Archive for April, 2008

What was once a Wall Street success story is now a company caught up in scandal. Investment firm Regions Morgan Keegan has been accused of using deceptive marketing practices to pass off risky subprime mortgage-backed mutual funds to clients - funds that have now tanked in value.

Investors, who say they were blindsided by Morgan Keegan, are responding in their own way: with lawsuits - and plenty of them.

Reportedly, an average of two lawsuits has been filed against Morgan Keegan every month (excluding January) for the past five months. And apparently that’s gotten the attention of management. Pending shareholder approval, directors of seven RMK funds have signed an agreement removing them and the funds’ director from managing the funds. The funds would then be transferred to Hyperion Brookfield Asset Management of New York.

Shareholders will vote on the transfer agreement on July 11.

The developments involving Morgan Keegan are disturbing on many levels. If allegations of misrepresentation prove to be true, the bonds of trust between RMK and its clients may be damaged beyond repair. At the very least, it is a signal to all investors to take a long, hard look at their portfolio. If you have invested in an RMK mutual fund and sustained significant losses, we encourage you to contact us so we can evaluate the facts and circumstances of how those investments were presented to you and whether they were appropriate in the first place.

The seven mutual funds in question include four Regions Morgan Keegan closed-end funds: Advantage Income Fund, High Income Fund, Multi-Sector High Income Fund and Strategic Income Fund. The other funds include three open-end funds: Regions Morgan Keegan Select Short Term Bond Fund, Intermediate Bond Fund and High Income Fund.

It’s unclear how the changing of the guard will affect the nine pending federal lawsuits.Since its founding in 1969 by Morgan and James Keegan, Morgan Keegan has been heralded as a Memphis success story. In 1970, the company purchased a seat on the New York Stock Exchange. In 1983, Morgan Keegan became a public company. And in 2001, the company was acquired by Birmingham-based Regions Financial.

The mutual fund meltdown that has since followed Morgan Keegan is becoming a familiar reality these days. On the advice of their broker, investors say they turned to RMK mutual funds as a “stable” type of investment. What investors didn’t know - and what they say Morgan Keegan failed to convey - was the critical fact that the funds had ties to investments in subprime mortgage-related assets and corporate junk bonds.

When the subprime mortgage crash hit, these investments took substantial losses - some losing more than 75 percent of their value. As for investors, many saw their retirement savings, money for children’s college education and life-long nest egg vanish almost overnight.

Our affiliation of 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.Â

The Securities and Exchange Commission (SEC) is on the hot seat, with Congress urging the regulatory agency to improve its oversight of credit-rating firms. The firms - including Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s Ratings Services - are being criticized for missing the mark when it came to assessing the risks of mortgage-backed securities.

Both business analysts and political leaders claim that mistake played a major role in the subprime mortgage crisis, which has since roiled the financial markets. Many believe the credit-rating agencies were blinded by their relationships with various debt issuers, because the issuers typically pay rating agencies to grade their debt.

Prior to the subprime fallout, Fitch, Moody’s and Standard & Poor’s each had given highly favorable ratings on the quality of many mortgage-backed securities. Then, after the subprime crisis hit full force and the credit crunch ensued, the rating agencies did an about-face, downgrading thousands of mortgage-related investments.

Accusations of conflicts of interest between rating agencies and issuers have been the subject of numerous news articles. A story in the Wall Street Journal reported that Moody’s periodically switched ratings analysts from certain deals at the request of the Wall Street firms, as well as altered its approach on other deals after Wall Street firms complained.

This isn’t the first time credit-rating agencies have found themselves in hot water. Two years ago, they were taken to task for failing to reduce their investment-grade ratings of Enron to junk status until four days before the company’s collapse. Shortly thereafter, the Credit Rating Agency Reform Act was signed into law, which gave the SEC additional authority to oversee rating agencies.

Now the SEC is being called upon to exert that power. Reportedly, it is considering a wide range of rules to strengthen accountability and transparency of the rating agencies, as well as a new scale for measuring mortgage-related and other structured-finance bonds.

Meanwhile, the credit-rating agencies can expect continued backlash in the weeks and months ahead over their critical misstep in putting investment-grade ratings on so many mortgage-backed securities. Not only have they lost credibility in the investing community but they also may very well find themselves in court for rubberstamping those doomed subprime deals.

Our affiliation of 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.

The problems facing structured investment vehicles (SIVs) continue to rage on. The structures have been hit hard in the turmoil sweeping the credit markets from their lack of access to funding and a massive decline in the value of the assets they hold.

Now, Moody’s Investors Service has announced that HSBC Holdings Plc and American International Group Inc. (AIG) are among those facing possible downgrades on $3 billion of SIVs. The cuts would affect capital notes, the lowest ranking debt, issued by HSBC’s Asscher Finance, WestLB’s Harrier and Kestrel, Bank of Montreal’s Links Finance, Banque AIG’s Nightingale Finance and Societe Generale’s Premier Asset Collateralized Entity.

Reportedly, holders of this type of debt are not likely to benefit from any type of restructuring proposal.

SIVs are special-purpose entities that issue commercial paper and medium-term notes to buy longer-term, higher-yield securities. An example would be a collateralized debt obligation (CDO). A SIV uses the proceeds from the sale of commercial paper to pay the principal and interest owed on previously issued, commercial paper that has matured. The mortgage securities include risky sub-prime mortgages.

When subprime loans go into default, the value of the CDO holding interest in the loans and the credit-worthiness of the SIV that holds the CDOs plummets. As a result, money funds have pulled back their investment in SIV commercial paper, leaving SIVs unable to finance new investments or meet current debt obligations.

All six of the capital notes under review by Moody’s already have been rated in the “junk” category, between Ba2 and Caa3.

In announcing the potential cuts, Moody’s said its actions reflected “further deterioration in the market values of SIV portfolios, and the limited benefits to capital notes of the various restructuring proposals implemented by bank sponsors.

Meanwhile, as reported in an April 24 article on Bloomberg.com, SIVs with at least $31 billion of debt have defaulted in the past nine months after investors stopped buying their notes because of the subprime toxicity surrounding them.

Our affiliation of 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.Â

The Federal Bureau of Investigation’s ongoing probe into the institutional players connected to the nation’s subprime mortgage crisis has netted 19 companies - and that may be just the tip of the iceberg.

The focus of the 19 criminal probes concerns accounting fraud, insider trading by investment managers and possible deceptive marketing practices. During testimony before Congress on April 16, FBI director Robert Mueller said there was no end in sight to the individual and corporate fraud cases that may materialize, and that the bureau intended to reassign agents from other areas to deal with the surge.

While Mueller didn’t disclose information on the companies named in the FBI investigation, several reports say Countrywide Financial Corp., the country’s largest mortgage lender, is one of those involved for alleged accounting fraud.

Earlier this year, three of Wall Street’s biggest investment firms - Goldman Sachs, Morgan Stanley, and Bear Stearns - confirmed that government investigators had requested information regarding their subprime activities. To date, the FBI has refused to comment on whether any of the three are targeted in its probe.

What the FBI does say is that its investigation into the subprime crisis could take years to officially close. Regardless, the fact that the main investigative arm of the U.S. Department of Justice is involved in the first place underscores the seriousness of what may lie ahead for countless companies across the financial industry.

And for the thousands of investors facing monumental monetary losses as a result of deceptive marketing practices by investment banks or brokers, justice can’t come soon enough.

Our affiliation of 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.

The past year hasn’t exactly been smooth sailing for the nation’s largest bank. In its first-quarter earnings report, Citigroup posted a record loss of $5.1 billion, following losses on assets tied to the subprime mortgage market that cut $14.1 billion in value from its investment portfolio.

The $14.1 billion in write-downs included $7 billion related to subprime and alt-A mortgages; $3.1 billion in leveraged loans; $1.5 billion related to bond insurers; $1.5 billion in auction-rate securities; and another $1 billion related to commercial real estate, a hedge fund and structured investment vehicles, or SIVs.

The losses stemming to subprime mortgages have forced the New York-based bank to bolster its capital by selling $6 billion of preferred shares in a public debt offering. The offering is in addition to the $37 billion of capital Citigroup has raised since November to replenish its balance sheets from credit losses and massive subprime-related write-downs.

Meanwhile, as Citigroup builds up its loan reserves for similar problems in the future, other investment banks have begun the process of writing down the value of auction-rate securities held by clients. UBS is reportedly lowering the values of its clients’ auction-rate securities by as much as 30 percent.

The problem is that auction-rate securities were, as the headlines report day after day, often sold to investors as cash-alternative investments. As UBS’ clients - and others to follow - are now discovering, the write-downs will yield them far less than “money in the bank.”

Our affiliation of 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.Â

Citing confidentiality, the U.S. Securities and Exchange Commission (SEC) has refused to buckle under to a congressional request for information on why the regulatory agency dropped its investigation into Bear Stearns and if the Wall Street firm improperly valued complex debt securities.

The information sought by Congress concerned two cases halted by the SEC in 2005 that involved Bear Stearns and the way it priced and valued more than $63 million of collateralized debt obligations (CDOs).

Another 2005 probe of Bear Stearns - this one by then-New York Attorney General Eliot Spitzer - also ended without formal charges filed.

In March, facing bankruptcy, Bear Stearns agreed to be bought by JPMorgan Chase & Co. for $10 a share in an all-stock transaction.

SEC Chairman Christopher Cox responded to the congressional request for information regarding its probe into Bear Stearns in an April 16 letter to Sen. Charles Grassley (R-IA), the ranking member of the Senate Finance Committee. In part, the letter stated, “The Commission does not disclose the existence or nonexistence of an investigation or information generated in any investigation unless made a matter of public record in proceedings brought before the Commission or the courts.

Given the severity of troubles that have mounted for Bear Stearns in recent months, it seems more than reasonable for Congress to step up to the plate in an attempt to more thoroughly understand the investment firm’s fall from grace and why securities regulators chose to halt an investigation into allegations of how Bear Stearns packaged and priced various subprime mortgages that were sold to investors. After all, it was when some of these very products plummeted in value that Bear Stearns hit the wall in the first place.

The SEC’s refusal to cooperate - not to mention its continued refusal to file suit against some of these investment firms, including Bear Stearns - gives the appearance of it going easy on Wall Street, perpetuating an image of all bark and no bite.

Meanwhile, thousands of Bear Stearns shareholders who have lost almost all of their equity are still left waiting - waiting for answers.

Our affiliation of 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.

The bad news keeps brewing for Citigroup. Massive write-downs from subprime-related exposure and increased credit costs contributed to the nation’s largest bank posting a $5.1 billion loss for its first-quarter earnings. It was one of the biggest quarterly losses in Citigroup’s history.

The company took more than $13.8 billion in write-offs in the first quarter and set aside an additional $3.1 billion to cover souring loans. Citigroup, which is a top underwriter of auction-rate securities (ARS), also announced write-downs of $1.5 billion in its ARS holdings. As reported on Bloomberg.com, the write-downs amounted to 20 percent of the $8.1 billion in auction-rate securities held by the company at the end of 2007.

The majority of Citigroup’s loss in auction-rate securities was in the student-loan backed portion of the bond market, which has been in crisis mode for the past few months.

Citigroup’s dismal earnings results came a day after Merrill Lynch announced that it took more than $6.5 billion in write-downs. Since the credit crisis heated up last summer, financial companies worldwide have suffered more than $230 billion of write-downs and credit-related losses.

Meanwhile, the financial losses at Citigroup translate into job cuts. The company says it plans to reduce its workforce by an additional 9,000 jobs.

Auction-rate securities have become fodder for countless news stories lately, not to mention numerous investigations and lawsuits from disgruntled investors. Citigroup, as well as Deutsche Bank AG, Morgan Stanley and Merrill Lynch & Co. and others, all have been named in separate litigation matters by customers who say they were misled about the risks of auction-rate securities.

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

The nation’s largest bank is in damage-control overdrive, following legal blow-ups with several of its hedge funds.

Specifically, the funds, which were sold under the names Falcon, ASTA and MAT, used massive piles of leverage to buy municipal bonds, and borrowed approximately $8 for every $1 raised. When the municipal market went astray in February, the funds tanked. Even after the emergency cash infusion by Cititgroup, the funds are significantly down in value. Falcon appears to have lost more than 30 percent of its value, with ASTA and MAT suffering losses in the range of up to 80 percent.

A class-action lawsuit was filed April 4 against Citigroup in a Florida federal court for purchasers of the Falcon Strategies Two B LLC Hedge Fund from September 2005, through January 2008.

Our affiliation of 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.Â

The financial earthquake known as subprime continues to wreak havoc - this time, it’s mutual fund giant Fidelity Investments feeling the pain.

In July 2007, a Fidelity affiliate, Ballyrock Investment Advisors LLC, issued $517 million worth of debt backed by risky subprime mortgages and other related loans. At first, the deal - known as collateralized debt obligations, or CDOs - received triple-A ratings; today, some of the debt is worth 15 cents on the dollar, according to several analysts.

Fidelity created Ballyrock Investment Advisors in 2002 to develop and manage collateralized debt obligations sold to institutional clients. In the beginning, the subsidiary avoided risky mortgages - that is until last summer.

Things went downhill quickly for the Ballyrock CDO. When the subprime mortgage debacle hit full force and a rush of homeowners began defaulting on the underlying home loans, Standard & Poor’s promptly cut the grade on some of the CDO’s securities from AAA to junk.

Moody’s Investors Service later followed S & P’s lead, slashing the ratings on various slices of the CDO and putting investors on notice that another downgrade may follow.

Apparently it is so bad that a $26.25 million tranche of the CDO has plummeted to only slightly above being considered a default risk. A recent article in the Boston Business Journal reports that another $150 million senior tranche of the CDO was cut from Moody’s top Aaa rating to just above junk status.

Taking a Fall

Problems with CDOs have rocked the financial world over the past year, taking a severe toll on some of Wall Street’s biggest players and causing tens of billions of dollars in write-downs. Earlier this month, the Wall Street Journal reported that Merrill Lynch  alone had more than $30 billion in write-downs since last October, most of which stemmed from the fallout of the subprime and CDO crisis.

The concept of CDOs has been around since the 1980s. A CDO is a structured debt vehicle that repackages the income from a pool of bonds, derivatives or other investments. For example, a mortgage CDO might own pieces of hundreds of bonds, with each piece containing thousands of individual mortgages.

Investors - including pensions, insurance companies, mutual funds and hedge funds - acquire slices of a CDO, receiving a fixed-rate of interest, similar to a bond, in return. The slices of a CDO are called tranches, and divided into various levels of risk, with losses applied in reverse order of seniority.

The highest-rated tranches are often referred to as super-senior tranches; investors at this level receive their payments before owners of the riskier lower layers. The lowest-rated tranche in a CDO provides the highest returns but assumes the greatest amount of risk.

It wasn’t until the subprime mortgage market went haywire that problems with CDOs began to surface. Much of the furor is around the fact that credit-ratings firms ranked the products much safer than they actually were. Moreover, the complexity of CDOs makes it difficult for investors to determine what they’ve actually bought and the true value of their investments.

These are the kinds of surprises that have investors up in arms - and heading to court. Shareholders and investors want answers from the sellers of CDOs as to why the risks associated with the product were never fully disclosed in the first place.

Institutional investors want answers, as well. On February 24, 2008, the German bank HSH-Nordbank AG announced that it intends to file a lawsuit against Swiss bank UBS in New York based on losses it incurred from its $500 million investment in a CDO called “North Street 2002-4.” The bank alleges that UBS made riskier investments than the bank was aware of or would have permitted.

Problems relating to investments in CDOs may well produce the next big wave of subprime lawsuits in the months ahead. Equally troubling is the fact that the owners of CDOs, including investment banks, hedge funds, insurance companies and pension funds, likely face even more write downs on mortgage investments beyond the billions they have already written off. For consumers and businesses, this means the availability of credit will be stretched tighter than it already is.

Our affiliation of 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.

Investors in collateralized debt obligations - a $450 billion market - apparently are engaging in tranche warfare as they attempt to capitalize on the debt.

As reported in the Financial Times by Michael Mackenzie and Aline Van Duyn, collateralized debt obligations, or CDOs, are structured credit vehicles made up of several different classes of bonds known as tranches.

Each tranche has a varying level of risk, as well as credit rating. Senior-level tranches make up the majority of funding for CDOs and are typically rated AAA. The smaller, or junior-level tranches, have lower ratings and are the first to absorb losses.

To improve returns, slices of senior-level tranches can be split and sold. After the bottom portion of a senior AAA-rated tranche is split, a higher-paying AAA-rated “sub-tranche” is created. The sub-tranche is first in line to take the losses for the super-senior tranche.

Investors in all but the super-senior tranches are discovering that when a structured deal flounders, their investment faces considerable risk. Moreover, they can easily be stripped of their assets rights if a deal liquidates.
Super-senior investors - a significant portion of which are major investment banks - have been taking advantage of this fact, seizing control of the assets and shutting off payments to other tranches. In doing so, they’re assured of being first in line to get their investments back before anyone else does.

Super-senior holders also can accelerate payments from the CDO, leaving junior investors with the prospect of no interest payments for months or years.The fact that so many investors in junior tranches were unaware of these provisions is testament to how little attention was paid to the fine print. Many junior investors now contend they bought into CDOs based on the strength of the credit rating.All of which has spurred a rash of lawsuits from tranche holders and trustees alike. Of course, it’s no surprise that investment banks once again seem to be looking out for No. 1 – and not the interests of investors who were sold CDO tranches in the first place.

Our affiliation of 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.Â