CDOs

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.

Massachusetts Regulator Fines Deutsche Bank Securities for CDO Conflict of Interest

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.

Bank of America Discloses NYAG Investigation and SEC Inquiry into RMBS Practices

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.

California Attorney General Brings Action Against Standard and Poor’s

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.

RBS Wins Dismissal of South Korean Bank Case

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.