Rating Agency Developments

On January 23, Fitch released its criteria for analyzing interest rate stresses in structured finance transactions and covered bondsFitch Report.

On January 22, DBRS released its methodology for rating wind power projectsDBRS Report.

On January 22, DBRS released its methodology for rating solar power projectsDBRS Report.

On January 22, S&P released its methodology for rating Japanese CMBSS&P Report.

On January 22, Fitch released an exposure draft seeking comments for sovereign risk impact on rating structured finance and covered bondsFitch Report.

On January 21, DBRS released its request for comment for rating supranational institutionsDBRS Report.

On January 21, DBRS released its cash flow assumptions for rating CLOs and CDOs backed by corporate debt.  DBRS Report.

On January 21, DBRS released its methodology for rating CLOs and CDOs backed by large corporate debtDBRS Report.

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Second Circuit Affirms Dismissal of Untimely CDO Claims against Merrill Lynch

On November 21, the Court of Appeals for the Second Circuit affirmed the dismissal of a suit brought by South Korea‘s Woori Bank against Merrill Lynch & Co., Inc. and Bank of America Corp. on statute of limitations grounds.  The bank brought claims for fraud, rescission, negligent misrepresentation and unjust enrichment on May 18, 2012 stemming from its $143 million investment in several collateralized debt obligations.  The Second Circuit agreed with the lower court that publicity about Merrill Lynch’s CDOs, related lawsuits and government investigations sufficiently alerted Woori to any claims prior to May 2009.  The bank’s claims were therefore time-barred under South Korea’s applicable three year statute of limitations.  Decision.

Rating Agency Developments

On November 20, S&P released a request for comment on its methodology for rating CDOs of project finance debt.  Comments must be submitted by December 21.  S&P Request for Comment.

On November 19, Moody’s released its updated approach to rating CLOsMoody’s Report.

On November 19, Moody’s released its approach to rating corporate synthetic CDOsMoody’s Report.

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Liquidators of Bear Stearns Hedge Funds Accuse Rating Agencies of Fraud

On November 12, the liquidators for two Bear Stearns overseas hedge funds filed their complaint against McGraw Hill, Standard & Poor’s, Moody’s, and Fitch (collectively the rating agencies) in an action in New York Supreme Court alleging that fraudulent ratings led to over $1 billion in losses for the funds’ investors.  According to the complaint, the funds invested in a portfolio of high-grade structured finance products, including CDOs and RMBS, where “at least 90% had the highest rating available,” and therefore depended heavily on ratings in making investment decisions.  The complaint alleges that the rating agencies knew that the ratings assigned to the securities in which the funds invested were false.  Plaintiffs claim that the rating agencies lacked independence from the issuers of the securities and that their ratings were tainted by a desire to maintain market share in a profitable industry.  The funds also allege that the rating agencies used relaxed standards in their initial ratings and subsequently failed to conduct proper ongoing surveillance of rated securities, leading to delays in downgrading ratings for allegedly faulty securities.  The liquidators initially commenced the action in July through New York’s summons with notice procedure.  Complaint.

Settlement Reached With Liquidators of Bear Stearns Hedge Funds

Several Bear Stearns defendants agreed to undisclosed terms with the joint official liquidators of two Bear Stearns hedge funds, resolving the liquidators’ claims for breach of fiduciary duty, breach of contract and negligence.  The terms of the settlement are undisclosed.  The lawsuit arose out of the failure of the Bear Stearns High Grade Structured Credit Strategies and Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage hedge funds that had allegedly invested heavily in Collateralized Debt Obligations (CDOs) and “CDO-squareds” (CDOs comprised of slices of other CDOs).  The liquidators alleged that the defendants failed to provide adequate oversight and risk management to the funds and placed their own interests ahead of those of the funds.  Complaint.  By virtue of the settlement, the lawsuit was dismissed with prejudice on August 16.  Stipulation.

Rating Agency Developments

On June 13, S&P released its insurance criteria for U.S. and Canadian CMBS transactions.  S&P Report.

On June 13, Fitch released its criteria for assigning short-term ratings for variable-rate demand obligations (VRDOs) or maturing commercial paper (CP) notes based on internal liquidity.  Fitch Report

On June 12, Fitch released its criteria for rating caps and limitations in global structured finance transactions.  Fitch Report

On June 12, DBRS released its methodology for European structured finance transactions.  DBRS Report

On June 11, DBRS released its methodology for CDOs of large corporate credit.  DBRS Report

On June 11, DBRS released its methodology for Canadian structured finance surveillance.  DBRS Report

On June 10, Fitch released its criteria for rating U.S. timeshare loan ABSFitch Report

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Rating Agency Developments

On May 9, Fitch released its guidelines for rating tender option bondsFitch Report.   

On May 9, Moody’s released its methodology for rating CLOsMoody’s Report.

On May 8, Fitch released its surveillance criteria for franchise loan ABSFitch Report

On May 7, S&P released its criteria for multiple-use special-purpose entitiesS&P Report

On May 7, S&P released its criteria for assessing guarantees in structured finance transactionsS&P Report.   

On May 7, S&P released its criteria for asset isolation and special-purpose entities in structured finance transactionsS&P Report

On May 7, Moody’s released its methodology for rating consumer loan ABS transactions.  Moody’s Report

On May 7, Moody’s released its guidelines for incorporating sovereign risk into (i) rating CDOs of SMEs in Europe; (ii) rating multi-pool financial lease-backed transactions in Italy; and (iii) rating EMEA auto loansMoody’s Report (SME CDO)Moody’s Report (Italy)Moody’s Report (EMEA Auto Loans)

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New York State Court Dismisses RMBS Fraud Suit Against UBS

On April 5, New York Supreme Court Justice Shirley Werner Kornreich dismissed with prejudice a suit brought by six Loreley Financing entities against various UBS entities.  Loreley alleged fraud stemming from UBS’s issuance of $331 million of CDOs, in which Loreley was an investor, that were comprised of RMBS and credit default swaps.  Loreley brought claims for common law fraud, conspiracy to defraud, aiding and abetting fraud, rescission, fraudulent conveyance and unjust enrichment.  Justice Kornreich held the allegations in the Complaint failed to show how UBS caused the CDOs to fail and therefore failed to state a claim, including for fraud.   Decision.

District Court Dismisses with Prejudice Loreley CDO Lawsuit

On March 28, Judge Richard Sullivan of the United States District Court for the Southern District of New York dismissed with prejudice a suit by five Loreley Financing entities against several banks and collateral managers stemming from Loreley’s investments in three CDOs that defaulted.  The defendants included Wells Fargo Bank, Harding Advisory, Structured Asset Investors and the three CDOs.  The court dismissed each of Loreley’s claims in their entirety.  It concluded that Loreley failed to allege adequately that an outside investor had interfered with the collateral managers’ asset selection.  The court also rejected Loreley’s allegations of material omissions in the offering documents, concluding that the information in question had been adequately disclosed to investors.  It further held that Loreley failed to plead facts giving rise to a strong inference that the defendants knew certain assets had decreased in value prior to purchasing them for one of the CDOs.  The court dismissed the remaining claims for the same reasons it dismissed the fraud claim.  Orrick represents Harding Advisory in this matter.  Order.