federal Reserve to take the lead role if any rescue efforts were needed.

Continue reading " Spitzer Protege Drives Bond-Insurer Rescue Talks " »

The Los Angeles Times has reported that a U.S. probe alleging insider trading by former Dow Jones & Co. director David Li and two other Hong Kong residents was settled for $24 million.

According to the Securities and Exchange Commission (SEC), in April 2007, Li conveyed material nonpublic information to his close friend Michael Leung the day after learning of the proposed takeover of Dow Jones by News Corp. Leung, assisted by his daughter and son-in-law, purchased $15 million in Dow Jones stock before the offer became public. Shares of Dow Jones surged 55% when News Corp. publicly unveiled the bid on May 1.

Continue reading " SEC Settlement Reached In Hong Kong-Linked Insider Trading Case " »

An article by Amir Efrati, Susan Pulliam, Kara Scannell and Craig Karmin in today’s Wall Street Journal reported that the U.S. Attorney’s Office in Manhattan has notified the SEC that it wishes to review the information gathered by that agency in its investigation of Merrill Lynch. The SEC probe, itself recently upgraded to a formal investigation, is examining, among other things, whether the firm booked inflated prices of mortgage bonds it held even though it knew that the valuation had dropped.

These developments are only the latest in a series of criminal and civil investigations being pursued by federal and state regulators in the wake of the mortgage-securities market collapse.

The Wall Street Journal had previously reported that the Brooklyn U.S. Attorney’s Office had launched a preliminary criminal investigation into whether UBS had improperly valued its mortgage-securities holdings. The SEC is also conducting a formal investigation into that issue.

Continue reading " More Bad News For Wall Street -- Federal Prosecutors Investigating Merrill Lynch, UBS And Bear Stearns Over Subprime Securities " »

According to a study conducted for the Securities Industry Conference on Arbitration (SICA), most securities customers involved in arbitration do not believe that the process is fair to all parties and reported dissatisfaction with the outcome of their disputes.

Compiled by Cornell University’s Survey Research Institute, An Empirical Study: Perception of Fairness of Securities Arbitration summarized the responses of 3,000 participants on both sides of arbitration cases. Although most participants believed the arbitration panel appeared competent, only 40% believed the arbitration panel was open-minded. Participants were split on whether the process is economical. Most desired an explanation of the awards.

Continue reading " Securities Arbitration Participants Say Process Is Unfair " »

According to Wall Street Journal reporters Aaron Lucchetti and Serena Ng, Standard & Poor’s downgraded or threatened to downgrade over 8,000 mortgages investments and projected that a widening array of financial institutions will face losses totaling more than $265 billion. These downgrades will create more turmoil in a market already reeling from at least $100 billion in write-downs.

S&P suggested that many financial institutions would have to sell some of the bonds affected by its ratings action. It expects that losses will more than double and will affect many firms that have not yet acknowledged the problem. While these new downgrades may not hurt the banks that have already taken large write-downs, the impact could spread to regional banks, credit unions, government-sponsored businesses as well as European and Asian banks that have not yet taken a write-down.

Continue reading " S&P Downgrades To Push Losses Over $265 Billion " »

Senior citizens have worked hard to build a lifetime's worth of savings. Consequently, stockbrokers and financial advisors often target them for "free" investment seminars in hopes of obtaining new business relationships. Many so-called "senior advisors" use misleading professional designations to engender trust. In reality, they are just interested in selling seniors a product that either carries a high commission, such as variable and equity index annuities, or is a high-risk investment that puts the senior's nest egg at risk.

In fact, a recent survey of state securities regulators conducted by the North American Securities Administrators Association shows that senior citizens make an estimated 44 percent of all investor-related complaints, up from 28 percent in 2005. The same study also revealed that variable and equity index annuities were involved in 48 percent of cases of senior financial exploitation reported to state securities regulators.

Senior investment fraud is a serious ongoing problem that is growing year by year.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry, LLC has successfully represented investors against brokers and their firms for causes of action based on elder abuse. For further information, please contact us.

John Glover of Bloomberg.com reported today that Collateralized Debt Obligations (CDOs) might be downgraded by as many as five levels as Fitch Ratings reviewed its criteria for rating $220 billion of such products after the massive mortgage-related losses from the subprime contagion.

AAA-rated CDOs that are based on credit-default swaps and are not actively managed will suffer the biggest cuts. CDOs that package high-yield assets may be cut three levels for the tranches first in line for losses.

Moody’s Investors Service also announced yesterday that it may overhaul its system for rating structured-finance products to include, among other things, a numerical scale and an “.sf” designation to signify a structure-finance ranking from a corporate credit grade.

Continue reading " CDO Ratings To Fall As Rating Agencies Overhaul Criteria " »

In a front-page story of the January 27, 2008, Sunday Business Section of the New York Times, Landon Thomas, Jr., reported on a peculiarity of Wall Street and its reaction to the huge losses in the subprime contagion. In most industries, if you lose billions of dollars, you are fired and are lucky if you ever work in that field again. Not so for some of the Wall Street executives who oversaw subprime investments at Merrill Lynch and Citigroup.

The article focused on Dow Kim of Merrill Lynch and Thomas G. Maheras of Citigroup. They were high-level executives at their respective firms who built up large position of subprime-related securities that led to $34 billion in losses last year. Those losses in the subprime contagion humbled these giant financial firms and forced their respective chief executive officers – Stan O’Neal and Charles Prince – to lose their jobs. The losses may not be over yet; both Merrill and Citigroup may report further losses in the months ahead.

Yet Mr. Kim and Mr. Maheras appear to have bright futures ahead of them.

Continue reading " Subprime Investments Explode But Many Of Those Responsible Land On Their Feet " »

Investors who are approaching retirement are often targeted by brokers and invited to free investment seminars. In some cases, the broker encourages investors to take one or more of the following actions:

• Retire earlier than they might otherwise have done;
• Opt out of the company's retirement plan or 401(k) plan and take a lump-sum payment;
• Open a traditional IRS at the broker's firm;
• Invest in variable annuities, equity-based annuities, Class B mutual funds, and exchange traded funds that are substantially riskier than the fixed benefit pension they gave up.

These recommendations are often coupled with the broker's false promises that the investor can receive higher monthly retirement income and can grow the investment with little or no risk. As a result of this bad advice, many individuals have lost their entire "next egg." Page Perry has found that, in many cases, the client's financial professional misled them about their investments by locking them into excessive withdrawal rates and exposing their portfolios to huge risk without adequate disclosure. Even worse, most retirees do not understand that they were misled or that they may have legal rights to recover the losses that they sustained.

On February 2, 2008, Kara Scannell, Anita Raghavan and Amir Efrati of The Wall Street Journal reported that federal criminal prosecutors are investigating whether broker-dealer UBS “misled investors by booking inflated prices of mortgage bonds it held despite knowledge that the valuation had dropped....” According to the report, the Securities and Exchange Commission (SEC) had also initiated a formal investigation into whether UBS improperly mispriced mortgage securities.

While the potential criminal and administrative consequences of these investigations are very serious, the civil consequences of such misconduct could be both massive and far reaching. Wide-spread mispricing of subprime mortgages and related securities would almost inevitably have caused significant damage to much of UBS’s customer base as well as to purchasers of its mortgage securities and its shareholders. Such misconduct would be particularly troubling because of the potential benefits that inured to UBS in the form of inflated sales proceeds, excessive management fees, and avoidance of losses. Such misconduct would also likely cause irreparable damage to UBS’s reputation because it may be indicative of efforts by UBS to unload risky mortgage securities off on its customers at inflated prices just as the credit crisis was heating up.

On Saturday, February 2, 2008, Craig Karmin of The Wall Street Journal reported that “Massachusetts state authorities accused Merrill Lynch & Co. on Friday of fraud and misrepresentation” related to Merrill’s sale of collateralized debt obligations also known as CDOs.

The complaint filed by Massachusetts arose out of Merrill’s sale of $13.9 million of CDOs to Springfield, Massachusetts last spring. Within several months, these CDOs plummeted over 90% in value to $1.2 millions creating a financial dilemma for the municipality. Massachusetts complained that Merrill’s actions were “inappropriate and illegal” because “these highly-risky and esoteric CDOs were unsuitable ... and Merrill Lynch did not properly disclose to the City the risks of owning these CDOs.”

Continue reading " Massachusetts Sues Merrill Lynch Over Inappropriate CDO Sales To Municipalities " »

Under threat of legal action, Merrill Lynch has resolved a dispute with the City of Springfield, Massachusetts by conceding that the sale of collateralized debt obligations (CDOs) backed by subprime mortgages to Springfield and the Springfield Financial Control Board was inappropriate. As part of the resolution, Merrill Lynch agreed to repurchase the CDOs for the amount that Springfield had paid for the CDOs and to pay Springfield’s legal fees.

The dispute arose when subprime based CDOs, that Merrill Lynch sold to Springfield for $13.9 million last spring, suddenly plummeted over 90% in value to $1.2 million, leaving the municipality in dire financial straits. Springfield asserted that the CDOs were improperly sold to it claiming, among other things, that:
1. Merrill violated state law by failing to inform Springfield of the nature of the investments;
2. Merrill failed to make required disclosures to Springfield; and
3. Merrill sold Springfield an inappropriate investment because state law limits cities to investing in government securities and other safe, short-term and easily tradable investments.

Continue reading " Merrill Lynch Acknowledges Impropriety Of Selling Subprime-Backed CDOs To A Municipality " »

State Street Bank and Trust Co. inappropriately invested in "subprime, mortgage-related financial derivatives," according to a lawsuit filed in U.S. District Court for the Southern District of Texas by the Houston Police Officers Pension System.

According to the suit, the bank and its investment management company, State Street Global Advisors Inc., were supposed to invest $72 million of the company’s pension assets in a “conservative, low-risk mix of bonds and securities.” Instead, tens of millions of dollars were lost due to the bank’s "[failure] to disclose that the Limited Duration Bond Fund itself would be invested almost in a single, residential mortgage sector, much of which was subprime or that the Limited Duration Bond Fund would itself be highly leveraged and illiquid."

The pension system further alleges that State Street's strategy missed the target return on investment of 6.7%, which produced “catastrophic results."

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According to Elena Logutenkova and Elizabeth Hester of Bloomberg.com, January 2008 was a horrific month for Europe’s largest bank. On January 30, Zurich-based UBS AG posted the biggest loss ever by a bank totaling approximately $14 billion. This large write-down caused the bank to post a net loss of $11.4 billion for the quarter.

UBS AG’s losses were larger than the $9.83 billion loss reported by the largest U.S. bank, Citigroup. Two additional New York based companies, Morgan Stanley and Bear Stearns Co., also reported record losses.

Director of Geneva’s Ethos Foundation, Dominique Biedermann, describes UBS’s loss as “enormous” and has called for an independent audit of the company. "[The investment wiped] out profit and shows that an inquiry is needed to make sure it doesn't happen again, and eventually whose responsibility this is,'' Biedermann said.

Continue reading " UBS AG Reports $11.4 Billion Loss And $14 Billion Write-Down As A Result Of Subprime Meltdown " »