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September 16, 2009

Securities Fraud Lawsuit Against UBS AG Gets Added Steam with Employee Email Calling Collateralized Debt Obligations “Vomit”

UBS AG must post a $35.6 million bond, says Superior Court Judge John Blawie. Blawie says that hedge fund Pursuit Partners, LLC has sufficient evidence to pursue its securities fraud case claiming that the investment bank knew it was selling collateralized debt obligations that were toxic to institutional investors but did nothing to inform clients about the risks.

Blawie cited an e-mail written by a UBS employee that called the asset-backed securities “vomit.” Another e-mail noted that UBS was selling Pursuit CDOs that were “crap.”

The judge is letting the securities fraud complaint go forward without ruling on the case’s merits. Between July and October 2007, UBS sold the hedge fund CDOs valued at $40.5 million. Following the global credit crisis, there has been $1.7 trillion in losses and writedowns.

UBS employees marketed the CDOs to Pursuit while they were communicating with Moody’s Investors Services Inc. The credit-rating agency was tasked with reviewing UBS’s CDO investment grade ratings. Blawie says that the UBS employees found out after meeting with Moody’s that the CDOs would become “financial toxic waste.”

The securities fraud lawsuit claims that UBS new that Moody’s was going to change its rater’s methodology but that the investment bank continued to promote the CDOs as if the changes were not going to happen. When Moody’s tchanged its market-based formula to focus on where prices were going instead of current prices, the CDOs value immediately fell.

Pursuit contends that it suffered a $35.6 million loss as a result of UBS concealing the non-public data it had about the CDOs investment grade rating dropping. It also says that because UBS took two sides of a derivatives contract, the investment bank was able to liquidate the CDOs and did not sustain losses.

UBS denies the allegations and argues that Pursuit knew the risks that came with buying the CDOs. The investment bank claims that the hedge fund made the purchases at hugely discounted rates as high as 96%. UBS spokesperson said that one e-mail from Pursuit called the CDOs “sh__.”

Moody’s is also a defendant in the securities fraud lawsuit.

Related Web Resources:
Lawsuit Against UBS Resurfaces to Threaten Wall Street Itself, Seeking Alpha, September 15, 2009

UBS Hit by Another Lawsuit, Business Week, March 6, 2008

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Posted In: Collateral Debt Obligation , Credit Ratings Agencies , Financial Firms , Moody's , Securities Fraud , UBS

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September 14, 2009

Morgan Keegan Hit with Large Penalty for Fouling Ex-NBA Star

Following a dispute that was resolved in arbitration, broker-dealer Morgan Keegan & Co. must pay former NBA player Horace Grant $1.46 million. The amount is the largest arbitration loss for Morgan Keegan to date. Morgan Keegan is the securities brokerage firm of Regions Financial Corp.

The award, issued by the Financial Industry Regulatory Authority, is for damages that Grant incurred because he invested in Morgan Keegan’s risky mutual funds that were involved in collateralized debt obligations connected to residential mortgages. Grant had originally sought $1.5 million for the damages he sustained.

There are still several hundred investment fraud lawsuits pending against the brokerage firm over mutual funds involving subprime mortgages that declined because the US housing market fell apart and loans defaulted. Up to 95% of the funds’ value has dissolved since the middle of 2007.

Green used to play for the Chicago Bull, the Los Angeles Lakers, the Seattle Supersonics, and the Orlando Magic. In his arbitration case, the former NBA basketball player contended that Morgan Keegan misrepresented the level of risk that came with the bond funds that he purchased.

Already, Morgan Keegan has lost a number of cases in 2009. Seven of the cases have cost the broker-dealer $3 million. Other professional athletes who have filed lawsuits against Morgan Keegan for losses that they say they sustained from the bond funds are Jerome Woods, formerly of the Kansas City Chiefs, and former St. Louis Cardinals baseball player Tim McCarver. Woods won $950,000 against the brokerage firm while McCarver resolved his claim for $100,000.

Our stockbroker fraud law firm represents numerous investors who have sued Morgan Keegan for misrepresenting risky investments as safer kinds of investments.

Related Web Resources:
Ex-NBA star wins $1.45M arbitration claim against Morgan Keegan, Investment News, September 14, 2009

Morgan Keegan ordered to pay former NBA star $1.4M, Memphis Business Journal, September 14, 2009

NFL retiree gets $950,000 for Morgan Keegan mutual fund losses, Commercial Appeal, April 14, 2009

McCarver Awarded $100K in Morgan Keegan Claim, Memphis Daily, February 26, 2009

Continue reading "Morgan Keegan Hit with Large Penalty for Fouling Ex-NBA Star" »

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Posted In: Arbitration , Collateral Debt Obligation , Financial Firms , Morgan Keegan

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July 10, 2009

Morgan Stanley Plan to Repackage Low-Grade Debt Obligations Then Sell These as Low-risk AAA Bonds is "Preposturous," Says Stockbroker Fraud Lawyer Bill Shepherd

Morgan Stanley is taking low grade collateralized debt obligations, repackaging these in into new pooled securities and obtaining questionable AAA ratings. The broker-dealer plans to sell $130 million CDO’s this way in a manner similar to the way banks have been dealing with commercial mortgage-backed securities. The repackaged CDO is to a great expent a copy of a CDO put together by Goldman Sachs Group in 2007 using bonds from Greywolf CLO I Ltd.

$87.1 million of securities are expected to receive the AAA rating—the offering is 89 cents on the dollar—the second portion is $42.9 million of securities that Moody's Investors Service have rated Baa2.

According to Sylvain Raynes, an R&R Consulting principal, many insurers and banks can only buy AAA. She says that by making AAA out of not AAA, people with AAA “on their forehead” can purchase.

Morgan Stanley is mirroring re-REMICs. This financing structure bundles mortgage securities into bonds that give investors another layer of collateral (or protection) from downgrades. Banks use Re-REMICs as protection against losses on residential mortgage securities.

Already, some $27 billion in home-loan bond re-REMICs have been issued this year—an increase from the $17 billion for all of 2008. Even Goldman Sachs has plans to sell $216.9 million of repackaged commercial mortgage debt. Re-REMIC will come from bonds sold in 2006.

After learning about Morgan Stanley’s plan to repackage CDO’s, Shepherd Smith Edwards and Kantas, LLP Founder and Stockbroker Fraud Attorney Bill Shepherd said, “Apparently there have been no lessons learned by Wall Street about packaging and selling questionable loans by attaching misleading AAA ratings to these in order to subvert prudent investment goals. Our securities fraud law firm is pursuing many claims for institutional and individual clients who have been burned by such investments. Any defense by investment firms that they did not know these investments were risky was then—as is now—simply preposterous!”

Related Web Resources:
Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds, Bloomberg.com, July 8, 2009

Morgan Stanley To Sell $130M Repackaged CDO - Sources, Wall Street Journal, July 8, 2009

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Posted In: Collateral Debt Obligation , Financial Firms , Morgan Stanley

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January 14, 2009

$865 billion in state pension fund losses are resulting in reduced benefits for new hires

Because state governments have accrued about $865.1 billion in state pension fund losses, new hires are ending up with reduced benefits. The losses not only exceed the $700 billion Troubled Asset Relief Program that Congress approved last year, but they are accompanied by $42 billion in state budget deficits. In a letter to US Treasury Secretary Henry Paulson, the mayors of Atlanta, Philadelphia, and Phoenix asked for help for their financially beleaguered cities and noted growing pension costs and investment deficits.

According to the Center for Retirement Research at Boston College, 109 state funds’ assets dropped 37% to $1.46 billion between October 2007 and December 2008. A 41% decline during this time period also occurred on the Standard & Poor’s 500 index of stocks.

For the 109 funds to be restored to their 2007 actuarial funding levels by 2010, the Boston College Center says the funds would require yearly returns of 52% on assets. These estimated projections could occur if there was a 5.7% increase in yearly liabilities and a $50 billion growth in assets from contributions beyond yearly payouts. While state funds do have enough money to pay for benefits for the foreseeable future, taxpayers will still have to make up this one-time loss—a proposition that is a hard sell.

A number of states are creating two-tiered systems that offer less benefits to new employees in order to reduce pension costs. For example, As of June 30, 2008, the largest fund in Kentucky for state workers had just 52% of the assets required to pay 117,000 members their present and future benefits. Now, Kentucky officials have established age 57 as the state’s minimum retirement age for workers hired after September 1. In order to receive full benefits, 30 years of service (rather than 27) are required. In New York, Governor David Patterson wants to increase the retirement age from 55 to 62 and decrease new workers’ benefits.

The stock market decline has also resulted in pension funds' asset losses. Marsh & McLennan pension consulting unit Mercer LLC says that defined benefit funds dropped from $1.3 trillion in September 2008 to $1.1 trillion the following month. There are also state retirement systems that have experienced derivatives losses. Public data put together by Bloomberg in 2007 shows that public pension funds purchased over $500 million in so-called equity trenches of collateralized debt obligations.

Related Web Resources:
State Pensions’ $865 Billion Loss Affects New Workers, Bloomberg.com, January 13, 2009

Philadelphia Takes Hit In Pension Fund Struggle, The Bulletin, January 14, 2009

Continue reading "$865 billion in state pension fund losses are resulting in reduced benefits for new hires" »

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Posted In: Collateral Debt Obligation

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February 11, 2008

Pondering the SEC’s Role in the Subprime Mortgage Crisis

What was the role of the Securities and Exchange Commission in the collapse of the subprime mortgage bubble? Although mortgage brokers, investment banks, and ratings agencies are frequently held responsible for the demise, little is said about the roles of the Financial Industry Regulatory Industry (FINRA) and the SEC—both watchdog agencies that are responsible for monitoring complex credit derivatives and their suitability requirements for investors.

Yet where was the SEC when it was time to oversee investment banks and determine whether they had sufficient capital for their balance sheets, trading positions, and the appropriate risk management systems so that major losses could be avoided?

One notable problem is that there is not enough clear data available about the credit derivatives market. Structured finance products, including collateralized debt obligations (CDOs) are traded over-the-counter in the United States. This means that price information for these products is not easily accessible.

It wasn’t until 2007 that the SEC, the Commodities Futures Trading Commission (CFTC), and other members of the President’s Working Group recommended that stricter oversight of the over-the-counter market be implemented.

While regulators are now examining the way banks structured, priced, and sold mortgage-laden securities, some industry insiders feel that these steps were taken too late. Should the SEC have noticed the warning signs?

In 2006, Merrill Lynch senior executive Jeff Kronthal was fired when he responded reluctantly to former Chief Executive Stanley O’Neal’s mandate that firms be more aggressive about taking risks with mortgage securities. Morgan Stanley’s new Chief Executive John Thain rehired Kronthal last December.

In 2005, Bear Stearns reported in its 2005 financial disclosure that it was threatened by a possible civil enforcement action related to pricing, analysis, and valuation of $63 billion in CDOs. Bear Stearns also reported that then-New York Attorney General Eliot Spitzer had contacted the firm about $16 billion in CDOs it had sold to an undisclosed client.

Former SEC attorney Gary Aguirre says that while aggressively pursuing Pequote Capital and its alleged involvement in an insider trading case in 2005, he was fired when he tried to interview Morgan Stanley Chief Executive John Mack. Aguirre claims that the SEC is too closely associated with the industry it regulates.

Earlier this month, securities regulators in Massachusetts filed a civil fraud lawsuit against Merrill Lynch over $14 million in CDOs that the firm sold to the town of Springfield. Regulators say they were unsuitable for and sold without the town’s permission. Merrill has admitted to the town’s lack of consent and paid its investment back in full—although it now has little value.

The Federal Bureau of Investigation says it is conducting criminal investigations into 14 firms regarding their involvement in mortgage securitization activities.

Morgan Stanley, Merrill Lynch, Bear Stearns, and Goldman Sachs all admit that different regulators have asked them about their handling of subprime mortgage securities.

If you are an investor who has lost money because of the misconduct or negligence of someone in the securities industry, please contact Shepherd Smith and Edwards today. Your first consultation with one of our stockbroker fraud lawyers is free.

Related Web Resources:

SEC

Collateralized Debt Obligation (CDO), Investopedia

Subprime Mortgage, Investopedia

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Posted In: Bear Stearns , Collateral Debt Obligation , Goldman Sachs , Morgan Stanley , SEC , Subprime Mortgage

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