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Home > Cases > Bank of America > Troubled Columbia Strategic Cash Portfolio Fund Hits Some Investors Hard

Troubled Columbia Strategic Cash Portfolio Fund Hits Some Investors Hard

Bank of America has been the subject of intense media scrutiny lately, mostly coverage of the good kind for its $50 billion rescue of Merrill Lynch, the nation's largest brokerage firm. Time will tell if the deal turns out to be the “shining bright star” that BofA's CEO Kenneth Lewis has described it to be. If past history is any indicator, however, the same refrain was used to characterize BofA's Columbia Strategic Cash Portfolio Fund, which was abruptly shut down in December following losses on toxic asset-backed securities.

The Strategic Cash Portfolio Fund is an enhanced money fund run by Bank of America's asset-management arm, Boston-based Columbia Management. The fund itself caters to wealthy institutional investors with a minimum investment of $25 million or more. In December 2007, Columbia stopped taking deposits after a single investor wanted $20 billion of its money from the fund.

As it turns out, holdings in the Strategic Cash Portfolio fund were connected to complex asset-backed securities and structured investment vehicles (SIVs). In addition, some of the SIVs in the fund had been downgraded by credit ratings agencies.

When Columbia was unable to satisfy investors' demands for withdrawals, it gave some of them securities instead of cash. The problem is the market for these illiquid securities continues to be less than desirable.

The city of St. Petersburg is one of the investors that got stuck with millions of dollars - $65 million worth - in those illiquid securities.

At the time the Strategic Cash Portfolio fund was closed in December 2007, it was a $12 billion fund. Two weeks prior, the fund - the largest of its kind - was reporting $40 billion in assets.

Enhanced money funds are designed to carry slightly higher risks than traditional money market funds. In exchange for the added risk, the funds offer higher returns for investors. This is accomplished partly through the portfolio make-up of enhanced money funds, which include investments in pools of mortgage-backed securities.

Unlike conventional money market funds, however, enhanced-cash funds are not required to maintain a $1 per share in net asset value.

Before its devaluation, the Strategic Cash Portfolio accounted for one-fifth of the total assets invested in enhanced money funds, according to Peter Crane, president of Crane Data, which tracks the money fund industry. Crane bases that number on the $200 billion currently invested in 15 enhanced cash funds, according to a Dec. 11, 2007, article in the New York Times.

Another firm that follows money market data, iMoneyNet, put the figure as high as $850 billion.

When Bank of America announced plans to shutter the Strategic Cash Portfolio fund, it was unclear which investors in the fund were covered. Some have been able to get their cash out, with several of the biggest investors told they would be given their share of the underlying securities in lieu of a cash payment.

Smaller shareholders were supposed to be able to cash out at the fund's share price, which at the time of closing was 99.4 cents on the dollar.

Now investors are questioning the valuations of the securities at the time of distribution. To sell them now when they are devalued could result in even more losses

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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.


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