Archive for November, 2008

It’s almost impossible to comprehend: $7 trillion. Yet, reportedly that’s what it will take to fix the nation’s economic troubles. To put $7 trillion in perspective, consider this: The amount is “half the value of everything produced in the nation last year,” according to Bloomberg. To put it another way, it amounts to about $25,000 for every American citizen, and it’s more than double what was spent on World War II, after adjustments are made for inflation.

Regardless of how you spin it, $7 trillion is huge - and the figure is likely to climb much, much higher when all is said and done. So far, the government’s financial commitments to bail out the nation come to around $3 trillion. Of that amount, some of the big-ticket items include:

• $800 billion, which was committed in November to support consumer loan and mortgage-backed securities;

• $700 billion, approved in early October under the Troubled Asset Relief Program (TARP);

• $200 billion to prevent the bankruptcy of Fannie Mae and Freddie Mac;• $150 billion to stave off the demise of American International Group (AIG);

• $50 billion to guarantee money-market funds against losses;

• $45 billion to Citigroup; and$29 billion in the form of a loan to JPMorgan Chase for the purchase of Bear Stearns in March.

Keep this in mind: The $7 trillion figure still doesn’t account for the trillions of additional dollars held in “off balance sheet” assets by Wall Street firms. When those assets eventually come back on to their books, the final tally could make $7 trillion seem like peanuts by comparison.

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.

A November 2008 posting on a Yahoo message board may be the best description yet of the Pimco High Income Fund: “A fund soon to be a member of the grateful dead.”

This year has not been kind for investors of Pacific Investment Management Company’s High Income Fund (NYSE: PHK). Between Sept. 10 and Nov. 25, the fund saw its value fall from $11.49 a share to $3.44. On Nov. 3, Pimco’s parent company, Germany-based Allianz SE, announced that the Pimco High Income Fund would suspend a November payment of dividends to common shareholders, as well as a scheduled payment in December, because the value of securities in the fund had fallen below the required 200% asset-coverage ratio.

On Nov. 19,  an announcement was issued that three Pimco funds - the Pimco High Income Fund, the Pimco Floating Rate Income Fund and the Pimco Floating Strategy Fund - would each redeem, at par, a portion of their auction-rate preferred shares (ARPS) beginning Dec. 8, 2008, and concluding on Dec. 12, 2008.

A number of investors who purchased these closed-end funds are retirees.  They relied on the dividends from their investments to pay daily living expenses. Some investors are now coming forth with claims that they were unaware of the risks associated with the funds and, as a result, have suffered significant financial losses.

Several other Pimco-managed funds, including the PIMCO Corporate Opportunity Fund, PIMCO Corporate Opportunity Fund, PIMCO Floating Rate Income Fund and the PIMCO Municipal Advantage Fund also are experiencing steep losses this year. Now it’s a question of exactly how underwater they may be.

So far, Pimco isn’t saying.

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.

Bill Gross, chief investment manager at bond-fund giant Pacific Investment Management Company, has been grossly off lately when it comes to Pimco’s closed-end funds. Several of the funds, including the Pimco High Income Fund, the Pimco Corporate Opportunity Fund, the Pimco Floating Rate Strategy Fund, the Pimco Global Stocksplus Income Fund and others are down in value by 50% or more this year.

The Pimco High Income Fund in particular continues to be squeezed by plunging asset values. The $623.8 million fund has fallen 77% in value so far this year. In January, its share value was $14; as of Nov. 25, it is $3.32. In November, market conditions forced the fund to postpone a dividend payment for that month, as well as one scheduled for December, because the value of its portfolio securities had fallen below the required 200% asset- coverage ratio.

Pimco, a unit of Munich-based Allianz SE, has about $800 billion in assets under management.

Some of the problems for investors in Pimco’s closed-end funds can be traced to the collapse of the auction-rate securities market in February, which overnight eliminated a key source of financing and left preferred share holders unable to sell their aution bonds. In the months following the auction market’s demise, falling debt prices have increased the cost of borrowing and further pushed down already-battered asset values.

Pimco also is dealing with collateral damage from its overexposure to credit default swaps with Lehman Brothers and American Insurance Corporation (AIG).

A credit default swap is similar to an insurance contract between two parties. One party buys protection against the threat of default by a company, a municipality or, in some instances, pools of debt. The other party pays the seller a premium over a set period of time and then pays out if a default occurs.

According to Bloomberg, Pimco has sold credit default swaps that guarantee $760 million of debt issued by AIG. Should AIG, which continues to have financial troubles despite two bailouts from the federal government, ultimately go bankrupt, Pimco is on the fence to pay on those swaps.

As for Lehman, which filed bankruptcy on Sept. 15, sellers of credit-default protection on it will have to pay 91.375 cents on the dollar to settle their contracts. It will be the biggest payout yet in the $55 trillion credit default swap market. Pimco’s Total Return Fund, with some $130 billion under management, has written protection on a face amount of $105.4 million of Lehman debt as of June 30, according to regulatory filings.

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.

Pioneer hedge fund investor Sandra Manzke is mad as hell and isn’t going to take it anymore. Last week, the 60-year-old sent a scathing email to some 500 high-net worth individuals, pension-fund managers, colleagues and others on what she says is the outrageous and over-the-top behavior of the $1.5 trillion hedge fund industry.

Manzke, best known for founding Tremont Capital Management in 1985, is up in arms over less-than-savory hedge fund practices, including high fees, limiting or suspending client withdrawals, funds that get their money out ahead of investors and managers who use borrowed money to make trades in some of the most volatile stock and bond markets in recent memory.

Manzke’s solution is to get her peers on board to form a watch-dog group called the Hedge Fund Investors United Forum that would protect the rights of investors.

According to Bloomberg.com, which ran the Nov. 21 story on Manzke and her hedge fund reform mission, losses for hedge funds are at record highs this year. More than 75 funds have liquidated, suspended client withdrawals or limited redemptions; others have placed some securities in a separate account so they can’t be sold.

Meanwhile, in between running MAXAM Capital Management LLC, Manzke reportedly is putting together a list of various hedge fund managers that have fallen from grace lately.

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.

It’s a familiar refrain on Wall Street: “too big to fail.” We heard it with Bear Stearns, Fannie Mae and Freddie Mac, American Insurance Group and Lehman Brothers. And each case, the opposite proved to be true. Government rescues in the form of multibillion-dollar bailouts prevented some of those supposed fail-proof businesses from going under. Now Citigroup, once the nation’s largest financial institution, is joining the ranks, as well, after succumbing to more than $65 billion in losses.

The government’s plans to prop up Citigroup were revealed on Sunday, Nov. 23, and include an additional $20 billion of taxpayer money for the bank, along with a guarantee on more than $300 billion of the firm’s most risky assets. In exchange for the guarantee, Citigroup will issue $7 billion in preferred stock to the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC).

So how did things get so bad for one of the country’s premiere financial services firms? In three words: reckless business bets.

Over the years, Citigroup created a multibillion-dollar business in mortgage-backed securities and collateralized debt obligations (CDOs). As profits grew, Citigroup got bolder, taking more and more risks. At the same time, the company employed tricky accounting practices that allowed it to move troubled assets into off-balance-sheet trusts that could then market the debts to other institutions. Once the assets had been moved off Citigroup’s balance sheets, it made it appear the bank was carrying less risk.

Appearances can be deceiving, however, for the simple fact they often mask the truth. To date, Citigroup has suffered four quarters of consecutive multibillion-dollar losses. It still holds $20 billion of mortgage-linked securities on its books, the majority of which have been marked down to between 21 cents and 41 cents on the dollar, according to a Nov. 22 article in the New York Times.

But the worst may be yet to come. Citigroup has another $1.2 trillion that is held “off balance sheet.”  When it begins to move those questionable assets back onto its books, get ready for a whole new firestorm of losses to ignite.

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.

Massachusetts Secretary of State William F. Galvin has charged Oppenheimer & Co. and several of its executives with fraud and unethical conduct for allegedly leaving clients in the dark while top officials dumped their own holdings in auction-rate securities.

In the complaint filed Nov. 18, Galvin contends Oppenheimer misrepresented the securities to investors by describing them as “cash equivalents” and failed to disclose that the auctions in which the instruments are traded could indeed fail. Additional charges in the complaint reveal that senior-level executives at Oppenheimer, including Chairman and CEO Albert Lowenthal, sold $3 million of personal ARS investments before the auction-rate market collapsed in February, yet the company continued to allow brokers to sell the securities to clients.

The complaint against Oppenheimer is the latest in an ongoing series of investigations by state and federal securities regulators of Wall Street investment firms and inappropriate sales of auction-rate securities. In February, the $330 billion auction-rate market came to a screeching halt when investment firms stopped buying the securities with their own capital. As a result, millions of investors wound up with illiquid investments that no one wanted. Oppenheimer’s own customers have been unable to access nearly $56 million, following the breakdown of the auction market.

Massachusetts wants Oppenheimer to repay customers who were forced to sell their auction-rate investments at a loss, as well as make whole any investor who has been unable to sell their holdings.

As reported Nov. 19 in the Wall Street Journal, the state also intends to seek a formal censure of Oppenheimer, in addition to invoking fines for Albert Lowenthal, Robert Lowenthal, senior managing director of Oppenheimer’s taxable fixed-income trading department, and Greg White, managing director of the auction-rate department.

For the senior Lowenthal, the final verdict may be even more harsh - and just. Regulators want to revoke his Massachusetts registration as a broker-dealer agent of Oppenheimer.

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. 

Investors with holdings in several funds managed by the Reserve Management Company continue to wait for answers as to when they can access their money. In September, assets in the $1 billion Reserve Yield Plus Fund - which is not a money market fund but apparently was represented as one, according to investors - fell to 97 cents for each dollar, causing the fund’s management to begin liquidation plans. Since then, Reserve Management has yet to provide concrete details on exactly when investors will receive their money in the fund.

Angry investors are posting their experiences regarding the Reserve Yield Plus Fund and the Reserve Primary Fund, also managed by Reserve Management, debacles on Internet message boards in droves. Many are like that of an Oct. 18, 2008, posting from Benny, who said:

“In March, I went to TD Ameritrade and asked the “adviser” for a safe money market fund to invest in while waiting for stock markets to rise. I was directed to the Reserve Yield Plus Fund and put my life savings in it. Now, TDAmeritrade claims the fund is not a money market fund like the Reserve Primary Fund and that it is my own fault for investing in it. Attempts to contact Reserve Management have proven fruitless. My funds are being held hostage and so am I.”

At least nine lawsuits have been filed against the Reserve Management Company and its president and founder of money-market funds, Bruce Bent. Among the charges, investors claim Reserve Management misled investors about the kind of investments made by the funds. And, in the case of the Reserve Primary Fund, investors say several executives from Reserve Management secretly tipped off at least two dozen large institutional investors about the fund’s pending losses and that the news would soon go public. When those investors subsequently pulled out more than half of the fund’s assets, losses for investors who remained in the fund became even worse. Instead of a 1% loss, it rose to 3%.

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. 

In September, investors were shocked to learn that the Reserve Primary Fund had “broke the buck,” and as a result, access to their cash unavailable. A few days later, investors got another surprise courtesy of the fund’s manager, the Reserve Management Company, when they discovered that the supposed safe, conservative fund had doubled its investment in Lehman Brothers during a time when the firm clearly was in financial trouble.

The revelation is especially disturbing because the transactions were contrary to what investors had been told about the fund and its investments in only high-quality, short-term securities. In May 2008, more than 50% of the holdings in the Reserve Primary Fund were in commercial paper. By comparison, the percentage was less than 1% a year ago.

Investors’ worst fears came to fruition on Sept. 17 when the Lehman debt, with a face value of $785 million, was written down to zero, which in turned caused the asset value of the nation’s oldest money market fund to drop below $1 a share.

Since then, the Reserve Primary Fund has invoked a mandatory suspension of redemption proceeds. The suspension was supposed to last only seven days. In October, however, the manager of the Fund asked the Securities and Exchange Commission (SEC) to extend the suspension indefinitely, or until the financial markets became liquid. The SEC approved the request, leaving investors in the Primary Fund, as well as a dozen other Reserve funds, unable to access their cash.

In early November, after weeks of delay, investors in the Reserve Primary Funds finally began to receive their checks, following an initial distribution of $26 billion. Even that, however, only covers about half of each client’s total account balance.

Adding to investors’ woes are the words of the Reserve Primary Fund’s founder, Bruce Bent. For years, the 71-year-old touted the safety and liquidity of money-market funds and was resolute in the fact that commercial paper paying slightly higher yields had absolutely no place in money-market funds. He apparently changed his belief because in May 2008, more than half of the Reserve Primary Fund’s holdings were in commercial paper.

Bent, along with his company’s Web site, also proudly advertised the Reserve Primary Fund’s “unwavering discipline and focus on protecting investors’ principal.” Right before the Reserve Primary Fund broke the buck, in fact, Brent is quoted in the Wall Street Journal as saying: “The purpose of a money fund is to bore the investor into a sound night’s sleep.”

For investors in the Reserve Primary Fund and similar Reserve funds, “nightmare” might be a more suitable depiction.

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. 

Investors who lost untold amounts of their money in seven failed Morgan Keegan mutual funds are finally getting some justice. Earlier this week, the Financial Industry Regulatory Authority (FINRA) ruled in favor of two investors who filed arbitration claims against Memphis-based broker Morgan Keegan, awarding more than $100,000 in compensation for their losses in the funds.

The funds at the center of the legal disputes 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.

For more than a year, the RMK funds have been a source of ongoing financial problems for both institutional and individual investors who cumulatively lost millions of dollars after the funds began to plummet in value from exposure to toxic subprime mortgages.

Since then, investors have filed dozens of civil lawsuits and arbitration cases, including several in the U.S. District Court of the Western District of Tennessee in Memphis. Among their claims, investors say Morgan Keegan marketed the funds as a “conservative” investment and a low-risk money-market alternative. Instead, they unknowingly entered into a high-risk and toxic investment.

In the case of the four RMK open-end funds, where total losses ultimately may reach $1 billion, investors also charge that Morgan Keegan misrepresented the true value of the funds’ underlying assets and collateralized debt obligations (CDOs). Because the funds are not traded on a stock exchange, their value is set by the management of the funds - in this case, Morgan Keegan.

Today, six of the seven RMK Funds has lost more than half of their value.

In April 2008, management for the seven RMK Funds was transferred to Hyperion Brookfield Asset Management of New York.

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.

For thousands of investors in Hong Kong and Singapore - many of them retirees - the name of Lehman Brothers probably wasn’t a topic of daily discussion. That is until now. Because of investments linked to the bankrupt brokerage, investors are seeing their life savings disappear overnight.

The problem investments are two structured finance products called Pinnacle Notes Series 9 and 10, and are part of a Pinnacle Notes Series of credit-linked notes. Series 9 and 10 notes were issued by Pinnacle Performance and arranged by Morgan Stanley Asia.

As of Nov. 14, the two notes were forced into a mandatory redemption because of their connection to toxic collateralized debt obligations (CDOs) and financially troubled companies like Lehman Brothers Holdings, Freddie Mac and Fannie Mae.

Now, New York-based Morgan Stanley is giving investors the news they do not want to hear: They can expect to lose their entire original investment in the Pinnacle Notes Series 9 and 10.

Rumors of the eminent collapse of the Pinnacle Notes Series 9 and 10 have been circulating for the past month, fueled in part by the failures of other structured products like DBS High Notes 5. Like the Pinnacle Notes Series 9 and 10, the DBS High Notes also were linked to Lehman Brothers. When Lehman filed for bankruptcy protection on Sept. 15, the notes became essentially worthless.

According to information posted on Morgan Stanley’s Web site, Standard & Poor’s had previously slashed the ratings of the underlying assets in the Pinnacle Series 9 and 10 from AA to CCC-, or junk status.

The two series of the Pinnacle Notes were sold solely in Singapore through five distributors: brokers DMG & Partners, Kim Eng Securities, OCBC Securities and UOB Kay Hian and lender Hong Leong Finance. Pinnacle Performance, the issuer of the Pinnacle Notes Series 9 and 10, is a special purpose company incorporated in the Cayman Islands.

Like many of the stories coming forth from investors burned recently by structured finance products, investors in the Pinnacle Notes Series 9 and 10 say they were unaware of the high-level of risk involved. They put their trust in the financial institutions that sold them the securities. Now, like their investments, that trust is shattered.

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.