Archive for the “ABS & CDOs” Category

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. 

A champion it’s not. Investments in high-risk mortgage-backed securities and credit-default swaps have pummeled the Oppenheimer Champion Income Fund (OPCHX). OppenheimerFunds’ flagship junk-bond mutual fund recorded one of the worst performances among its bond-fund peers in 2008, with assets losing more than 80% of their value. Only the Regions Morgan Keegan Select High Income Fund fared worse.

Problems for Oppenheimer’s Champion Income Fund first came to light in 2006, when fund manager Angelo Manioudakis started to focus on a risky - and, some say questionable - investing strategy that involved total-return swaps. A total return swap is a financial contact that transfers both the credit risk and market risk of an underlying asset from one party to another.

In the case of the Champion Income Fund, the underlying assets were tied to securities on commercial mortgages. Following the burst of the housing bubble in the summer of 2007 and the subsequent onset of the subprime debacle, Manioudakis’ gamble that the securities would increase in value never saw the light of day.

Making matters even worse for the Champion Income Fund: credit-default swaps. Through at least September 2008, the fund sold credit-default swaps on companies that already were in deep financial trouble - companies like Lehman Brothers Holdings, which filed for bankruptcy protection on Sept. 15, and American International Group (AIG), which has required two emergency bailouts from the government in order to stay afloat.

The financial devastation caused by wrong-way bets placed on derivatives goes far beyond just investors of the Champion Income Fund. At least 10% or more of the fund is held by other Oppenheimer funds, as well.

Unfortunately, investors never realized the level of risks they were taking on with the Champion Income Fund. That’s because Oppenheimer’s financial advisors marketed the fund as a conservative, high-income bond fund, one that presented only minimal degrees of risk. Even the fund’s own prospectus - as well as a revised version that was created after the fund began to lose vast amounts of money - described the Champion Income Fund as an appropriate investment for retirees, with an overall investment strategy that focused on building a broad and diversified portfolio to help moderate the special risks of investing in high-yield debt instruments.

Investors who’ve lost millions of dollars because of Oppenheimer’s irresponsible gamble on some of the riskiest and most toxic derivatives possible know otherwise.

In related OppenheimerFunds news, thousands of Illinois families are up in arms over unexpected and dramatic losses in the state’s Bright Start College Savings program and what they say is the mismanagement of the Oppenheimer Core Plus Bond Fund (OPIGX).

The fund, which was supposed to be invested in conservative investment-grade bonds and U.S. government securities but instead took on assets in risky mortgage-backed securities, credit default swaps and other toxic investments, lost more than 40% of its market value last year. By comparison, similar funds managed by other investment firms posted positive returns of about 5%.

Illinois State Treasurer Alexi Giannoulias is preparing to sue OppenheimerFunds in an attempt to recover the $85 million that the Bright Start College Savings program has lost thus far.  

Like Oppenheimer’s Champion Income Fund, the Core Plus Bond Fund was managed under the not-so-watchful eye of Angelo Manioudakis.  Besides Illinois, the Oppenheimer Core Plus Fund is included in 529 college savings plans in Oregon, Texas, Maine, and New Mexico.

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. 

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.

Memphis-based Regions Morgan Keegan (RMK) may advertise “exceptional due diligence” as what sets it apart from competitors, but investors in six collapsed RMK mutual funds would say otherwise.

The RMK funds, including the RMK Select Intermediate Bond Fund (MKIBX) and the Select High Income Fund (MKHIX), are some of the bond industry’s biggest failures on record. Some of the RMK funds have plummeted more than 80% in value since mid-2007 thanks to the actions of former manager James Kelsoe, who invested a huge chunk of the funds’ portfolios in toxic subprime paper.

A recently released paper by the Securities Litigation and Consulting Group (SLCG) sheds new light on how complex structured investment deals like those associated with the RMK funds have enabled Wall Street to create risky securities backed by even more risky securities. While the investment innovations may provide additional investing opportunities, they also present a dangerous downside. Their sheer complexity makes it difficult, if not impossible, for investors to fully comprehend the substantial risks they are unwittingly taking on.

Case in point: six Morgan Keegan bond funds - four closed-end funds (RMH, RHY, RMA and RSF) and two open-end funds (MKHIX and MKIBX) - that cost investors $2 billion in losses. Investors in these funds never knew that the funds’ holdings included hundreds of low-priority tranches of structured finance deals - deals that included high-risk collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs), and asset-backed securities (ABS).

In almost every case, the asset-backed securities held by the RMK funds were virtually always the most risky tranches in asset-backed securities deals, according to the SLCG paper. As an example, SLCG examined the portfolio of the RMK Multi-Sector High Income Fund (RHY), and identified whether the tranches held were senior or subordinated for 147 of its 161 asset and mortgage-backed securities. Only nine of the 147 tranches were senior; 138 of the 147 were subordinated.

Morgan Keegan always has been keen on letting investors know that it performs “in-depth and detailed evaluations” on all of the bond funds recommended to retail clients. The company’s so-called due diligence is supposedly one of the hallmarks of its operations. If that were the case, however, any evaluation that had been performed on the six RMK bond funds would have uncovered RMK’s misrepresentation of risky asset-backed securities as corporate bonds and preferred stocks, as well as disclosed the highly leveraged credit risk in the low-priority asset-backed securities held in the funds.

The bottom line: The catastrophic losses suffered by investors in the RMK funds did not have to happen. From the outset, Morgan Keegan failed to fully or accurately inform investors in its bond funds of the risks regarding the subordinated tranches that the funds held. Only after massive losses occurred did RMK reveal this critical detail.

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. 

For two years, Regions Morgan Keegan (RMK) has been at the center of legal controversy, with numerous arbitration claims and class-action lawsuits filed on behalf of investors who say the investment firm marketed six of its mutual funds as low-risk and conservative when in actuality they were tied to toxic subprime mortgage securities and other risky debt.

Backing up investors’ claims is a new study paper issued by the Securities Litigation and Consulting Group (SLCG). The document, titled Regions Morgan Keegan: The Abuse of Structured Finance, details how Regions Morgan Keegan misrepresented hundreds of millions of dollars of high-risk mortgage-backed securities as corporate bonds and preferred stocks.

The six funds in question were open-end and closed-end funds. All contained over-the-top concentrations of low-priority tranches in structured finance products backed by risky debt. That means the tranches RMK purchased significantly increased investors’ exposure to the credit risk of the subprime mortgages, loans and bonds backing the tranches.

At the same time, the funds’ prospectuses failed to disclose the high levels of credit risk in which fund shareholders were being exposed to as a result of the low-priority tranches the funds’ portfolio manager had purchased.

In the end, the six RMK funds plummeted 62% on average in value, with investors losing $2 billion from March 31, 2007 to March 31, 2008. By comparison, similar bond funds posted positive returns or only modest losses.

The six RMK bond funds include: the Regions Morgan Keegan Select Intermediate Bond Fund A (MKIBX); Regions Morgan Keegan Select Intermediate Bond Fund C (RIBCX); Regions Morgan Keegan Select Intermediate Bond Fund I (RIBIX); Regions Morgan Keegan Select High Income Fund A (MKHIX); Regions Morgan Keegan Select High Income Fund C (RHICX); and the Regions Morgan Keegan Select High Income Fund I (RHIIX).

According to SLCG’s findings, the catastrophic losses experienced by the RMK funds were not, as Regions Morgan Keegan contends, the result of a “flight to quality” or a “mortgage meltdown.” Rather, the losses are attributed to the high-risk nature of the collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs), and asset-backed securities (ABS) held in the funds’ portfolios.

Investors, of course, had no way of knowing about the risks they were taking on. RMK never disclosed the risk factor until after the funds experienced outrageous losses.

Even more disturbing: Information in the SLCG study paper contends that four of the RMK closed-end funds actually were substantially more risky than their benchmark even prior to the sharp declines of 2007. From April 2006 to September 2006, the RMK funds were three times as volatile as their benchmark, and six times as volatile between October 2006 and March 2007 (even before the dramatic losses in the summer of 2007). From April 2007 to September 2007, the RMK funds were 12 times as volatile as their benchmark.

Additional findings from the Securities Litigation and Consulting Group document also suggest that fund managers at Regions Morgan Keegan were “smoothing” the NAV (net asset value) of the six funds by failing to use reasonable estimates of market prices in their NAV calculations.

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.