Archive for the “ABS & CDOs” Category

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. 

Investor losses in two nearly identical Schwab YieldPlus ultra short bond funds, the Schwab YieldPlus Select Shares (SWYSX) and the Schwab YieldPlus Investor Shares (SWYPX) have evoked a rash of arbitration claims with the Financial Industry Regulatory Authority (FINRA). At the center of these complaints are allegations that Charles Schwab and former fund manager Kimon Daifotis failed to represent the true risks of the funds, as well as disclose critical information about the toxic mortgage backed and asset backed securities the funds contained.

The alleged omissions and overconcentration of risky assets ultimately resulted in hundreds of thousands of dollars in losses for investors, many of whom are retirees. In July 2007, the Schwab YieldPlus Fund net assets totaled $13.5 billion; by May 31, 2008, assets had plunged by an astonishing 96% to $507 million.

By comparison, shares of other ultra short-term bond funds lost on average less than 2% of their value from June 30, 2007, to June 30, 2008. In that same time period, shares of the Schwab YieldPlus Fund fell by more than 33%.

Investors who are filing lawsuits and arbitration claims against Charles Schwab contend that the company intentionally used deceptive marketing practices to sell the Schwab YieldPlus Fund, representing it as a safe, cash alternative comparable to certificates of deposit and highly suitable for risk-wary investors. 

Instead, the Schwab YieldPlus Fund loaded up with risky and toxic mortgage and asset backed securities, a fact that exposed investors to greater risks and the potential of substantial financial losses.

Meanwhile, as investors were lulled into what they thought to be a conservative ultra short bond fund, Schwab was raking in big profits. According to an investor claim filed against Charles Schwab in March 2009, Charles Schwab Investment Management, a wholly owned subsidiary of parent Charles Schwab, saw its annual management fees of the Schwab YieldPlus Fund grow by 600% from the years 2003 to 2007. During that time, Schwab earned management fees of $76 million.

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. 

Investors keep scoring big in arbitration claims involving Morgan Keegan fraud. The latest win is by Jerome Woods, a former professional football player for the Kansas City Chiefs who just cinched a $950,000 arbitration award as a result of his claim with the Financial Industry Regulatory Authority (FINRA) against Memphis-based Morgan Keegan.

The decision in favor of Woods is FINRA’s largest award to date related to claims by investors for the financial losses they suffered in a group of Regions Morgan Keegan (RMK) mutual bond funds.

As in the majority of arbitration claims against Morgan Keegan, the basis of Woods’ complaint focused on the bank’s mismanagement of his investments, as well as Morgan Keegan’s failure to disclose the risks associated with various RMK bond funds. Specifically, the funds contained a high concentration of securities linked to risky subprime mortgages, loans and other speculative debt, a fact that investors say fund managers intentionally kept hidden. 

Investors who purchased the Morgan Keegan bond funds in question initially thought they were getting a diversified portfolio of relatively conservative corporate bonds and preferred stocks. Later, however, a compendium of evidence would reveal that neither Morgan Keegan’s management nor the informational documents on the funds accurately portrayed the true level of credit risk investors had taken on. It was only after the RMK funds plummeted by more than 60% on average in value that investors finally learned that Morgan Keegan had purchased high-risk, low-priority tranches of toxic collateralized debt obligations (CDOs).

Ultimately, Morgan Keegan’s misguided decisions caused investors to lose $2 billion from March 31, 2007 to March 31, 2008.

The massive financial losses have since spurred a wave of investor lawsuits and arbitration claims against Morgan Keegan. In addition to FINRA’s $950,000 award to Woods, other recent investor arbitration wins include $100,000 to Memphis sports broadcaster Tim McCarver; $267,711 plus interest to two California brothers; $187,215 to an Alabama retired couple; and$18,000 to Jo L. Wright, an Indiana church secretary. Investors in the latter two cases were represented by Maddox Hargett & Caruso.

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.

Some blame Wall Street. Others fault borrowers who overextended themselves. And some say the lead culprit behind the nation’s financial crisis is an accounting rule known as the Financial Accounting Standards Board’s Rule 157, or FAS 157. 

The purpose of FAS 157 is to give companies guidance on how to come up with market, or fair, values, for investments. This includes hard-to-value and exotic investments like collateralized debt obligations (CDOs) and other subprime-related debt. According to FAS 157, the assets must be valued at current market prices. 

And therein is the problem. In some cases, no market exists for these investments. Even without a market, companies must still assign a value to their assets accordingly. Sometimes that means marking the value down to fire-sale prices. 

Critics of FAS 157 say the rule is why investment banks have been forced to take billions and billions of dollars in write downs on losses related to CDOs and other “untouchable” investments.  

Proponents say FAS 157 brings more transparency to the market itself, strengthening the risk management practices of investment banks and publicly traded companies and giving investors clarity about the worth of their investments. 

Now the Financial Accounting Standards Board is preparing to vote on an overhaul of mark-to-market accounting rules. Under apparent pressure from lawmakers and financial banks, the board is proposing changes that will allow companies to use “significant judgment” when it comes to assigning value to their assets. In addition, the proposed changes will let companies reduce the amount of write-downs they must take on illiquid investments.  

In other words, companies will be able to handpick the values most appealing to them and put those that create further turmoil to their balance sheets on the backburner.  

As for investors, FAS 157’s proposed revisions not only create inconsistencies in valuations, but also will likely weaken an already waning confidence in Wall Street even further.  

A final vote on FAS 157 revisions is scheduled for April 2.  

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.

On the heels of several arbitration awards by Financial Industry Regulatory Authority (FINRA) panels, more investors who lost money in a group of Regions Morgan Keegan bond funds are prepping for legal action. The common denominator in their claims: Memphis-based Regions Morgan Keegan (RMK) and its managers allegedly hid the credit risks of various RMK bond funds. It wasn’t until after the funds plummeted in value that the brokerage firm finally came clean with investors.

Some of the RMK funds at the center of investors’ claims have seen their value fall by more than 90% because of ties to high risk and toxic collateral debt obligations (CDOs). Ultimately, investors suffered losses of more than $2 billion.

At issue is the alleged deception displayed by Regions Morgan Keegan and its management. According to investor complaints, Regions Morgan Keegan marketed and sold the bond funds as “relatively conservative” investments. Investors never knew about the hidden risks of the funds or the fact that mortgage-backed securities and collateralized debt obligations comprised more than 50% of each fund’s portfolio.

So far, FINRA has returned awards totaling more than $600,000 for investor claims over losses suffered in the RMK bond funds. The most recent awards were decided in March 2009 by FINRA arbitration panels in Indiana and Alabama.

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. 

Another victory has been scored for investors who lost money in Morgan Keegan & Co. bond funds. On March 12, a Financial Industry Regulatory Authority (FINRA) panel awarded Jo L. Wright, a church secretary from Whitestown, Indiana, $18,000 for losses she suffered in bond funds managed by Morgan Keegan.

For more than a year, Morgan Keegan has been the subject of numerous complaints and investigations regarding a group of open end and closed end bond funds that were invested heavily in high risk asset backed securities.

As reported in a March 19 article in the Indianapolis Star, during 2007, when the crash of the subprime mortgage market took hold, individuals who purchased shares of certain Morgan Keegan funds began to suffer big financial losses, losses that investors say could have been avoided if only Morgan Keegan had disclosed the inherent risks associated with their investments.

Wright, who lost $11,000 in the funds, served as the first Indiana case to go to an arbitration hearing, said her lawyer, Mark E. Maddox of Maddox Hargett & Caruso, in the Indianapolis Star article.

Memphis based Morgan Keegan is a division of Regions Financial Corp.

Wright’s introduction to Morgan Keegan occurred via her local Indiana Regions bank branch manager. At the time of the referral, Wright had her money in a certificate of deposit and a savings account.

On the recommendation of the bank manager and Morgan Keegan, Wright transferred her money into the Morgan Keegan Select Intermediate Bond Fund, which she believed was a safe, conservative but higher-yielding investment.

According to the FINRA complaint, Wright was never informed that the Morgan Keegan fund was considered a risky investment, nor did she ever receive a prospectus outlining any risks or details about the fund.

Wright is far from alone. Many investors contend Morgan Keegan intentionally withheld critical information about the Morgan Keegan Select Intermediate Bond Fund. Instead, management told them that any risk of principal loss was virtually non-existent and that investing in the Morgan Keegan Select Intermediate Bond Fund was appropriate for the “most conservative-minded investors.”

Ultimately, the Morgan Keegan Select Intermediate Bond Fund virtually collapsed in value because of its high concentration of holdings in collateralized debt obligations (CDOs) and other speculative investments. The losses in the fund, as well as other Morgan Keegan funds, have since spawned a wave of securities litigation and arbitration claims, with regulators continuing to look into the cause of the funds’ meltdown.

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.

Warren Buffett famously called them “financial weapons of mass destruction,” and as it turns out, he was right. Collateral debt obligations (CDOs) not only brought down investment powerhouse Bear Stearns, but eventually also wreaked havoc on the nation’s entire financial system.

The exotic world of structured finance products is the subject of new book by author William Cohan, a former Wall Street banker for 17 years and best-selling author of The Last Tycoons: The Secret History of Lazard Frères & Co. Cohan’s new book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, explores the ripple effects of CDOs and how one of the country’s most formidable investment firms ultimately would bring about its own demise by betting heavily on these toxic mortgage-backed securities.

An excerpt of Cohan’s book is in the March 4 issue of Fortune magazine. Among other things, the article traces how an ill-fated decision by Bear Stearns management to become big players of CDOs and other risky financial instruments produced disastrous consequences for Bear Stearns and, later, financial markets everywhere.

At the center of Cohan’s story, of course, are Ralph Cioffi and Matthew Tannin, the two hedge fund managers largely credited with bringing Bear Stearns to its knees after losing billions in two collapsed hedge funds, while costing thousands of unsuspecting investors their life savings.

On June 19, 2008, the two men were arrested for allegedly misleading investors about the financial state of the two hedge funds they managed, the High Grade Strategy and Enhanced High Grade funds. Among other charges, Cioffi and Tannin were accused of deceiving their own investors and the funds’ institutional counterparts by fraudulently concealing from them the full extent of the funds’ deepening troubles.

Both the High Grade Strategy and Enhanced High Grade hedge funds failed in June 2007. Before crashing, the funds had more than $20 billion in assets.

The fall of 85-year-old Bear Stearns is without precedent. The company first joined the ranks of publicly traded Wall Street firms in October 1985. The share price of its initial public offering was $6. In January 2007, Bear Stearns stock peaked at $171.50. Throughout its entire history of doing business, the investment firm never had a losing quarter.

Then, in November 2007, the world changed for Bear Stearns. The company incurred a net loss of $854 million after lowering the valuation of its inventory of mortgage securities. Several months later, news of Cioffi and Tannin’s subterfuge came to light. And the rest, as they say, is history.

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William Cohan is set for release on March 10.

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. 

Hidden risks and bad bets by fund managers have translated into huge financial losses for investors in the Schwab YieldPlus Fund (SWYPX). Many investors now fault the marketing techniques used by Charles Schwab Corporation, accusing the company of pitching and selling Schwab YieldPlus as a higher-yielding alternative to money- market funds.

In truth, the Schwab YieldPlus Fund was overexposed to high-risk mortgage-backed securities. That fact, as well as information regarding the fund’s concentration in toxic collateralized obligations (CDOs), was never revealed to investors. The alleged deception not only exposed investors to substantially more risk but also compromised the liquidity of the fund itself.

San Francisco-based Charles Schwab first began offering shares of the Schwab YieldPlus Fund in 1999. At the time - as is the case even today - documents and sales materials characterized the fund as “providing higher yields on cash with only marginally higher risk.” Also touted were the fund’s investments, which would primarily be made in “high-quality investment-grade bonds,” according to corporate literature on the Schwab YieldPlus Fund.

Later, investors discovered the YieldPlus Fund was far from well-diversified or low risk. Instead, more than 50% of the fund’s assets had been invested in toxic mortgage-backed securities. The fact that Schwab management also relied on investment ratings from credit agencies paid by their own broker-dealers only added to the fund’s eventual financial troubles. In addition, the net asset values of the Schwab YieldPlus Fund ultimately turned out to be highly speculative and reportedly inflated.

The Schwab YieldPlus Fund is an ultra-short bond fund. According to a Nov. 17, 2007, YieldPlus prospectus, the fund is designed to generate income with minimal changes in share price. In marketing the fund to investors, Schwab managers and the company’s own Web site highlighted the fact that the safety of the YieldPlus Fund would be enhanced by the short duration of holdings in its portfolio. Both statements would later be proved inaccurate.

For risk-averse retirees living on a fixed income, the marketing hype produced a quick sell but ultimately devastating financial results. Illiquidity and investor redemptions took the Schwab YieldPlus Fund from nearly a $14 billion fund in July 2007 to a fund whose net assets had fallen to $500 million one year later.

Today, investors who’ve suffered losses in the Schwab YieldPlus Fund continue to file arbitration claims with the Financial Industry Regulatory Authority (FINRA) in an attempt to recover their financial investments. In October, one of those investors, Jeffrey Nielson, was awarded $542,340 as part of an arbitration claim against his broker for making misrepresentations and false statements about the extent of risk associated with the Schwab Yield PlusFund.

Many believe the October 2008 ruling by FINRA could be an omen of things to come for other investors with losses in the Schwab YieldPlus Fund. In addition to the increase in arbitration claims filed against Charles Schwab for its alleged mismanagement of the Schwab YieldPlus Fund, class action lawsuits also are underway. As in the arbitration claims, the lawsuits charge Charles Schwab of misrepresenting the Schwab YieldPlus Fund as a safe alternative to money market funds and omitting key facts, including the risks tied to the fund’s high concentration of subprime holdings.

At one time, the biggest holders in the YieldPlus Fund were other Charles Schwab funds. But, in what can only be described as a true vote of no-confidence, the company said in April 2008 that no Schwab funds now held the YieldPlus Fund.

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.

Another hedge fund bites the dust and wipes out investors. This time, massive losses on high-risk collateralized debt obligations (CDOs) have forced Highland Capital Management LP to close the Highland CDO Opportunity Fund. It is the third fund to shutter under the Dallas-based investment group since October 2008.

At one time, the Highland CDO Opportunity Fund ranked among the top 50 hedge funds, placing third in an October 2007 report by Barron’s magazine. The notoriety ended last year, however, when the fund - which previously achieved an average annual return of about 44% for three years straight - and the CDOs it invested in plunged in value.

As reported Feb. 20 by Bloomberg, Highland Capital is the largest shareholder in the Highland CDO Opportunity Fund. The firm also is considered one of the biggest players in the CDO world itself. That position, however, has suffered in recent months, as the value of CDOs continues to crumble dramatically.

In October, losses on high-risk loans and other types of toxic debt caused Highland Capital to close two other hedge funds: the Crusader Fund and the Credit Strategies Fund. Together, the funds had assets totaling more than $1.5 billion.

Now, Highland Capital is facing more problems. On Jan. 23, the Mary E. Bivins Foundation sued Highland on charges that the company reneged on a $1.8 million redemption request filed before the closing of the Highland Credit Strategies Fund. According to the lawsuit, the Amarillo-based not-for-profit invested $1.75 million in the Highland Credit Strategies Fund in 2006. Two years later, when the foundation wanted out of the fund, Highland accepted its request but reportedly delayed the foundation’s payout (valued at $1.9 million). In October, Highland announced plans to wind down the fund entirely. 

To date, only $80,000 has been paid to Bivins.

Hedge funds in general are in meltdown mode lately. The financial crisis, de-leveraging, client withdrawals and illiquid assets all have contributed to the average hedge fund losing 18.3% in 2008. About 700 hedge funds closed during the first nine months of 2008, according to Hedge Fund Research. For the entire year, 920 funds may have been shuttered - a figure that eclipses the previous record high of 848 closures in 2005.

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 is big win for institutional investors trapped in auction-rate securities (ARS). Earlier today, the Financial Industry Regulatory Authority (FINRA) announced that Credit Suisse Group must pay STMicroelectronics NV more than $400 million to resolve claims that it misled the semiconductor maker into buying auction-rate securities.

The award is the biggest to date for investors not covered by last year’s ARS settlements, which concentrated solely on retail investors and small businesses. More importantly, the award backs up claims by institutional investors that they, too, were misled about the risks of auction-rate securities.

As reported Feb. 13 by Bloomberg, Credit Suisse Securities will pay $400 million in damages and more than $6.5 million in fees as part of FINRA’s latest decision involving auction-rate securities.  

Since February 2008, when the market for auction-rate securities collapsed, both individual and institutional investors have faced a financial nightmare. Overnight, the supposed cash-like instruments became illiquid investments no one wanted to buy.

In the case of STMicroelectronics, the semiconductor maker said that it initially instructed brokers at Credit Suisse to invest in top-rated securities backed by student loans. Instead, STMicroelectronics says the company invested its cash in unauthorized and unsuitable investments, including toxic and highly risky collateralized debt obligations (CDOs).

STMicroelectronics also believed that Credit Suisse was aware that its brokers were moving clients’ accounts into risky auction-rate securities as part of a scheme to get the securities out of its own inventory and earn higher fees for its services.

FINRA’s Feb. 13 decision would appear to agree. If you are a victim of auction-rate securities fraud, now is the time to act. Call us today.

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.