Archive for the “Fidelity” Category

Safe havens in the investing world have become an oxymoron. Amid the dismantling of Wall Street and other centers of financial engineering, investments once characterized as “cash alternatives” are vanishing overnight. What investors thought was a safe, secure liquid-as-cash investment is no more.

Case in point: Ultra short bond funds. Ultra short bond funds are mutual funds that typically invest in fixed-income securities with short maturity dates before they become due for payment. Like other bond funds, ultra short bond funds can invest in a wide range of securities, from corporate debt, to government securities, to mortgage-backed securities and other asset-backed securities.

Often described as a cash-alternative investment, ultra short bond funds are attractive to investors who want higher yields than traditional cash accounts with only marginally higher risk. That’s the theory, anyway. In the past year, the average ultra short bond fund has lost about 5% versus a 2.6% average gain for taxable money funds. And, in some cases, investors have seen their ultra short bond fund investments obliterated entirely.

The Schwab YieldPlus Fund is one example. Marketed by Charles Schwab as an alternative to cash, the one-time $14 billion fund has seen its value plummet, falling nearly 34% in 2008 alone. Another ultra short bond fund to implode this year is Evergreen Investments Ultra Short Opportunities Fund. That ultra short bond fund has lost than 20% of its value and was deemed the second-worst performing - behind the Schwab YieldPlus Fund - of the ultra-short bond funds tracked by Morningstar Inc.

So how did it go so wrong for these supposed “cash-like” investments? In a word: subprime.

In addition to mischaracterizing their funds and failing to offer adequate explanations of their potential risks, the companies behind the Schwab YieldPlus Fund and the Evergreen Ultra Short Opportunities Fund apparently omitted key information about what their managers really were investing in. In short, the words, subprime or high concentrations of mortgage-related investments, came up missing entirely at the time the funds were marketed and sold to investors.

As a result, investments made in risky illiquid mortgage-backed securities caused many ultra short bond funds to tank in value following the onset of the subprime crisis. Making the carnage even worse was the fact that the funds’ managers had to get rid of the toxic securities at fire-sale prices in order to come up with the cash for investors wanting to bail out.

The bottom line: With the country’s financial crisis playing out before us, safe, conservative investments are becoming harder and harder to find. One thing is for sure: In today’s market, investors who are considering ultra short bond funds may want to think long and hard. Lessons of the past year concerning fallen funds like the Schwab YieldPlus Fund, Evergreen Investments Ultra Short Opportunities Fund and others serve as definitive proof that ultra short in no way means ultra safe.

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.

Fidelity Investments has become the first retail institution to reach a settlement in the auction-rate securities probe spearheaded by New York Attorney General Andrew Cuomo. As part of an agreement with Massachusetts and New York regulators, the mutual fund company will buy back about $300 million worth of the securities from its customers, including individuals, businesses and charities.

Initially, Fidelity balked at buying back the auction-rate securities from clients, contending it, like investors, also had been deceived about the condition of the auction-rate securities market. The Boston-based brokerage and mutual fund giant said it should therefore be exempt from buying back the securities because it did not underwrite or issue the bonds.

Assigning blame in the auction-rate mess has gained momentum in recent weeks as several of Wall Street’s biggest investment banks - including UBS, Citigroup, JP Morgan Chase and others - agreed to buy back billions of dollars of auction rate securities from their customers. To date, nine investment banks have committed to buy back more than $50 billion worth of the securities and pay $520 million in fines and penalties.

Auction-rate securities are municipal bonds, corporate bonds, or preferred stocks whose interest rates reset through auctions held every seven, 14, 28, or 35 days. In theory, investors can liquidate their auction holdings at face value during these auctions. In February, however, trading came to an abrupt halt when investment banks decided to no longer support the auction market.

Under the terms of its agreement, Fidelity will buy back customers’ auction-rate securities within 30 days of their request. A civil penalty will not be imposed on the company.

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 lack of mea culpa from “downstream” brokers over the state of auction rate securities and the predicament of investors stuck with the now-illiquid securities may speak volumes. At least New York Attorney General Andrew Cuomo appears to think so.

In an Aug. 20 letter to the Regional Bond Dealers Association (RBDA), the New York attorney general’s office blatantly dismissed earlier claims by the RBDA that brokerage firms such as Fidelity Investments and Charles Schwab shouldn’t be held liable for the demise of the auction rate market or the illiquidity of their clients’ auction rate investments.

In the letter, Benjamin Lawsky, deputy counselor and special assistant to the attorney general, wrote:

Attorney General Cuomo’s investigation has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages you paint . . . For example, some evidence indicates that Fidelity was actively marketing auction rate securities to its high net worth clients. . . “If downstream brokerages deliberately stuck their heads in the sand but continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of the firms’ culpability.”

In early August, Fidelity Investments and Charles Schwab were among a number of brokerages to contend that state and federal regulators should focus their investigations of abuses concerning auction rate securities solely on the major investment banks that underwrote the securities, rather than the smaller brokerages. As “supporting evidence,” the brokerages suggested they were unaware of the potential pitfalls of auction rate securities and had no prior knowledge that the auction market was in trouble.

Such excuses may not hold water, however. As licensed brokers, having knowledge and information about a particular investment product is a standard part of the job. That point was reiterated in Lawsky’s letter, in which he stated that the attorney general believes it is highly unlikely that the brokerages were, as they claim, “in the dark with investors” regarding the liquidity risks of auction rate securities.

The growing concern by secondary dealers for their auction rate securities fate stems to recent settlement announcements by Cuomo’s office - settlements that do not include some $60 billion in outstanding auction rate securities purchased through smaller brokerages. Now, the brokerages fear the onus will be on them.

Indeed, next week the Financial Industry Regulatory Authority (FINRA) is planning a series of on-site inspections at approximately 40 downstream brokerages, where it will try to determine exactly what they knew in advance of the auction market’s collapse and whether they knowingly represented auction rate securities as safe and liquid investments to clients.

Meanwhile, Citigroup, JPMorgan Chase, Morgan Stanley, UBS and Wachovia all have agreed to buy back $35 billion of auction rate securities and pay more than $360 million in fines. As reported Aug. 22 in the New York Times, three other banks - Merrill Lynch, Goldman Sachs and Deutsche Bank - also plan to buy back at least $12.5 billion in the securities and pay more than $160 million in fines as part of settlements reached late in the day on Aug. 21.

Beginning in October, Merrill Lynch will buy back at least $10 billion of auction rate securities from investors holding less than $4 million of the investments. A $125 million fine also was imposed on the firm.

Separately, the Securities and Exchange Commission (SEC) is continuing its investigation into Merrill Lynch for possible corporate and individual violations.

Goldman Sachs agreed to buy back about $1.5 billion of auction rate securities from investors by mid-November, and pay a $22.5 million fine, while Deutsche Bank will buy back $1 billion of auction rate debt by mid-November and pay a $15 million penalty.

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.

“Nobody gets a pass.” That’s apparently the verdict from Christopher Cox, chairman of the Securities and Exchange Commission (SEC), who says investigations into the collapse of the auction rate securities market will indeed extend beyond major Wall Street investment banks to include secondary dealers who sold the securities.

Cox’s clarification follows recent criticism by smaller brokerages like Fidelity Investments and Oppenheimer & Co., which contend they should not be obligated to buy back billions of dollars of auction rate securities from investors based on the fact they didn’t underwrite the securities nor run the auctions for the securities. The big investment banks did.

Moreover, the brokerages say that when it came to knowing about potential problems brewing in the auction rate market, they were kept in the dark right along with investors.

The finger pointing over who’s at fault over auction rate securities has gained momentum in the past week after several of Wall Street’s biggest players - including UBS, Citigroup, JP Morgan Chase and Wachovia - agreed to settle claims of auction rate fraud with New York Attorney General Andrew Cuomo and buy back more than $42 billion of auction rate securities from their customers. Now, smaller brokerages say even though some of Wall Street’s larger investment banks are agreeing to Cuomo’s terms, it doesn’t mean they need to follow suit.

As reported Aug. 19 in the Wall Street Journal, secondary dealers of auction rate securities like Fidelity and Oppenheimer believe regulators should put the onus of blame for the auction market’s demise - as well as any agreements to buy back auction rate securities from investors - solely on the underwriters of the securities and the controllers of the auctions: Wall Street investment banks.

“None of the rest of the market knew about how auction dealers allegedly controlled the whole auction process for 25 years,” said Michael Decker, chief executive of the association that represents regional brokerages, in the Wall Street Journal article.

Whether regional brokers had prior knowledge about the inner workings of the auction rate process may be irrelevant. At the heart of the state and federal investigations regarding auction rate securities is the issue of whether the securities were presented and sold to investors as “safe” and “liquid” when, in fact, they were not. In many cases, investors contend brokers sold them the instruments as cash alternatives - investments they could cash out of at will.

It was only when the auction market collapsed in February - and their auction securities became illiquid - that investors learned their “cash alternative” investments strayed far from the promises of brokers.

Moving forward, the issue of culpability for smaller brokerage houses will be contingent on what regulators uncover in their investigations. Period. Interestingly, several of the brokerages mentioned in the Aug. 19 Wall Street Journal story, including Oppenheimer, E-Trade Financial Corp. and Fidelity Investments, have refused to specify the dollar amount in auction rate securities their clients hold.

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.

Ultra-short bond funds have been hammered in the financial boxing ring lately. Now, Evergreen Investments’ Ultra-Short Opportunities Fund is the latest fund to be KO’d.

Banking giant Wachovia announced June 20 that its Evergreen Investments unit will shut down the fund to the tune of $403 million - less than half of its value six months ago.

An ultra-short bond fund is a mutual fund that invests in fixed-income instruments with extremely short-term maturities. As with other mutual funds, ultra-short bond funds invest in a wide range of securities - including corporate debt, government bonds, subprime mortgages, and other asset-backed securities.

Like a number of ultra-short bond funds this year, Evergreen’s Ultra-Short Opportunities Fund has struggled to stay afloat under the weight of the subprime crisis. The fund - which had nearly three quarters of its assets in mortgage-backed securities - lost more than 20 percent this year, making it the second worst performing of the ultra-short bond funds tracked by Morningstar Inc.

According to a press statement issued by Evergreen Investments, investors in the Ultra-Short Opportunities Fund will receive $7.48 a share, or the equivalent of the fund’s net asset value as of June 19.

As reported in a June 20 article on Bloomberg.com, the demise of the Ultra-Short Opportunities Fund highlights the difficulty asset managers have in pricing illiquid securities. According to Bloomberg, the fund was carrying a $13 million slice of the Novastar ABS CDO I Ltd., which was created last year out of low-rated subprime- mortgage bonds, at $9.1 million, or 70 percent of its face value.

Other funds in the same boat as Evergreen’s Ultra-Short Opportunities Fund include Schwab’s YieldPlus fund, which is down an astonishing 29 percent and considered the worst performer among ultra-short funds, and Fidelity Investments Ultra-Short Bond Fund, which has fallen more than 13 percent.

The financial failures of these funds have prompted investor lawsuits against the companies that marketed them as “safe” investments that would provide higher returns than money-market funds with only a marginally higher risk factor.

As it turns out, investors who owned shares in many ultra-short bond funds - including Evergreen’s Ultra-Short Opportunities Fund – were in fact highly exposed to toxic subprime-backed securities.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The financial earthquake known as subprime continues to wreak havoc - this time, it’s mutual fund giant Fidelity Investments feeling the pain.

In July 2007, a Fidelity affiliate, Ballyrock Investment Advisors LLC, issued $517 million worth of debt backed by risky subprime mortgages and other related loans. At first, the deal - known as collateralized debt obligations, or CDOs - received triple-A ratings; today, some of the debt is worth 15 cents on the dollar, according to several analysts.

Fidelity created Ballyrock Investment Advisors in 2002 to develop and manage collateralized debt obligations sold to institutional clients. In the beginning, the subsidiary avoided risky mortgages - that is until last summer.

Things went downhill quickly for the Ballyrock CDO. When the subprime mortgage debacle hit full force and a rush of homeowners began defaulting on the underlying home loans, Standard & Poor’s promptly cut the grade on some of the CDO’s securities from AAA to junk.

Moody’s Investors Service later followed S & P’s lead, slashing the ratings on various slices of the CDO and putting investors on notice that another downgrade may follow.

Apparently it is so bad that a $26.25 million tranche of the CDO has plummeted to only slightly above being considered a default risk. A recent article in the Boston Business Journal reports that another $150 million senior tranche of the CDO was cut from Moody’s top Aaa rating to just above junk status.

Taking a Fall

Problems with CDOs have rocked the financial world over the past year, taking a severe toll on some of Wall Street’s biggest players and causing tens of billions of dollars in write-downs. Earlier this month, the Wall Street Journal reported that Merrill Lynch  alone had more than $30 billion in write-downs since last October, most of which stemmed from the fallout of the subprime and CDO crisis.

The concept of CDOs has been around since the 1980s. A CDO is a structured debt vehicle that repackages the income from a pool of bonds, derivatives or other investments. For example, a mortgage CDO might own pieces of hundreds of bonds, with each piece containing thousands of individual mortgages.

Investors - including pensions, insurance companies, mutual funds and hedge funds - acquire slices of a CDO, receiving a fixed-rate of interest, similar to a bond, in return. The slices of a CDO are called tranches, and divided into various levels of risk, with losses applied in reverse order of seniority.

The highest-rated tranches are often referred to as super-senior tranches; investors at this level receive their payments before owners of the riskier lower layers. The lowest-rated tranche in a CDO provides the highest returns but assumes the greatest amount of risk.

It wasn’t until the subprime mortgage market went haywire that problems with CDOs began to surface. Much of the furor is around the fact that credit-ratings firms ranked the products much safer than they actually were. Moreover, the complexity of CDOs makes it difficult for investors to determine what they’ve actually bought and the true value of their investments.

These are the kinds of surprises that have investors up in arms - and heading to court. Shareholders and investors want answers from the sellers of CDOs as to why the risks associated with the product were never fully disclosed in the first place.

Institutional investors want answers, as well. On February 24, 2008, the German bank HSH-Nordbank AG announced that it intends to file a lawsuit against Swiss bank UBS in New York based on losses it incurred from its $500 million investment in a CDO called “North Street 2002-4.” The bank alleges that UBS made riskier investments than the bank was aware of or would have permitted.

Problems relating to investments in CDOs may well produce the next big wave of subprime lawsuits in the months ahead. Equally troubling is the fact that the owners of CDOs, including investment banks, hedge funds, insurance companies and pension funds, likely face even more write downs on mortgage investments beyond the billions they have already written off. For consumers and businesses, this means the availability of credit will be stretched tighter than it already is.

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.