M&T Bank Sues Deutsche Bank Over $80 Million In CDO Losses
In February 2007, M&T Bank came across a complex Wall Street innovation called “Gemstone VII.” Deutsche Bank did the pitching to M&T, and reportedly promised big returns and little risk. Like many Wall Street-engineered products, however, the investment turned out too good to be true. M&T Bank ended up losing $80 million.
M&T Bank is now suing Deutsche Bank for what it claims was a misrepresentation of Gemstone’s securities. Far from the conservative, low-risk instrument that M&T thought it was getting into, Gemstone consisted of bonds backed by toxic subprime mortgages and risky credit-default swaps.
M&T also contends that Deutsche Bank withheld key information from credit rating agencies Moody’s Investors Service and Standard & Poor’s regarding the securities held by Gemstone. By not having that information, the agencies inappropriately assigned higher ratings than they should have to the CDOs.
According to the complaint filed Jan. 19 with the New York State Supreme Court in Erie County, M&T is seeking more than $100 million of punitive damages.
The M&T/Deutsche Bank case is indicative of a new trend in which corporate and institutional investors are taking Wall Street to task for falsely marketing certain financial instruments. Another case that involves the mishandling of CDOs is the Ohio State Teachers Retirement System, which recently sued and won a $550 million settlement from Merrill Lynch.
Institutional investors are often regarded as “sophisticated” and “financially savvy;” therefore, critics argue that they should know what they’re investing in. However, whether an individual or institutional investor, brokerage firms and investment banks are bound by law to provide complete and truthful disclosure about the securities they represent. If misrepresentation occurs, institutional investors deserve to hold the responsible parties accountable.
It would appear that the law is leaning in their favor, as evidenced by the Ohio State Teachers Retirement System’s $550 million win from Merrill Lynch and cases like the one just filed by M&T.
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.
