Archive for December, 2008

Investors who purchased auction-rate securities from UBS should be aware of the date Dec. 19, 2008. That’s when the settlement offer forcing UBS to repurchase auction-rate securities that it sold to investors prior to the collapse of the ARS market in February 2008 officially expires.

For investors who did not participate in the repurchase program, there are still some options available, however. They can continue to hold the illiquid securities until their maturity dates or they can file an arbitration claim to recover access to their funds.

Earlier this summer, state and federal investigations into UBS over sales of auction-rate securities revealed that the Swiss-based firm had misrepresented the securities as cash equivalents to investors. Regulators also discovered that UBS intentionally ramped up its corporate marketing efforts to dump auction-rate securities onto investors so that the company wouldn’t be left holding the bag when the ARS market eventually imploded in February.

In August, in a deal struck with New York Attorney General Andrew Cuomo, Massachusetts Secretary of State William Galvin, the Securities and Exchange Commission (SEC), and other state regulators, UBS agreed to buy back nearly $20 billion in failed auction-rate securities from investors and pay a fine of $150 million to Massachusetts and New York.

UBS also faces additional allegations that seven of its executives sold approximately $21 million in personal auction rate holdings while continuing to push the instruments to investors.

Our affiliation of securites 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 the wake of the Sept. 15 bankruptcy filing of Lehman Brothers Holdings, New York and other municipalities are finding themselves stuck with unexpected costs to get out of interest-rate swap contracts gone sour. In the case of the Big Apple, it has paid Lehman and Wall Street banks at least $75.9 million since March to buy out ill-fated swap agreements.

Between 2002 and 2005, New York was among several issuers that turned to interest-rate swaps as a way to lower borrowing costs on some $7 billion in bonds, according to a Dec. 24 article by Bloomberg. What they failed to take into account, however, was the unexpected. In this case, the unexpected meant the sudden bankruptcy of a counterparty - an event that not only terminates a swap contract but could do so in less-than-desirable “mark-to-market conditions.”

When the unexpected became reality on Sept. 15 with the bankruptcy of Lehman Brothers, New York and others like it were forced to pony up funds in order to exit their interest-rate swap agreements and issue new debt to replace bonds linked to the swaps.

Making matters worse: Many states already are financially strapped and have record budget deficits looming. Spending millions, and in some cases, billions of dollars, to cover increased interest payments and penalties couldn’t come at a more fiscally problematic time.

In a swap contract, two parties agree to exchange interest-rate payments. Typically, the deal consists of exchanging a fixed payment for a variable interest rate.

Besides New York, a number of state and local governments have been burned by interest-rate swaps tied to Lehman Brothers. When officials in Sacramento County, California, terminated the county’s swap with Lehman recently, they had to pay $23 million. Then, because the terms of the new deal with Deutsche Bank were not as favorable as those with Lehman, Sacramento County officials had to pay an estimated $8 million more for protection from fluctuations in interest rates.

The Butler Area School District in Pennsylvania is another municipal agency to lose big because of interest rate swaps. In August, the district opted to pay JPMorgan Chase $5.2 million to get out of its swap contract - more than seven times what it paid to enter the agreement in the first place, according to Bloomberg.

JP Morgan also is a central figure in several lawsuits involving interest-rate swap deals for a sewer system in Jefferson County, Alabama. County commissioners there now contend the Wall Street banks - and JP Morgan in particular - that devised the financing arrangement overcharged the county by as much as $100 million. Since then, the county has been teetering on the brink of bankruptcy.

In September 2008, following federal probes into its interest-rate swap deals, JP Morgan announced that it would no longer sell derivatives to state and local governments.

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. 

GMAC LLC, the financing lender of General Motors Corporation, got a welcome shot in the arm recently when the Federal Reserve gave approval for its conversion to a bank holding company, thereby providing access to much-needed sources of new funding, including the government’s $700 billion bailout fund.

Detroit-based GMAC, which provides financing for GM dealers and customers, as well as home mortgage loans via its Residential Capital LLC unit, has been plagued by money problems lately. In the past year, GMAC has racked up nearly $8 billion in losses. Without the Fed’s financial lifeline, it’s likely the auto financing company would have filed for bankruptcy.

As part of GMAC’s deal with the Fed, both GM, which owns 49% of GMAC, and Cerberus Capital Management LP, which owns the remaining 51%, will significantly reduce their ownership stakes in the company. GM will reduce its equity share to less than 10%, Cerberus to 33%.

GMAC’s access to the government’s $700 billion bailout fund also bodes well for GM. In the past year, the automaker has been forced to absorb about $1.2 billion in losses from its stake in GMAC.

In becoming a bank, GMAC could receive up to $6.3 billion in capital through the Fed’s Troubled Asset Relief Program (TARP). The lender also may issue as much as $17.5 billion of guaranteed debt under the government-backed Temporary Liquidity Guarantee Program.

Meanwhile, GMAC still faces a midnight deadline to swap $38 billion of debt to satisfy capital requirements to become a bank. However, given that the Fed has pre-approved GMAC’s conversion via the use of its emergency powers, it’s unlikely such details will hold up the process.

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.

New York-based Reserve Management Company, along with several of its senior executives, has learned it will face charges by the Securities and Exchange Commission (SEC) for violation of federal securities laws. Charges also are expected to be brought against Reserve President Bruce Bent, Senior Vice President Bruce Bent II and Arthur Bent III, chief operating officer and treasurer.

The charges against Reserve Management come on the heels of at least 19 investor lawsuits after the company’s Reserve Primary Fund broke the buck on Sept. 16 when commercial paper from Lehman Brothers Holdings, Inc. became essentially worthless amid the bank’s bankruptcy filing. The fund was the first money-market fund in 14 years to break the buck.

The Primary Fund, whose assets exceeded $65 billion in September, including $785 million in bonds issued by Lehman Brothers, is now in the process of liquidating.

Meanwhile, shareholders of the Reserve Primary Fund who did not get out before the company froze redemptions in September are taking legal action. According to lawsuits already filed, investors contend the fund “deviated from its stated investment objective by sacrificing preservation of capital and liquidity in pursuit of higher yields. This strategy was exemplified by the fund’s disastrous and unreasonable concentration of $785 million face value in commercial paper issued by Lehman.”

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.

After a string of bad bets on high-risk mortgage-backed securities and credit-default swaps, OppenheimerFunds’ Senior Vice President Angelo Manioudakis has left the company. On Manioudakis’ watch, the Oppenheimer Champion Income Fund has lost more than 80% of its value this year - the biggest decline of any bond fund tracked by Morningstar, Inc. By comparison, the average junk-bond fund fell 32%.

Manioudakis’ departure may be the least of the issues for OppenheimerFunds, however. OppenheimerFunds owns Tremont Capital Management, an investment-management business that placed hundreds of millions of dollars of investors’ money in funds run by Bernard (Bernie) L. Madoff, who was arrested last week for operating a $50 billion Ponzi hedge fund fraud scheme.

Meanwhile, Jerry Webman will temporarily take over for Manioudakis as head of OppenheimerFunds’ Core Plus team.

Problems for the Oppenheimer Champion Income Fund began shortly after Manioudakis and his team took over management responsibilities for the fund in 2006.  The fund’s demise was then hastened by too many derivative bets gone bad and, in particular, something called total-return swaps. As reported Dec. 16 in the Wall Street Journal, total-return swaps are agreements between parties to exchange cash flows in the future based on how a set of securities performs. In the case of the Oppenheimer Champion Income Fund, the fund was betting that top-rated commercial mortgage-backed securities would recuperate this year. It was a gamble that failed miserably.

Credit-default swaps (CDS) and mortgage securities tied to financially ailing companies like Washington Mutual and mortgage giant Freddie Mac also became a major source of trouble for the Oppenheimer Champion Income Fund. Compounding the fund’s problems were purchases in Lehman bonds between June and September with nearly $30 million in principal value. When Lehman filed Chapter 11 bankruptcy protection on Sept. 15, those bonds plummeted in value to $144,000.

Moving forward, other OppenheimerFunds offerings that held the Oppenheimer Champion Income Fund could be headed for their own set of financial problems. One of the funds includes the Oppenheimer Conservative Investor Fund, which had 4% in the Champion Income fund through November, according to the Wall Street Journal. Year to date, the Oppenheimer Conservative Investor Fund is down an astonishing 40%, making it one of the worst-performing conservative allocation funds followed by Morningstar.

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. 

Life for Bernard Madoff and the thousands of investors who were duped as part of a $50 billion Ponzi hedge fund scam will never be the same again. Federal investigators arrested the Wall Street financier last week, following a tip from Madoff’s own sons who reported their father to authorities after learning of the multibillion-dollar fraud scheme.

Now FBI agents are uncovering evidence that Madoff also may have operated an unregistered money-management business alongside his firm’s brokerage and investment-advisory subsidiaries. As reported Dec. 15 by Bloomberg, clients of the undisclosed unit are said to include numerous hedge funds.

Clients who trusted Madoff with their money run the gamut, from grandmothers in Florida, to pension funds, to New York Mets owners Fred Wilpon and Saul Katz, to global financial firms such as Nomura Holdings Inc. in Tokyo, to Senator Frank Lautenberg of New Jersey, to the Massachusetts School of Law and charities like the Carl and Ruth Shapiro Family Foundation.

Behind Closed Doors

Over the weekend, investigators continued to unravel sordid details of Madoff’s fraud scheme, as they tried to determine exactly how much money remains in the coffers of Bernard L. Madoff Investment Securities LLC. As of last week, before his Dec. 11 arrest, Madoff told his two sons he had only “$300 million left.”  However, in a January regulatory filing, Madoff listed $17 billion in assets under management.

When federal agents formally arrested Madoff, the 70-year-old apparently confessed that his investment advisory business “was all just one big lie.” Later, according to court documents, Madoff revealed that his company had been insolvent for years, and that he expected to go to jail for his actions.

Other details now coming forth show that Madoff exerted obsessive-like control over the financial statements of his investment-advisory company, which operated on a separate floor from his brokerage units. The “entire advisory business was a mystery to most staff members,” according to Bloomberg.

Also a mystery is whether Madoff had accomplices in his $50 billion investment subterfuge. Madoff’s sons, Mark and Andrew, were senior executives at Bernard L. Madoff Investment Securities LLC. According to the SEC complaint filed against their father, both men say they knew nothing about the scam or the advisory component run by the elder Madoff until last week. Madoff himself apparently made few appearances at the brokerage offices during the day, arriving instead at night when he reportedly inspected employees’ desks for neatness.

Another question for investigators is the role, if any, Madoff’s wife, Ruth, may have played in the alleged fraud. According to SEC documents, Ruth Madoff’s name appears on papers linked to various transactions involved in the fraud. His wife also runs a self-funded not-for-profit organization, with about $19 million in assets, according to IRS 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. 

At one time, Legg Mason’s William H. Miller was known as the king of mutual fund managers. Then, too many bad investments in low-quality mortgages and in stock of troubled companies like Fannie Mae, Freddie Mac and Bear Stearns uniformly swept away Miller’s title. One of the funds hardest hit from Miller’s management decisions is the Legg Mason Value Trust (LMVTX).

Investors have lost nearly 60% of their money this year in the Legg Mason Value Trust, which is now among the worst-performing in its class for the past one-, three-, five- and 10-year periods, according to Morningstar.

Legg Mason launched the Value Trust fund in 1982, followed by an initial public offering one year later. Last year, the fund had $22 billion under management; today, its assets total $4.3 billion.

Problems for Legg Mason first began to surface three years ago, when the company negotiated a swap of its stock brokerage unit to Citigroup in return for taking on the bank’s money-management operations. Since then, however, the Baltimore-based money manager has been plagued with performance issues. The economic downturn, continuing fears over the credit market, downgrades of its senior debt, investor redemptions and takeover speculation all have wreaked havoc on Legg Mason’s stock, which has lost more than 75% of its market value since the beginning of this year.

By comparison, reinvested returns of the Standard & Poor’s 500 Index declined by 40%.

Meanwhile, after three consecutive quarters of losses, Legg Mason announced plans to cut about 8% of its workforce on Dec. 5 in order to lower annual expenses by $120 million.

Looking ahead, more trouble may be in store for Legg Mason. Last month, analysts at Friedman Billings Ramsey downgraded the money manager to a “sell” rating because of fears falling assets could trigger a financing crunch. Moreover, some of Legg Mason’s agreements to shore up poor-performing funds are set to expire soon, which means the company might need to tap its cash in order to buy securities from the funds.

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. 

After raking in millions of dollars in underwriting fees for municipal bonds, Goldman Sachs turned around and told another group of investors that they could make big profits by buying insurance from the investment bank because those bonds could be headed for default. Goldman’s strategy is known as “shorting municipal credit,” and while technically not illegal, the actions reek of conflict of interest and questionable business conduct.

For years, traders have been able to make money short-selling stock, but shorting municipal bonds via credit default swaps is a relatively new phenomenon. Goldman Sachs is both a leading dealer of municipal credit default swaps, as well as a major underwriter of municipal securities.

This summer, Goldman collected $1 million in fees for helping the state of New Jersey sell $345 million in highway improvement bonds to investors. The fees are among some $15 million that the investment firm has earned since 2002 for selling hundreds of millions of dollars in New Jersey debt to investors, according to a Nov. 23 article in the Newark Star-Ledger.

In California, Goldman reportedly has earned about $25 million over the past five years in underwriting fees from bond issues.

In September, several news reports say Goldman began ramping up its strategy of shorting municipal credit, outlining plans in a 58-page report obtained by ProPublica, a New York-based not-for-profit group. According to the report, Goldman advised certain investors that states like New Jersey and five others might not be able to make their bond payments as planned because of pending budget shortfalls. As a result, investors buying default insurance stood to make big profits from their demise.

As for Goldman Sachs, it bit the hand of at least one client that fed it and profited all around. The investment firm not only collected millions of dollars in fees from the states where it sold bonds and found buyers, but also made money when it sold credit default swaps to investors and thereby bet those same states would be unable to make their scheduled payments.

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.

Top executives of Fannie Mae and Freddie Mac faced intense questioning on Dec. 9 by members of the Committee on Oversight and Government Reform over their role in the collapse of the two mortgage giants. Lawmakers grilled former Fannie Mae CEOs Daniel Mudd and Franklin Raines and former Freddie Mac CEOs Richard Syron and Leland Brendsel on why the companies ignored previous warnings about the potential problems of subprime mortgages and continued to buy up risky subprime and Alt-A loans.

As expected, finger pointing was in full force. During the hearing, Henry Waxman, chairman of the Oversight and Government Reform Committee, quizzed Fannie Mae’s former CEO Mudd about a June 2005 document citing the company was at a “strategic crossroads” and could either delve into riskier loans or focus on more secure ones. According to the document, the real “revenue opportunity” was in buying subprime and other alternative mortgages.

The document went on to say that homes were “being utilized … like an ATM.” It also acknowledged that investing in subprime and alternative mortgages would mean “higher credit losses” and “increased exposure to unknown risks.”

Other documents presented during the hearing made it clear that both Fannie Mae and Freddie Mac knew what they were doing as they took on added risks. Their own risk managers repeatedly raised concerns about the dangers of investing heavily in the subprime and alternative mortgage market.

In 2004, Freddie Mac’s chief risk officer, David Andrukonis, sent an e-mail to CEO Richard Syron urging the company to stop purchasing loans with no income or asset requirements “as soon as practicable.” The risk officer further warned that mortgage lenders were targeting “borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed” and that the “potential for the perception and the reality of predatory lending with this product is great.”

Syron did not heed any of the recommendations. Instead, he fired Andrukonis.

Questioning of the CEOs and others lasted more than four hours. Besides finger pointing, little was resolved in the end. Rep. Darrell Issa of California offered perhaps the most fitting comment of the day when he chastised the former Fannie Mae and Freddie Mac CEOs with the following comment:

“All four of you seem to be in complete denial that Freddie and Fannie are in any way responsible for this. Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is that everyone is doing it.”

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. 

Ralph R. Cioffi and Matthew Tannin, the two former Bear Stearns executives who managed ill-fated hedge funds that cost investors billions of dollars, are scheduled to go to trial in September. Cioffi and Tannin are accused of deceiving investors about the financial status of the High Grade Structured Credit Strategies Master Fund and the Enhanced Master Fund, which were heavily invested in mortgaged-backed securities and losing substantial amounts of money. Both funds eventually collapsed.

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.