Archive for the “Lehman Brothers” Category

A 2,200-page report by Anton R. Valukas, the bankruptcy examiner for Lehman Brothers Holdings, sheds disturbing light on how an obscure accounting maneuver called Repo 105 enabled Lehman to hide $50 billion of troubled, toxic assets from investors and regulators alike.

Valukas’ report reveals that Lehman Brothers had actually reached the insolvency stage some time before it was forced to file for bankruptcy in September 2008. Investors never saw it coming, however, because of alleged accounting trickery and Lehman’s prolific use of Repo 105. Essentially, Repo 105 temporarily keeps certain assets off of a bank’s balance sheets for a short period of time, thereby giving a healthier financial appearance to investors.

Repo 105 is a common fixture in the investment banking world. The deals themselves are very short term, and occur when an investment bank exchanges securities or bonds for cash for a short period of time. The bank then agrees to repo, or repurchase, the bonds, less a small amount that the company gets to keep as interest.

As reported March 13 by the Wall Street Journal, if deemed as sales, the deals would shrink Lehman’s balance sheet, helping satisfy investors’ qualms about Lehman’s use of borrowed money, or leverage.

One of the most shocking revelations in the examiner’s report is Lehman’s growing dependence on Repo 105s. In the fourth quarter of 2007, Lehman’s turned to Repo 105 transactions to reduce its leverage by $38.6 billion, by $49 billion in the first quarter of 2008 and an astounding $50.4 billion in the second quarter of 2008.

Besides offering a slew of evidence on the factors leading up to Lehman’s downfall, the report squashes, once and for all, claims by ex-Lehman chairman Richard Fuld that Lehman met its demise because of rumors and loss of confidence on the part of clients and trading partners.

Among the tidbits of information Valukas raises in his report:

• A Lehman accounting executive, Matthew Lee, raised the alarm bells about Lehman’s questionable accounting methods and took his concerns to auditor Ernst & Young. One month later he was ousted from his job.
• Lehman failed to value its inventory of financial products in a “fully realistic or reasonable” manner, thereby once again giving a misleading and false picture of its true financial condition to investors.
• Oversight systems were ineffective and there were “tens of billions of dollars” of possibly toxic liabilities.

The bankruptcy of Lehman Brothers in September 2008 is the biggest bankruptcy in U.S. history involving $613 billion in debts.

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.

Two institutional investors are suing Lehman Brothers Holdings, charging the bank of misleading them about the risks of auction-rate securities. The investors, Western Digital Corporation and Ceradyne Inc., are suing Lehman for more than $190 million.

According to the lawsuits, Western Digital and Ceradyne say they suffered devastating financial losses as a result of Lehman’s alleged deception concerning auction-rate securities, which were supposedly liquid financial instruments. The companies contend that Lehman knew, but failed to inform them, that the securities were “not supported by a broad, fully-functioning market.”

Western Digital and Ceradyne are in the same situation as many institutional ARS investors. When the market for auction-rate securities collapsed in February 2008, the products suddenly became illiquid, leaving corporate and retail investors unable to sell their investments at auctions.

Later that same year, a number of Wall Street investment firms and banks agreed to settle charges by state and federal regulators over sales practices of auction-rate securities and bought back millions of dollars worth of the securities from retail investors and small businesses. Larger institutional investors, however, were for the most part left out of the settlement offers. Today, many are still forced to hold onto their toxic instruments.

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.

Securities regulators in New Hampshire have accused a unit of UBS AG, Switzerland’s largest bank, of recommending unsuitable investments to customers who put their money into complex securities underwritten by Lehman Brothers Holdings, Inc.

According to the New Hampshire Bureau of Securities Regulation, UBS allegedly represented the securities as “safe” investments to clients, guaranteeing them “principal protection.”

As it turns out, following the September 2008 bankruptcy filing of Lehman Brothers - which is the largest in U.S. history at more than $600 billion in debt - many of these same investors will likely lose the majority of their supposed principal-protected investment. Additionally, New Hampshire regulators also contend UBS failed to warn investors about the potential risks of the structured finance products once Lehman itself began to experience financial troubles.

As reported June 4 by the Wall Street Journal, New Hampshire regulators filed the civil complaint against UBS on Wednesday, June 3.

In a statement, Jeff Spill, New Hampshire’s deputy director of securities regulation for enforcement, said UBS presented “the structured notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions.”

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.

U.S. pensions are encroaching upon dangerous territory these days, with the amount of under funded plans nearly doubling to $373 billion from just five months ago. For many already financially strapped companies, this means they must somehow come up with even more dollars for contributions if they hope to close pension funding gaps in the future.

As reported March 23 by Bloomberg, the dramatic plunge of U.S. stock prices will saddle 53% of companies in the Standard & Poor’s 1500 Index with defined-benefit plans with about $70 billion in pension expenses this year. That’s a sevenfold increase from 2008.

Dow Chemical and Sears Holdings Corporation are among the companies facing under funded pension plans. Dow, whose pension plan was under funded by $4 billion at the end of 2008, expects to more than double pension contributions to $376 million from $185 million last year, according to the Bloomberg article.

As for Sears, it may need to nearly triple pension contributions to $500 million next year if pension reforms aren’t enacted and the financial markets fail to rebound.

Meanwhile, the state of New Jersey is suing former executives of Lehman Brothers, charging fraud and misrepresentation caused New Jersey’s public pension fund to suffer more than $118 million in losses.

According to the lawsuit filed March 17, “thirst for profit” and “simple greed” on the part of Lehman’s top executives, including former embattled CEO Richard Fuld, were behind the investment firm misstating its financial position when New Jersey bought more than $180 million worth of Lehman shares in April and June 2008.

The lawsuit also contends that Lehman executives provided false and misleading statements about the firm’s liquidity, the value of its assets and its ability to hedge against risk.

As reported in a March 17 article in the New York Times, this is the second lawsuit filed by a government entity that names former Lehman executives as defendants. In November 2008, San Mateo County, Calif., accused Fuld and other Lehman executives of making false statements that ultimately led to a $150 million loss in the county’s investment pool.

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. 

Investor allegations of mismanagement and negligence regarding an open-ended fixed income mutual fund owned and managed by OppenheimerFunds have resulted in a class-action lawsuit against Oppenheimer and its Champion Income Fund (OPCHX).

Filed on Feb. 13, the complaint charges OppenheimerFunds and various officers and directors connected to the Champion Income Fund of violating the Securities Exchange Act of 1934, the Securities Act of 1933 and the Investment Company Act of 1940.

According to the complaint, OppenheimerFunds and its managers not only failed to exercise due diligence when it came to the Champion Income Fund but also intentionally withheld critical information about their investing strategy. Marketed as a high-yield bond fund, Oppenheimer managers began to substantially increase their use of derivative instruments in late 2006, purchasing high-risk subprime mortgage securities. Information regarding that additional risk exposure, however, apparently was never disclosed to investors until after the Champion Income Fund plummeted in value.

In December 2008, Angelo Manioudakis, the man whose gamble on toxic mortgage-backed securities and other risky structured finance deals ultimately backfired, abruptly resigned as the manager of the Champion Income Fund.

The Oppenheimer Champion Income Fund has lost nearly 80% of its value, making it the worst-performing taxable high-yield bond fund of 2008. By comparison, similar bonds were down 30%. 

Credit-default swaps also added to the losses of the Champion Income Fund. Similar to insurance contracts, credit-default swaps provide protection for investors against bond and loan defaults. In exchange for making possible payouts, sellers of credit-default swaps receive regular interest payments.

In the case of the Oppenheimer Champion Income Fund, credit-default swaps were sold on financially troubled companies like Lehman Brothers Holdings, American International Group (AIG) and General Motors Corp.  In 2008, all three firms either went bankrupt or sought financial protection from the federal government. That, in turn, had a devastating financial effect on the assets in the Champion Income Fund’s portfolio.

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. 

An arbitration award totaling $400 million is what the Credit Suisse Group will pay STMicroelectronics NV to settle claims that it misled the semiconductor maker into buying auction-rate securities.

The Financial Industry Regulatory Authority (FINRA) announced the ARS award, which is the biggest to an investor not covered by last year’s regulatory settlements, on Feb. 13. In addition to the $400 million award, a FINRA arbitration panel also ordered Credit Suisse to pay $3 million in attorney and expert witness fees, $1.5 million in financing fees, and interest on the original value of the auction-rate securities.

STMicroelectronics’ win against Credit Suisse could be just the tip of the iceberg on auction-rate settlements, as more companies may be compelled to file claims for their losses in the investments. Said Thomas Hargett, a partner at Maddox Hargett & Caruso PC, in a Feb. 15 article on Gulfnews.com:

“FINRA’s ruling is a clear signal that there are opportunities for corporate and individual investors to recover their losses from broker-dealers. The evidence is so compelling against the major broker-dealers that sold this garbage.”

According to the complaint STMicro filed with FINRA in August 2008, the company initially wanted to invest in student-loan securities backed by U.S. government guarantees. Instead, STMicro says Credit Suisse brokers invested into high-risk collateralized-debt obligations (CDOs), many of which were backed by toxic subprime real-estate loans. Following the collapse of the housing market, those CDOs plunged in value.

Credit Suisse and its ties to auction-rate securities also made headlines in September 2008, when a federal grand jury in Brooklyn brought criminal fraud charges against two former Credit Suisse brokers who sold more than $1 billion of auction-rate securities to STMicroelectronics and other investors.

Since then, STMicroelectronics has taken a $75 million charge stemming from losses tied to auction-rate securities.

The ARS ruling is one more black mark against Credit Suisse. On Feb. 5, Erin Callan, the former chief financial officer of Lehman Brothers Holdings, announced that she was taking an indefinite leave of absence from her position as head of hedge funds at Credit Suisse. Callan has been on the job for only five months.

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. 

Things are getting ugly for OppenheimerFunds these days. Not only has Tremont Capital Management, which Oppenheimer owns, lost hundreds of millions of dollars in the Bernie Madoff scandal, but bad bets on toxic mortgage-backed securities and credit-default swaps have decimated bond funds like the Oppenheimer Core Bond Fund and the Oppenheimer Champion Income Fund.

The Oppenheimer Champion Income is down more than 80%, making its performance one of the worst among bond funds for 2008. As for the Oppenheimer Core Bond Fund, it is down by more than 42%.

As reported Dec. 18 in a story by Eric Jacobson on Morningstar.com, the Core portfolio carried approximately $400 million in mortgage-backed securities as of the end of March 2008, “exceeding its (then) $2.2 billion in net assets via transactions that were effectively akin to margin borrowing.”

The fund also had approximately $800 million in exposure to credit via default swaps, including American International Group (AIG), Lehman Brothers, Wachovia, Washington Mutual, and Bear Stearns, as well as around $600 million in total return swaps. These facts, critical to investors, were never included on the fund’s balance sheet, according to the article, and therefore did not appear in its net assets.

By the end of September, the Core Bond’s credit exposure to those various markets “totaled more than 180% of net assets on a dollar basis,” says the Morningstar article. To put it another way, for every shareholder dollar in the fund, it was exposed to the credit-driven movement of more than $1.80 worth of toxic securities.

Making matter worse: Most of the additional market exposure came from off-balance-sheet derivatives, giving the appearance to investors that the funds’ portfolios were not highly leveraged and therefore more fiscally sound than what was reality. And despite the fact that both the Core Bond fund and the Champion Fund were highly exposed to commercial mortgage-backed securities, detailed information regarding the extent of that over-concentration was and is no where to be found in any of Oppenheimer’s marketing materials or on Web site.

The ramifications of Oppenheimer’s behind-the-scenes gamble with derivative bets gone bad have been painful for investors. In particular, parents who invested in several state-run college savings plan are facing major financial losses because of portfolios containing the sinking Oppenheimer funds. To top it off, the losses hit the most conservative plans the hardest.

In Oregon, the 529 College Savings Plan includes more than 70,000 investors who are saving college money for 100,000 children, grandchildren and others. The plans in the network are worth about $750 million. One year ago, the value was $1 billion. About $89 million was invested in the Oppenheimer Core Bond Fund in September 2008.

In October 2008, the board that oversees the Oregon College Savings Plan questioned Oppenheimer about the fund’s poor performance. At the time, Oppenheimer managers said they bought the mortgage-backed securities when they believed the price had bottomed out. However, the securities continued to lose value, yet Oppenheimer just kept buying them.

In Oregon’s case, an investigation with the attorney general’s office is underway regarding Oppenheimer’s actions. But the bottom line is clear: The returns on the funds simply don’t add up to what Oppenheimer represented.

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. 

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.