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Home > Cases > Barclays' Golden Key and Mainsail > Barclays' Golden Key and Mainsail Funds Overview

Barclays' Golden Key and Mainsail Cost Investors $50 Million, Suit Claims

In the past year, SIV-lite investment funds have become financial vehicles of mass destruction for investors. Similar to traditional structured investment funds, SIV-lites are complex, unregulated instruments that hold mostly risky subprime mortgage-backed securities that have all but plummeted in value following the burst of the U.S. housing bubble. Two of the latest funds to cost investors millions of dollars: Barclays' Golden Key and Mainsail.

The creation of SIV-lites can be attributed to Edward Cahill, who at one time headed up the collateralized debt obligations (CDOs) unit of the UK-based bank Barclays. In August 2007, Cahill made a hasty departure from the company, just three days before Standard & Poor's, the credit-rating agency, slashed its assessment on two SIV-lite funds that Cahill and his team had set up for clients to junk status. The two funds, Golden Key and Mainsail, are now the subject of several lawsuits.

Specifically, Oddo Asset Management, a French asset management company, contends Barclays used Golden Key as a dumping ground to move losing investments out of its own accounts into those held by outside investors, namely Golden Key and another SIV-lite fund, Mainsail. The transfer of those toxic mortgages took place just as another division of Barclays was facing massive losses from investments in two Bear Stearns hedge funds that collapsed last summer.

According to the 72-page complaint filed in New York County Court, between 2005 and 2006, Oddo Asset Management invested some $50 million in Golden Key and Mainsail. By August 2007, both Golden Key and Mainsail were effectively frozen, their investment portfolios having plummeted in value. In the complaint, Oddo alleges that the collapse of Golden Key and Mainsail would not have happened “if not for the egregious and self-serving misconduct of the various parties who created, arranged, managed and issued credit ratings for these investment vehicles. Indeed, virtually all of the parties involved in Golden Key and Mainsail have not come under some form of regulatory scrutiny.“

The complaint goes on to say that the manager of Golden Key, Avendis Financial Services Ltd. (which is now in liquidation), and Solent, the manager of Mainsail, conspired with Barclays in the first half of 2007 to transfer “impaired securities backed by toxic U.S. sub-prime mortgages from Barclays own books to Golden Key and Mainsail respectively. Meanwhile, Barclays continued to promote the two SIV-lites as desirable investments to investors.”

As reported Oct. 1, 2007, in BusinessWeek, the fact that two of the three major credit-rating agencies - Moody's and Standard & Poor's - did an about-face in a one-month timeframe to change the rating status of both Golden Key and Mainsail by 17 notches from the highest grade of AAA to a CCC junk-status level was unusual to say the least. Apparently, the odds of that happening at the time were about 1 in 10,000.

Fast forward nine months and it's a different story altogether. Ratings agencies, like the Wall Street investment banks, are charged with being a major contributor to the subprime debacle, having based their ratings on antiqued historical data and failing to take into consideration the complexity of certain investment products like SIV-lites and inherent market conditions.

Oddo Asset Management is taking the credit-rating agency, Standard & Poor's, to task as part of its lawsuit against Barclays. The company is suing McGraw-Hill, the corporate parent of Standard & Poor's, claiming that the rating agency knowingly issued false ratings, that it was well aware Barclays was dumping the toxic securities at inflated prices on Golden Key and Mainsail and that the ratings of both Golden Key and Mainsail would be negatively affected as a result of those actions.

Both Golden Key and Mainsail were appointed receivers in 2008. Deloitte was named the receiver for Golden Key, KPMG for Mainsail. The next step will be for the receivers to assess the various assets held in the two SIV-lite funds. Given the fact that the markets for such investments has all but vanished, however, a future sale is hard to imagine.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

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