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.
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.
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.
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