Archive for June, 2009

The Wall Street Journal first broke the story in December 2007 when it reported that Columbia Management was shutting down its Columbia Strategic Cash Portfolio fund. The reason behind the liquidation of one of largest enhanced cash funds began with a $20 billion withdrawal from a single institutional investor.  Columbia Management’s, Strategic Cash Portfolio troubles stem to extensive exposure to risky asset-backed securities and structured investment vehicles (SIVs) tied to real-estate mortgages.

Columbia Management is the investment arm of Bank of America. At the time the Columbia Strategic Cash Portfolio was shuttered, only a few investors were able to liquidate their positions in the fund. Others were given their pro rata share of the fund’s underlying securities in lieu of cash.  Still other shareholders were told they could cash out at the fund’s current share price at a loss.

The Columbia Strategic Cash Portfolio was marketed as an enhanced cash fund and a suitable substitute for money market accounts.  In reality, the risks of this investment were significantly greater than the risks associated with cash and cash like investments.

Today, as investors evaluate liquidating the securities distributed to them from their Strategic Cash Portfolios, they are determining they have sustained significant losses.

Investors that were sold shares in the Columbia Strategic Cash Portfolio as a suitable cash equivalent might have strong claims against Columbia Management and Bank of America relating to the manner in which the fund was presented versus how it was invested.

Our affiliation of lawyers is actively involved in advising institutional investors in evaluating their legal options when confronted with significant investment losses.

Many enhanced cash investment products were poor segregates for cash. Case in point: The Columbia Strategic Cash Portfolio fund for institutional investors, managed by Columbia Management of Boston, a division of Bank of America. In less than two months, losses and liquidations tied to the credit and mortgage crisis caused the fund to plummet in value from $40 billion to less than $11 billion. The Columbia Strategic Cash Portfolio was frozen in December 2007 when an institutional investor pulled out $20 billion.

Described by fund managers as an alternative to money-market funds, the Columbia Strategic Cash Portfolio was an enhanced investment fund designed to offer institutional investors many of the same features associated with traditional money-market funds with only moderately higher risk levels. Just like “a money-market fund,” the Columbia Strategic Cash Portfolio was promoted to provide income through a short-term, low risk investment portfolio.

From our perspective, the Columbia Strategic Cash Portfolio inappropriately invested in  high risk structured investment vehicles (SIVs) and mortgage dependent securities that subjected investors to inappropriate risks and eventually significant losses. When the subprime mortgage debacle began to unfold in the summer of 2007, the Columbia Strategic Cash Portfolio fund collapsed under the weight of high-risk mortgage related investments.

Since then, a number of institutional investors have come forth with claims that the Columbia Strategic Cash Portfolio fund did not adequately disclose the high level of risks associated with its investment activity. Specifically, some institutional investors believe Columbia Management inappropriately concentrated the Strategic Cash Portfolio in securities that were illiquid, had to0 much default risk and were too closely tied to real estate.

Unlike traditional money market funds, enhanced money funds like the Columbia Strategic Cash Portfolio are not required to maintain a $1 net asset value. However, because many investors believed the Columbia Strategic Cash Portfolio was a suitable cash alternative, they thought similar requirements were mandated by the Columbia Strategic Cash Portfolio and that by the dictates of its investments guidelines, the fund would invest in short term, liquid, safe investments without inappropriate concentrations in any sector or industry.  

At the time the Columbia Strategic Cash Portfolio was shuttered, only a few investors were able to liquidate their positions in the fund. Many investors were given their pro rata share of the fund’s underlying securities in lieu of cash. Still other shareholders were told they could cash out at the fund’s current share price, which at the time generally constituted a loss.

The Columbia Strategic Cash Portfolio was marketed as an enhanced cash fund and a suitable substitute for money market accounts to institutional investors.  In reality, the risks associated with this investment were significantly greater than the risks associated with cash and cash like investments.  As investors begin to evaluate liquidating the securities distributed to them from their Strategic Cash Portfolios, they are determining they have sustained significant losses.

Our affiliation of lawyers is actively involved in advising institutional investors of their legal options when confronted with significant investment losses.

Despite the fact it has numerous lawsuits and arbitration claims pending over a group of failed hedge funds known as ASTA/MAT - not to mention having received some $45 billion of federal govern ment bailout money - Citigroup plans to raise the base salaries of its investment bankers and traders by as much as 50%. 

As reported June 24 by Bloomberg, Citigroup isn’t the only financial services firm instituting big salary increases for some of their top executives. Morgan Stanley and UBS plan to do so, as well. 

Over the past year, Citigroup been rocked by investor complaints and lawsuits connected to the failure of ASTA/MAT, a group of six hedge funds sold under the brand names of ASTA and MAT. Investors contend Citigroup misrepresented the funds as safe, conservative investments, a desirable alternative to traditional bond funds that would produce tax-advantages and reliable cash flows. 

Millions of dollars in losses later, investors learned that Citigroup had employed a highly risky investing strategy known as municipal bond arbitrage, which entailed borrowing approximately $8 for every $1 raised. When the credit and bond markets began to experience trouble in the summer of 2007, ASTA/MAT started to lose value. Ultimately, the funds plummeted by some 90%.

Citigroup followed up the financial problems of ASTA/MAT by offering to compensate investors for their losses. The plan, however, translated into refunding only 45% to 55% of the value in their portfolios. To top it off, the deal required investors to forego future litigation against Citigroup.

Meanwhile, the New York-based bank is announcing pay hikes for certain employees.

“They just don’t get it,” said Senate Banking Committee Chairman Christopher Dodd, D-Conn., of Citigroup. 

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.

Thousands of institutional investors that bought auction-rate securities on the premise they were cash equivalents are still waiting for their liquidity to materialize. By and large, corporate investors were not included in the settlement agreements that took place last summer when Wall Street banks and investment firms agreed to buy back billions of dollars worth of auction-rate securities from retail investors and small businesses as a way to settle state and federal charges alleging misrepresentation of the instruments. Instead, institutional investors continue to be left waiting in the wings, with no ARS solution in sight.

Auction-rate securities are long-term bonds or preferred stocks that pay interest or dividends at rates determined through auctions held every seven, 14 or 28 days. In February 2008, the market for auction-rate securities essentially collapsed, leaving both retail and institutional investors holding a supposedly liquid investment now considered worthless. 

Approximately $330 billion of auction-rate securities were outstanding when the auctions began collapsing in February. About $160 billion of auction rates remain outstanding following the settlements, according to a May 24, 2009, article in Investment News, with most paying very low “penalty” rates under the terms of the failed auctions.

The ARS buyback programs that were announced by brokerage firms in August 2008 failed to provide liquidity relief to institutional investors, offering instead only vague commitments to work with corporate investors on finding a solution for their ARS holdings. Even then, it could be years before institutional investors see any of their auction-rate securities redeemed for cash. 

Meanwhile, companies such as Citigroup, Wachovia, Merrill Lynch, and UBS Financial Services all face a growing list of individual lawsuits from institutional investors that have massive amounts of money still tied up in illiquid auction-rate bonds. To date, several investors have scored major legal victories in their ARS cases, including a February 2009 decision by a Financial Industry Regulatory Authority (FINRA) arbitration panel that awarded European chipmaker STMicroelectronics $406 million over a dispute with Swiss bank Credit Suisse Group and the unauthorized purchase of 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.

Citigroup CEO Vikram Pandit can’t seem to catch a break these days. And with good eason. For months, the bank and its leader have been embroiled in investor lawsuits connected to the marketing and sale of a group of proprietary Citigroup hedge funds sold under the brand names ASTA and MAT. Marketed to investors as safe fixed-income funds with losses not to exceed 5%, the hedge funds were later crucified by the credit crunch. Ultimately, the value of the funds fell dramatically - between 60% to 80% - and cost many investors their life savings.

Legal issues surrounding ASTA/MAT aren’t the only problems facing Pandit. Adding to his woes: $36 billion of net losses during the past six quarters.

More criticism was levied on Pandit last week courtesy of Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC). In a story appearing June 5 in the Wall Street Journal, it was reported that Bair’s office had been maneuvering to oust various members of Citigroup’s top executives. Specific individuals were not identified in the Wall Street Journal story, but Pandit’s name was rumored to be among those on Bair’s list.

Adding fuel to Citi’s management shake-up rumor mill is the apparent delay of a stock swap agreement between the U.S. Treasury Department and Citigroup. Announced three months ago, the deal entails converting $53 billion of Citigroup preferred stock into common shares, giving the U.S. government a 34% stake in the bank.

Another black mark occurred for Citigroup on June 1, which signaled the bank’s final day on as part of the Dow Jones Industrial Average. On Monday, June 8, Citigroup was replaced by The Travelers Companies.

Citigroup, which is the recipient of $45 billion in taxpayer funds under the federal government’s Troubled Asset Relief Program (TARP), has watched its stock deteriorate for more than a year now. Since mid-January, Citigroup shares have traded below $5. On June 8, the stock closed at a shocking low of $3.42; by comparison, the price was $20.48 at this same time last year.

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.

For more than a year now, investors who lost up to 95% of their money in a group of collapsed mutual funds have been engaged in a full-on legal battle with Memphis-based Morgan Keegan as they try to recover their financial losses. The good news: Many investors are winning. In May, eight arbitration decisions were announced in their favor by the Financial Institution Regulatory Authority (FINRA).

As reported June 3, 2009, by the Memphis Commercial Appeal, Morgan Keegan accounted for nearly 16% of the 89 arbitration decisions announced last month by FINRA.

The litigation against Morgan Keegan involves several bond funds that plummeted in value following the onset of the subprime mortgage crisis. According to investors, Morgan Keegan deliberately misrepresented hundreds of millions of dollars of leveraged asset-backed securities as corporate bonds and preferred stocks to make the funds seem more diversified and less risky than they actually were. In truth, the funds were loaded with low-quality, high-risk collateral debt obligations (CDOs).

As a result of the alleged deception, investors in the Regions Morgan Keegan bond funds collectively sustained more than $2 billion in losses in 2007.

In 2008, Hyperion Brookfield Asset Management took over the management responsibilities for seven of the troubled Morgan Keegan funds. In January 2009, Hyperion changed the names of the funds to reflect its brand name, Helios. The funds include:

• Helios Select High Income Fund: HIFAX (Previously MKHIX)
• Helios Select Intermediate Income Fund: HSIBX? (Previously MKIBX)
• Helios Select Short Term Bond Fund: Remains as MSBIX
• Helios Advantage Income Fund: HAV (Previously RMA)
• Helios High Income Fund: HIH (Previously RMH)
• Helios Multi-Sector High Income Fund: HMH (Previously RHY)
• HMH Helios Strategic Income Fund: HSA (Previously RSF)

The latest legal victory for investors who suffered losses in the Morgan Keegan funds occurred on June 4 when a FINRA arbitration panel in Boca Raton, Florida, awarded $431,000 to Philip Richardson on his claim of “negligence” against Morgan Keegan for the sale of the RMK Select High Yield Bond Fund (MKHIX) and the RMK Select Intermediate Bond Fund (MKIBX).

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.

Securities regulators in New Hampshire have accused a unit of UBS AG, Switzerland’s largest bank, of recommending unsuitable investments to customers who put their money into complex securities underwritten by Lehman Brothers Holdings, Inc.

According to the New Hampshire Bureau of Securities Regulation, UBS allegedly represented the securities as “safe” investments to clients, guaranteeing them “principal protection.”

As it turns out, following the September 2008 bankruptcy filing of Lehman Brothers - which is the largest in U.S. history at more than $600 billion in debt - many of these same investors will likely lose the majority of their supposed principal-protected investment. Additionally, New Hampshire regulators also contend UBS failed to warn investors about the potential risks of the structured finance products once Lehman itself began to experience financial troubles.

As reported June 4 by the Wall Street Journal, New Hampshire regulators filed the civil complaint against UBS on Wednesday, June 3.

In a statement, Jeff Spill, New Hampshire’s deputy director of securities regulation for enforcement, said UBS presented “the structured notes as simple, safe investments when in fact they are highly volatile and are subject to shifting 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.

Auction-rate securities (ARS) are once again making news. This time it’s in the state of Virginia, which has just filed a lawsuit against investment broker Stifel, Nicolaus & Co. over its sale of auction-rate securities to Virginia investors.

Among the charges, the suit contends St. Louis-based Stifel Nicolaus sold $8.4 million worth of auction-rate securities to investors while touting them as liquid, cash investments.

“Retail clients were systematically and routinely informed that ARS were safe, conservative, liquid investments equivalent to cash or money market funds, a misleading and improper classification,” the complaint said.

Stifel denies any wrongdoing in the Virginia case, which is the same argument it made back in March when Missouri Secretary of State Robin Carnahan filed a lawsuit against Stifel and its Stifel, Nicolaus & Co. subsidiary for allegedly misleading Missouri customers who bought auction-rate securities. In addition, the Missouri suit charged Stifel of failing to come up with an adequate buy-back program to reimburse investors for their ARS losses. Yielding to pressure, Stifel agreed in April to buy back $180 million in frozen auction-rate securities from 1,200 Missouri investors.

Thousands of investors throughout the country have been in financial distress following the collapse of the auction-rate securities market in February 2008. Since then, intense backlash has been building against the investment firms that represented auction-rate securities as safe, cash-like investments to retail and institutional clients.

In reality, auction-rate securities are debt instruments with a long-term maturity. Interest rates are reset via an auction process, with auctions for the securities held every seven, 14 or 35 days by various brokerage firms that run the auctions. In February 2008, however, the same brokerage firms that conducted the auctions and sold the securities to investors decided to pull out of the ARS market and no longer financially back the instruments. As a result, investors, who thought auction-rate securities were the equivalent of cash investments, were left holding an illiquid investment no one wanted to buy.

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.