Archive for the “ABS & CDOs” Category

The number of arbitration claims and class-action lawsuits filed against Charles Schwab & Co. on behalf of investors who’ve lost millions of dollars in the Schwab YieldPlus Fund keeps piling up. The consistent theme in the claims: allegations that the fund’s managers misrepresented the risks of the YieldPlus Fund and failed to disclose information about the high-risk and toxic securities it held.

Investors in the Schwab Yield Plus Fund first began to realize the financial repercussions of the fund’s troubles following the onset of the subprime debacle in 2007. The fund, which is an ultra-short bond fund, had been marketed as a safe alternative to money-market funds with minimal risk. In truth, the Schwab Yield Plus Fund made large investments in risky subprime mortgage securities. When the housing market collapsed, so, too, did the Schwab YieldPlus Fund.

The apparent failure of Schwab management to diversify the fund’s investments exposed investors to substantially more risk than similar ultra-short bond funds. As it turns out, big stakes in mortgage-backed securities and collateral debt obligations (CDOs) comprised nearly half of the Schwab Yield Plus Fund’s net assets. Now, investors - many of whom were retirees - must face the unpleasant reality of seeing their nest eggs virtually tapped out.

At one time, the Schwab Yield Plus Fund was a $14 billion fund; following a run on investor redemptions, the fund has since lost more than 95% of that value. Today, it is left with just over $213 million in assets.

Meanwhile, many of the investors in the Schwab YieldPlus Fund are heading to court, holding those who promised enhanced bond returns with minimal risk accountable for their misrepresentation of this toxic 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. 

Corporate and institutional investors with significant holdings in collateralized debt obligations (CDOs), auction-rate securities and other structured finance products will be feeling the repercussions of a recent fair-value accounting ruling by the Securities and Exchange Commission (SEC). On Dec. 31, 2008, the SEC announced that it would not suspend FASB 157, the much-maligned measurement standard of “mark to market” accounting.

FASB 157 initially evolved as a result of the Enron scandal and various regulations contained in the Sarbanes Oxley Act. In October 2008, following the federal government’s approval of a $800 billion bailout package for U.S. financial industry, the SEC was asked to conduct a study on FASB 157 and its possible role in the recent failures of several large Wall Street investment banks and financial services firms.

On Dec. 31, the SEC recommended against suspending fair-value accounting standards. Rather, the 211-page report suggested making improvements to existing practices, including the development of additional guidance for determining the fair value of investments in inactive markets.

For corporate and institutional investors, this means they will be forced to value certain securities like CDOs and auction-rate holdings at their actual market values. In other words, they can no longer simply accept valuations provided by their brokerage firm or value holdings based on “guesstimates” by management.

In many instances, the value of these securities will be much lower than originally reported. For example, to determine the true market value of their CDO holdings, institutional investors must consider Merrill Lynch’s CDO sale in July of 2008 to Lone Star Funds. At the time of the sale, Merrill Lynch sold $30.6 billion of CDOs for 22% of their face value.

Moreover, the majority of the sale was funded via a loan from Merrill Lynch.

The bottom line: Investors are likely to be in for a rude wake-up call when they discover how little their holdings are actually worth today in the open market. Many of these investments were poorly structured from the outset, with investment firms failing to conduct due diligence on behalf of clients and downplaying the true risks of the products. Now, it appears a whole new can of worms has been opened.

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. 

The year of 2008 will likely be remembered as the year subprime mortgages and corporate scandals changed the face of Wall Street. Buried under the weight of the subprime crisis, financial institutions took nearly $800 billion in writedowns and losses. The value of stocks worldwide plummeted by more than $30 trillion. Goliath investment houses like Bear Stearns fell apart. State, municipal and corporate pension funds reported massive losses from investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs).

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra-Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value. Finally, there is Charles Schwab’s YieldPlus Fund. Marketed to investors as a safe alternative to cash, the fund suffered the most losses of any ultra-short bond fund in 2008, losing more than 40% of its value.

Investors, meanwhile, are suing all three funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities. And, in the case of Schwab’s YieldPlus Fund, several investors who have filed lawsuits claim various Schwab executives and fund manager Kimon Daifotis committed “acts of gross misconduct” by encouraging investors to hold on to their YieldPlus shares, while simultaneously dumping millions of YieldPlus shares from the portfolios of Schwab’s other mutual funds.

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested Dec. 11 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

For investors, the Madoff affair may well be the final nail in the coffin when it comes to confidence in Wall Street. Already shaken from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions - Wall Street has its work cut out in 2009 as it tries to renew investors’ faith once again.

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. 

The past 12 months may well be remembered as the year in which losses connected to hard-to-value securities reached unheard-of levels, as investment firms and financial institutions disclosed nearly $700 billion in write-downs for mortgage-backed securities, leveraged loans and other assets that plunged in value. Still, the coming new year could give 2008 a run for its money. That’s because of something called off-balance sheet financing.

For some time now, financial institutions have made profits hand over fist by financing business deals with off-balance sheet entities. In simple terms, off-balance sheet refers to when companies transfer certain projects, investments or underperforming assets such as collateral debt obligations (CDOs), subprime-mortgage securities or credit default swaps from the parent company to an off-balance-sheet subsidiary.

Once the assets have been removed from a company’s primary balance sheet, it gives the appearance that the parent is carrying less debt - and thereby less risk. And, because off-balance sheet entities are largely unregulated, there is no one to question otherwise.

As the concept of off-balance sheet financing gained favor with Wall Street, so too did massive leveraging. Collateral debt obligations, subprime securities, credit default swap contracts - all have increased exponentially in recent years. What Wall Street failed to consider as it took on these added risks was the possibility of failure, not to mention the systemic damage that the failure potentially could unleash on the nation’s financial system as a whole.

Case in point: Credit default swaps. Credit default swaps are privately negotiated contracts between two parties - a buyer and a seller. The buyer of a credit default swap pays a fee to the seller. In exchange for that fee, the seller agrees to cover the buyer’s losses in the event that the underlying financial instrument defaults. The problem is the credit-default swap market itself. It is a $60 trillion unregulated market where contracts are traded without any federal oversight to ensure buyers actually are capable of covering losses.

When credit markets began to freeze up this year, that’s exactly what happened to institutions like Bear Stearns, Lehman Brothers, American Insurance Group and Citigroup. At the time, all of the firms were holding high concentrations of mortgage-backed securities - the same assets they once used as collateral to get credit and had to now significantly mark down in value.

A domino effect ultimately took hold, as creditor institutions turned up the heat via margin calls on the institutions that wrote the credit default swap contracts. Unable to meet those calls, Bear Stearns, Lehman, AIG, Citigroup and others quickly found themselves in trouble. Some of the companies like Lehman filed for bankruptcy protection; others were forced into a firesale; and some turned to the federal government for a bail-out to the tune of billions of dollars.

Now, countless other financial institutions are holding their breath, hoping they won’t meet a similar fate. Unfortunately, off-balance-sheet excesses already may have put them on a path to failure. There are literally trillions upon trillions of dollars of outstanding debt obligations residing “off-balance sheet” today for nearly every Wall Street institution around. When reality finally sets in, and the off-balance-sheet assets come back on balance sheet, watch out. It could make the nation’s current fiscal crisis look like child’s play.

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 a familiar refrain on Wall Street: “too big to fail.” We heard it with Bear Stearns, Fannie Mae and Freddie Mac, American Insurance Group and Lehman Brothers. And each case, the opposite proved to be true. Government rescues in the form of multibillion-dollar bailouts prevented some of those supposed fail-proof businesses from going under. Now Citigroup, once the nation’s largest financial institution, is joining the ranks, as well, after succumbing to more than $65 billion in losses.

The government’s plans to prop up Citigroup were revealed on Sunday, Nov. 23, and include an additional $20 billion of taxpayer money for the bank, along with a guarantee on more than $300 billion of the firm’s most risky assets. In exchange for the guarantee, Citigroup will issue $7 billion in preferred stock to the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC).

So how did things get so bad for one of the country’s premiere financial services firms? In three words: reckless business bets.

Over the years, Citigroup created a multibillion-dollar business in mortgage-backed securities and collateralized debt obligations (CDOs). As profits grew, Citigroup got bolder, taking more and more risks. At the same time, the company employed tricky accounting practices that allowed it to move troubled assets into off-balance-sheet trusts that could then market the debts to other institutions. Once the assets had been moved off Citigroup’s balance sheets, it made it appear the bank was carrying less risk.

Appearances can be deceiving, however, for the simple fact they often mask the truth. To date, Citigroup has suffered four quarters of consecutive multibillion-dollar losses. It still holds $20 billion of mortgage-linked securities on its books, the majority of which have been marked down to between 21 cents and 41 cents on the dollar, according to a Nov. 22 article in the New York Times.

But the worst may be yet to come. Citigroup has another $1.2 trillion that is held “off balance sheet.”  When it begins to move those questionable assets back onto its books, get ready for a whole new firestorm of losses to ignite.

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 who lost untold amounts of their money in seven failed Morgan Keegan mutual funds are finally getting some justice. Earlier this week, the Financial Industry Regulatory Authority (FINRA) ruled in favor of two investors who filed arbitration claims against Memphis-based broker Morgan Keegan, awarding more than $100,000 in compensation for their losses in the funds.

The funds at the center of the legal disputes include four Regions Morgan Keegan closed-end funds: Advantage Income Fund, High Income Fund, Multi-Sector High Income Fund and Strategic Income Fund. The other funds include three open-end funds: Regions Morgan Keegan Select Short Term Bond Fund, Intermediate Bond Fund and High Income Fund.

For more than a year, the RMK funds have been a source of ongoing financial problems for both institutional and individual investors who cumulatively lost millions of dollars after the funds began to plummet in value from exposure to toxic subprime mortgages.

Since then, investors have filed dozens of civil lawsuits and arbitration cases, including several in the U.S. District Court of the Western District of Tennessee in Memphis. Among their claims, investors say Morgan Keegan marketed the funds as a “conservative” investment and a low-risk money-market alternative. Instead, they unknowingly entered into a high-risk and toxic investment.

In the case of the four RMK open-end funds, where total losses ultimately may reach $1 billion, investors also charge that Morgan Keegan misrepresented the true value of the funds’ underlying assets and collateralized debt obligations (CDOs). Because the funds are not traded on a stock exchange, their value is set by the management of the funds - in this case, Morgan Keegan.

Today, six of the seven RMK Funds has lost more than half of their value.

In April 2008, management for the seven RMK Funds was transferred to Hyperion Brookfield Asset Management of New York.

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.

Arbitration claims and lawsuits against Morgan Keegan & Co. are going into overdrive these days, as more investors take the Memphis, Tenn.-based investment firm to task for its mismanagement of seven bond funds that imploded because of bad bets on collateralized debt obligations (CDOs) and other risky securities. Many of the investors in the Regions Morgan Keegan Select bond funds were retirees, and have watched their life savings disappear after the funds lost some 95% of their value.

The four Regions Morgan Keegan closed-end funds include the Advantage Income Fund, the High Income Fund, the Multi-Sector High Income Fund and the Strategic Income Fund. The three other funds are open-end funds and include Regions Morgan Keegan Select Short Term Bond Fund, the Intermediate Bond Fund and the High Income Fund.

According to a Nov. 9 article in Investment News, the blow-up of the Regions Morgan Keegan Select funds is expected to generate between 1,000 to 1,500 arbitration cases to ultimately be filed against Morgan Keegan, with potential damages exceeding $200 million.

There already may be a precedent established. Earlier this month, Morgan Keegan lost its first arbitration case related to losses in the funds, with two investors awarded $90,000.

The funds in question were formerly run by Morgan Keegan’s James Kelsoe, who at one time was heralded as a Wall Street rock star for his supposed investing acumen. Under Kelsoe’s tutelage, the funds were promoted by Morgan Keegan as a stable source of income, conservative and without excessive credit risks. For certain funds, marketing materials went so far as to say “they did not invest in speculative derivatives.”

In reality, Kelsoe invested the funds in some of the most risky tranches of CDOs possible - information that reportedly was never disclosed to investors. One lawsuit filed in a Tennessee federal court on July 11 alleges that some of the Morgan Keegan funds kept as much as 50% of their assets in these exotic and high-risk securities.

Apparently, investors weren’t the only ones misled about the RMK funds. In various complaints to come forth, brokers have gone on record as saying they had been instructed by Morgan Keegan to advise clients to hold on to the funds. Meanwhile, the funds’ investments deteriorated.

This summer, shareholders voted to replace Morgan Keegan and hire New York-based Hyperion Brookfield Asset Management to manage the funds. The news, while no doubt welcome to those investors who have yet to flee the ill-fated funds, is by no means an indicator of better things to come.

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 SIV-lite investment fund called Golden Key has turned out to be anything but golden.  Now investors are facing losses totaling hundreds of millions of dollars after the fund, initially promoted by Barclays Capital as a “super-safe” and “desirable” investment with triple AAA credit ratings, ultimately was reduced to junk status.

Created by Barclays and managed by Swiss-based Avendis Financial Services, Golden Key is a type of structured investment vehicle (SIV) that issues cheap commercial paper to buy higher-yielding assets - assets that typically are backed by risky subprime- related securities.

Barclays is now facing several lawsuits over the demise of Golden Key, including one from Oddo Asset Management, a French money manager, who says the UK bank used Golden Key as a dumping ground to move toxic investments out of its own accounts into those held by outside investors, namely Golden Key and another SIV-lite fund called Mainsail. The transfer of the toxic mortgages into the two SIV-lites occurred just as another division of Barclays was facing massive losses from its investment in two Bear Stearns hedge funds that ultimately collapsed last year.

Both Golden Key and Mainsail imploded in the summer of 2007 when they became unable to service their own debt. At the time, Mainsail had more than $2 billion of assets and Golden Key managed $1.8 billion. As for investors, they have been unable to withdraw funds from Golden Key ever since the vehicle hit a wall over restructuring plans with creditors. In April 2008, Golden Key was placed into receivership with Deloitte.

The concept of SIV-lites was the brainchild of Edward Cahill, a former manager of collateralized debt obligations (CDOs) at Barclays. Ironically, Cahill left the company in August 2007, right before two SIV-lites that he and his team created - Golden Key and Mainsail - had their ratings slashed to junk status by Standard & Poor’s.

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.

Recent lawsuits filed by two Louisiana pension funds against Citigroup and JPMorgan Chase highlight the growing concerns facing more corporate, state and municipal pension funds in the wake of the subprime fallout and ongoing credit crunch. In the case of Louisiana, the Louisiana Sheriffs’ Pension and Relief Fund and the Louisiana Municipal Employees’ Retirement System allege that Citigroup and JPMorgan misled investors in more than $29 billion of Citigroup’s securities offerings dating back to May 2006.

The proposed class-action lawsuits also name former Citigroup chairman Charles Prince and more than a dozen underwriters of the securities offerings, including units of Bank of America Corp., Goldman Sachs Group Inc., UBS AG, Barclays PLC, Deutsche Bank AG and Fortis.

The complaint, which was filed Oct. 1 in New York State Supreme Court in Manhattan, contends that Citigroup “harmed investors by causing a significant decline in the value of the securities purchased in or traceable to a series of securities offerings.” 

The suit also claims that Citigroup failed to disclose its “massive exposure to losses from its mortgage-related assets” and failed to write down the assets to properly reflect their true value.

The success of public pension funds depends on the entities that serve as the steward of the fund’s assets.  In a number of instances that are just now coming to light, that work has been severely flawed. Meanwhile, pension fund managers continue to reassure retirees and current employees that their funds are safe and the assets sufficient to pay benefits for several years.

In truth, it depends on the quality and quantity of the securities contained in the fund’s portfolio, as well as the valuation model used to determine the value of the assets. The bottom line: Many portfolios of large pension funds include a high concentration of hard-to-value and difficult-to-sell assets, including mortgage-related securities and other collateralized pools of debt. These investments do not readily trade on the secondary market. Therefore, the value assigned to them simply does not reflect their actual value.

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. 

First there were auction-rate securities, then collateral debt obligations (CDOs). Now, credit-default swaps are making news. On Oct. 20, U.S. federal prosecutors and New York Attorney General Andrew Cuomo jointly announced that their two agencies had launched an investigation into the $58 trillion credit-default swaps market and whether Wall Street investment firms manipulated the instruments for their own financial gain.

Among other things, regulators are looking to determine if traders used the credit swaps to artificially lower share prices of various financial companies, which then resulted in large sell-offs and a downward spiral of company stock.

According to an Oct. 20 article in the New York Times, the New York Attorney General’s office issued subpoenas to stock exchanges, investment firms and three companies involved in processing trades in swaps and stocks. The firms are: the Depository Trust Clearing Corporation, Markit and Bloomberg.

Credit-default swaps have been the source of problems for several high-profile companies recently, including Bear Stearns, Lehman Brothers, American International Group (AIG), Morgan Stanley and others.

A credit-default swap is a contract for insurance on certain types of debt. Buyers of credit swaps pay a fee in exchange for having their losses covered in the event the debt defaults. The problem is the credit-default swap market itself. It is unregulated. That means contracts are regularly traded without any oversight to ensure buyers actually can cover losses.

That may be changing in the future, however. Joint investigations between federal prosecutors and the New York attorney general are a rarity. That fact alone suggests the investigation into credit-default swaps is going to be a big one - and that fundamental changes involving transparency and oversight could be coming sooner rather than later.

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.