Archive for June, 2008

Switzerland-based banking giant UBS reportedly may be considering the sale of Paine Webber, the core of its U.S. wealth-management business.

Rumors of a potential sale first started circulating late last year, when CNBC reported that the bank was hawking the U.S. brokerage unit to a number of competitors, including Barclays, Bank of America and Wells Fargo.

Now, after taking more than $37 billion in subprime-related write downs this year, many feel the sale could be revived as UBS looks to overhaul its business and raise cash.

The wealth management division of UBS employs more than 8,200 brokers.

UBS has repeatedly denied it is mulling a sale of Paine Webber.

Meanwhile, the firm has an even more important task at hand: winning back the trust of clients. On Thursday, June 26, Massachusetts securities regulators filed civil fraud charges against the Swiss bank’s financial services arm, UBS Financial Services, for allegedly selling investments it knew were extremely risky but portrayed as safe to investors.

Specifically, the complaint by the Massachusetts Securities Division alleges that UBS knowingly allowed its brokers and representatives to market and sell auction-rate securities as virtually risk-free so that it could reduce its own stake in the failing program.

Auction-rate securities, which are municipal bonds, corporate bonds, or preferred stocks, have interest rates that reset through auctions held every seven, 14, 28, or 35 days. Since February, the market for the securities has been frozen, when Wall Street investment banks, which had initially sold the instruments as “good as cash” investments and collected a fee at the same time, pulled back their support and refused to take more debt onto their own balance sheets.

The complaint against UBS charges that even though company executives were referring to the auction-rate program as an “albatross” and knew it was nearing collapse as early as December 2007, they continued to sell the securities to individual investors. The company presented the investments as a good value in order to reduce its own inventory, according to the complaint.

The state wants UBS to return investors’ funds and pay a fine. The amount of money being sought was not disclosed in the complaint.

Investor complaints and lawsuits over auction-rate securities have haunted UBS since the market froze up five months ago. In February, the Massachusetts attorney general’s office began investigating allegations that UBS misled towns, cities and state and municipal entities regarding whether auction rate securities were a permissible investment for municipalities under Massachusetts Law.

In May, UBS reached an agreement with Massachusetts Attorney General Martha Coakley in which it agreed to reimburse 17 Massachusetts local governments and the Massachusetts Turnpike Authority approximately $37 million by buying back the auction-rate securities they had invested in.

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

Imagine you went to a bank, where you opened an account and placed your entire life savings or children’s college fund in it. When you needed the money and tried to withdraw it, you were told the funds wouldn’t be available for a long, long while.

That’s exactly the scenario thousands of investors in auction-rate securities have faced since February, when the $330 billion auction-rate market became frozen. Beginning that month, buyers for the securities all but disappeared from the market. After already taking millions of dollars in subprime mortgage-related write downs and credit losses, brokerage firms and investment banks that once prevented the auctions from failing refused to step in and support them.

As a result, the auction-rate market became “frozen,” and retail investors were left with what they thought was a short-term, cash-equivalent investment that had become a long-term, illiquid instrument.

Auction-rate securities - which are long-term bonds sold by issuers such as municipalities, student loan companies, hospitals and closed-end funds - have interest rates that reset every seven, 14, 28 or 35 days. If an auction fails to draw enough bidders, the interest rate resets to a level previously determined in documents issued at the time of the bond sale.

From 1984 through 2006, only 13 auction failures were recorded. By May 2008, more than 80 percent of auctions were failing, as investors began a mass exodus from the market because much of the debt was insured by companies facing losses from bad bets on subprime-related mortgage-related debt.

Issuers were left facing penalty interest rates, sometimes as high as 20 percent, while investors already holding auction securities were stuck with bonds they could not sell.

Many of these investors were retirees and families who have lost their children’s college education funds - funds they say were made in investments pitched to them as cash-alternatives.

Earlier this year, investor complaints over auction-rate securities led securities regulators in 10 states to launch probes into the auction-rate securities market and the sales practices used by Wall Street banks to market the securities to investors.

In a lawsuit filed June 26 by Massachusetts Secretary of State William Galvin, UBS became one of the first investment banks to face fraud charges since the auction-rate securities market seized up in February.

In a 101-page complaint, Galvin claims UBS committed fraud by selling the auction bonds as the equivalent of money-market funds without disclosing to investors the inherent risks associated with the auction securities. The company also is charged with selling the securities, which were only redeemable in cash at UBS auctions, while already believing that the auction market was headed for collapse.

As reported June 27 on Bloomberg.com, while executives at the Swiss-based bank identified the hazards of auction-rate securities in August, they simultaneously began to “mobilize the troops,” holding more than a dozen conference calls with its sales team and giving them new marketing materials to promote the bonds, according to e-mails from David Shulman, head of UBS’s municipal securities group.

“The pressure is on to move inventory,” Shulman said in an Aug. 30 e-mail.

According to the Bloomberg article, UBS ramped up its marketing efforts to individual investors in August. Financial managers were paid 40 percent of the marketing fee from the periodic auctions, according to e-mails.

Galvin is seeking to force UBS to liquidate all of the auction- rate bonds it previously sold to investors in Massachusetts, which is reportedly about $200 million.

The Massachusetts securities regulator also is investigating Merrill Lynch and Bank of America over their dealings in auction-rate securities.

Meanwhile, the latest charges against UBS are giving investors in Massachusetts a much-needed and long overdue glimmer of light at the end of the auction-rate tunnel.

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 news has not been good for the nation’s largest bank and indicates more Citigroup trouble. Analysts are forecasting that Citigroup losses will show even more write downs on subprime-related investments in the second quarter, reducing the value of its assets by $8.9 billion.

This is the third consecutive quarter showing Citigroup losses, and sent shares of the company’s stock to their lowest levels in more than a decade.

The New York-based company has seen nearly $15 billion of losses in the past two quarters, with more than $46 billion of credit losses and write-downs since mid-2007. Now, analysts say Citigroup may write down $7.1 billion in collateralized debt obligations (CDOs) and associated hedges, and $1.2 billion for other asset classes.

A cut in Citigroup’s dividend program also is likely. This will be the second dividend cut this year.

As reported June 26 on Bloomberg.com, Goldman Sachs analyst William Tanona lowered the ratings on U.S. brokerages from “attractive” to “neutral,” stating that the pace of deterioration in the financial sector is far worse than expected. Tanona also cut his six-month price target for Citigroup to $16 and put the bank on Goldman’s “conviction sell” list.

Goldman Sachs itself was downgraded June 26 by Wachovia, which cited renewed concerns about economic growth, slower prime brokerage business and a slowing pace of large capital raises.

The downgrade caused Goldman’s stock to fall 2% to $180 in pre-market trading.

The latest news indicates Citigroup trouble is not unexpected. Last week, Gary Crittenden, Citi’s chief financial officer, warned of additional large write downs and credit losses in the second quarter, saying its business remained under pressure amid unprecedented market conditions.

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.

If you don’t know the answer to the question, just ask. But for thousands of investors stuck with illiquid auction-rate securities, that has been a long and difficult road to haul.

Since February, the $330 billion auction-rate securities market has been plagued with problems when a lack of bidders caused the auction process that the securities depended upon to break down. In turn, Wall Street investment banks - which conducted the auctions and served as underwriters for the securities - were no longer willing to take on the debt after sustaining heavy losses in the subprime loan market and began to pull back their financial support. This caused a chain reaction of auction failures that eventually shut down the market entirely.

As a result, investors already holding auction securities found themselves left with an illiquid investment that nobody wanted. And though things have improved ever so slightly when a small secondary market opened for trading recently, investors are far from getting answers to their auction-securities questions.

A story in the June 25 edition of the Boston Globe highlights the growing frustration that investors are feeling these days about auction-securities and the brokerage firms that they say failed to provide adequate information about the inherent risks associated with the instruments.

Boston Globe writer Beth Healy focuses on UBS Financial Services Inc., which was officially charged on June 26 after a lengthy investigation by Massachusetts Secretary of State William F. Galvin with fraud and dishonest conduct for telling investors that auction-rate securities were safe when it knew that was not the case.

Healy’s article echoes that sentiment. In numerous interviews with UBS clients - one of whom was a current and former UBS broker - she uncovers a consistent theme: UBS failed to give “even the mildest warning to individual investors of the trouble lurking in the market in late 2007 and early 2008.

”Ironically, Teresa Contardo, a veteran Boston-area broker with more than three decades of experience and who retired from UBS in 2001, was herself a victim in the auction-rate security ordeal. According to the Globe article, Contardo had been led to believe by her broker that auction-rate securities were similar to a money-market fund. She didn’t receive a prospectus, nor did she ask for one, she says, because her broker presented the securities as a “cash-alternative” investment.

Now, Contrado’s cash-alternative, $350,000 investment is like that of many investors: inaccessible. She says had she been given a prospectus, it would have set off a warning bell for her.

Early Warning Signs

Healy’s story brings to light yet another disconcerting detail in the auction-rate securities saga - and that is at what point in time did Wall Street investment banks realize the auction market was headed for trouble. As reported in the Boston Globe article, in some cases UBS investment bankers were advising issuers of auction-rate debt - clients like student lenders - to employ special measures to keep the auctions from failing. At the same time, UBS brokers were selling the securities to individuals and corporate and municipal treasurers, yet never mentioned the mounting risks.

Meanwhile, UBS investors continue to look for answers over the auction-rate securities debacle. Now, however, with the June 26 charges that have been levied on UBS by the Massachusetts securities regulator, they may at last get 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

When the Federal Reserve orchestrated a bail-out plan for investment banking giant Bear Stearns back in March and followed it with emergency funding to keep the financial markets up and running, the intervention was thought to be a temporary solution at best.

Now, some policymakers fear the Fed’s actions may be seen as enabling, and that Wall Street investment firms will become increasingly dependent on the emergency loans as a permanent source of future funding.

Apparently that’s what Assistant U.S. Treasury Secretary Anthony Ryan fears. As reported June 24 on Bloomberg.com, Ryan believes that once credit markets stabilize, the Treasury should put an end to the supply of funding for Wall Street.

“When they [the Federal Reserve] put these lending facilities in place back in March, they said they were going to be temporary,” Ryan said in the article. “We don’t want to encourage the dependence upon the Federal Reserve as a backstop.

“Regulators must balance the need for market stability with concerns about the likelihood of increased moral hazard. While firm failures are painful, as a policy matter, we must be in a place where firms are allowed to fail,” he added.

The Primary Dealer Credit Facility was created by the Federal Reserve on March 16 as a means to bolster market liquidity and keep the financial markets functioning properly. At the time the Fed announced the lending program, the idea was for it to operate about six months, offering loans for as long as 90 days, rather than 30 days under the regular discount window.

Many financial experts have cautioned that providing such loans in the first place only increases the chances for future reckless lending, as well as another credit crisis.

Since the fallout of the subprime mortgage crisis, investment banks and securities firms have taken writedowns and credit losses totaling approximately $400 billion.

Meanwhile, while the Federal Reserve’s emergency funding plan may have temporarily helped restore some investor confidence in financial markets, it also sends a very ambiguous message to Wall Street - one in which there appears to be little emphasis on risk management. And now more than ever, sound risk management practices are sorely needed.

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.

Proposed new regulatory changes by the Securities and Exchange Commission (SEC) are likely to come as an unwelcome reality for the nation’s credit rating agencies. The plans, which are expected to be announced June 25, would diminish the importance of credit ratings across various markets, and make ratings serve more as a guide on what investors can and cannot hold.

The SEC’s proposal comes after months of criticism over the workings of the three main credit rating agencies - Moody’s Investor Service, Standard & Poor’s and Fitch Ratings – and, specifically, their handling of the subprime crisis.

For years, critics have questioned the role credit rating agencies play in the nation’s financial markets. Last year, the SEC launched its own investigation into the rating industry when thousands of mortgage-backed securities were downgraded, causing the value of the investments to nosedive and forcing billions of dollars in losses and write-downs at major investment banks and securities firms.

As reported June 23 in the Wall Street Journal, the SEC’s proposed changes would include the $3.4 trillion money-market industry, making it possible for U.S. money-market funds to invest in short-term debt without regard to ratings placed on the securities by credit rating agencies.

Regulators hope the new changes, if approved, will reverse the over-reliance that investors place on ratings, which became evident during the subprime mortgage debacle.

Regulators also rely on ratings. In arranging the sale of Bear Stearns to J.P. Morgan Chase in March, the Federal Reserve reportedly said it would take some illiquid, beaten-down assets from investment banks, but only if the assets were rated highly by the rating firms, according to the Wall Street Journal article.

Meanwhile, in an effort to create more competition in the credit-ratings industry, the SEC recognized a 10th bond-rating firm, Realpoint LLC, on June 22.

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

More than 400 individuals have joined former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin as part of a nationwide take-down over fraudulent and criminal activities related to the housing and credit crisis.

Cioffi and Tannin were arrested in the early morning hours of June 19 on charges that they marketed two hedge funds, backed by a pool of subprime-related debt securities, as a low-risk investment strategy and made misrepresentations to stave off investor withdrawals when the funds neared collapse.

Meanwhile, the U.S. Department of Justice and the Federal Bureau of Investigation (FBI) have charged 406 people from March 1 to June 18 in a national probe called “Operation Malicious Mortgage.” The individuals face a variety of charges, including lending fraud, foreclosure rescue scams and mortgage-related bankruptcy ploys. According to officials, some of the specific cases involve fraudulent misrepresentations about a borrower’s financial status, the use of false or fictitious employment records and the inflation of property values.

To date, some 60 arrests have been made in mortgage fraud-related cases, with the total number of cases now at 144. The FBI estimates that the incidents have resulted in more than $1 billion in losses.

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 recent announcement by Evergreen Investments, a unit of financial services giant Wachovia, to liquidate its Ultra-Short Opportunities Fund has many investors crying foul - charging that the fund was marketed as a low-risk investment designed to provide higher returns than money-market funds.

In 2008, the Ultra-Short Opportunities Fund was named one of the worst-performing ultra-short bond funds, losing 20 percent as a result of extensive investments in risky subprime-backed securities.

By comparison, similar bond funds posted losses of approximately 2 percent.

This isn’t the first time Evergreen Investments has found itself in hot water. In 2007, the company agreed to pay $32.5 million to settle accusations by the Securities and Exchange Commission (SEC) that it failed to prevent excessive trading in its mutual funds and that its former chief executive approved a secret deal allowing a broker to make market-timing trades.

Market timing, which entails making excessive trades in and out of mutual funds, is often done to take advantage of various inefficiencies in the way funds are priced. It is not illegal. However, most mutual fund companies, including Evergreen, pledge to investors that they will restrict market timing because excessive trades can cause damage to a fund’s return.

The SEC said Evergreen failed to have adequate controls in place to prevent market timing until October 2003. Nearly 90 percent of the damage among Evergreen funds hurt by market timing occurred in 1998 and 1999, according to the SEC.

Evergreen also was criticized by the SEC for failing to adequately keep track of e-mails.

Evergreen neither admitted nor denied findings in the settlement, according to its own news release.

The SEC also levied a $1 disgorgement fine and a $150,000 civil penalty on former Evergreen CEO William M. Ennis, finding that he, Evergreen and its affiliates “entered into an agreement to allow a registered representative of a broker-deal to market time” Evergreen funds. Ennis was barred from working in the industry for at least one year.

Meanwhile, Evergreen Investments is now shutting down the Ultra-Short Opportunities Fund to the tune of $403 million - an amount that is less than half of the fund’s original value six months ago.

As for investors in the fund - which had more than 70 percent of its assets in mortgage-backed securities - they will receive $7.48 per share from the liquidation.

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.

Bad bets on subprime-backed mortgages and related investments have cost Citigroup billions of dollars in losses. Now, it’s the employees turn.

The New York-based banking giant is expected to begin a round of massive lay-offs of investment banking employees this week as part of a corporate plan to reduce its workforce by approximately 65,000 individuals.

As reported in the June 23 edition of the Wall Street Journal, Citigroup is in the same boat as many Wall Street investment banks as it tries to recover from bad investments on subprime-related mortgages that caused more than $16 billion in write downs in the first quarter alone. Citigroup’s write downs and credit losses from the collapse of the subprime mortgage market now total almost $40 billion, with billions of additional write downs anticipated in the second quarter.

Citigroup, which has more than 350,000 employees worldwide, already fired at least 9,000 employees as of March 31, 2008. According to the Wall Street Journal article, the forthcoming job cuts are part of Chief Executive Vikram Pandit’s goal to reduce Citigroup’s annual expenses by $15 billion.

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

Last week’s announcement by Evergreen Investments to liquidate its Ultra-Short Opportunities Fund is expected to generate an outcry - not to mention lawsuits - from investors who contend managers of the mutual fund failed to disclose the full extent of the fund’s risks.

In reality, Evergreen’s Ultra-Short Opportunities Fund lost 20 percent this year as a result of heavy investments in risky subprime-backed securities. In 2008, the fund was rated as one of the worst performing ultra-short bond funds. Behind the Ultra-Short Opportunities Fund was the Schwab YieldPlus Fund, which has lost an astonishing 35 percent of its value.

By comparison, similar bond funds have posted losses of about 2 percent.

Meanwhile, thousands of investors in the Ultra-Short Opportunities Fund will receive $7.48 per share - a major haircut for a fund that was supposedly considered a conservative investment.

For these investors, the next move may be in court. The Ultra-Short Opportunities Fund had more than 70 percent of its assets in mortgage-backed securities - hardly a low-risk investment or an appropriate place for investors only looking for a place to park cash.

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.