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.
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.
On March 13, the Massachusetts Securities Division (Division) and Deutsche Bank Securities Inc. (DBSI) entered into a Consent Order following an investigation into the issuance of collateralized debt obligations. DBSI consented to the Division’s characterization of the facts underlying the matter, and did not admit or deny the Division’s legal findings. According to the stipulated facts, DBSI helped design, build, and market a CDO (Carina CDO Ltd.) in 2006 while simultaneously buying protection against losses on similar CDOs. The Division found that DBSI violated Section 204(a)(2)(G) and (J) of the Massachusetts Uniform Securities Act by failing to disclose its conflict of interests in structuring and selling the Carina CDO while purchasing CDS protection referencing other CDOs with similar expected performance. DBSI agreed to cease and desist any violations of Massachusetts securities law, accept formal censure by the Division, and pay a $17.5 million civil penalty. Consent Order.
In its February 28, 2013 Form 10-K filed with the SEC, Bank of America disclosed that it is under investigation by the New York Attorney General over its purchase, securitization and underwriting of home loans and RMBS. According to the filing, Bank of America has received several subpoenas and requests for information, particularly relating to its underwriting and issuance of RMBS and involvement with certain collateralized debt obligation offerings. Additionally, the filing disclosed that the SEC has issued an inquiry to Bank of America regarding the SEC’s investigation of Merrill Lynch’s risk control, valuation, structuring, marketing and purchase of CDOs. Bank of America disclosed that it is providing documents and testimony to the New York Attorney General and the SEC in full cooperation with both investigations. Form 10-K Excerpt.
On February 5, the Attorney General of California, Kamala D. Harris, filed suit in Superior Court in California against Standard & Poor’s and its parent company, the McGraw Hill Company. The Complaint alleges violations of California’s False Claims Act, Unfair Competition Law, and False Advertising Law, and alleges that S&P made knowingly false representations in connection with credit ratings for RMBS and CDOs between 2004 and 2007. The complaint further alleges that California’s public pension funds lost hundreds of millions of dollars in connection with their purchase of RMBS rated by S&P. The state seeks treble damages, civil penalties and a permanent injunction. Complaint.
On December 27, 2012, Judge Harold Baer, Jr. of the United States District Court for the Southern District of New York dismissed an action brought by Woori Bank against RBS Securities and related entities claiming fraud, negligent misrepresentation, and unjust enrichment. Woori alleged that defendants knowingly marketed CDOs based on RMBS that had a greater risk than their ratings suggested, and that RBS fraudulently and negligently induced Woori to buy those CDOs. Further, Woori alleged that RBS concealed or failed to properly disclose their efforts to manipulate LIBOR rates. The court dismissed the fraud claim because Woori’s allegations did not specifically connect RBS’s alleged knowledge of problems or suspect behavior to the transactions at issue. Further, the court found that Woori was unable to show with sufficient specificity any facts that demonstrated RBS had created an inherently unfair transaction by failing to disclose information and accordingly dismissed the negligent misrepresentation claim. Decision.
On November 26, CIFG sued JP Morgan in Supreme Court for the State of New York for alleged losses stemming from its insurance of credit default swaps on two Bear Stearns RMBS-backed CDOs. CIFG alleges that instead of being selected and managed by independent collateral managers, the CDO portfolios were actually selected by Bear Stearns in order to unload its own risk. CIFG alleges it suffered more than $100 million in losses when the two CDOs defaulted. The complaint’s causes of action are for material misrepresentation in the inducement of an insurance contract and fraud. Complaint.
On September 10, Fitch updated its covered bond criteria. Fitch Report.
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