Archive for April, 2009

Massachusetts Secretary of State William Galvin has launched an investigation into State Street Corp. and whether the Boston-based firm portrayed a bond fund that invested in high-risk derivatives, swaps and subprime-mortgage securities as a low-risk, conservative investment to pension funds and retirement plans.

The center of Galvin’s investigation is an enhanced index bond fund known as the State Street Limited Duration Bond Fund. The fund itself was supposedly created as a way for pension funds and other institutional investors to generate better returns than ultra-safe money market funds, but with only slightly more risk. Instead, it turns out the fund invested heavily in risky mortgage-related products - products that ultimately plummeted in value following the collapse of the subprime market.

In addition, the bond fund was highly leveraged, borrowing money to make bigger bets on mortgage-backed securities. The strategy ultimately caused more financial losses.

According to an April 30 article in the Wall Street Journal, Massachusetts’ Galvin wants to know if State Street marketed and sold the Limited Duration Bond Fund as a “safe” investment to pension funds despite the fact it held risky instruments considered inappropriate for that sector of investors.

Inappropriate bets on subprime mortgages have plagued State Street’s enhanced index funds for some time now, making the company the focus of several lawsuits. On April 8, the Sisters of Charity of the Blessed Virgin Mary, based in Dubuque, Iowa, sued State Street, charging it of putting their money in risky subprime mortgages instead of the more conservative investments State Street’s financial advisors had promised.

The nuns say they have lost more than $1 million.

In a document that State Street apparently gave clients on another enhanced bond index fund, the Government/Corporate Bond Fund, investments are described as those in a “broad-based, investment-grade fixed-income universe.” As of March 31, 2007, however, the fund had nearly half of its weighting in mortgage-backed securities and other risky asset-backed products, according to the Wall Street Journal.

By comparison, the same fund’s biggest weighting in September 2005 was in U.S. Treasurys, while mortgage- and asset-backed securities accounted for less than 6% of the fund’s top 10 holdings, according to the Wall Street Journal.

State Street also is at the center of a 2007 lawsuit filed by Prudential Financial, which claims the firm deceived the insurer by investing in products whose returns were linked to 20 high-risk subprime mortgage pools.

In early 2008, State Street replaced William Hunt, CEO of State Street Global Advisors, amid growing controversy of the company’s ties to subprime mortgages and other toxic financial products.

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 fury over auction-rate securities continues to heat up in the state of California, which has filed a lawsuit against three Wells Fargo subsidiaries for allegedly telling California investors that $1.5 billion of the risky securities were “cash-like investments.”

The lawsuit, filed April 23 in San Francisco, focuses on Wells Fargo Investments LLC, Wells Fargo Brokerage Services LLC and Wells Fargo Institutional Services LLC. During a news conference, California Attorney General Jerry Brown said the Wells Fargo firms advertised the auction-rate securities to investors as short-term, liquid investments, similar to money-market accounts. When the market for auction-rate securities collapsed in February 2008, however, investors quickly lost their money.

According to Brown, about 2,400 Californians are unable to sell their ARS investments, leaving many strapped for cash that they need to pay their day-to-day living expenses.

Following the collapse of the auction-rate market, federal and state regulators launched investigations into whether Wall Street institutions deceived investors about the liquidity and risks of auction-rate securities. In August 2008, a number of firms agreed to settle those claims by agreeing to pay fines and buy back billions of dollars of the instruments from retail investors and small businesses.

In addition to California, several other lawsuits recently have been filed over auction-rate securities. On April 17, Braintree Laboratories, a pharmaceutical company based in Braintree, Massachusetts, filed a lawsuit against Citigroup, charging the bank with selling more than $33 million of auction-rate securities and misrepresenting them to Braintree as “money-market investments.”

Also on April 17, Ashland, Inc., which makes Valvoline motor oil and other chemicals, filed a lawsuit against Oppenheimer & Co. over the sale of $194 million of auction-rate securities. According to the complaint, Oppenheimer failed to disclose accurate and truthful information about the liquidity and risks associated with auction-rate securities.

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 maker of Valvoline motor oil has filed a lawsuit against Oppenheimer & Co., a subsidiary of Oppenheimer Holdings, over the sale of $194 million of auction-rate securities. According to the complaint by Ashland Inc., Oppenheimer misrepresented the liquidity and risks of the instruments at the time it sold them to the chemical company in 2007 and early 2008. 

When the market for auction-rate securities collapsed in February 2008, Ashland, like thousands of institutional and retail investors, found itself stranded with an illiquid investment that no one wanted to buy. Several months later, in an effort to settle investigations by state and federal regulators, many Wall Street firms, including Citigroup, UBS and Merrill Lynch, agreed to buy back billions of dollars of auction-rate securities from investors. Oppenheimer, however, opted not to participate in the ARS buy-back programs, contending it didn’t issue or underwrite the securities but only sold them.

In November 2008, Massachusetts’ Secretary of State William Galvin sued Oppenheimer, charging the firm with fraud and dishonest and unethical conduct in connection to its auction-rate securities business. Galvin not only wanted Oppenheimer to rescind all sales of auction-rate securities at par and make full restitution to investors who already had sold their securities but also sought to revoke Oppenheimer Chairman and CEO Albert Lowenthal’s Massachusetts registration as a broker-dealer agent of Oppenheimer, as well as fine the company and several senior-level executives.

Ashland filed its lawsuit against Oppenheimer on April 17 in the U.S. District Court for the Eastern District of Kentucky.

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.

Citigroup continues to clash with institutional investors over auction-rate securities (ARS). This time, Braintree Laboratories is suing the bank for selling more than $33 million of the instruments and disguising them as money market investments. Braintree contends the sale, which occurred last year, was orchestrated at the very same time federal and state regulators were investigating Citigroup for fraudulent marketing practices relating to auction-rate securities.

In August 2008, in an effort to settle the investigations, Citigroup agreed to buy back as much as $20 billion worth of auction-rate securities from individual investors and small businesses. In addition, the bank paid a $100 million fine. Citigroup also agreed to provide loans to more than 2,500 institutions that held some $12 billion of the securities.

At issue in the Braintree case is the timing of the auction-rate securities sale. As reported in an April 17 article by Bloomberg, Citigroup apparently sold some of the securities to Braintree on Aug. 6, just one day prior to its settlement agreement with regulators.

According to Braintree’s complaint, Citigroup described the auction-rate securities to Braintree as “seven day rolls” and “government-backed money market investments that could be sold at par at any time on seven days’ notice.”

Now, Citigroup refuses to buy back the auction-rate securities from Braintree. As for the instruments, they remain illiquid and unredeemable until the year 2030.

Founded in 1982, Braintree Laboratories is a privately held pharmaceutical company based in Braintree, Massachusetts. 

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.

Hoping to permanently shatter the “Greed is Good” line made famous by fictitious corporate raider Gordon Gekko in the movie Wall Street, Andy Stern, president of the Service Employees International Union (SEIU), has sent a scathing letter to 29 financial services firms over executive bonuses tied to inflated profits on derivatives and other investments that ultimately turned out to be worthless. Stern called upon the companies, which included American International Group (AIG), Citigroup, Morgan Stanley, and JP Morgan Chase to either pay back the bonuses immediately or get prepared to face a slew of lawsuits.

The SEIU’s pension fund, known as the SEIU Master Trust, wants the firms’ boards of directors to review more than $5 billion in bonuses and stock option awards that were given to their companies’ top five executives since 2005.

In addition, the pension fund is demanding the companies overhaul their executive compensation practices.

 “The collective choices of top executives to reward themselves despite their failure to deliver a profit on their investments negatively impacted our pension fund and left our economy in shambles,” said SEIU’s Stern in an April 20 article by Bloomberg. “It’s as if these guys got a windfall payoff for betting the family’s savings on the wrong horse.”

All of the companies in question have come under fire recently over executive compensation issues. Leading the pack is financially troubled AIG, which has been bailed out by the U.S. government multiple times and received more than $185 billion in funds. Despite the taxpayer-funded rescue, as well as a $62 billion fourth-quarter loss, the insurer turned over $165 million in executive bonuses in 2008.

Meanwhile, pension funds investing in AIG and in other firms that awarded over-the-top bonuses to executives while their companies struggled financially have lost billions of dollars.

News of the AIG bonuses led Congress to create legislation in March that would establish a 90% tax on bonuses at any company receiving $5 billion in government aid.

The SEIU Master Trust held investments in all 29 financial services firms that received a letter from Stern.

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. 

Hedge funds have become a hotbed of controversy lately, with fund managers facing state and federal investigations, lawsuits and arbitration claims over disclosure issues and charges of misleading investors. Case in point: Citigroup’s ASTA/MAT hedge funds. The failure of ASTA/MAT, which consists of six hedge funds that were sold under the brand names of ASTA and MAT, has resulted in a slew of complaints from investors who say the funds not only were misrepresented, but also that Citigroup raked in millions of dollars in fees and unexplained commissions in the process.

The losses experienced by ASTA/MAT and the lawsuits that have followed are a black eye for Citigroup. According to investors, Citigroup billed MAT and ASTA as safe, conservative investments - alternatives to traditional bond funds that were designed to produce tax-advantages and reliable cash flows. Moreover, investors would be exposed to minimal risks.

In reality, Citigroup took on a risky investing strategy known as municipal bond arbitrage, which involved borrowing approximately $8 for every $1 raised. When the credit and bond markets began to falter in the summer of 2007, and continue their descent in 2008, ASTA/MAT responded accordingly. Ultimately, that mayhem and volatility caused the funds to lose more than 90% of their value.

Despite the financial bleeding, however, Citigroup management continued to push ASTA/MAT to investors. The reason may have had something to do with the millions of dollars in exorbitant fees that Citigroup and its brokers collected.

Citigroup later offered to compensate investors for their losses in ASTA/MAT. The plan, which entailed refunding investors only 45% to 55% of their portfolio’s value, required investors to forego any future litigation against Citigroup for their financial losses in the funds.

Understandably, many investors said a resounding “no” to Citigroup’s settlement offer. Instead, they filed lawsuits to recover their losses, charging Citigroup of misrepresenting ASTA/MAT as a relatively safe, low-volatility bond fund investments when in actuality the funds were highly leveraged and subject to market volatility.

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. 

A recent Financial Industry Regulatory Authority (FINRA) award of $187,000 to a retired Alabama cattle farmer who suffered losses in Morgan Keegan & Company bond funds is now the subject of an appeal by the Memphis-based investment bank. On April 13, Morgan Keegan filed a motion to vacate the award, arguing that FINRA overstepped its authority to provide compensatory damages greater than the amount actually requested by the investors.

Specifically, on March 11, an Alabama FINRA arbitration panel awarded Phillip Willingham and Melinda Oates $187,215 for their claim against Morgan Keegan. Initially, the couple sought damages of $109,881, as well as “unspecified, well-managed damages had their account been properly invested.”

FINRA did not explain the rationale behind the amount it awarded, saying only that the award was for compensatory damages.

Investors’ claims against Morgan Keegan concern the performance of a group of RMK bond funds, many of which have lost more than 95% of their value since mid-2007. The losses have since been traced to the investments that Morgan Keegan made in risky and untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other debt instruments. Ultimately, the overexposure to those products cost investors more than $2 billion in losses.

In turn, the financial carnage in the Morgan Keegan funds has spawned a wave of lawsuits and arbitration claims by investors who say they were steered into risky funds that Morgan Keegan represented as low-risk and conservative.

Morgan Keegan is owned by Regions Financial.

As for Morgan Keegan’s latest attempt to sidestep FINRA’s March 11 award of $187,000 to Phillip Willingham and Melinda Oates, a Jefferson County, Alabama, Circuit Court will now decide the final outcome in the case.

In the meantime, Morgan Keegan is facing hundreds of additional arbitration claims regarding its collapsed bond funds. To date, FINRA has awarded more than $1.6 million to investors for their losses in the funds. Among the most recent arbitration awards: $950,000 to Jerome Woods, a former football player for the Kansas City Chiefs; $100,000 to sports broadcaster Tim McCarver; $267,711 plus interest to two California brothers; and $18,000 to an Indiana church secretary.

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 become a familiar scene across the country: Public pension funds gambled billions of dollars of their employees’ retirement money in the high stakes world of hedge funds. Now, as pension fund managers discover that their hedge funds investments have delivered far less than what they expected, many people are left to wonder if their golden years will instead be spent logging more time in the workforce.

Long before Bernard Madoff made front page news for his $50 billion hedge fund Ponzi fraud, hedge funds were garnering the attention of state and federal regulators for their lack of transparency and opaque oversight standards.

Despite this veil of secrecy, public pension funds nonetheless gravitated to hedge funds in droves, putting their money into everything from real estate to private equity funds. In 2005, 13% of all public pension funds invested in hedge funds, according to an April 15 article in the New York Times. Three years later, the percentage had climbed to 40%.

The apparent infatuation of public pensions and hedge funds may be changing, however. Faced with the grim reality of massive losses on their hedge fund investments, more pension funds are scaling back or, at the very least, trying to change the terms of their hedge fund investments.

The California Public Employees’ Retirement System (Calpers) is a prime example. As reported in the New York Times article, the nation’s largest public pension fund is trying to reduce hedge fund fees and alter the terms of its investments to hedge funds. The decision comes after Calpers saw its investments in hedge funds fall from $7.6 billion to $5.9 billion.

Moreover, the annual returns Calpers has achieved since it began investing in hedge funds in 2002 have been modest at best: only a 3.5% annual rate of return. The percentage is far, far less than what it initially had been promised by Caplers’ hedge fund managers, according to the New York Times story.

As for hedge funds, many are in no position to question the demands of investors like Calpers. In the past year, hedge fund assets have collectively fallen by nearly 40% to $1.2 trillion due to record losses and redemption requests. Adding to the industry’s blight are state and federal investigations into whether certain hedge funds made illegal payments to intermediaries in order to gain access to state public pension funds.

Among the hedge firms under investigation by the Securities and Exchange Commission (SEC) and New York Attorney Andrew Cuomo as having paid fees to garner business from the New York State Common Retirement Fund are the Carlyle Group, Odyssey Investment Partners, and HFV Asset Management LP. On April 15, Barrett Wissman, an executive at HFV, pleaded guilty to securities fraud and agreed to a $12 million settlement as part of the investigation.

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 a Morgan Keegan lawsuit are finally getting their day in court. Recent decisions handed down by Financial Institution Regulatory Authority (FINRA) panels are ruling in favor of investors for their losses in several RMK bond funds that plummeted in value after Memphis based Morgan Keegan secretly gambled and lost with bets on subprime mortgage securities, collateral debt obligations (CDOs) and other risky debt instruments. 

During the past two months, FINRA has awarded investors more than $1.6 million for their claims against the embattled investment bank. The most recent award of $950,000 went to Jerome Woods, a former football player for the Kansas City Chiefs.

Woods’ win is the sixth consecutive win for investors. Moving forward, Morgan Keegan faces hundreds of additional claims from investors who collectively lost $2 billion between March 31, 2007 and March 31, 2008. Some of the Morgan Keegan bond funds in question have plummeted in value by as much as 95%.

At the center of investors’ claims are charges of misrepresentation and negligence on the part of Morgan Keegan. Specifically, the RMK funds that stumbled did so because of investments in high risk subprime mortgages and collateralized debt obligations, a fact that investors contend Morgan Keegan never disclosed to them.

Moreover, recent documents and testimony involving investor claims with FINRA show that Morgan Keegan apparently gave advanced notice to institutional clients and large retail clients to get out of the troubled funds ahead of small retail investors.

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. 

Losses totaling $36 million in Oregon’s 529 college savings plan has prompted the state to sue OppenheimerFunds, charging that the money manager made risky investments that were never disclosed to plan participants. Oregon filed its lawsuit against Oppenheimer on April 13, according to an April 14 article in the Wall Street Journal, citing violations of securities law, breach of contract, breach of fiduciary duty, negligence and negligent misrepresentation.

Oregon’s charges against Oppenheimer focus on the Oppenheimer Core Bond Fund, which served as the conservative portion of the investing options offered in the state’s $770 million Oregon College Savings Plan. In late 2007 or early 2008, however, the conservative option turned considerably more risky, with the Core Bond Fund losing nearly 40% of its value. By comparison, its benchmark index, the Barclays Capital Aggregate Bond Index, rose 5.2%. 

In the complaint, Oregon states that “the Core Bond Fund was no longer a plain bond fund. It had become a hedge fund like investment fund that took extreme risks.”

Those risks included credit default swaps, total return swaps, derivatives and other high risk, toxic instruments that were a far cry from suitable investments for conservative and ultraconservative portfolios.

On March 27, Oregon replaced the Core Bond Fund with the Dreyfus Bond Market Index Fund. Another Oppenheimer fund, the Limited Term Government Bond Fund, was replaced as well with the Vanguard Short Term Bond Index Fund.

OppenheimerFunds, which is a unit of Massachusetts Mutual Life Insurance Co., also faces scrutiny by attorney generals in four other states for losses suffered in college savings plans. The states include Texas, New Mexico, Illinois and Maine. Officials in those states currently are jointly exploring whether OppenheimerFunds violated its fiduciary duty to investors in their 529 plans.

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.