Archive for the “JP Morgan Chase” Category

Bruce Sherman, co-founder of Private Capital Management LP, is suing Bear Stearns Cos., its former chief executive officer James Cayne, Warren Spector, former co-president and chief operating officer, and the auditing firm of Deloitte & Touche for allegedly overstating the value of Bear’s mortgage-backed and asset-backed securities and the quality of its risk management.

As reported Sept. 25 by the Wall Street Journal, the lawsuit claims that Cayne and others at New York-based Bear Stearns misled and misrepresented facts to investors about the firm’s financial health prior to its Federal Reserve-forced sale to JPMorgan Chase & Co. in March 2008.

“[The] defendants knew that the market and the financial press would view Sherman’s sale of his Bear stock as a loss of confidence in Bear by a well-known and long-standing investor,” the lawsuit said.

“This, in turn, would have undermined confidence in Bear’s management at a critical time when Bear’s liquidity and Bear’s valuation of its assets were open to question following the implosion of two Bear-sponsored hedge funds in the summer of 2007.”

At one time, Sherman was Bear Stearns’ largest stockholder, owning a 5.9% stake, or 5.5 million shares valued at more than $475 million before falling to nearly zero when Bear collapsed. Sherman eventually sold his stake at a huge financial loss and retired from PCM, which is a unit of Legg Mason.

In March 2008, Bear Stearns was sold to JPMorgan Chase for $1 billion. Only two months earlier, the investment firm had a market value of $20 billion.

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 auction rate securities mess is heating up for Charles Schwab. New York Attorney General Andrew Cuomo is expected to soon file a lawsuit against San Francisco-based Schwab over issues related to the company’s marketing and sales of auction rate securities (ARS) to retail and institutional investors. Cuomo announced last month that he intended to take legal action against the brokerage unless it agreed to an ARS settlement and a buy-program to repurchase the auction rate securities from clients.

Since no deal has materialized, Cuomo will likely proceed with a civil fraud lawsuit against Schwab, according to an Aug. 17 story in the Wall Street Journal. As part of the lawsuit, Cuomo will present transcripts of recorded conversations between Schwab brokers and its clients, revealing how the auction rate securities were misrepresented by Schwab.

In one exchange between a Schwab broker and a client, the customer says: “You know, I’m not trying to make a ton of money. I just want to play it safe.” The broker responds: “The hardest part of this auction is getting into it. That is the tough part. Getting out is easy as just selling.”

Auction rate securities are considered long-term debt instruments that act as a short-term investment because of the manner in which they are resold. Interest rates on the products are reset at weekly or monthly auctions. When the market for auction rate securities collapsed in February 2008, thousands of retail and institutional investors became stuck with an illiquid investment.

Faced with potential lawsuits from state and federal securities regulators, a number of Wall Street firms that underwrote auction rate securities, including Citigroup, Merrill Lynch, UBS and J.P. Morgan Chase, agreed to buy back more than $60 billion of the instruments from customers.

Several retail brokerages, however, opted not to participate in the buy-back programs. Specifically, some “distributors” of auction rate securities continue to leave their clients with no solution to the financial losses they’ve suffered because of ARS investments.

When the market for auction-rate securities collapsed last year, Schwab’s clients were stuck with $789 million of the securities.

Schwab’s hold-out to avoid any type of settlement with regulators comes on the heels of recent agreements by two retail brokers to buy back millions of dollars in auction rate securities from clients. In July, Fidelity Investments and TD Ameritrade both agreed to repurchase $756 million of the securities from customers.

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.

It’s a familiar story: Homeowners across the country face foreclosure on their home because of abuse and reckless lending practices. The surge in foreclosures is in part linked to the predatory lending practices of mortgage lenders. On the sidelines, however is a silent partner in the problem: Wall Street financial institutions that helped finance the mortgage loans and concocted the securitization arrangements that pooled the loans together and then sold them to investors. 

So far the latter group has remained under the radar when it comes to legal responsibility for the mortgage loan crisis. That may be changing, however, predict legal experts, citing several high-profiles cases in which plaintiffs contend the investment firms involved in the securitization process of toxic mortgage loans worked so closely with the lenders that they, too, should face liability as members of a joint venture.

Gretchen Morgenson writes about this issue in the July 11 edition of the New York Times. She points to a lawsuit in Atlanta where homeowners Patricia and Ricardo Jordan are suing over a home foreclosure they say was the result of an abusive and predatory loan made by NovaStar Mortgage. Also named as a defendant in the case is JP Morgan Chase, the initial trustee of the securitization containing the Jordans’ loan.

The lawyer for the Jordans contends JP Morgan should be held liable because it was involved in the securitization of their loan and profited from it.

Another case involving a brokerage firm/predatory lender partnership is First Alliance and Lehman Brothers Holdings. As its main source of financing, Lehman had provided First Alliance, which declared bankruptcy in 2000 over fraud charges, some $500 million over the years. More than 7,500 borrowers successfully sued First Alliance for fraud, according to the New York Times article. In 2003, a jury also found Lehman liable for its role in assisting First Alliance, and ordered Lehman to pay $5.1 million.

“As we are unpeeling what was happening on Wall Street, we may see that Wall Street didn’t find the safety from litigation risk that it hoped to find in securitization,” said Kathleen Engel, a professor at Cleveland-Marshall College of Law at Cleveland State University, in the July 11 New York Times article. “I think there is potential for liability if borrowers can engage in discovery to see exactly how much the sponsors were shaping the practices of the lenders.”

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 market for credit default swaps - complex derivative instruments invented by JP Morgan Chase & Co. in 1992 and today believed to be a key contributor to the onset of the nation’s financial meltdown - is sorely in need of a major overhaul. The trouble is the big participants in the market, including financial institutions and other special interest groups, apparently don’t want that to happen.

Credit default swaps initially emerged as a way for financial institutions to buy insurance against defaults on their corporate debt. Similar to an insurance contract, a credit default swap involves one party paying another party to protect it from the potential risk of default on a bond, loan, or other types of debt. If the loan or bond defaults, the insurer, or seller, compensates the buyer for the loss. Sellers of credit default swaps typically are banks, hedge funds or investment firms.

The market for credit default swaps is unregulated. Contracts for the swaps trade over the counter versus through the New York Stock Exchange. Lacking any oversight or regulation, the potential for financial disaster is great. As reported May 18 by Bloomberg, lax oversight of credit derivative instruments played a leading role behind the financial failures of powerhouse firms like Lehman Brother Holdings and American International Group (AIG), not to mention the $1.4 trillion in writedowns that banks have taken in the past year.

For more than a decade, however, these same investment banks have fought tooth and nail against government regulation of OTC credit default swaps. Why? Because credit default swaps contracts translate into huge profits for them. In 2008, JPMorgan reportedly took in $5 billion in profits from trading in fixed-income over the counter derivatives, according to the Bloomberg article.

Meanwhile, the rest of us are forced to wait out what appears to be an unrelenting and merciless financial crisis - a crisis largely triggered by the ticking time bomb known as credit default swaps. Defusing this ticking bomb with improved regulation and transparency is long overdue.

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.

Hoping to permanently shatter the “Greed is Good” line made famous by fictitious corporate raider Gordon Gekko in the movie Wall Street, Andy Stern, president of the Service Employees International Union (SEIU), has sent a scathing letter to 29 financial services firms over executive bonuses tied to inflated profits on derivatives and other investments that ultimately turned out to be worthless. Stern called upon the companies, which included American International Group (AIG), Citigroup, Morgan Stanley, and JP Morgan Chase to either pay back the bonuses immediately or get prepared to face a slew of lawsuits.

The SEIU’s pension fund, known as the SEIU Master Trust, wants the firms’ boards of directors to review more than $5 billion in bonuses and stock option awards that were given to their companies’ top five executives since 2005.

In addition, the pension fund is demanding the companies overhaul their executive compensation practices.

 “The collective choices of top executives to reward themselves despite their failure to deliver a profit on their investments negatively impacted our pension fund and left our economy in shambles,” said SEIU’s Stern in an April 20 article by Bloomberg. “It’s as if these guys got a windfall payoff for betting the family’s savings on the wrong horse.”

All of the companies in question have come under fire recently over executive compensation issues. Leading the pack is financially troubled AIG, which has been bailed out by the U.S. government multiple times and received more than $185 billion in funds. Despite the taxpayer-funded rescue, as well as a $62 billion fourth-quarter loss, the insurer turned over $165 million in executive bonuses in 2008.

Meanwhile, pension funds investing in AIG and in other firms that awarded over-the-top bonuses to executives while their companies struggled financially have lost billions of dollars.

News of the AIG bonuses led Congress to create legislation in March that would establish a 90% tax on bonuses at any company receiving $5 billion in government aid.

The SEIU Master Trust held investments in all 29 financial services firms that received a letter from Stern.

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. 

In the wake of the Sept. 15 bankruptcy filing of Lehman Brothers Holdings, New York and other municipalities are finding themselves stuck with unexpected costs to get out of interest-rate swap contracts gone sour. In the case of the Big Apple, it has paid Lehman and Wall Street banks at least $75.9 million since March to buy out ill-fated swap agreements.

Between 2002 and 2005, New York was among several issuers that turned to interest-rate swaps as a way to lower borrowing costs on some $7 billion in bonds, according to a Dec. 24 article by Bloomberg. What they failed to take into account, however, was the unexpected. In this case, the unexpected meant the sudden bankruptcy of a counterparty - an event that not only terminates a swap contract but could do so in less-than-desirable “mark-to-market conditions.”

When the unexpected became reality on Sept. 15 with the bankruptcy of Lehman Brothers, New York and others like it were forced to pony up funds in order to exit their interest-rate swap agreements and issue new debt to replace bonds linked to the swaps.

Making matters worse: Many states already are financially strapped and have record budget deficits looming. Spending millions, and in some cases, billions of dollars, to cover increased interest payments and penalties couldn’t come at a more fiscally problematic time.

In a swap contract, two parties agree to exchange interest-rate payments. Typically, the deal consists of exchanging a fixed payment for a variable interest rate.

Besides New York, a number of state and local governments have been burned by interest-rate swaps tied to Lehman Brothers. When officials in Sacramento County, California, terminated the county’s swap with Lehman recently, they had to pay $23 million. Then, because the terms of the new deal with Deutsche Bank were not as favorable as those with Lehman, Sacramento County officials had to pay an estimated $8 million more for protection from fluctuations in interest rates.

The Butler Area School District in Pennsylvania is another municipal agency to lose big because of interest rate swaps. In August, the district opted to pay JPMorgan Chase $5.2 million to get out of its swap contract - more than seven times what it paid to enter the agreement in the first place, according to Bloomberg.

JP Morgan also is a central figure in several lawsuits involving interest-rate swap deals for a sewer system in Jefferson County, Alabama. County commissioners there now contend the Wall Street banks - and JP Morgan in particular - that devised the financing arrangement overcharged the county by as much as $100 million. Since then, the county has been teetering on the brink of bankruptcy.

In September 2008, following federal probes into its interest-rate swap deals, JP Morgan announced that it would no longer sell derivatives to state and local governments.

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. 

The web of lies continues to grow for former Bear Stearns executives Ralph Cioffi and Matthew Tannin. At a recent court hearing in Brooklyn, New York, prosecutors claim that one of the two disgraced hedge fund managers tried to influence potential witnesses last summer during an internal investigation of the Wall Street institution. Prosecutors would not say which of the two men attempted to interfere with witness statements.

The collapse of 85-year-old Bear Stearns in March 2008 has been referred to as the trigger that propelled the nation’s credit crunch and ignited the onset of what continues to be a financial mess for banks and investment firms whose losses on investments in subprime mortgage-related securities now total $500 billion and counting.

Cioffi and Tannin were at the center of Bear Stearns’ downfall when the hedge funds they managed collapsed in June 2007, leaving investors with $1.4 billion in losses. Prior to shutting down the funds, both men continued to extol their solid financial state to investors, while privately stating the funds’ collapse was imminent. On June 19, 2008, Cioffi, 52, and Tannin, 46, were both arrested by the Federal Bureau of Investigations (FBI) and charged with conspiracy, securities fraud, insider trading and wire fraud. If convicted, the two men could be sentenced for up to 20 years or more in prison.

By the time Bear Stearns assets were taken over by JP Morgan Chase in March 2008, the company had lost more than 90% of its market value.

Conflicts of Interest

Meanwhile, H. David Kotz, the inspector general of the Securities and Exchange Commission (SEC), is blasting the Miami office of the SEC for its role in dropping a three-year-old investigation into whether Bear Stearns improperly valued some $60 million worth of collateralized bond obligations sold to W. Holding Co.’s Puerto Rico bank unit.

After months of legal wrangling, Bear Stearns agreed to pay $500,000 to settle the matter. Before that could happen, however, the SEC suddenly abandoned the case.

According to testimony given by Michael Trager, the lawyer representing Bear Stearns, the head of the SEC’s Miami office, David Nelson, told Trager in a telephone call that “Christmas is coming early this year,” and that “Bear Stearns can keep their money.”

Underlying the events is the fact that Trager, the Bear Stearns lawyer, once worked at the SEC with Nelson in the 1980s.

Kotz is now calling for disciplinary actions against Nelson for his decision to close the investigation.

The SEC’s report, “Failure to Vigorously Enforce Action Against W. Holding and Bear Stearns at the Miami Regional Office,” was issued on Sept. 30, 2008. It has yet to be posted on the SEC’s Web site. A copy can, however, be viewed at the Miami Herald: http://media.miamiherald.com/smedia/2008/10/14/20/Report_of_Investigation.source.prod_affiliate.56.pdf.

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.

Ill-fated financing arrangements concocted back in 2002 by JPMorgan Chase and other Wall Street banks for a sewer project in Jefferson County, Alabama, are causing havoc once again - this time for school districts in Pennsylvania.

As reported Oct. 17 on Bloomberg.com, the Securities and Exchange Commission (SEC) is reviewing records from the Bethlehem Area School District in Pennsylvania over interest-rate swaps that the district entered into with JPMorgan and Morgan Stanley.

As in the case of Jefferson County, Alabama - which continues to teeter on the brink of bankruptcy as a result of the flawed financing deals put together by JP Morgan and others - the SEC inquiry in Pennsylvania is part of a larger investigation concerning at least $8 million in fees that Bethlehem and other school districts paid to various Wall Street banks that sold the interest-rate swaps.

Interest-rate swaps are tied to variable interest rates. The swap itself is much like a bet between the purchaser and a bank: If interest rates remain favorable, the purchaser is the winner. If market conditions create an unfavorable interest rate environment, the bank that sold the swap receives higher payments from the purchaser.

In the case of the Bethlehem Area School District, the bank is now winning. In September, the district’s weekly debt costs increased by $250,000 - nearly $1 million a month.

Just like in Jefferson Country, Alabama, Bethlehem school board members say they failed to fully understand the ramifications of interest-rate swaps at the time they approved the deal with JP Morgan and others. Only now do they realize their mistake, they say, and just how risky and speculative the derivatives market can be.

Unfortunately, hindsight is 20/20. Now, it’s left to taxpayers to pick up the pieces and pay for the error in judgment by school board members of the Bethlehem Area School District. Students, too, are going to be affected by those bad decisions. As debt costs continue to mount for the district, tough choices will need to be made, including cutbacks to educational programs and reduced services in schools.

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 basic principle of investing relies on it: diversification. In almost every instance, but especially during times of market turmoil, a diversified investment portfolio serves as a prerequisite to help limit risks and mitigate potential losses for investors. Unfortunately for those who have gone the other investing route, the lesson learned can be costly - and one that many investors are now discovering as they face severe financial losses as a result of portfolios overly concentrated in one type of investment.

A prime example is an investor’s whose portfolio is heavy in preferred stocks only. Bought and sold like common stocks, preferred stocks actually are more similar to bonds. Investors who hold preferred shares means the issuing company pays them any dividends before paying common stock shareholders. In the event a company goes bankrupt, preferred shareholders again move to the front of the line and have first rights to claim the liquidation proceeds of a company’s assets.

At the same time, investors with investment portfolios solely concentrated in preferred shares can open themselves up to significant financial risks. If a portfolio includes investments in several asset sectors versus a single one, the chances that all of those sectors will sustain losses simultaneously is relatively slim. On the other hand, the likelihood an investor might encounter financial losses by holding only one type of security or asset class certainly is not hard to fathom.

In addition, many preferred stocks come with their own set of rules and regulations - both of which can translate into more profits or extra risks.

Stories involving investors who have suffered sizeable financial losses because their brokerage firm over-concentrated their accounts with preferred stocks are becoming more and more visible. Case in point: Freddie Mac and Fannie Mae. On Sept. 8, when the federal government took control of the two mortgage giants to prevent them from going under, investors who had been sold various series of the companies’ preferred shares as “safe, stable fixed-income investments” were shocked to learn the truth. In the week following the takeover by the government, Fannie Mae’s 8.25% preferred stock dropped to $2.65 from $13.70, while Freddie Mac’s 5.57% preferred stock fell to $1.50 from $9.15.

As of late September, investors holding certain series of preferred shares in Freddie Mac and Fannie Mae have seen their investments decline in value by more than 90%. Many of these investors say they were never advised of the risks associated with preferred shares by their brokers. Moreover, some investors were holding preferred shares of Freddie Mac and Fannie Mae as their sole investment, thus leaving the doors of their portfolios wide open for potential financial disaster.

To make matters worse, some investors believed that because Fannie Mae and Freddie Mac were considered “quasi-governmental enterprises,” any defaults on their preferred shares in the companies would be covered by Uncle Sam. They came to that conclusion because that’s what they were told by their brokerage firm.

The fact of the matter is that holders of preferred shares in Fannie Mae or Freddie Mac are in no way covered or protected by the U.S. federal government. Any financial losses these investors sustain are theirs alone.

There are other examples, as well, documenting what can happen to investors whose portfolios are overly concentrated with preferred shares in a single sector or company - from Lehman Brothers’ bankruptcy filing, to the bailout of American International Group Inc. (AIG), to the acquisition of Bears Stearns by JP Morgan Chase at a fire-sale price. As in these and other cases that are coming to light this year, investors who took the advice of their investment bank and bought preferred shares as a “sure bet” and a safe, fixed-income investment are learning an entirely different story as they watch their life savings literally vanish before them.

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.