Archive for the “Mortgage Backed Securities” Category

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.

At least two more investors have filed a lawsuit against OppenheimerFunds, Inc. after assets in the Oppenheimer Champion Income Fund (OPCHX) entered a free fall last year. Investors Gary and Rita Wallen filed their lawsuit April 10 in a Denver, Colorado, U.S. District Court.

The couple’s complaint follows similar charges against Oppenheimer in which investors say managers of the Oppenheimer Champion Income Fund misled them about the fund’s portfolio composition. Instead of being a conservative high-income fund, the Champion Income Fund invested more than 25% of its assets in high-risk mortgage-backed securities and illiquid derivatives.

According to the fund’s own policies, that move required a majority vote from shareholders, something Oppenheimer failed to obtain and which violated state laws.

As a result of the high-risk investments, the Oppenheimer Champion Income Fund lost more than 80% of its value, dropping almost $2 billion over the course of a year. By comparison, other high-yield funds averaged a drop of 32% in 2008.

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 Schwab YieldPlus Fund (SWYPX) and the Schwab YieldPlus Select Fund (SWYSX) have become synonymous with class-action lawsuits and investor arbitration claims with the Financial Industry Regulatory Authority (FINRA). Portrayed by Charles Schwab and Co. as the equivalent of a money-market fund, the YieldPlus funds were instead concentrated in speculative, illiquid mortgage-backed securities, with more than 50% of the funds’ assets in these high-risk products.

When the subprime mortgage market collapsed in the summer of 2007, this over-concentration produced staggering losses for investors to the tune of $1.3 billion between July 1, 2007, and April 30, 2008.

In the lawsuits and FINRA arbitration claims that have since been filed, investors say San Francisco-based Charles Schwab intentionally misrepresented the risk factors associated with the YieldPlus funds. Investors also contend marketing materials on the funds, as well as statements made by YieldPlus fund managers, were materially misleading.

As an example, in a May 16, 2007, interview with Bloomberg TV, Matt Hastings, co-manager of the YieldPlus funds, says Schwab’s target investors for the YieldPlus funds “are money fund investors or investors who are defensive on the bond market.” 

To view the interview with Hastings in its entirety, go to http://video.aol.com/video-detail/fund-focus-schwab-yield-plus-fund/2456162970.

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.

Memphis-based Morgan Keegan & Co., the brokerage arm of Regions Financial Corp., is discovering the best-laid plans can indeed have dire - and expensive - consequences. In 2002, Morgan Keegan enthusiastically unveiled a group of high-yield bond funds filled with unconventional and untested structured finance products, including large concentrations of mortgage-backed securities. Today, Morgan Keegan and those bond funds are mired in lawsuits, with six cases costing the company more than $1.6 million in just the past two months.

For awhile, the RMK funds, which included the Select Intermediate Bond Fund and the Select High Income Fund, outperformed their peers. Then, in 2007, the subprime mortgage crisis took center stage and a dark cloud suddenly was cast over the future performance of the funds. In late 2006, the funds’ assets were $1.6 billion; by the end of June 2008, the figure had shrunk to $52 million.

As reported May 1 by the Birmingham Business Journal, investors in the RMK funds cried foul, contending the “safe” investments that Morgan Keegan had sold them essentially were now worthless. Hundreds of arbitration claims against Morgan Keegan soon followed, along with several class-action lawsuits.

Morgan Keegan’s bonds were fat with some of the “worst pieces of structured finance deals,” on the market, said securities expert Craig McCann of Virginia-based Securities Litigation & Consulting Group in the Birmingham Business Journal article.

New information regarding the risk factors of the bond funds and what Morgan Keegan did and did not reveal to investors, including the funds’ classification as investments similar to corporate bonds and preferred stocks when in fact they were high-risk derivatives, ultimately has helped investors prove their cases. Since early March, six different investors have rendered significant awards from FINRA arbitration panels. In one case, an investor won $950,000.

The bottom line: There seems to be a new trend shadowing the arbitration claims against Morgan Keegan and its bond funds, one in which more investors are coming out on top because the evidence speaks for itself.

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.

There appears to be no end in sight for the arbitration claims that keep piling up against Charles Schwab & Co. over losses suffered by investors in the Schwab YieldPlus Fund and the Schwab YieldPlus Select Fund. As recently as April 2009, investor claims were filed with the Financial Industry Regulatory Authority (FINRA), charging Schwab with breach of fiduciary duty, negligence, misrepresentation and fraud.

The focus of the claims centers on the fact that Schwab allegedly failed to disclose certain risks about the Schwab YieldPlus Funds. Specifically, investors say Schwab marketed and sold the funds as safe, low-risk alternatives to money-market investments, with the idea they would generate higher potential returns at only a slightly higher risk.

It turns out the Schwab YieldPlus Funds were heavily invested in subprime mortgage-backed securities, with more than 50% of the funds’ assets in these high-risk products. In the face of the subprime mortgage market collapse, this over-concentration caused investors to suffer $1.3 billion in losses between July 1, 2007, and April 30, 2008.

Since then, investors from Indiana to California have taken legal action against Charles Schwab, filing both arbitration claims with FINRA and class-action lawsuits. So far, FINRA arbitration panels have ruled in favor of several investors. In one decision, FINRA awarded more than half a million dollars, or about 81% of the investor’s claimed damages. Other FINRA claims have resulted in awards totaling 100% of investors’ claimed damages.

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.

One of the world’s biggest institutional managers has found itself in the middle of an investigation by Massachusetts securities regulator William Galvin. The Wall Street Journal first reported that Boston-based State Street Corp. was being targeted by Galvin over whether the firm intentionally misled pension funds and institutional investors about the risks of certain bond funds. 

Galvin’s probe apparently is zeroing in on State Street’s enhanced index bond funds, which include the State Street Limited Duration Bond Fund. According to the April 30 Journal article, the fund was marketed to pension funds, retirement plans and other investors as a safe, conservative bond fund when in actuality it held high-risk securities such as derivatives, swaps, and mortgage-backed assets.

This isn’t the first time State Street’s Limited Duration Bond has been at the center of state and federal investigations. Several investors previously sued State Street after suffering losses because of what they say was deception and gross negligence of State Street management to invest fixed-income funds in high-risk mortgage-backed securities. 

In January 2008, State Street set aside more than $600 million to settle legal claims over losses and other issues associated with its bond funds. If Galvin’s investigation turns up evidence proving State Street deceived pension funds and institutional investors, that amount could be just the beginning.

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.

Lewisburg, Tennessee, is a quaint, affable town known for rich farmland and friendly neighbors. Now, thanks to investment bank Morgan Keegan & Company, Lewisburg is becoming known for something else: municipal bond derivative deals gone bad.

The small city’s introduction to Morgan Keegan and the derivative instruments occurred five years ago, when Lewisburg was trying to lower the interest on a bond for a new sewer system. Bob Phillips, Lewisburg’s part-time mayor, approached Morgan Keegan for advice and quickly became immersed in the complex world of derivatives.

As reported April 7 by the New York Times, that world soon soured for Lewisburg an hundreds of small cities just like it. Municipalities that bought derivatives were much like homeowners, securing fixed-rate mortgages and then refinancing with lower interest, variable rate mortgages, says the New York Times article.

In the case of the municipalities, however, many officials now say they were never told or didn’t understand that interest rates on derivatives can go much higher if economic conditions turn sour.

When the inevitable happened and the economy, in fact, worsened, Lewisburg paid the price. The cost of interest paid on its sewer bonds has quadrupled to an astounding $1 million. As for Lewisburg residents, they face a 33% increase in water and sewer rates.

And the added costs couldn’t come at a worst time. Unemployment in Lewisburg currently stands at more than 10%, as a slew of established businesses close their doors. Even longtime employer Sanford Pencil, the Sharpie pen maker, is preparing to relocate to Mexico. 

At the time Lewisburg officials entered into their municipal derivative contract with Morgan Keegan, the Memphis based investment firm dominated nearly the municipal bond derivative business in Tennessee, both in terms of acting as an adviser and as an underwriter. According to the New York Times article, data compiled by Tennessee’s comptroller’s office show Morgan Keegan sold some $2 billion worth of municipal bond derivatives to 38 cities and counties since 2001.

Many of the deals orchestrated by Morgan Keegan have resulted in similar predicaments like happening in Lewisburg. In nearby Claiborne County, Tennessee, for instance, officials there are desperately trying to get out of a municipal bond derivative contract with Morgan Keegan. Doing so, however, will cost the county $3 million, money the county can ill afford.

The same is true in Mount Juliet. Located about 17 miles from downtown Nashville, city leaders recently learned that payments on their bonds had increased by 500% to $478,000, according to the New York Times story.

Meanwhile, as Lewisburg, Mount Juliet and many other Tennessee municipalities struggle to find a way out of their derivative messes, Morgan Keegan is counting the millions and millions of dollars in fees it’s collected by serving in the dual, and questionable, role of underwriter and adviser.

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. 

Warren Buffett famously called them “financial weapons of mass destruction,” and as it turns out, he was right. Collateral debt obligations (CDOs) not only brought down investment powerhouse Bear Stearns, but eventually also wreaked havoc on the nation’s entire financial system.

The exotic world of structured finance products is the subject of new book by author William Cohan, a former Wall Street banker for 17 years and best-selling author of The Last Tycoons: The Secret History of Lazard Frères & Co. Cohan’s new book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, explores the ripple effects of CDOs and how one of the country’s most formidable investment firms ultimately would bring about its own demise by betting heavily on these toxic mortgage-backed securities.

An excerpt of Cohan’s book is in the March 4 issue of Fortune magazine. Among other things, the article traces how an ill-fated decision by Bear Stearns management to become big players of CDOs and other risky financial instruments produced disastrous consequences for Bear Stearns and, later, financial markets everywhere.

At the center of Cohan’s story, of course, are Ralph Cioffi and Matthew Tannin, the two hedge fund managers largely credited with bringing Bear Stearns to its knees after losing billions in two collapsed hedge funds, while costing thousands of unsuspecting investors their life savings.

On June 19, 2008, the two men were arrested for allegedly misleading investors about the financial state of the two hedge funds they managed, the High Grade Strategy and Enhanced High Grade funds. Among other charges, Cioffi and Tannin were accused of deceiving their own investors and the funds’ institutional counterparts by fraudulently concealing from them the full extent of the funds’ deepening troubles.

Both the High Grade Strategy and Enhanced High Grade hedge funds failed in June 2007. Before crashing, the funds had more than $20 billion in assets.

The fall of 85-year-old Bear Stearns is without precedent. The company first joined the ranks of publicly traded Wall Street firms in October 1985. The share price of its initial public offering was $6. In January 2007, Bear Stearns stock peaked at $171.50. Throughout its entire history of doing business, the investment firm never had a losing quarter.

Then, in November 2007, the world changed for Bear Stearns. The company incurred a net loss of $854 million after lowering the valuation of its inventory of mortgage securities. Several months later, news of Cioffi and Tannin’s subterfuge came to light. And the rest, as they say, is history.

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William Cohan is set for release on March 10.

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. 

Hidden risks and bad bets by fund managers have translated into huge financial losses for investors in the Schwab YieldPlus Fund (SWYPX). Many investors now fault the marketing techniques used by Charles Schwab Corporation, accusing the company of pitching and selling Schwab YieldPlus as a higher-yielding alternative to money- market funds.

In truth, the Schwab YieldPlus Fund was overexposed to high-risk mortgage-backed securities. That fact, as well as information regarding the fund’s concentration in toxic collateralized obligations (CDOs), was never revealed to investors. The alleged deception not only exposed investors to substantially more risk but also compromised the liquidity of the fund itself.

San Francisco-based Charles Schwab first began offering shares of the Schwab YieldPlus Fund in 1999. At the time - as is the case even today - documents and sales materials characterized the fund as “providing higher yields on cash with only marginally higher risk.” Also touted were the fund’s investments, which would primarily be made in “high-quality investment-grade bonds,” according to corporate literature on the Schwab YieldPlus Fund.

Later, investors discovered the YieldPlus Fund was far from well-diversified or low risk. Instead, more than 50% of the fund’s assets had been invested in toxic mortgage-backed securities. The fact that Schwab management also relied on investment ratings from credit agencies paid by their own broker-dealers only added to the fund’s eventual financial troubles. In addition, the net asset values of the Schwab YieldPlus Fund ultimately turned out to be highly speculative and reportedly inflated.

The Schwab YieldPlus Fund is an ultra-short bond fund. According to a Nov. 17, 2007, YieldPlus prospectus, the fund is designed to generate income with minimal changes in share price. In marketing the fund to investors, Schwab managers and the company’s own Web site highlighted the fact that the safety of the YieldPlus Fund would be enhanced by the short duration of holdings in its portfolio. Both statements would later be proved inaccurate.

For risk-averse retirees living on a fixed income, the marketing hype produced a quick sell but ultimately devastating financial results. Illiquidity and investor redemptions took the Schwab YieldPlus Fund from nearly a $14 billion fund in July 2007 to a fund whose net assets had fallen to $500 million one year later.

Today, investors who’ve suffered losses in the Schwab YieldPlus Fund continue to file arbitration claims with the Financial Industry Regulatory Authority (FINRA) in an attempt to recover their financial investments. In October, one of those investors, Jeffrey Nielson, was awarded $542,340 as part of an arbitration claim against his broker for making misrepresentations and false statements about the extent of risk associated with the Schwab Yield PlusFund.

Many believe the October 2008 ruling by FINRA could be an omen of things to come for other investors with losses in the Schwab YieldPlus Fund. In addition to the increase in arbitration claims filed against Charles Schwab for its alleged mismanagement of the Schwab YieldPlus Fund, class action lawsuits also are underway. As in the arbitration claims, the lawsuits charge Charles Schwab of misrepresenting the Schwab YieldPlus Fund as a safe alternative to money market funds and omitting key facts, including the risks tied to the fund’s high concentration of subprime holdings.

At one time, the biggest holders in the YieldPlus Fund were other Charles Schwab funds. But, in what can only be described as a true vote of no-confidence, the company said in April 2008 that no Schwab funds now held the YieldPlus Fund.

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

Investors in the Oppenheimer Champion Income Fund (OCHBX, OPCHX and OCHCX) have lost millions of dollars because of decisions by the fund’s management to gamble on illiquid mortgage securities and credit-default swaps. Now, some investors - many of whom are retirees and have lost their entire life savings - are taking legal action. The first of what may be many arbitration claims to come has just been filed with the Financial Industry Regulatory Authority (FINRA).

Among the charges in the complaint: OppenheimerFunds and the former manager of the Oppenheimer Champion Income Fund, Angelo Manioudakis, intentionally withheld critical information about the fund’s risks and its concentration in toxic derivatives and other risky securities. 

As of Dec. 31, 2008, the Oppenheimer Champion Income Fund has seen the value of its assets plunge by more than 80%. The reason: Massive bets on subprime mortgage securities and total-return swaps. Total-return swaps are extremely complex agreements between parties to exchange cash flows in the future based on the performance of a set of underlying securities in the fund.

The Oppenheimer Champion Income Fund also contained credit-default swaps, another complicated and highly speculative derivative product. Credit-default swaps are like an insurance policy; they protect investors in the event a bond or loan defaults. In return for this guarantee, buyers agree to pay - much like an insurance premium - a fixed percentage fee to the seller of the contract.

There is a downside to this kind of speculative leveraging, however. Billionaire investor Warren Buffet spoke out against credit-default swaps as early as 2002, calling them “financial weapons of mass destruction.”

The $50-plus trillion market for credit-default swaps is unregulated. That means contracts are regularly traded without any oversight to ensure buyers actually can cover possible losses. When the mortgage-backed securities that many credit-default swaps were supporting began to plummet in value in 2007, investors quickly discovered their credit-default swaps to be a liability, rather than a guarantee, against risk. 

For sellers of credit-default swaps, the outcome can be equally grim. This is especially true in instances where the seller has provided insurance on companies that go bankrupt or experience severe financial problems. Oppenheimer’s Champion Income Fund found this out after selling credit-default swaps on Lehman Brothers Holdings, American International Group (AIG) and General Motors Corp.

At issue for investors in the Oppenheimer Champion Income Fund is the fact that the fund’s management, as well as various literature and materials on the fund, touted its investment strategy as “building a broad and diversified portfolio to help moderate the special risks of investing in high-yield debt instruments.”  Investors also claim the fund was advertised as far less risky than the typical high-income fund.

In reality, the Oppenheimer Champion Income Fund achieved neither. Instead, it invested in some of the most dangerous and toxic securities on the market.

For retirees and other conservative, risk-adverse investors who were in the Champion Income Fund, this strategy was a disaster waiting to happen.

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.