February 14, 2014

OppenheimerFunds Increases Its Exposure to Puerto Rico Debt Despite Downgrade by Moody’s, S & P, and Fitch to Junk Status

Even though Puerto Rico’s debt has been downgraded to “junk” status by the three major ratings agencies (Standard & Poor’s, Moody’s, and Fitch Ratings), OppenheimerFunds (OPY) has increased its holding of Puerto Rican debt in two of its municipal bond funds that carry lower risk. The credit raters downgraded the US Commonwealth over worries about its failing economy and decreased ability to finance its deficits in capital markets.

According to Reuters, Lipper Inc. says that at the end of last year, the Oppenheimer Rochester Short-Term Municipal Fund's (ORSCX) exposure to Puerto Rico’s debt had risen 13% from a year ago, while its Intermediate-Term Municipal Fund more than doubled its exposure to 17%. (Details of the holdings in both funds since then are still unavailable.) Both have a 5% limit on how much junk-rated debt they can contain. However, because the US territory’s debt was downgraded after the buys were made, Oppenheimer, which is part of MassMutual Financial Group, may not obligated to unload the assets.

The company has continued to support Puerto Rico municipal bonds, even as a lot of other mutual fund firms have lowered their exposure to Puerto Rico debt. This week, Oppenheimer downplayed the investment risk involved, noting that most bonds involved are insured (Reuters reports that 27% of the holdings in the intermediate-fund and another 4% in the short-term fund, do not have insurance).

In addition to the Rochester short and intermediate bond funds, Oppenheimer has several state specific bond funds that also have significant exposure to Puerto Rican debt. Bloomberg says that the Oppenheimer funds that are focused on Pennsylvania, Massachusetts, Virginia, North Carolina, and Maryland have the largest weightings toward the US commonwealth out of all its state-specific funds —more than 25% each. Its Limited-Term New York Municipal Fund has 25% of its bonds coming from Puerto Rico as well.

Some of Oppenheimer’s funds have started to see outflows of investors because of the exposure to Puerto Rican debt. Last month, for example, investors withdrew roughly $317 million from Rochester muni bond funds. Similarly, a lot of other industry players are taking the same stance, with BlackRock Inc. (BLK), Vanguard, and others eliminating or lowering their exposure to Puerto Rico debt. On Wednesday, Fitch said that in a look at six large asset managers and their 92 municipal closed-end funds, on average Puerto Rico debt had been reduced by over 65% during the last half of last year. Two managers left their holdings completely.

Our Puerto Rico bond fraud lawyers represent investors with muni bond fraud claims against many major Wall Street firms as well as a number of Puerto Rico based firms including: UBS (UBS), Banco Santander (SAN), and Banco Popular. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.


Oppenheimer Rochester on Puerto Rico Downgrades: An Update, OppenheimerFunds, February 12, 2014

OppenheimerFunds increased Puerto Rico risk in two safer funds, Reuters, February 12, 2014

More Blog Posts:
Standard and Poor’s Reduces Puerto Rico Obligation Debt to Junk Status, Stockbroker Fraud Blog, February 6, 2014

How Can you Recover Your Loss on UBS Puerto Rico Municipal Bonds?, Stockbroker Fraud Blog, February 7, 2014


Ex-Oppenheimer Fund Manager to Pay $100K To Settle Private Equity Fund Fraud Charges, Institutional Investor Securities Blog, January 25, 2014

February 6, 2014

Standard and Poor’s Reduces Puerto Rico Obligation Debt to Junk Status

This week, Standard & Poor’s (“S&P”) cut the credit rating for Puerto Rico’s general obligation debt to junk-bond status due to concerns about an inability to access capital markets. S&P had put the US territory’s rating on notice for such a downgrade late last year. Now, the credit rating agency announced, it is officially issuing that downgrade to a “BB”—a level under investment grade.

The credit rating agency believes that the Caribbean island’s ability to sell additional debt in $3.7 trillion municipal bond market is limited and cash shortages could happen. Because of such “liquidity constraints,” S & P does not feel that an investment-grade rating is warranted. The agency also cut its rating on Puerto Rico’s Government Development Bank to a BB, as well.

Puerto Rico has been in peril of getting a ratings downgrade by all three US credit raters for some time now in part because of its $70 billion of tax-free debt. Responding to the junk status downgrade, Puerto Rico’s Treasury Secretary and Government Development Bank said that S & P’s decision was a disappointment but they remained “confident” that the US territory had enough liquidity to meet such needs through the fiscal year’s conclusion.

It was last week that UBS (UBS) put out a report stating that at least one of the three credit raters was expected to reduce its rating of Puerto Rico’s debt to “junk” within the next 30 days. Unfortunately, the announcement comes far too late for the brokerage firm’s retail customers on the Caribbean Island that have way too many Puerto Rico bonds in their portfolios. Also, the financial firm’s closed-end funds are comprised in large part of these bonds.

Many of UBS Puerto Rico’s customers have seen 50-60% losses, or more, in their retirement accounts. Now, with S & P’s announcement of an official downgrade, the effects on Puerto Rico debt holders will be, according to Forbes, “grave.”

Meantime, reports The Wall Street Journal, Puerto Rico has been preparing a debt offering of about $2 billion. The sale would be the first made by a Puerto Rico entity in six months. The US territory reportedly wants to show investors it can still borrow funds in the public market and had been hoping to avoid the downgrade to junk status. Morgan Stanley (MS) had suggested the island raise about $1 billion in a bond that had a 10% interest rate to sell to investors, including hedge funds.

At Shepherd Smith Edwards and Kantas, our Puerto Rico bond fraud lawyers are representing customers who suffered losses from their investments they made through UBS, Banco Santander (SAN), Banco Popular, Merrill Lynch (MER) and other financial firms. Please contact our Puerto Rico bond fraud lawyers today. We work with clients both in the US and in Puerto Rico and have a Puerto Rico licensed attorney on staff.

UBS Drops First Shoe On Puerto Rico Bond Investors, Forbes, February 4, 2014

Puerto Rico Seeking $2 Billion Debt Offering, The Wall Street Journal, February 2, 2014

A Debt Downgrade for Puerto Rico, NY Times, February 5, 2014


More Blog Posts:
Seniors and Retirees Suffer Massive Losses in Puerto Rico, Stockbroker Fraud Blog, Stockbroker Fraud Blog, January 31, 2014

A History of UBS Bad Bets, Stockbroker Fraud Blog, January 29, 2014

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013

February 5, 2014

Claims Mount: UBS Loss Larger Than Reported in Puerto Rico

The losses that investors in Puerto Rico bonds and UBS Puerto Rico bond funds have suffered continue to mount, and the downgrade to high risk, or “junk bond” status is only going to make things worse. In 2013 alone, investors in Puerto Rican bonds saw losses of over 20%. However, those losses do not include the leverage that many investors were ultimately exposed to. Many investors were sold proprietary investments funds created by UBS. Those funds borrowed additional funds to be able to purchase even larger amounts of Puerto Rican bonds. This strategy increases the potential gains an investor can make, but also increases the potential losses. Investors in funds that were 50% leveraged, which many UBS funds were, saw losses closer to 40%.

This permitted these UBS funds to see losses of over $1.6 billion. Moreover, these losses do not take into account the losses of investors who were convinced to buy Puerto Rico bonds outside of these funds, or investors who lost additional money through extra leverage sold by their brokers.

Many investors were convinced to borrow more money, either through a margin account, a bank loan, or through a second mortgage, to make even larger investments, exponentially increasing their risk. These layers of borrowed money made it possible for some investors to see their entire accounts get wiped out.

Yesterday, the market for these bonds took yet another blow. Standard & Poor’s, one of the three main ratings agencies for securities, downgraded the vast majority of Puerto Rico bonds to junk bond status. This downgrade will force a number of other mutual funds to sell off their positions in Puerto Rico bonds. Currently, around 70% of U.S. municipal bond funds hold some amount of Puerto Rico bonds. Many of these funds are restricted by their operating documents to only hold “investment grade” bonds, which Puerto Rico bonds no longer qualify as. These funds will be forced to sell at huge discounts to get out of the Puerto Rico bonds, resulting in large price drops for all bond holders.

Additionally, this downgrade could prevent Puerto Rico from borrowing additional funds, despite previously stated plans to do so. Puerto Rico is planning on borrowing an additional $1-2 billion within the next few weeks. However, this downgrade will likely greatly increase the interest rate Puerto Rico agrees to pay in order to convince investors to accept the risks of the bonds. This could have devastating effects on a government which has relied so heavily on borrowed money for the last decade to stay afloat, as well as the investors who rely on that government to pay them back.

February 5, 2013

US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations

The US Department of Justice and has filed civil fraud charges against Standard & Poor’s Ratings Service, contending that credit rating agency’s fraudulent ratings of mortgage bonds played a role in causing the economic crisis. Settlement talks with Justice Department reportedly broke down after the latter indicated that it wanted at least $1 billion. S & P was hoping to pay around $100 million. Also, there was disagreement between both sides as to whether or not the credit rater could agree to settle without having to admit to any wrongdoing.

The securities case against S & P involves over 30 collateralized debt obligations, which were created in 2007 when the housing market was at its height. The government believes that between September 2004 and October 2007 the credit rater disregarded the risks that came along with the investments, giving them too high ratings in the interest of profit and gaining market share. The ratings agency allegedly wanted the large financial firms and others to select it to rate financial instruments. Meantime, S & P continued to tout its ratings as objective, misleading investors as a result. S & P would go on to make record profits, and the complex home loan bundles eventually failed.

Although there have been questions for some time now about the credit ratings agencies’ role in creating a housing bubble, this is the first securities lawsuit brought by the government against one of these firms over the financial crisis. It was in 2010 that a Senate probe revealed that from 2004 to 2007 S & P and Moody’s Investors Service (MC) both applied rating models that were inaccurate, which caused them to fail to predict exactly how well the risky mortgages would do. The lawmakers believed that the credit rating agencies let competition between each other affect how well they did their jobs.

S & P claims that a CDO lawsuit by the DOJ would be completely lacking in legal or factual merit. It pointed out that in the two years leading up to the economic collapse it had gone ahead and downgraded a lot of mortgage-backed investments. Also, S & P notes, it had access to the same subprime mortgage data as everyone else—and that every mortgage-backed bond cited by the government also got the same rating from another agency. S & P maintains that when it issued the ratings, it acted in good faith.

Over a dozen federal prosecutors are expected to join the federal securities case. The DOJ had considered also pursuing a criminal case against S & P but has since changed its mind.

U.S. Accuses S. & P. of Fraud in Suit on Loan Bundles, NY Times, February 4, 2013

Feds file suit over S&P mortgage bond ratings, USA Today, February 5, 2013


More Blog Posts:
McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2012

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

Standard & Poors Receives SEC Wells Notice Over CDO Rating, Institutional Investor Securities Blog, September 30, 2011

December 20, 2012

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit

This month, the U.S. Court of Appeals for the Sixth Circuit refused to revive statutory and common law MBS claims made by five Ohio pension funds: The Ohio Police & Fire Pension Fund, the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System, the Ohio Public Employees Deferred Compensation Program, and the School Employees Retirement Systems of Ohio. All of them are run by the state for public employees.

Per the court’s opinion, between 2005 and 2008, the funds had invested hundreds of million of dollars in 308 mortgage-backed securities that all were given AAA or the equivalent from one of the three credit rating agencies. When MBS value dropped during this time, the Funds lost about $457 million.

The plaintiffs believe that the reason that they lost their money is because the ratings that were given to the MBS were false and misleading. They filed their Ohio securities lawsuit under the state’s “blue sky “ laws, as well as the common law theory of negligent misrepresentation.

The Funds claim that the defendants had a conflict of interest with the “issuer pays” model, which tainted the MBS ratings that they issued, and that they neglected to disclose this weakness even while knowing that investors depended on accuracy to make their investment choices.

Finding that the credit rating agencies were not the ones that sold the securities, nor did they assist the sellers in making fraudulent transactions, the district court dismissed the MBS securities lawsuit. Also, that court found the plaintiffs’ statements of opinion to be not actionable because the complaint did not allege that the defendants believed their ratings to be inaccurate when they made them.

The Sixth Circuit affirmed the district’s court ruling. It noted that Ohio Revised Code Section 1707.41(A) establishes a private remedy against securities sellers based on false sales material and persons that get the profits of these types of sales. With this mortgage-backed securities case, however, it found that the Funds did not allege that the defendants sold or offered the securities that they rated and this particular cold section would have been contingent upon if the CRAs profited from the MBS sales. The appeals court noted that the fees the defendants received for issuing the ratings were fixed costs of an MBS issue and don't have the “contingent quality” associated with profits.

Also, even though the Funds wanted relief too from Section 1707.43(A), which allows securities fraud victims a rescission remedy, the Sixth Court said that the plaintiffs mainly relied on the credit raters’ alleged violation of 1707.41(A), as support for their claim to Section 1707.43(A) rescission, which, the court determined is meritless. The court did not go with the Funds efforts to save their rescission remedy by claiming that the defendants violated Section 1707.44(B)(4), which only blocks affirmative misrepresentations.

As for common-law misrepresentations, the court affirmed that the plaintiffs couldn’t hold the agencies liable for this either under Ohio law or New York law. The Sixth Court said that the Funds failed to properly allege that the defendants owed them a duty or that the ratings that were issued were misrepresentations that weren’t actionable.

“Considering the widespread reliance upon their opinions, it is incredible that securities credit rating agencies are exempt from responsibility for their reporting,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Mortgage-Backed Securities Lawyer William Shepherd. Their only purpose is to give investors some sense of the risks involved in an investment. They serve absolutely no purpose to the issuers of the securities except to help them convince investors to invest. Thus, only the investor is the target of such information. CRA’s should be legally responsible for sloppy or misleading reports which cause investors to lose their money.”

Ohio Police & Fire Pension Fund v. Standard & Poor's Financial Services LLC (PDF)


More Blog Posts:
Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012
Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements, Stockbroker Fraud Blog, June 13, 2012

Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court, Institutional Investor Securities Blog, December 30, 2010

October 7, 2009

Make Credit Rating Agencies Collectively Liable for Inaccuracies, Proposes Lawmaker

House Financial Services subcommittee chair Paul Kanjorski introduced a new draft bill that proposes making credit ratings agencies collectively liable for inaccuracies. The agencies received a lot of heat when they failed to properly warn investors about the risks associated with subprime mortgage securities before the market fell.

One problem with the current system is that the firms issuing the securities are the ones paying the credit ratings agencies for rating the securities. Kanjorski’s draft bill lets investors pursue lawsuits against credit rating agencies that recklessly or intentionally did not examine key data to determine the ratings. He says that collective liability could compel the ratings agencies to provide reliable, quality ratings while providing the proper incentive for them to monitor each other.

Critics of the plan, including Republicans and industry executives, warned that collective liability could result in a slew of expensive complaints while decreasing competition even more in an industry that Fitch Ratings, Moody’s Investors Services, and Standard and Poor’s already dominate.

Kanjorski said that his proposal was a “start,” which comes as Congress intensifies its watch over the credit ratings agency industry and the Obama administration calls for stricter government oversight.

Credit ratings agencies are charged with issuing the creditworthiness ratings of securities and public companies. The ratings can impact a company’s ability to borrow or raise funds and determine how much mutual funds, banks, local governments, and state pension funds will pay for securities.

When home-loan delinquencies went up last year, the investments’ value dropped and the credit ratings agencies were forced to downgrade the ratings they gave to thousands of securities. Large banks and investment firms sustained hundreds of billions of dollars in losses because of the downgrades.

Meantime, two former Moody’s employees, former analyst Eric Kolchinsky and former senior vice president for compliance Scott McCleskey, are accusing Moody’s of misconduct, including engaging in conflicts of interest, knowingly inflating ratings, and failing to implement “meaningful surveillance of municipal securities” despite the credit ratings agency's statements to the contrary. Moody’s acknowledges misjudging the magnitude of the subprime mortgage collapse but says the allegations are “unsupported.”

Recently, the SEC proposed rules that would put a stop to conflicts of interest and allow for greater transparency for credit ratings agencies.

When the subprime mortgage market collapsed, many investor sustained massive financial losses. Our securities fraud law firm is dedicated to helping our clients recover those losses. Contact Shepherd Smith Edwards & Kantas LTD LLP today.

Related Web Resources:
Lawmaker seeks group liability for rating agencies, Business Week, September 30, 2009

The Role and Impact of Credit Rating Agencies on the Subprime Credit Markets, SEC.gov, September 26, 2009

House Committee on Financial Services

November 6, 2008

Moody’s, Standard & Poor's, and Fitch’s Assignment of High Credit Ratings to Mortgage-Backed Securities Contributed to the Financial Meltdown

At a hearing presided over by the House Oversight and Government Reform Committee in Washington DC, the executives of Moody’s, Standard & Poor's, and Fitch Ratings, the three top credit rating agencies in the country, were grilled about how their assignment of high ratings to mortgage-backed securities, while drastically underestimating their risks, contributed to the current financial crisis.

While the heads of the country’s three leading credit agencies—Standard and Poor’s Deven Sherman, Fitch Ratings’s Stephen W. Joynt, and Moody’s Raymond W. McDaniel—have called the mortgage-backed securities collapse “unprecedented” and “unanticipated and said that any errors the agencies' made were unintentional, internal documents reveal that the credit rating agencies knew that the ratings they were giving the securities were overvalued. It wasn’t until this past year, when homeowners began defaulting on subprime mortgages, that the credit ratings agencies began downgrading thousands of the securities.

Lawmakers are trying to determine whether the firms’ business model contributed to the conflicts of interests. Issuers pay the credit ratings agencies for evaluating securities. While the credit ratings agencies were giving mortgage-backed securities high ratings, the heads of the three leading credit agencies were earning $80 million in compensation.

At the hearing, former Moody’s credit policy managing director Jerome S. Fons testified that the agencies’ business model prevents analysts from placing investor interests before the firms’ interests. In one confidential document obtained by investigators, Moody’s CEO McDaniels is quoted as saying that bankers, investors and creditors regularly “pitched” the credit ratings agency. According to Frank L. Raiter, the former head of residential mortgage-backed securities ratings at Standard and Poor's, "Profits were running the show."

Investors depend on the credit rating agencies for independent evaluations. According to Congressman Waxman, the ratings agencies “broke this bond of trust,” while federal regulators failed to heed the red flags and protect investors.

Related Web Resources:

Credit Rating Agency Heads Grilled by Lawmakers, New York Times, October 22, 2008

Oversight Committee Hearing on Credit Rating Agencies and the Financial Crisis, Polfeeds.com, October 22, 2008

Committee on Oversight and Government Reform

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