Archive for the “Lehman Brothers” Category

New York-based Reserve Management Company, along with several of its senior executives, has learned it will face charges by the Securities and Exchange Commission (SEC) for violation of federal securities laws. Charges also are expected to be brought against Reserve President Bruce Bent, Senior Vice President Bruce Bent II and Arthur Bent III, chief operating officer and treasurer.

The charges against Reserve Management come on the heels of at least 19 investor lawsuits after the company’s Reserve Primary Fund broke the buck on Sept. 16 when commercial paper from Lehman Brothers Holdings, Inc. became essentially worthless amid the bank’s bankruptcy filing. The fund was the first money-market fund in 14 years to break the buck.

The Primary Fund, whose assets exceeded $65 billion in September, including $785 million in bonds issued by Lehman Brothers, is now in the process of liquidating.

Meanwhile, shareholders of the Reserve Primary Fund who did not get out before the company froze redemptions in September are taking legal action. According to lawsuits already filed, investors contend the fund “deviated from its stated investment objective by sacrificing preservation of capital and liquidity in pursuit of higher yields. This strategy was exemplified by the fund’s disastrous and unreasonable concentration of $785 million face value in commercial paper issued by Lehman.”

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.

After a string of bad bets on high-risk mortgage-backed securities and credit-default swaps, OppenheimerFunds’ Senior Vice President Angelo Manioudakis has left the company. On Manioudakis’ watch, the Oppenheimer Champion Income Fund has lost more than 80% of its value this year - the biggest decline of any bond fund tracked by Morningstar, Inc. By comparison, the average junk-bond fund fell 32%.

Manioudakis’ departure may be the least of the issues for OppenheimerFunds, however. OppenheimerFunds owns Tremont Capital Management, an investment-management business that placed hundreds of millions of dollars of investors’ money in funds run by Bernard (Bernie) L. Madoff, who was arrested last week for operating a $50 billion Ponzi hedge fund fraud scheme.

Meanwhile, Jerry Webman will temporarily take over for Manioudakis as head of OppenheimerFunds’ Core Plus team.

Problems for the Oppenheimer Champion Income Fund began shortly after Manioudakis and his team took over management responsibilities for the fund in 2006.  The fund’s demise was then hastened by too many derivative bets gone bad and, in particular, something called total-return swaps. As reported Dec. 16 in the Wall Street Journal, total-return swaps are agreements between parties to exchange cash flows in the future based on how a set of securities performs. In the case of the Oppenheimer Champion Income Fund, the fund was betting that top-rated commercial mortgage-backed securities would recuperate this year. It was a gamble that failed miserably.

Credit-default swaps (CDS) and mortgage securities tied to financially ailing companies like Washington Mutual and mortgage giant Freddie Mac also became a major source of trouble for the Oppenheimer Champion Income Fund. Compounding the fund’s problems were purchases in Lehman bonds between June and September with nearly $30 million in principal value. When Lehman filed Chapter 11 bankruptcy protection on Sept. 15, those bonds plummeted in value to $144,000.

Moving forward, other OppenheimerFunds offerings that held the Oppenheimer Champion Income Fund could be headed for their own set of financial problems. One of the funds includes the Oppenheimer Conservative Investor Fund, which had 4% in the Champion Income fund through November, according to the Wall Street Journal. Year to date, the Oppenheimer Conservative Investor Fund is down an astonishing 40%, making it one of the worst-performing conservative allocation funds followed by Morningstar.

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. 

The final months of 2008 have morphed into a hotbed of legal problems for the Reserve Management Corporation, which is now facing a new federal class-action lawsuit concerning the Yield Plus Fund. Filed in New York on Nov. 25, the lawsuit accuses Reserve Management of misleading thousands of investors in the fund by taking on risky investments, rather than preserving capital as initially advertised.

As reported Nov. 28 in USA Today, the risky investments in the Yield Plus Fund included Lehman Brothers debt. When Lehman filed for bankruptcy protection on Sept. 16, the Yield Plus Fund quickly broke the buck, and redemptions in the $1.1 billion fund were subsequently frozen.

The lawsuit also accuses TD Ameritrade of intentionally misleading clients in the Yield Plus Fund by characterizing the fund as a money market fund. In reality, the Yield Plus Fund is a diversified mutual fund that made high-risk investments as opposed to the conservative nature of a money market investment.

The Yield Plus Fund lawsuit is just one of a number of lawsuits on Reserve Management’s plate. To date, at least 16 other lawsuits have been filed against the company over another fund that it manages, the Reserve Primary Fund. The $64 billion Primary Fund, which is the oldest money-market fund in the United States, became the first fund in 14 years to break the buck after Lehman Brothers filed bankruptcy in September. At the time, Reserve Management told investors that redemptions only would take up to seven days.

Seven days ultimately turned into months. However, unlike the Yield Plus Fund, the Reserve Primary Fund is covered by the government’s bailout out plan. As for investors in the frozen Reserve Yield Plus Fund, their “coverage” is non-existent; instead, they are looking at double-digit losses.

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.

Bill Gross, chief investment manager at bond-fund giant Pacific Investment Management Company, has been grossly off lately when it comes to Pimco’s closed-end funds. Several of the funds, including the Pimco High Income Fund, the Pimco Corporate Opportunity Fund, the Pimco Floating Rate Strategy Fund, the Pimco Global Stocksplus Income Fund and others are down in value by 50% or more this year.

The Pimco High Income Fund in particular continues to be squeezed by plunging asset values. The $623.8 million fund has fallen 77% in value so far this year. In January, its share value was $14; as of Nov. 25, it is $3.32. In November, market conditions forced the fund to postpone a dividend payment for that month, as well as one scheduled for December, because the value of its portfolio securities had fallen below the required 200% asset- coverage ratio.

Pimco, a unit of Munich-based Allianz SE, has about $800 billion in assets under management.

Some of the problems for investors in Pimco’s closed-end funds can be traced to the collapse of the auction-rate securities market in February, which overnight eliminated a key source of financing and left preferred share holders unable to sell their aution bonds. In the months following the auction market’s demise, falling debt prices have increased the cost of borrowing and further pushed down already-battered asset values.

Pimco also is dealing with collateral damage from its overexposure to credit default swaps with Lehman Brothers and American Insurance Corporation (AIG).

A credit default swap is similar to an insurance contract between two parties. One party buys protection against the threat of default by a company, a municipality or, in some instances, pools of debt. The other party pays the seller a premium over a set period of time and then pays out if a default occurs.

According to Bloomberg, Pimco has sold credit default swaps that guarantee $760 million of debt issued by AIG. Should AIG, which continues to have financial troubles despite two bailouts from the federal government, ultimately go bankrupt, Pimco is on the fence to pay on those swaps.

As for Lehman, which filed bankruptcy on Sept. 15, sellers of credit-default protection on it will have to pay 91.375 cents on the dollar to settle their contracts. It will be the biggest payout yet in the $55 trillion credit default swap market. Pimco’s Total Return Fund, with some $130 billion under management, has written protection on a face amount of $105.4 million of Lehman debt as of June 30, according to regulatory filings.

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.

For thousands of investors in Hong Kong and Singapore - many of them retirees - the name of Lehman Brothers probably wasn’t a topic of daily discussion. That is until now. Because of investments linked to the bankrupt brokerage, investors are seeing their life savings disappear overnight.

The problem investments are two structured finance products called Pinnacle Notes Series 9 and 10, and are part of a Pinnacle Notes Series of credit-linked notes. Series 9 and 10 notes were issued by Pinnacle Performance and arranged by Morgan Stanley Asia.

As of Nov. 14, the two notes were forced into a mandatory redemption because of their connection to toxic collateralized debt obligations (CDOs) and financially troubled companies like Lehman Brothers Holdings, Freddie Mac and Fannie Mae.

Now, New York-based Morgan Stanley is giving investors the news they do not want to hear: They can expect to lose their entire original investment in the Pinnacle Notes Series 9 and 10.

Rumors of the eminent collapse of the Pinnacle Notes Series 9 and 10 have been circulating for the past month, fueled in part by the failures of other structured products like DBS High Notes 5. Like the Pinnacle Notes Series 9 and 10, the DBS High Notes also were linked to Lehman Brothers. When Lehman filed for bankruptcy protection on Sept. 15, the notes became essentially worthless.

According to information posted on Morgan Stanley’s Web site, Standard & Poor’s had previously slashed the ratings of the underlying assets in the Pinnacle Series 9 and 10 from AA to CCC-, or junk status.

The two series of the Pinnacle Notes were sold solely in Singapore through five distributors: brokers DMG & Partners, Kim Eng Securities, OCBC Securities and UOB Kay Hian and lender Hong Leong Finance. Pinnacle Performance, the issuer of the Pinnacle Notes Series 9 and 10, is a special purpose company incorporated in the Cayman Islands.

Like many of the stories coming forth from investors burned recently by structured finance products, investors in the Pinnacle Notes Series 9 and 10 say they were unaware of the high-level of risk involved. They put their trust in the financial institutions that sold them the securities. Now, like their investments, that trust is shattered.

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

For some, art is the window to their soul; for Lehman Brothers CEO Richard Fuld, art constitutes more money in his pocket. A Nov. 12 art sale at Christie’s International in New York yielded $13.5 million for 16 drawings from Fuld’s private collection. Ironically, a bidding war broke out for the disgraced Lehman executive’s “Study for Agony I” drawing by Arshile Gorky. It ultimately fetched $2.2 million.

Last week, plans were set in motion for Fuld to leave Lehman by the end of the year. He will not receive a severance or bonus. It’s unlikely that matters, however. Fuld made more than $20 million last year, and reportedly has taken in nearly $500 million during his 14 years at Lehman.

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. 

Lehman Brothers CEO Richard Fuld can’t catch a break - and with good reason. The embattled executive is at the center of controversy for his role in the financial troubles that ultimately led to the firm’s bankruptcy filing on Sept. 15. Now, federal prosecutors are turning up the heat on Fuld and Lehman, issuing subpoenas to a number of Wall Street securities firms and individual analysts for information to determine if investors were intentionally misled about the state of Lehman’s financial health.

As the supposed “eyes and ears” of investors, any information obtained from analysts could play a key role in getting to the truth on whether Lehman valued its assets at artificially high levels before filing for bankruptcy protection, according to an Oct. 22 story in the Wall Street Journal.

Fuld also has receiveded a subpoena to testify before a grand jury.

In a conference call held less than one week before Lehman Brothers filed for bankruptcy protection, the company told analysts it was financially sound. Twenty-four hours prior to that call, however, Lehman’s own executives stated the firm needed at least $3 billion in new capital.

On Sept. 15, when Lehman filed for Chapter 11 bankruptcy, the 158-year-old firm mad e history as becoming the largest bankruptcy in the United States. It had $613 billion of debt.

Meanwhile, the company’s CEO Richard Fuld pocketed more than $45 million in salary and bonuses in 2007, as well as directed that millions of dollars be given to Lehman executives even though at the time the company was pleading for a federal bailout.

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 what’s become a juggling act on the part of the government to reinvigorate the frozen state of the credit markets, the Federal Reserve will now provide $540 billion in financing to help money-market mutual funds swamped by investor redemptions.

Following the collapse of Lehman Brothers in September, along with other major financial upsets, nervous investors have withdrawn some $500 billion from money-market funds. On Sept. 16, one of the first and biggest money-market funds - the $63 billion Reserve Primary Fund - broke the buck after the net asset value of its shares fell below $1.

The Fed’s latest move to shore up money-market funds - a $3.3 trillion industry - entails an initiative called the “Money Market Investor Funding Facility” which, as its name implies, will provide liquidity to money-market fund investors. As part of the program, JP Morgan Chase will run five special facilities, with the Federal Reserve Bank of New York lending the facilities 90% of the purchase price of the assets that they buy. Among the assets eligible for purchase are certificates of deposit and commercial paper issued by highly rated financial institutions that has 90 days or less remaining until the mat urity date is reached.

The Federal Reserve says the Money Market Investor Funding Facility will remain in place until at least April 30.

Meanwhile, in a Bloomberg Television interview, Jim Bianco, president of Bianco Research LLC, called the government’s effort to back securities purchases from money-market funds a sign “that policy makers are trying to prevent Great Depression II.”

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.