Massachusetts Secretary of State William F. Galvin Thursday charged UBS Securities LLC and UBS Financial Services Inc. with fraud and dishonest conduct in connection with UBS’s sale of auction rate securities.
After filing the complaint, Galvin’s office issued a statement saying UBS told investors “the investments were safe, liquid ‘cash alternatives’ when UBS knew they were not.”
The securities could only be redeemed at auctions conducted by UBS, usually held weekly. Galvin’s office accused UBS of continuing to sell the securities even as the company planned to suspend the auctions. In February 2008, it stopped selling them.
Many investors have been left with securities they can not convert to cash.
“UBS pushed the sales of these instruments as ‘cash alternatives’ without telling their customers of their vulnerabilities,” Galvin said in a prepared statement.
“The game was fixed,” Galvin said. “Only the customers were in the dark.”
Thursday, June 26, 2008
Wall Street Aware of Auction-Rate Danger, Still Sold to Investors
It's becoming clear now that Wall Street dealers knew that the demand for auction-rate securities was disappearing and even as they warned securities issuers that the market was in danger of collapsing, the dealers were still telling investors that these were safe and liquid investments they should buy into.
Many investors are probably suffering like Yanping Cui of Long Beach, California. Cui said her UBS AG broker urged her to invest in auction-rate bonds last December, but in that same month, UBS told one of the issuers of those auction-rate securities, a New Hampshire student-loan agency, that the $330 billion market was in danger of failing. The market did fail two months later and Cui was told she wouldn't get her money back until the market recovered. So much for the promises of safety and liquidity.
Bond documents and interviews show that Citigroup and UBS were among the dealers who sold auction-rate securities as low-risk while they were telling issuers that demand was softening.
Since March, at least 24 proposed class-action lawsuits have been filed against brokerages and a nine-state task force has been formed to examine how the firms marketed the auction-rate securities. Massachusetts, part of the task force, charged UBS with fraud today for its sales of auction-rate securities to the state's investors. Massachusetts alleges UBS told investors the long-term bonds were ``safe, liquid cash alternatives'' when the bank knew the securities weren't.
As the auction-rate market slowed last year, dealers at firms like UBS urged issuers to increase their bond's penalty rates to attract bidders. Issuers like the Missouri Higher Education Loan Authority and the New Hampshire Higher Eduction Loan Corp. raised their rates as a result. However, when bidders disappeared and the banks stopped buying unsold auction-rate bonds in February, the penalty rates issuers had to pay for failed auctions began soaring. Dealers didn't want to be known as the first to have a failed auction so some securities filings didn't disclose the new penalty rates and their implications of turmoil in the market until March, after buyers like Cui purchased auction-rate debt recommended by her broker.
So far, UBS has offered loans to their investors who are stuck in auction-rate securities. Meanwhile, UBS is cutting the estimated value of auction-rate securities held by its customers by 5 percent to reflect the lack of trading.
Many investors have lost their life savings or ability to even pay their next mortgage because their assets are frozen in the now worthless auction-rate paper. Investors are turning to arbitration and their lawyers for help and most are crying conflicts of interest; their financial advisers urged them to buy auction-rate securities and at the same time, those advisers' firms underwrote and managed the auctions.
Jon Corzine, New Jersey's Governor and former head of Goldman Sachs, pointed out that the securities were never truly liquid because they had a maturity on them. Corzine commented that investors' confusion may be how auction-rate securities were sold in the first place.
A settlement with the SEC in May 2006 over auction-rate securities sales practices required dealers to disclose risks to investors. A description of those practices can be found on most dealers' websites. A very close reader might have spotted that.
Many investors are probably suffering like Yanping Cui of Long Beach, California. Cui said her UBS AG broker urged her to invest in auction-rate bonds last December, but in that same month, UBS told one of the issuers of those auction-rate securities, a New Hampshire student-loan agency, that the $330 billion market was in danger of failing. The market did fail two months later and Cui was told she wouldn't get her money back until the market recovered. So much for the promises of safety and liquidity.
Bond documents and interviews show that Citigroup and UBS were among the dealers who sold auction-rate securities as low-risk while they were telling issuers that demand was softening.
Since March, at least 24 proposed class-action lawsuits have been filed against brokerages and a nine-state task force has been formed to examine how the firms marketed the auction-rate securities. Massachusetts, part of the task force, charged UBS with fraud today for its sales of auction-rate securities to the state's investors. Massachusetts alleges UBS told investors the long-term bonds were ``safe, liquid cash alternatives'' when the bank knew the securities weren't.
As the auction-rate market slowed last year, dealers at firms like UBS urged issuers to increase their bond's penalty rates to attract bidders. Issuers like the Missouri Higher Education Loan Authority and the New Hampshire Higher Eduction Loan Corp. raised their rates as a result. However, when bidders disappeared and the banks stopped buying unsold auction-rate bonds in February, the penalty rates issuers had to pay for failed auctions began soaring. Dealers didn't want to be known as the first to have a failed auction so some securities filings didn't disclose the new penalty rates and their implications of turmoil in the market until March, after buyers like Cui purchased auction-rate debt recommended by her broker.
So far, UBS has offered loans to their investors who are stuck in auction-rate securities. Meanwhile, UBS is cutting the estimated value of auction-rate securities held by its customers by 5 percent to reflect the lack of trading.
Many investors have lost their life savings or ability to even pay their next mortgage because their assets are frozen in the now worthless auction-rate paper. Investors are turning to arbitration and their lawyers for help and most are crying conflicts of interest; their financial advisers urged them to buy auction-rate securities and at the same time, those advisers' firms underwrote and managed the auctions.
Jon Corzine, New Jersey's Governor and former head of Goldman Sachs, pointed out that the securities were never truly liquid because they had a maturity on them. Corzine commented that investors' confusion may be how auction-rate securities were sold in the first place.
A settlement with the SEC in May 2006 over auction-rate securities sales practices required dealers to disclose risks to investors. A description of those practices can be found on most dealers' websites. A very close reader might have spotted that.
Huge Losses with Citigroup's Hedge Funds
The huge losses in Citigroup's Falcon Hedge Funds is causing a lot of pain for investors who didn't even know they were making a risky bet. Citi's Smith Barney advisers told investors that the Falcon Hedge Fund was solid and "bullet-proof" when it wasn't; in reality, the Falcon held a lot of risky mortgage-back securities. Worse, as Falcon deteriorated, Smith Barney advisers were still telling investors not to worry about the fund. Most people lost their investments by the time advisers started to tell the truth. If you lost money in Citigroup's Falcon Hedge Funds, you should probably contact a lawyer right away to discuss your legal options.
An unnamed conservative investor from La Habra, California lost hundreds of thousands of dollars with the Falcon fund. Smith Barney told this investor that the Falcon Hedge Fund was as bullet-proof as the municipal bonds he usually invested in and Falcon was only being offered to qualified investors who had three to five million dollars of investments with Smith Barney. Smith Barney demanded an immediate response from him and sweetened the pot by telling him the fund would give him a seven percent return, paid twice a year.
So, in October of last year, this investor gave $500,000 to Smith Barney for the Falcon fund and in less than 30 days, Falcon began to hemorrhage money. This investor demanded an explanation from Smith Barney right away and was still told the Falcon was bullet-proof and only a very small percentage of the fund was in mortgage-backed securities.
Still the fund continued to lose money and Smith Barney and Citigroup started to have conference calls that investors could call into and listen, and in those calls, they were still saying the Falcon would recover but it would take a little longer than three years to recoup the fund.
Four months after he bought into Falcon, our unnamed investor lost more than half of this initial investment. Finally, Smith Barney told him that the Falcon would never recover because there was too much invested in mortgage-backed securities and investors should not expect any dividends on the fund. Plus, investors who have had the fund for longer than three years should be able to sell their shares but Smith Barney suspended all sales and dividends.
This investor was repeatedly told that the Falcon Hedge fund was safe and bullet-proof but in a span of nine months, his initial $500,000 investment is down to $135,775. Obviously, what Smith Barney promised was very different from reality.
An unnamed conservative investor from La Habra, California lost hundreds of thousands of dollars with the Falcon fund. Smith Barney told this investor that the Falcon Hedge Fund was as bullet-proof as the municipal bonds he usually invested in and Falcon was only being offered to qualified investors who had three to five million dollars of investments with Smith Barney. Smith Barney demanded an immediate response from him and sweetened the pot by telling him the fund would give him a seven percent return, paid twice a year.
So, in October of last year, this investor gave $500,000 to Smith Barney for the Falcon fund and in less than 30 days, Falcon began to hemorrhage money. This investor demanded an explanation from Smith Barney right away and was still told the Falcon was bullet-proof and only a very small percentage of the fund was in mortgage-backed securities.
Still the fund continued to lose money and Smith Barney and Citigroup started to have conference calls that investors could call into and listen, and in those calls, they were still saying the Falcon would recover but it would take a little longer than three years to recoup the fund.
Four months after he bought into Falcon, our unnamed investor lost more than half of this initial investment. Finally, Smith Barney told him that the Falcon would never recover because there was too much invested in mortgage-backed securities and investors should not expect any dividends on the fund. Plus, investors who have had the fund for longer than three years should be able to sell their shares but Smith Barney suspended all sales and dividends.
This investor was repeatedly told that the Falcon Hedge fund was safe and bullet-proof but in a span of nine months, his initial $500,000 investment is down to $135,775. Obviously, what Smith Barney promised was very different from reality.
Losses Equal Write-Down Disaster for Citigroup
Analysts are forecasting that Citigroup losses will show even more write downs on subprime-related investments in the second quarter, reducing the value of its assets by $8.9 billion. The news has not been good for the nation’s largest bank and indicates more Citigroup trouble.
This is the third consecutive quarter showing Citigroup losses, and sent shares of the company’s stock to their lowest levels in more than a decade. The New York-based company has seen nearly $15 billion of losses in the past two quarters, with more than $46 billion of credit losses and write-downs since mid-2007. Now, analysts say Citigroup may write down $7.1 billion in collateralized debt obligations (CDOs) and associated hedges, and $1.2 billion for other asset classes.
A cut in Citigroup’s dividend program also is likely. This will be the second dividend cut this year. As reported June 26, 2008 on Bloomberg.com, Goldman Sachs analyst William Tanona lowered the ratings on U.S. brokerages from attractive to neutral, stating that the pace of deterioration in the financial sector is far worse than expected. Tanona also cut his six-month price target for Citigroup to $16 and put the bank on Goldman’s conviction sell list.
Goldman Sachs itself was downgraded June 26, 2008 by Wachovia, which cited renewed concerns about economic growth, slower prime brokerage business and a slowing pace of large capital raises. The downgrade caused Goldman’s stock to fall 2% to $180 in pre-market trading.
In early June of 2008, Gary Crittenden, Citi’s chief financial officer, warned of additional large write downs and credit losses in the second quarter, saying its business remained under pressure amid unprecedented market conditions. he latest news indicates Citigroup trouble is not unexpected.
This is the third consecutive quarter showing Citigroup losses, and sent shares of the company’s stock to their lowest levels in more than a decade. The New York-based company has seen nearly $15 billion of losses in the past two quarters, with more than $46 billion of credit losses and write-downs since mid-2007. Now, analysts say Citigroup may write down $7.1 billion in collateralized debt obligations (CDOs) and associated hedges, and $1.2 billion for other asset classes.
A cut in Citigroup’s dividend program also is likely. This will be the second dividend cut this year. As reported June 26, 2008 on Bloomberg.com, Goldman Sachs analyst William Tanona lowered the ratings on U.S. brokerages from attractive to neutral, stating that the pace of deterioration in the financial sector is far worse than expected. Tanona also cut his six-month price target for Citigroup to $16 and put the bank on Goldman’s conviction sell list.
Goldman Sachs itself was downgraded June 26, 2008 by Wachovia, which cited renewed concerns about economic growth, slower prime brokerage business and a slowing pace of large capital raises. The downgrade caused Goldman’s stock to fall 2% to $180 in pre-market trading.
In early June of 2008, Gary Crittenden, Citi’s chief financial officer, warned of additional large write downs and credit losses in the second quarter, saying its business remained under pressure amid unprecedented market conditions. he latest news indicates Citigroup trouble is not unexpected.
Tuesday, June 24, 2008
Thousands to be Laid Off from New York Mega Bank, Citigroup
After billions of dollars in investor losses related to subprime-backed mortgages and other similar investments, Citigroup’s employees are the ones who will ultimately have to suffer.
The New York-based banking giant is expected to begin a round of massive lay-offs of investment banking employees this week as part of a corporate plan to reduce its workforce by approximately 65,000 individuals.
As reported in the June 23, 2008 edition of the Wall Street Journal, Citigroup is in the same boat as many Wall Street investment banks as it tries to recover from bad investments on subprime-related mortgages that caused more than $16 billion in write downs in the first quarter alone. Citigroup’s write downs and credit losses from the collapse of the subprime mortgage market now total almost $40 billion, with billions of additional write downs anticipated in the second quarter.
With more than 350,000 employees worldwide, and 9,000 former employees as of March 31, 2008 Citigroup will be hit hard. According to the Wall Street Journal article, the forthcoming job cuts are part of Chief Executive Vikram Pandit’s goal to reduce Citigroup’s annual expenses by $15 billion.
The New York-based banking giant is expected to begin a round of massive lay-offs of investment banking employees this week as part of a corporate plan to reduce its workforce by approximately 65,000 individuals.
As reported in the June 23, 2008 edition of the Wall Street Journal, Citigroup is in the same boat as many Wall Street investment banks as it tries to recover from bad investments on subprime-related mortgages that caused more than $16 billion in write downs in the first quarter alone. Citigroup’s write downs and credit losses from the collapse of the subprime mortgage market now total almost $40 billion, with billions of additional write downs anticipated in the second quarter.
With more than 350,000 employees worldwide, and 9,000 former employees as of March 31, 2008 Citigroup will be hit hard. According to the Wall Street Journal article, the forthcoming job cuts are part of Chief Executive Vikram Pandit’s goal to reduce Citigroup’s annual expenses by $15 billion.
Bear Stearns Execs Indicted and 400 Charged in Mortgage Fraud
While Ralph Cioffi and Matthew Tannin, former Bear Stearns hedge fund managers, were indicted and charged with conspiracy, securities fraud and wire fraud on Thursday, more than 400 people were also charged in a wide-ranging probe of mortgage abuses during the U.S. housing boom.
The indictment accuses Cioffi and Tannin of marketing the Bear Stearns hedge funds as low-risk when in fact they were made up mostly of risky sub-prime mortgages. Cioffi and Tannin are also accused of making misrepresentations to keep investors from redeeming their shares and failing to let investors know the funds were collapsing. The funds lost $1.4 billion dollars when it collapsed last summer and triggered global panic in the financial markets.
Meanwhile, between March and June, the Department of Justice and the FBI has charged 406 people for engaging in a variety of schemes related to housing fraud. They're calling this national probe Operation Malicious Mortgage.
Just as Cioffi and Tannin were arrested, officials also arrested 60 some people in 144 separate cases related to mortgage fraud. FBI estimates the cases have resulted in one billion in losses.
These arrests show that the Justice Department and the FBI are being vigilant in punishing those who engaged in mortage fraud. The Operation Malicious Mortgage task force is investigating a variety of tactics including lending fraud, foreclosure rescue scams and mortgage-related bankruptcy schemes. The task force will also look into fraudulent misrepresentations about the borrower's financial status, the use of false or fictitious employment records or the inflation of property values. Foreclosure schemes usually involve criminals who target legitimate homeowners in dire circumstances and collect fees for supposed foreclosure prevention services.
The indictment accuses Cioffi and Tannin of marketing the Bear Stearns hedge funds as low-risk when in fact they were made up mostly of risky sub-prime mortgages. Cioffi and Tannin are also accused of making misrepresentations to keep investors from redeeming their shares and failing to let investors know the funds were collapsing. The funds lost $1.4 billion dollars when it collapsed last summer and triggered global panic in the financial markets.
Meanwhile, between March and June, the Department of Justice and the FBI has charged 406 people for engaging in a variety of schemes related to housing fraud. They're calling this national probe Operation Malicious Mortgage.
Just as Cioffi and Tannin were arrested, officials also arrested 60 some people in 144 separate cases related to mortgage fraud. FBI estimates the cases have resulted in one billion in losses.
These arrests show that the Justice Department and the FBI are being vigilant in punishing those who engaged in mortage fraud. The Operation Malicious Mortgage task force is investigating a variety of tactics including lending fraud, foreclosure rescue scams and mortgage-related bankruptcy schemes. The task force will also look into fraudulent misrepresentations about the borrower's financial status, the use of false or fictitious employment records or the inflation of property values. Foreclosure schemes usually involve criminals who target legitimate homeowners in dire circumstances and collect fees for supposed foreclosure prevention services.
Evergreen Ultra Short Opportunities Fund Class Action
A class action was filed today in the U.S. District Court for the District of Massachusetts on behalf of purchasers of all classes of shares of the Evergreen Ultra Short Opportunities Fund (Evergreen Ultra-Sht;A, Evergreen Ultra-Sht;B,
Evergreen Ultra-Sht;C, Evergreen Ultra-Sht;I (the "Ultra-Short Opportunities Fund" or the "Fund") who purchased or otherwise acquired shares of the Fund within three years of the filing of this lawsuit (the "Class"), seeking to pursue remedies under the Securities Act of 1933 (the "Securities Act"). Prior to August 1, 2005, the Fund was known as the Evergreen Ultra Short Bond Fund.
The complaint alleges that Evergreen Investment Management Co., LLC ("Evergreen Co.") and certain related entities, and officers and directors, violated the Securities Act. Evergreen Investment Management Co., LLC serves as the investment advisor to a group of mutual funds marketed under the Evergreen name. Evergreen Investments is the brand name under which Wachovia Corporation (Wachovia Corp) conducts its investment management business.
On or about May 29, 2003, the defendants began offering shares of the Ultra Short Bond Fund pursuant to an initial registration statement, filed with the SEC as a Form 485BPOS (the "Registration Statement"). The complaint charges that defendants solicited investors to purchase shares of the Fund by stating that the Fund's investment objective was to: "provide current income consistent with preservation of capital and low principal fluctuation." The complaint alleges that these statements were materially false and misleading because the fund employed an undisclosed high-risk strategy that led to realized losses of approximately 18 percent and seeks to recover damages on behalf of the Class.
Beginning on or about June 9, 2008, the Fund's per share net asset values declined precipitously across all share classes. On June 19, 2008 the Fund reported that it was liquidating, and that its net assets were only $403 million, far lower than the $731.4 million net asset value reported by the Fund on March 31, 2008.
Anyone wishing to serve as lead plaintiff must move the Court no later than 60 days from today. If you wish to consider joining this action as lead plaintiff, discuss this action or have any questions concerning this notice or your rights or interests, please contact plaintiffs' counsel at the phone numbers or e-mail addresses listed below. Any member of the purported class may move the Court to serve as lead plaintiff through counsel of their choice, or may choose to do nothing and remain an absent class member.
Evergreen Ultra-Sht;C, Evergreen Ultra-Sht;I (the "Ultra-Short Opportunities Fund" or the "Fund") who purchased or otherwise acquired shares of the Fund within three years of the filing of this lawsuit (the "Class"), seeking to pursue remedies under the Securities Act of 1933 (the "Securities Act"). Prior to August 1, 2005, the Fund was known as the Evergreen Ultra Short Bond Fund.
The complaint alleges that Evergreen Investment Management Co., LLC ("Evergreen Co.") and certain related entities, and officers and directors, violated the Securities Act. Evergreen Investment Management Co., LLC serves as the investment advisor to a group of mutual funds marketed under the Evergreen name. Evergreen Investments is the brand name under which Wachovia Corporation (Wachovia Corp) conducts its investment management business.
On or about May 29, 2003, the defendants began offering shares of the Ultra Short Bond Fund pursuant to an initial registration statement, filed with the SEC as a Form 485BPOS (the "Registration Statement"). The complaint charges that defendants solicited investors to purchase shares of the Fund by stating that the Fund's investment objective was to: "provide current income consistent with preservation of capital and low principal fluctuation." The complaint alleges that these statements were materially false and misleading because the fund employed an undisclosed high-risk strategy that led to realized losses of approximately 18 percent and seeks to recover damages on behalf of the Class.
Beginning on or about June 9, 2008, the Fund's per share net asset values declined precipitously across all share classes. On June 19, 2008 the Fund reported that it was liquidating, and that its net assets were only $403 million, far lower than the $731.4 million net asset value reported by the Fund on March 31, 2008.
Anyone wishing to serve as lead plaintiff must move the Court no later than 60 days from today. If you wish to consider joining this action as lead plaintiff, discuss this action or have any questions concerning this notice or your rights or interests, please contact plaintiffs' counsel at the phone numbers or e-mail addresses listed below. Any member of the purported class may move the Court to serve as lead plaintiff through counsel of their choice, or may choose to do nothing and remain an absent class member.
Monday, June 23, 2008
Evergreen Investments Liquidating Ultra-Short Fund After 18% Drop
Wachovia's money-management arm, Evergreen Investments, is liquidating it's $403 million Evergreen Ultra-Short Opportunities Fund after it dropped a whopping 18% this month. Three quarters of the fund's assets are mortgage-backed securities.
Shareholders in the Ultra-Short Opportunities Fund will receive $7.48 a share (per closing price on June 18th) and Wachovia will finance the redemptions to guarantee that price.
Managed by Lisa Brown-Premo and Robert Rowe, the Evergreen Ultra-Short has lost 20% this year and is second worst among ultra-short bond funds.
Evergreen is not alone in its losses though. Rival funds like Fidelity and Charles Schwab's YieldPlus funds are all linked to investments in mortgage-backed securities and have suffered major losses, prompting investor lawsuits.
Schwab's YieldPlus fund, which is down 29 percent, takes the title as the worst performer among ultra-short funds. YieldPlus funds were marketed as alternatives to money-market accounts that provided higher returns by taking more risk.
At the end of the first quarter, two thirds of Evergreen's Ultra-Short Opportunities assets were home-loan securities without guarantees from government-linked entities such as Fannie Mae or asset-backed securities that may be tied to subprime mortgages. The fund is carrying a $13 million share of the Novastar ABS CDO I Ltd., a group of low-rated sub-prime mortgage bonds created last year, at $9.1 million, or 70 percent of its face value.
Standard & Poor's already gave a non-investment grade rating of B to that debt. The shareholdings will need to be valued correctly to make sure investors who redeem their shares aren't receiving too much or too little.
Shareholders in the Ultra-Short Opportunities Fund will receive $7.48 a share (per closing price on June 18th) and Wachovia will finance the redemptions to guarantee that price.
Managed by Lisa Brown-Premo and Robert Rowe, the Evergreen Ultra-Short has lost 20% this year and is second worst among ultra-short bond funds.
Evergreen is not alone in its losses though. Rival funds like Fidelity and Charles Schwab's YieldPlus funds are all linked to investments in mortgage-backed securities and have suffered major losses, prompting investor lawsuits.
Schwab's YieldPlus fund, which is down 29 percent, takes the title as the worst performer among ultra-short funds. YieldPlus funds were marketed as alternatives to money-market accounts that provided higher returns by taking more risk.
At the end of the first quarter, two thirds of Evergreen's Ultra-Short Opportunities assets were home-loan securities without guarantees from government-linked entities such as Fannie Mae or asset-backed securities that may be tied to subprime mortgages. The fund is carrying a $13 million share of the Novastar ABS CDO I Ltd., a group of low-rated sub-prime mortgage bonds created last year, at $9.1 million, or 70 percent of its face value.
Standard & Poor's already gave a non-investment grade rating of B to that debt. The shareholdings will need to be valued correctly to make sure investors who redeem their shares aren't receiving too much or too little.
Bear Stearns Emails Detail Hedge Fund Losses
Email messages allegedly sent by two ex-Bear Stearns Cos. hedge fund managers indicted for fraud show even sophisticated professionals disregard the dangers of putting sensitive information in e-mails.
Ralph Cioffi, 52, and Matthew Tannin, 46, were charged last week with misleading investors by saying two funds were thriving while knowing subprime-mortgage investments threatened their collapse. Investors in the funds lost $1.6 billion. The indictments cited e-mails from both business and personal accounts in which the men described looming problems.
Cioffi and Tannin are the first to be indicted over charges relating to last year's subprime mortgage crisis. The government is continuing its probe of banks and mortgage firms whose losses in subprime loans and related securities total $397 billion.
The men were each charged in federal court in Brooklyn, New York, with conspiracy, securities fraud and wire fraud. Cioffi also was charged with insider trading. They face as much as 20 years in prison if convicted on the most serious counts. Both men denied the charges and vowed to win at trial.
Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. The investment bets by the funds, which put most of their assets in subprime-mortgage- related securities, failed last June when prices for collateralized-debt obligations linked to loans fell amid rising late payments by borrowers with poor credit or heavy debt.
The indictments brought to light e-mail conversations that allegedly took place between the two men and others about the health of the funds, including a March 15, 2007, message from Cioffi to a team economist with the subject line ``Fear.''
"As we discussed it may not be a meltdown for the general economy but in our world it will be,'' the indictment quotes Cioffi as writing. "Wall Street will be hammered with lawsuits. Dealers will lose millions and the CDO business will not be the same for years.''
CDOs are created by packaging assets including bonds and loans and using their income to pay investors. The securities are divided into different portions of varying risk and can offer higher returns than the debt on which they are based.
"E-mail is very stark; it's something you put up on the screen in front of a jury and you can center your whole case around that language,'' Hochberg said.
Using a personal e-mail account, rather than a business account, can still implicate a defendant, ex-prosecutors said.
According to the indictment, Tannin sent an e-mail from a personal account to the personal e-mail account of Cioffi's wife.
"The subprime market is pretty damn ugly,'' Tannin wrote in the message, according to the indictment. "I think we should close the funds now.''
While e-mails can be easily retrieved from business or commercial Internet service-providers, many defendants use the medium with the belief that it's private communication, prosecutors said. Just using e-mail itself can be used by the government as evidence of guilt, one former prosecutor said.
"If you have one or a handful of damning e-mails on a personal account, prosecutors will argue that use of e-mail is consciousness of guilt because they took a route to communication that they thought wouldn't be discovered,'' said Daniel Horwitz, a former assistant district attorney in Manhattan, now a partner at the law firm Dickstein Shapiro.
Cioffi acknowledged in a private e-mail that certain types of CDOs, which included subprime debt, rated AAA or AA were "not really AAA,'' because they were subject to heightened risk of defaults, according to the indictment.
Differences between defendants' public and private communications can help prosecutors show that they were telling the truth when their guard was down, legal experts said.
Cioffi said in another e-mail that a fund's loss in February was the result of a failure to properly hedge market volatility, prosecutors said. The following month, he told investors "we were effectively able to hedge.''
The case is U.S. v. Cioffi, 08-00415, U.S. District Court, Eastern District of New York (Brooklyn).
Ralph Cioffi, 52, and Matthew Tannin, 46, were charged last week with misleading investors by saying two funds were thriving while knowing subprime-mortgage investments threatened their collapse. Investors in the funds lost $1.6 billion. The indictments cited e-mails from both business and personal accounts in which the men described looming problems.
Cioffi and Tannin are the first to be indicted over charges relating to last year's subprime mortgage crisis. The government is continuing its probe of banks and mortgage firms whose losses in subprime loans and related securities total $397 billion.
The men were each charged in federal court in Brooklyn, New York, with conspiracy, securities fraud and wire fraud. Cioffi also was charged with insider trading. They face as much as 20 years in prison if convicted on the most serious counts. Both men denied the charges and vowed to win at trial.
Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. The investment bets by the funds, which put most of their assets in subprime-mortgage- related securities, failed last June when prices for collateralized-debt obligations linked to loans fell amid rising late payments by borrowers with poor credit or heavy debt.
The indictments brought to light e-mail conversations that allegedly took place between the two men and others about the health of the funds, including a March 15, 2007, message from Cioffi to a team economist with the subject line ``Fear.''
"As we discussed it may not be a meltdown for the general economy but in our world it will be,'' the indictment quotes Cioffi as writing. "Wall Street will be hammered with lawsuits. Dealers will lose millions and the CDO business will not be the same for years.''
CDOs are created by packaging assets including bonds and loans and using their income to pay investors. The securities are divided into different portions of varying risk and can offer higher returns than the debt on which they are based.
"E-mail is very stark; it's something you put up on the screen in front of a jury and you can center your whole case around that language,'' Hochberg said.
Using a personal e-mail account, rather than a business account, can still implicate a defendant, ex-prosecutors said.
According to the indictment, Tannin sent an e-mail from a personal account to the personal e-mail account of Cioffi's wife.
"The subprime market is pretty damn ugly,'' Tannin wrote in the message, according to the indictment. "I think we should close the funds now.''
While e-mails can be easily retrieved from business or commercial Internet service-providers, many defendants use the medium with the belief that it's private communication, prosecutors said. Just using e-mail itself can be used by the government as evidence of guilt, one former prosecutor said.
"If you have one or a handful of damning e-mails on a personal account, prosecutors will argue that use of e-mail is consciousness of guilt because they took a route to communication that they thought wouldn't be discovered,'' said Daniel Horwitz, a former assistant district attorney in Manhattan, now a partner at the law firm Dickstein Shapiro.
Cioffi acknowledged in a private e-mail that certain types of CDOs, which included subprime debt, rated AAA or AA were "not really AAA,'' because they were subject to heightened risk of defaults, according to the indictment.
Differences between defendants' public and private communications can help prosecutors show that they were telling the truth when their guard was down, legal experts said.
Cioffi said in another e-mail that a fund's loss in February was the result of a failure to properly hedge market volatility, prosecutors said. The following month, he told investors "we were effectively able to hedge.''
The case is U.S. v. Cioffi, 08-00415, U.S. District Court, Eastern District of New York (Brooklyn).
Saturday, June 21, 2008
Jefferson County Sewer Customer Sues
A Jefferson County sewer system customer sued current and former county commissioners, Wall Street banks, bond insurers and others on Tuesday, contending that some of the deals to pay for work on the sewer system involved negligence and fraud.
The complaint, filed in Jefferson County Circuit Court, seeks money damages for losses suffered by sewer ratepayers "due to defendants' wrongful conduct and dereliction of duties, which has directly caused or contributed to the wrongful increases in their sewer rates."
A Jefferson County sewer system customer sued current and former county commissioners, Wall Street banks, bond insurers and others on Tuesday, contending that some of the deals to pay for work on the sewer system involved negligence and fraud.
The complaint, filed in Jefferson County Circuit Court, seeks money damages for losses suffered by sewer ratepayers "due to defendants' wrongful conduct and dereliction of duties, which has directly caused or contributed to the wrongful increases in their sewer rates."
The complaint, filed in Jefferson County Circuit Court, seeks money damages for losses suffered by sewer ratepayers "due to defendants' wrongful conduct and dereliction of duties, which has directly caused or contributed to the wrongful increases in their sewer rates."
A Jefferson County sewer system customer sued current and former county commissioners, Wall Street banks, bond insurers and others on Tuesday, contending that some of the deals to pay for work on the sewer system involved negligence and fraud.
The complaint, filed in Jefferson County Circuit Court, seeks money damages for losses suffered by sewer ratepayers "due to defendants' wrongful conduct and dereliction of duties, which has directly caused or contributed to the wrongful increases in their sewer rates."
Thursday, June 19, 2008
Former Bear Stearns Hedge Fund Managers Indicted
Ralph Cioffi and Matthew Tannin, ex-Bear Stearns hedge fund managers, were arrested today and charged with mail fraud and conspiracy to commit securities fraud.
The first prosecution in U.S. regulators' crackdown on sub-prime fraud (which has a total loss close to $400 billion so far), Cioffi and Tannin are charged with misleading investors about the prospect of two Bear Stearns hedge funds whose collapse last year started the sub-prime mortgage crisis. Cioffi was also charged with insider trading and the SEC is also suing the men for duping investors before the funds imploded.
The collapse of the Bear Stearns hedge funds ignited the credit crisis and many lawsuits against Countrywide Financial, American Home Mortgage Investment, Citigroup and JPMorgan Chase have followed. Some lawsuits against Bear Stearns are accusing the firm of knowing the investments in the two failed hedge funds weren't worth what they were telling shareholders. Bear Stearns was forced to sell itself at a discount to J.P. Morgan to avoid bankruptcy this past March.
If Cioffi and Tannin are convicted of conspiracy to commit securities fraud, wire fraud or mail fraud, they can face up to 30 years in prison.
Cioffi was the manager and Tannin was the chief operating officer of the two failed Bear Stearns hedge funds (the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd.) The funds invested close to all of their assets in sub-prime-mortgage-related securities. Their investment bets imploded last June when prices for collateralized-debt obligations (CDOs) linked to loans plummeted amid default by borrowers who shouldn't have qualified for the loans in the first place.
According to the Wall Street Journal, the smoking gun is in an e-mail allegedly sent by Cioffi and Tannin suggesting that their funds were headed for trouble when four days later, they told investors they were comfortable with their holdings. Tannin allegedly e-mailed Cioffi saying he was afraid that the market for bond securities they had invested in was ``toast,'' and suggested shutting the funds. But Cioffi and Tannin have told colleagues that they quickly were convinced that Tannin's concerns were misplaced.
Cioffi left Bears Stearns last December amid prosecutors and the SEC's investigation into whether he withdrew $2 million of his money from the two hedge funds before their collapse in July. Investors lost $1.6 billion in the two Bear Stearns funds which once held $20 billion in assets. The funds filed for bankruptcy last July.
Barclays PLC, the Britain's third-biggest bank, claimed in its lawsuit against Bear Stearns that it was misled about the health of Bear's so-called enhanced fund. Barclays suit is also accusing Cioffi of withdrawing his $2 million at the same time Bear Stearns persuaded Barclays to double its investment in the hedge funds. Barclays suit cites a February e-mail from Tannin to Barclays in which Tannin allegedly said the fund is "having our best month ever'' and that our "hedges are working beautifully.'' However, Barclays said at the time, the fund was having "severe'' liquidity problems and had lost hundreds of millions already. Plus, internally, Cioffi and Tannin had discussed the "wipe out'' of the fund.
Cioffi and Tannin's indictment may open the floodgates and lead to a flood of criminal cases and civil suits against brokerage firms and their brokers. Separately today, the U.S. Justice Department already charged more than 400 people in a mortgage-fraud sweep they're calling Operation Malicious Mortgage.
The first prosecution in U.S. regulators' crackdown on sub-prime fraud (which has a total loss close to $400 billion so far), Cioffi and Tannin are charged with misleading investors about the prospect of two Bear Stearns hedge funds whose collapse last year started the sub-prime mortgage crisis. Cioffi was also charged with insider trading and the SEC is also suing the men for duping investors before the funds imploded.
The collapse of the Bear Stearns hedge funds ignited the credit crisis and many lawsuits against Countrywide Financial, American Home Mortgage Investment, Citigroup and JPMorgan Chase have followed. Some lawsuits against Bear Stearns are accusing the firm of knowing the investments in the two failed hedge funds weren't worth what they were telling shareholders. Bear Stearns was forced to sell itself at a discount to J.P. Morgan to avoid bankruptcy this past March.
If Cioffi and Tannin are convicted of conspiracy to commit securities fraud, wire fraud or mail fraud, they can face up to 30 years in prison.
Cioffi was the manager and Tannin was the chief operating officer of the two failed Bear Stearns hedge funds (the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd.) The funds invested close to all of their assets in sub-prime-mortgage-related securities. Their investment bets imploded last June when prices for collateralized-debt obligations (CDOs) linked to loans plummeted amid default by borrowers who shouldn't have qualified for the loans in the first place.
According to the Wall Street Journal, the smoking gun is in an e-mail allegedly sent by Cioffi and Tannin suggesting that their funds were headed for trouble when four days later, they told investors they were comfortable with their holdings. Tannin allegedly e-mailed Cioffi saying he was afraid that the market for bond securities they had invested in was ``toast,'' and suggested shutting the funds. But Cioffi and Tannin have told colleagues that they quickly were convinced that Tannin's concerns were misplaced.
Cioffi left Bears Stearns last December amid prosecutors and the SEC's investigation into whether he withdrew $2 million of his money from the two hedge funds before their collapse in July. Investors lost $1.6 billion in the two Bear Stearns funds which once held $20 billion in assets. The funds filed for bankruptcy last July.
Barclays PLC, the Britain's third-biggest bank, claimed in its lawsuit against Bear Stearns that it was misled about the health of Bear's so-called enhanced fund. Barclays suit is also accusing Cioffi of withdrawing his $2 million at the same time Bear Stearns persuaded Barclays to double its investment in the hedge funds. Barclays suit cites a February e-mail from Tannin to Barclays in which Tannin allegedly said the fund is "having our best month ever'' and that our "hedges are working beautifully.'' However, Barclays said at the time, the fund was having "severe'' liquidity problems and had lost hundreds of millions already. Plus, internally, Cioffi and Tannin had discussed the "wipe out'' of the fund.
Cioffi and Tannin's indictment may open the floodgates and lead to a flood of criminal cases and civil suits against brokerage firms and their brokers. Separately today, the U.S. Justice Department already charged more than 400 people in a mortgage-fraud sweep they're calling Operation Malicious Mortgage.
Criminal Indictments of Former Bear Stearns Hedge Fund Managers Substantiates Investor Claims that the Game was Rigged
Criminal indictments that were announced today of the former managers of the Bear Stearns hedge funds show that the game was rigged and that the interests of investors were sacrificed so that the manipulators of this apparent scheme could enrich themselves.
In the 28 page indictment, federal prosecutors from the Office of the United States Attorney, for the Eastern District of New York, charged Ralph R. Cioffi, Jr., a resident of Tenafly, New Jersey, with four counts of securities fraud. Matthew Tannin, a resident of New York City, was charged with three counts of securities fraud. Mr. Cioffi and Mr. Tannin were portfolio managers of the Bear Stearns High Grade Structured Credit Strategies Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Fund.
Mr. Cioffi and Mr. Tannin were charged with conspiracy to commit securities fraud and wire fraud, securities fraud in connection with the High Grade and Enhanced funds and wire fraud. Mr. Cioffi was separately charged with insider trading
Bear Stearns has previously disclosed that the events leading up to the demise of the Bear Stearns High Grade Structured Credit Strategies Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Fund - and the management of both funds by portfolio managers Cioffi and Tannin - are the subject of a number of regulatory investigations by the United States Securities & Exchange Commission, the Office of the Secretary of the Commonwealth of Massachusetts and other authorities.
According to Steven B. Caruso, of Maddox Hargett & Caruso’s office in New York City, “These indictments clearly indicate that officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at their hedge funds, for an extended period of time before they imploded, and that, as a result of the apparent desire of these managers to enrich themselves in what now appears to have been a rigged game, the financial interests of victims of this nefarious scheme - including both individual investors and professional money managers from around the world, were sacrificed.”
Added Ryan Bakhtiari, of Aidikoff, Uhl & Bakhtiari, “Given Bear Stearns’ dominance in the mortgage-backed and derivative securities underwriting markets and their purported reputation for integrity in the hedge fund arena, these indictments strongly suggest that when their reputational facade is stripped away, what remains is nothing more than an investment firm failing to adequately protect the interests of their clients.”
The legal team pursuing the arbitration claims includes the immediate past president and several current and former directors of the Public Investors Arbitration Bar Association (PIABA), the co-chairman of the American Bar Association Securities Arbitration Subcommittee, the current chair and past members of the FINRA National Arbitration and Mediation Committee (NAMC), a former general counsel of a national brokerage company, a former state securities commissioner, and a past member of the NASD Securities Arbitration Policy Task Force.
In the 28 page indictment, federal prosecutors from the Office of the United States Attorney, for the Eastern District of New York, charged Ralph R. Cioffi, Jr., a resident of Tenafly, New Jersey, with four counts of securities fraud. Matthew Tannin, a resident of New York City, was charged with three counts of securities fraud. Mr. Cioffi and Mr. Tannin were portfolio managers of the Bear Stearns High Grade Structured Credit Strategies Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Fund.
Mr. Cioffi and Mr. Tannin were charged with conspiracy to commit securities fraud and wire fraud, securities fraud in connection with the High Grade and Enhanced funds and wire fraud. Mr. Cioffi was separately charged with insider trading
Bear Stearns has previously disclosed that the events leading up to the demise of the Bear Stearns High Grade Structured Credit Strategies Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Fund - and the management of both funds by portfolio managers Cioffi and Tannin - are the subject of a number of regulatory investigations by the United States Securities & Exchange Commission, the Office of the Secretary of the Commonwealth of Massachusetts and other authorities.
According to Steven B. Caruso, of Maddox Hargett & Caruso’s office in New York City, “These indictments clearly indicate that officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at their hedge funds, for an extended period of time before they imploded, and that, as a result of the apparent desire of these managers to enrich themselves in what now appears to have been a rigged game, the financial interests of victims of this nefarious scheme - including both individual investors and professional money managers from around the world, were sacrificed.”
Added Ryan Bakhtiari, of Aidikoff, Uhl & Bakhtiari, “Given Bear Stearns’ dominance in the mortgage-backed and derivative securities underwriting markets and their purported reputation for integrity in the hedge fund arena, these indictments strongly suggest that when their reputational facade is stripped away, what remains is nothing more than an investment firm failing to adequately protect the interests of their clients.”
The legal team pursuing the arbitration claims includes the immediate past president and several current and former directors of the Public Investors Arbitration Bar Association (PIABA), the co-chairman of the American Bar Association Securities Arbitration Subcommittee, the current chair and past members of the FINRA National Arbitration and Mediation Committee (NAMC), a former general counsel of a national brokerage company, a former state securities commissioner, and a past member of the NASD Securities Arbitration Policy Task Force.
Wednesday, June 18, 2008
Tender Offer For Citigroup Falcon Hedge Fund to Move Forth
One of Citigroup’s much-beleaguered Falcon Strategies hedge funds has been given the green light to move forth with a tender offer initiated in May as part of its wind down.
As reported June 17 on Bloomberg.com, a New York federal judge rejected a request by investors to halt the tender offer of the Falcon Strategies Two LLC fund. In a proposed class-action suit filed May 20, investors - who were not asking for any damages - claimed the offering memorandum omitted important information and details regarding future legal claims, the value of their stakes in the fund and the shares’ current net asset value.
In the fourth quarter of 2007, Citigroup’s Falcon Strategies Two fund fell almost 53 percent in value, ultimately plummeting nearly 80 percent overall. The losses were largely attributed to the fund betting on mortgage-backed and preferred securities, as well as making trades based on the relative values of municipal bonds and U.S. Treasuries.
By the end of 2007, almost 99 percent of the fund’s assets were invested in 11 Citigroup-affiliated funds engaged in the risky strategies, according to the Bloomberg article. Since March, Citigroup has been in the process of liquidating the Falcon Strategies Two fund, after it suspended the fund’s redemptions and distributions. In May, Citigroup revealed that the U.S. Securities and Exchange Commission (SEC) had requested records related to the bank’s hedge funds but did not identify the specific funds.
The Falcon fund initiated its tender offer on May 8, with a scheduled expiration date of June 30. According to the offering documents, the offer would pay 45 cents a share. The shares, valued at $1 each when the fund began in 2004, now have a net asset value of 19 cents to 21 cents, according to court papers. The turn of events surrounding Citigroup’s Falcon Strategies hedge fund has no doubt left investors feeling duped and cheated. Unknown to them, the Falcon Strategies funds were not, as promised, the safe alternatives to money market investments. Instead, investors found themselves in extremely high-risk investment strategies - so much so that the funds ultimately lost the majority of their value.
As reported June 17 on Bloomberg.com, a New York federal judge rejected a request by investors to halt the tender offer of the Falcon Strategies Two LLC fund. In a proposed class-action suit filed May 20, investors - who were not asking for any damages - claimed the offering memorandum omitted important information and details regarding future legal claims, the value of their stakes in the fund and the shares’ current net asset value.
In the fourth quarter of 2007, Citigroup’s Falcon Strategies Two fund fell almost 53 percent in value, ultimately plummeting nearly 80 percent overall. The losses were largely attributed to the fund betting on mortgage-backed and preferred securities, as well as making trades based on the relative values of municipal bonds and U.S. Treasuries.
By the end of 2007, almost 99 percent of the fund’s assets were invested in 11 Citigroup-affiliated funds engaged in the risky strategies, according to the Bloomberg article. Since March, Citigroup has been in the process of liquidating the Falcon Strategies Two fund, after it suspended the fund’s redemptions and distributions. In May, Citigroup revealed that the U.S. Securities and Exchange Commission (SEC) had requested records related to the bank’s hedge funds but did not identify the specific funds.
The Falcon fund initiated its tender offer on May 8, with a scheduled expiration date of June 30. According to the offering documents, the offer would pay 45 cents a share. The shares, valued at $1 each when the fund began in 2004, now have a net asset value of 19 cents to 21 cents, according to court papers. The turn of events surrounding Citigroup’s Falcon Strategies hedge fund has no doubt left investors feeling duped and cheated. Unknown to them, the Falcon Strategies funds were not, as promised, the safe alternatives to money market investments. Instead, investors found themselves in extremely high-risk investment strategies - so much so that the funds ultimately lost the majority of their value.
Tuesday, June 17, 2008
Cuomo is Moving Fast with Auction-Rate Investigation
New York Attorney General Andrew Cuomo is making fast progress with his investigation of the auction-rate securities market meltdown.
Moving quicker than other state attorneys general and federal regulators, Cuomo's office subpoenaed 18 banks and financial firms in April as part of a criminal probe into how banks and brokerages marketed auction-rate securities as cash equivalents with better yields than money market funds.
Since the auction-rate market froze in February, most individual and corporate investors have not been able to access their money. According to an ex-branch chief of the SEC, Cuomo is also talking to registered reps, reaching out to a number of customers, and handling six to seven requests his clients (anonymous for now) received from regulators.
Under the Martin Act, Cuomo's subpoenas will give New York investigators broad powers. Cuomo is already asking for information on how bankers persuaded borrowers to issue the bonds and what make the banks decide to stop bidding in mid-February.
Other regulators are also putting forth their auction-rate investigations. The North American Securities Administrators Association announced in March that regulators from Massachusetts, Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington formed a task force to investigate the collapse of the auction-rate market. Meanwhile, the SEC is partnering with the Financial Industry Regulatory Authority in their auction-rate probe. Individual investors are also seeking help via lawsuits.
These are the companies subpoenaed by Cuomo so far: Bank of America, Citigroup, Deutsche Bank AG, E*Trade Financial, First Albany, Goldman, JPMorgan Chase, Lehman Brothers Holdings, Merrill Lynch, Morgan Keegan, Morgan Stanley, Piper Jaffrey, Raymond James Financial, RBC Dain Rauscher, TD Ameritrade Holding, UBS AG, Wachovia and its subsidiary AG Edwards.
Moving quicker than other state attorneys general and federal regulators, Cuomo's office subpoenaed 18 banks and financial firms in April as part of a criminal probe into how banks and brokerages marketed auction-rate securities as cash equivalents with better yields than money market funds.
Since the auction-rate market froze in February, most individual and corporate investors have not been able to access their money. According to an ex-branch chief of the SEC, Cuomo is also talking to registered reps, reaching out to a number of customers, and handling six to seven requests his clients (anonymous for now) received from regulators.
Under the Martin Act, Cuomo's subpoenas will give New York investigators broad powers. Cuomo is already asking for information on how bankers persuaded borrowers to issue the bonds and what make the banks decide to stop bidding in mid-February.
Other regulators are also putting forth their auction-rate investigations. The North American Securities Administrators Association announced in March that regulators from Massachusetts, Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington formed a task force to investigate the collapse of the auction-rate market. Meanwhile, the SEC is partnering with the Financial Industry Regulatory Authority in their auction-rate probe. Individual investors are also seeking help via lawsuits.
These are the companies subpoenaed by Cuomo so far: Bank of America, Citigroup, Deutsche Bank AG, E*Trade Financial, First Albany, Goldman, JPMorgan Chase, Lehman Brothers Holdings, Merrill Lynch, Morgan Keegan, Morgan Stanley, Piper Jaffrey, Raymond James Financial, RBC Dain Rauscher, TD Ameritrade Holding, UBS AG, Wachovia and its subsidiary AG Edwards.
Barclays Bear Stearns Complaint May Assist US Attorney
A complaint by Barclays PLC, the U.K.'s third-biggest bank, over the implosion of two Bear Stearns Cos. hedge funds that invested in subprime mortgages may help guide prosecutors probing whether executives broke the law.
Barclays Bank PLC, a unit of London-based Barclays, claimed it lost "hundreds of millions of dollars'' in one fund because Bear Stearns Asset Management Inc. and two managers hid negative financial information, according to a complaint amended June 6 in federal court in New York. Managers Ralph Cioffi and Matthew Tannin might be criminally charged within a week, the Wall Street Journal reported yesterday, citing unidentified people familiar with the case.
The U.S. Justice Department is examining the collapse of the funds, which helped trigger the credit crisis last year and led Bear Stearns to agree in March to sell itself to JPMorgan & Chase Co.
Prosecutors will study the Barclays complaint, which claims Cioffi and Tannin engaged in "conscious deception of Barclays and others,'' according to a lawyer not involved in the case.
"I would expect prosecutors to pay close attention to those sets of allegations,'' former federal prosecutor Andrew Hruska said yesterday in a phone interview. "The facts underlying the civil lawsuit could be become direct evidence in their case in chief if they file criminal charges.''
Barclay's lost "almost all'' of a $400 million investment made after August 2006 in a fund known as Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., referred to as the Enhanced Fund, according to the complaint.
Cioffi and Tannin convinced Barclays to become the sole shareholder after deceiving the bank about another fund, Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., referred to as the High-Grade Fund, according to the complaint.
Both the Enhanced Fund and the High-Grade Fund once had $20 billion in assets, Barclays claimed. The two Bear Stearns funds failed when prices for collateralized-debt obligations linked to subprime mortgages plummeted as late payments among U.S. borrowers with poor credit histories or heavy debts increased.
Cioffi, 52, and Tannin, 46, wooed Barclays by touting the success of the High-Grade Fund, which began in March 2003 and had a 50 percent return by January 2007, according to the complaint.
Bear Stearns Asset Management, Cioffi and Tannin hid "problems and disarray'' in the High-Grade Fund including a failure to get approval from the board of directors for hundreds of self-dealing transactions, according to the complaint. Barclays also wasn't told that Bear Stearns had halted transactions with the High-Grade Fund, the bank said in its complaint.
In its complaint, Barclays accuses Bear Stearns Asset Management, Cioffi and Tannin of fraud, conspiracy and breach of fiduciary duties. Barclays seeks unspecified compensatory and punitive damages.
The case is Barclays Bank Plc v. Bear Stearns Asset Management, 07-cv-11400, U.S. District Court, Southern District of New York (Manhattan).
Barclays Bank PLC, a unit of London-based Barclays, claimed it lost "hundreds of millions of dollars'' in one fund because Bear Stearns Asset Management Inc. and two managers hid negative financial information, according to a complaint amended June 6 in federal court in New York. Managers Ralph Cioffi and Matthew Tannin might be criminally charged within a week, the Wall Street Journal reported yesterday, citing unidentified people familiar with the case.
The U.S. Justice Department is examining the collapse of the funds, which helped trigger the credit crisis last year and led Bear Stearns to agree in March to sell itself to JPMorgan & Chase Co.
Prosecutors will study the Barclays complaint, which claims Cioffi and Tannin engaged in "conscious deception of Barclays and others,'' according to a lawyer not involved in the case.
"I would expect prosecutors to pay close attention to those sets of allegations,'' former federal prosecutor Andrew Hruska said yesterday in a phone interview. "The facts underlying the civil lawsuit could be become direct evidence in their case in chief if they file criminal charges.''
Barclay's lost "almost all'' of a $400 million investment made after August 2006 in a fund known as Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., referred to as the Enhanced Fund, according to the complaint.
Cioffi and Tannin convinced Barclays to become the sole shareholder after deceiving the bank about another fund, Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., referred to as the High-Grade Fund, according to the complaint.
Both the Enhanced Fund and the High-Grade Fund once had $20 billion in assets, Barclays claimed. The two Bear Stearns funds failed when prices for collateralized-debt obligations linked to subprime mortgages plummeted as late payments among U.S. borrowers with poor credit histories or heavy debts increased.
Cioffi, 52, and Tannin, 46, wooed Barclays by touting the success of the High-Grade Fund, which began in March 2003 and had a 50 percent return by January 2007, according to the complaint.
Bear Stearns Asset Management, Cioffi and Tannin hid "problems and disarray'' in the High-Grade Fund including a failure to get approval from the board of directors for hundreds of self-dealing transactions, according to the complaint. Barclays also wasn't told that Bear Stearns had halted transactions with the High-Grade Fund, the bank said in its complaint.
In its complaint, Barclays accuses Bear Stearns Asset Management, Cioffi and Tannin of fraud, conspiracy and breach of fiduciary duties. Barclays seeks unspecified compensatory and punitive damages.
The case is Barclays Bank Plc v. Bear Stearns Asset Management, 07-cv-11400, U.S. District Court, Southern District of New York (Manhattan).
Monday, June 16, 2008
Auction Rate Securities - FINRA Requires Firms to Allow Customers To Sell
FINRA is providing guidance to member firms on obligations that may arise in connection with customer requests to sell generally illiquid securities and informing customers of buy interest in such securities.
Recently, questions have been raised regarding a firm’s obligations when it receives a customer’s unsolicited instruction to liquidate a position in an illiquid security when the customer is aware of specific buying interest in that security. There is no FINRA rule that would require a firm to refuse to follow the customer’s instruction under these circumstances, even if the firm believes the market or price for the security is not favorable at that time. In those instances, the firm should fully disclose the pricing risks to the customer and receive a written acknowledgment that the customer understands those risks.
FINRA also recognizes that theremay be valid reasons for a firm to delay, or obtain more information, before following a customer’s instructions (e.g., if the firm has reason to doubt the identity of the person giving the instruction). However, a firm’s refusal to follow the customer’s unsolicited instruction to sell to a specific buyer may violate NASD Rule 2110. When the following conditions are present, firms should not delay or decline executing such a transaction in an illiquid security:
(1) the customers on both sides of the transaction have indicated their understanding that the firm is not recommending the transaction ormaking a suitability determination;
(2) the customers understand that the firm cannot reach a view as to the sufficiency or competitiveness of pricing; and
(3) there are no legitimate concerns as to the ability of both sides to settle the proposed transaction.
Customers may also learn of buy interest fromtheir firm. In informing customers of buy interest, firms should also consider appropriate disclosure, including, as applicable, information regarding the firm’s inability tomake a representation as to the nature, fairness or sufficiency of the pricing; and any pecuniary interest the firmmay have in the transaction. If the firm recommends the transaction to a customer, the firm has additional obligations andmust ensure that the transaction is suitable pursuant to NASD Rule 2310.3
Recently, questions have been raised regarding a firm’s obligations when it receives a customer’s unsolicited instruction to liquidate a position in an illiquid security when the customer is aware of specific buying interest in that security. There is no FINRA rule that would require a firm to refuse to follow the customer’s instruction under these circumstances, even if the firm believes the market or price for the security is not favorable at that time. In those instances, the firm should fully disclose the pricing risks to the customer and receive a written acknowledgment that the customer understands those risks.
FINRA also recognizes that theremay be valid reasons for a firm to delay, or obtain more information, before following a customer’s instructions (e.g., if the firm has reason to doubt the identity of the person giving the instruction). However, a firm’s refusal to follow the customer’s unsolicited instruction to sell to a specific buyer may violate NASD Rule 2110. When the following conditions are present, firms should not delay or decline executing such a transaction in an illiquid security:
(1) the customers on both sides of the transaction have indicated their understanding that the firm is not recommending the transaction ormaking a suitability determination;
(2) the customers understand that the firm cannot reach a view as to the sufficiency or competitiveness of pricing; and
(3) there are no legitimate concerns as to the ability of both sides to settle the proposed transaction.
Customers may also learn of buy interest fromtheir firm. In informing customers of buy interest, firms should also consider appropriate disclosure, including, as applicable, information regarding the firm’s inability tomake a representation as to the nature, fairness or sufficiency of the pricing; and any pecuniary interest the firmmay have in the transaction. If the firm recommends the transaction to a customer, the firm has additional obligations andmust ensure that the transaction is suitable pursuant to NASD Rule 2310.3
Bear Stearns Hedge Fund Managers Face Criminal Charges
After a yearlong investigation, federal prosecutors are preparing to file criminal charges against Ralph Cioffi and Matthew Tannin, managers of two Bear Stearns hedge funds that imploded last year.
Cioffi and Tannin, former Bear Stearns managers, managed two high-profile bond portfolios for the securities firm's asset-management unit. The federal investigation focused on whether the managers deliberately misled investors by telling them the funds will perform well when they were privately telling colleagues that the funds may not survive the volatility in the mortgage market. Cioffi and Tannin could be charged with securities fraud as soon as next week and that indictment would be the first criminal charges against Wall Street executives borne out of the worldwide credit crisis that began last year.
The collapse of the two Bear Stearns hedge funds cost investors $1.6 billion and helped mark the start of the credit crisis. Weeks before the funds' meltdown in June 2007, Cioffi and Tannin were still painting a rosy picture for investors. The funds' implosion raises questions about Bear Stearns' managerial oversight and risk controls. Bear Stearns' large mortgage portfolio and over-reliance on short-term funding also spelled its downfall when clients panicked and pulled their money out, triggering its collapse and a shotgun marriage with J.P. Morgan.
Cioffi and Tannin's funds, the High-Grade Structured Credit Strategies Fund and its riskier sister fund, used large amounts of borrowed cash and securities to invest in pools of bonds backed by low-end sub-prime mortgages. Cioffi, a former mortgage salesman, was highly regarded by investors and investor money poured in when the funds were created in 2006, some of it from sophisticated professional investors and corporate titans.
As the sub-prime mortgage market began to come to a head in February 2007, Cioffi still told investors at a conference late that month that a meltdown in the sector was "unlikely to occur." But in March, Cioffi sought and received permission from Bear Stearns' compliance officials to move $2 million of the $6 million he had personally invested in the riskier hedge fund into a separate internal fund called Structured Risk Partners. Cioffi explained that the transfer was an effort to use money gained from his investment in the High-Grade fund to give a boost to a neighboring hedge fund at the firm.
In emails with colleagues in April 2007, Cioffi expressed concerns about the credit markets and how a downturn might affect his investors. Yet, according to the transcripts of an April 25th call with fund investors, Cioffi said he was "cautiously optimistic" about his and Tannin's ability to hedge their portfolio. Cioffi said "the market will stabilize" and he and Tannin had a plan to get the funds back on track and the funds had enough cash on hand. Tannin echoed Cioffi's reassurances and advised investors not to be alarmed by the news. "We're quite comfortable with where we sit," said Tannin.
In May, Cioffi and Tannin began selling billions worth in bonds to raise cash for the struggling funds. Bad news leaked out and some investors rushed to get their money back. But the Cioffi and Tannin didn't have enough cash to repay investors and meet margin calls so they refused the redemption requests. That was like adding hot oil to water.
By late June, Cioffi and Tannin had given up on the riskier sister fund and left it to die. Bear Stearns agreed to lend up to $3.2 billion in an effort to save the less risky High Grade fund but eventually only lent half of that amount which the fund never fully repaid. On July 31, the funds filed for bankruptcy protection in a New York federal court.
Neither side of the investigation has commented but Cioffi has told people that he and Tannin denies misleading anyone and they were grappling with the volatile mortgage markets just as the rest of the financial world was.
Federal prosecutors have not hinted at bringing broader charges against Bear Stearns (now part of J.P. Morgan Chase) or its executives. However, Cioffi and Tannin's indictment over the two hedge funds could bear down on other companies and executives now under investigation for alleged criminal missteps related to the mortgage-market meltdown. For example, UBS AG, Countrywide and American Home Mortgage Investment are all being investigated for some type of securities, loan or accounting fraud.
Cioffi and Tannin, former Bear Stearns managers, managed two high-profile bond portfolios for the securities firm's asset-management unit. The federal investigation focused on whether the managers deliberately misled investors by telling them the funds will perform well when they were privately telling colleagues that the funds may not survive the volatility in the mortgage market. Cioffi and Tannin could be charged with securities fraud as soon as next week and that indictment would be the first criminal charges against Wall Street executives borne out of the worldwide credit crisis that began last year.
The collapse of the two Bear Stearns hedge funds cost investors $1.6 billion and helped mark the start of the credit crisis. Weeks before the funds' meltdown in June 2007, Cioffi and Tannin were still painting a rosy picture for investors. The funds' implosion raises questions about Bear Stearns' managerial oversight and risk controls. Bear Stearns' large mortgage portfolio and over-reliance on short-term funding also spelled its downfall when clients panicked and pulled their money out, triggering its collapse and a shotgun marriage with J.P. Morgan.
Cioffi and Tannin's funds, the High-Grade Structured Credit Strategies Fund and its riskier sister fund, used large amounts of borrowed cash and securities to invest in pools of bonds backed by low-end sub-prime mortgages. Cioffi, a former mortgage salesman, was highly regarded by investors and investor money poured in when the funds were created in 2006, some of it from sophisticated professional investors and corporate titans.
As the sub-prime mortgage market began to come to a head in February 2007, Cioffi still told investors at a conference late that month that a meltdown in the sector was "unlikely to occur." But in March, Cioffi sought and received permission from Bear Stearns' compliance officials to move $2 million of the $6 million he had personally invested in the riskier hedge fund into a separate internal fund called Structured Risk Partners. Cioffi explained that the transfer was an effort to use money gained from his investment in the High-Grade fund to give a boost to a neighboring hedge fund at the firm.
In emails with colleagues in April 2007, Cioffi expressed concerns about the credit markets and how a downturn might affect his investors. Yet, according to the transcripts of an April 25th call with fund investors, Cioffi said he was "cautiously optimistic" about his and Tannin's ability to hedge their portfolio. Cioffi said "the market will stabilize" and he and Tannin had a plan to get the funds back on track and the funds had enough cash on hand. Tannin echoed Cioffi's reassurances and advised investors not to be alarmed by the news. "We're quite comfortable with where we sit," said Tannin.
In May, Cioffi and Tannin began selling billions worth in bonds to raise cash for the struggling funds. Bad news leaked out and some investors rushed to get their money back. But the Cioffi and Tannin didn't have enough cash to repay investors and meet margin calls so they refused the redemption requests. That was like adding hot oil to water.
By late June, Cioffi and Tannin had given up on the riskier sister fund and left it to die. Bear Stearns agreed to lend up to $3.2 billion in an effort to save the less risky High Grade fund but eventually only lent half of that amount which the fund never fully repaid. On July 31, the funds filed for bankruptcy protection in a New York federal court.
Neither side of the investigation has commented but Cioffi has told people that he and Tannin denies misleading anyone and they were grappling with the volatile mortgage markets just as the rest of the financial world was.
Federal prosecutors have not hinted at bringing broader charges against Bear Stearns (now part of J.P. Morgan Chase) or its executives. However, Cioffi and Tannin's indictment over the two hedge funds could bear down on other companies and executives now under investigation for alleged criminal missteps related to the mortgage-market meltdown. For example, UBS AG, Countrywide and American Home Mortgage Investment are all being investigated for some type of securities, loan or accounting fraud.
FINRA Speeding up Investigation of Fraud against Senior Investors
The Financial Industry Regulatory Authority (FINRA) isn't wasting any time in investigating several cases involving possible fraud against senior investors; their cases will receive top priority in the regulatory agency's examinations and enforcement and restitution actions.
FINRA will have teams looking into possible fraud cases and they have four months to complete their probe. If wrongdoing is found, cases will be given top priority in the enforcement division.
FINRA will focus on "free-lunch" seminars, in which advisers target large groups of potential investors with high-pressure sales talks, and on the use of credentials that falsely create the impression an adviser is trained to work with older clients.
Usually, regulatory investigation can take months to a few years but investment fraud against senior investors can be detrimental to their livelihood so FINRA is moving quickly in an attempt to protect these older investors who have become big targets with their vast sums of retirement money.
It is not uncommon to find seniors who have been duped out of their life savings since now more are responsible for their self-funded retirement accounts instead of company-managed pension plans. Plus, advanced age or medical problems could prevent them from monitoring their advisors and investments.
FINRA's actions will probably cause brokerage firms to raise the priority level for senior issues among broker-dealers as well.
FINRA will have teams looking into possible fraud cases and they have four months to complete their probe. If wrongdoing is found, cases will be given top priority in the enforcement division.
FINRA will focus on "free-lunch" seminars, in which advisers target large groups of potential investors with high-pressure sales talks, and on the use of credentials that falsely create the impression an adviser is trained to work with older clients.
Usually, regulatory investigation can take months to a few years but investment fraud against senior investors can be detrimental to their livelihood so FINRA is moving quickly in an attempt to protect these older investors who have become big targets with their vast sums of retirement money.
It is not uncommon to find seniors who have been duped out of their life savings since now more are responsible for their self-funded retirement accounts instead of company-managed pension plans. Plus, advanced age or medical problems could prevent them from monitoring their advisors and investments.
FINRA's actions will probably cause brokerage firms to raise the priority level for senior issues among broker-dealers as well.
Friday, June 13, 2008
Fidelity Sued For Ultra-Short Bond Fund Losses
Fidelity Investments, the world's largest mutual-fund company, is being sued over losses linked to investments in subprime mortgage-backed securities made by its Ultra-Short Bond Fund.
Fidelity made "misleading or inaccurate'' statements in the bond fund's registration documents, investor Alan Zametkin said in a complaint filed June 5 in U.S. District Court in Massachusetts. The fund has fallen 6.8 percent this year and 13 percent in the past 12 months.
Fidelity's is at least the second ultra-short bond fund sued over subprime-related losses. San Francisco-based Charles Schwab Corp., the largest U.S. online broker, faces eight proposed group lawsuits from investors in its YieldPlus Fund, which is down 32 percent in the past year, compared with an average decline of 1.2 percent for similar funds.
Ultra-short bond funds invest in corporate, mortgage-backed and government securities with maturities of one year or less. The $330 million Fidelity fund's subprime-backed holdings were rated AAA and AA, the highest investment-grade levels, Loporchio said. All ultra-short bond funds faced ``an unusually challenging market environment over the past 12 to 18 months,'' he said.
The complaint, which seeks class-action status, says Fidelity failed to inform investors adequately about the risks associated with the fund's holdings in mortgage-backed securities. The fund invested "nearly two-thirds'' of its assets in subprime-backed investments, according to the complaint, first reported yesterday by the Wall Street Journal.
The case is Zametkin v. Fidelity Management & Research Co., 08-CV-10960, U.S. District Court, Boston.
Fidelity made "misleading or inaccurate'' statements in the bond fund's registration documents, investor Alan Zametkin said in a complaint filed June 5 in U.S. District Court in Massachusetts. The fund has fallen 6.8 percent this year and 13 percent in the past 12 months.
Fidelity's is at least the second ultra-short bond fund sued over subprime-related losses. San Francisco-based Charles Schwab Corp., the largest U.S. online broker, faces eight proposed group lawsuits from investors in its YieldPlus Fund, which is down 32 percent in the past year, compared with an average decline of 1.2 percent for similar funds.
Ultra-short bond funds invest in corporate, mortgage-backed and government securities with maturities of one year or less. The $330 million Fidelity fund's subprime-backed holdings were rated AAA and AA, the highest investment-grade levels, Loporchio said. All ultra-short bond funds faced ``an unusually challenging market environment over the past 12 to 18 months,'' he said.
The complaint, which seeks class-action status, says Fidelity failed to inform investors adequately about the risks associated with the fund's holdings in mortgage-backed securities. The fund invested "nearly two-thirds'' of its assets in subprime-backed investments, according to the complaint, first reported yesterday by the Wall Street Journal.
The case is Zametkin v. Fidelity Management & Research Co., 08-CV-10960, U.S. District Court, Boston.
Wednesday, June 11, 2008
Lawsuits Against Real Estate Developer James Koenig
James Koenig, CEO of Asset Real Estate and Investment Co. (AREI) in Redding, is facing four lawsuits that claim he bilked investors in a tax-shelter scam and defaulted on loans used to help finance the alleged schemes.
According to one of the lawsuits, Koenig and his associates had promised investors in Reddings' Oakdale Heights and Sierra Oaks senior care centers an 8 percent annual return plus equity if the property was sold. But these investors, who bought tax-shelter shares in the care homes last spring, have lost hundreds of thousands of dollars in unpaid rent. Now the facilities face foreclosure. Meanwhile, Koenig and his partners systematically and deceitfully bought back these senior care home shares and sold them to other investors, keeping the commissions and equity for themselves. This suit is seeking restitution, returns of Koenig's allegedly ill-gained profits and triple damages.
Another suit alleges that Koenig and associates used the same scheme and defrauded investors in a group of Southern California senior care homes, a San Joaquin Valley golf course and a $55 million corporate note. Meecorp Capital Markets in New Jersey filed the third and fourth suit, seeking to recoup from Koenig and his associates $7.9 million in loans they had used to finance the purchase of senior care homes and other property. Together, the four lawsuits have some 30 individuals and family trusts names as plaintiffs.
One of the suits claim Koenig's business is a complex system designed to funnel money into Koenig's and his associates' accounts without paying a dime to creditors.
AREI buys senior housing communities through so-called “1031 exchanges,” a minimally regulated tax-deferral strategy for investors named for the IRS code that defines it. These exchanges allow investors to sell commercial property without paying capital gains taxes on their profit so long as they buy another similar property within 180 days.
Sierra Oaks investors sank $10.24 million into the northeast Redding assisted living and memory care campus.. Oakdale Heights investors put $12.3 million into the west Redding assisted living home. These investors had no idea that AREI, or a firm under their control, managed every aspect of their investments, including the firm that would profit from selling their property to other investors looking for a tax shelter.
Investors bought “tenant-in-common” interests in the care homes through AREI which meant they owned the property with others, and each was supposed to get a share of the cash generated by the rent. Under their agreement with AREI, investors leased their property back to the firm, which managed the care homes and paid investors their share of the rental income.
However, the suits are alleging that AREI was less interested in giving investors rent payment and managing the properites and was more interested in buying back these properties so it could sell them to someone else at a much higher price and profit from the brokerage commissions and equity.
Koenig is not unfamiliar with defrauding investors. In 1986, Koenig pleaded guilty to mail fraud in a gold-selling scam and was sentenced to 2 years in prison and ordered to pay $5 million in restitution to investors.
According to one of the lawsuits, Koenig and his associates had promised investors in Reddings' Oakdale Heights and Sierra Oaks senior care centers an 8 percent annual return plus equity if the property was sold. But these investors, who bought tax-shelter shares in the care homes last spring, have lost hundreds of thousands of dollars in unpaid rent. Now the facilities face foreclosure. Meanwhile, Koenig and his partners systematically and deceitfully bought back these senior care home shares and sold them to other investors, keeping the commissions and equity for themselves. This suit is seeking restitution, returns of Koenig's allegedly ill-gained profits and triple damages.
Another suit alleges that Koenig and associates used the same scheme and defrauded investors in a group of Southern California senior care homes, a San Joaquin Valley golf course and a $55 million corporate note. Meecorp Capital Markets in New Jersey filed the third and fourth suit, seeking to recoup from Koenig and his associates $7.9 million in loans they had used to finance the purchase of senior care homes and other property. Together, the four lawsuits have some 30 individuals and family trusts names as plaintiffs.
One of the suits claim Koenig's business is a complex system designed to funnel money into Koenig's and his associates' accounts without paying a dime to creditors.
AREI buys senior housing communities through so-called “1031 exchanges,” a minimally regulated tax-deferral strategy for investors named for the IRS code that defines it. These exchanges allow investors to sell commercial property without paying capital gains taxes on their profit so long as they buy another similar property within 180 days.
Sierra Oaks investors sank $10.24 million into the northeast Redding assisted living and memory care campus.. Oakdale Heights investors put $12.3 million into the west Redding assisted living home. These investors had no idea that AREI, or a firm under their control, managed every aspect of their investments, including the firm that would profit from selling their property to other investors looking for a tax shelter.
Investors bought “tenant-in-common” interests in the care homes through AREI which meant they owned the property with others, and each was supposed to get a share of the cash generated by the rent. Under their agreement with AREI, investors leased their property back to the firm, which managed the care homes and paid investors their share of the rental income.
However, the suits are alleging that AREI was less interested in giving investors rent payment and managing the properites and was more interested in buying back these properties so it could sell them to someone else at a much higher price and profit from the brokerage commissions and equity.
Koenig is not unfamiliar with defrauding investors. In 1986, Koenig pleaded guilty to mail fraud in a gold-selling scam and was sentenced to 2 years in prison and ordered to pay $5 million in restitution to investors.
Schwab May Pay $260 Million on Fund Losses
Charles Schwab, the largest U.S. online brokerage firm, may pay $260 million (about half a quarter's profit) to settle investors' claims over losses in YieldPlus, a bond fund with sub-prime mortgage holdings.
Schwab is the defendant in eight proposed class-action suits which accuses the firm of misleading investors by describing its YieldPlus mututal fund in prospectuses as only "marginally" riskier than cash when risky mortgage-related securities actually accounted for more than half of the fund's value. Separately, Schwab also faces arbitration claims and individual investor lawsuits.
YieldPlus was the nation's largest short-term bond fund, with a peak worth of $13.5 billion last July. The ultra-short bond fund holds assets for a year or less and was designed for high dividend yields and minimal share price changes. However, losses in July and August last year sparked redemptions and forced Schwab to sell securities at a loss; investors lost $1.3 billion between July and April of this year.
The exorbitant losses and the lawsuits are a blow to Schwab's image as a wholesome broker-dealer and would likely hurt the big online business they've cultivated. Schwab is under pressure to settle and the payout could win some public relations points back for Schwab.
Schwab has started offering some clients from 50 percent to 90 percent of losses under $10,000. For losses of $50,000 or more, offers have been 5 to 20 percent. Some note that Schwab seems to be paying a higher percentage to people who are retired or not sophisticated in the financial markets.
Schwab is the defendant in eight proposed class-action suits which accuses the firm of misleading investors by describing its YieldPlus mututal fund in prospectuses as only "marginally" riskier than cash when risky mortgage-related securities actually accounted for more than half of the fund's value. Separately, Schwab also faces arbitration claims and individual investor lawsuits.
YieldPlus was the nation's largest short-term bond fund, with a peak worth of $13.5 billion last July. The ultra-short bond fund holds assets for a year or less and was designed for high dividend yields and minimal share price changes. However, losses in July and August last year sparked redemptions and forced Schwab to sell securities at a loss; investors lost $1.3 billion between July and April of this year.
The exorbitant losses and the lawsuits are a blow to Schwab's image as a wholesome broker-dealer and would likely hurt the big online business they've cultivated. Schwab is under pressure to settle and the payout could win some public relations points back for Schwab.
Schwab has started offering some clients from 50 percent to 90 percent of losses under $10,000. For losses of $50,000 or more, offers have been 5 to 20 percent. Some note that Schwab seems to be paying a higher percentage to people who are retired or not sophisticated in the financial markets.
UBS Failed to Warn all Investors about Auction-Rate Risk
The Boston Globe reports that UBS AG's UBS Financial Services Inc. knew last December what kind of risk investors were exposed to with auction-rate securities and failed to warn all of its clients.
Citing a letter to investors, the Globe reports that in December, UBS advised the New Hampshire Higher Education Loan Corp. to offer a 17 percent or 18 percent rate on its bonds if they ever stopped trading. The borrower had paid about 5.2 percent on its bonds on average.
This agreement with the New Hampshire group and Lehman was never disclosed to other investors. UBS never warned other investors of the potential for failed auctions either. Some holders of the New Hampshire student-loan bonds were told in February that they were unable to sell the debt.
Citing a letter to investors, the Globe reports that in December, UBS advised the New Hampshire Higher Education Loan Corp. to offer a 17 percent or 18 percent rate on its bonds if they ever stopped trading. The borrower had paid about 5.2 percent on its bonds on average.
This agreement with the New Hampshire group and Lehman was never disclosed to other investors. UBS never warned other investors of the potential for failed auctions either. Some holders of the New Hampshire student-loan bonds were told in February that they were unable to sell the debt.
Tuesday, June 10, 2008
Fidelity Ultra-Short Bond Fund Lawsuit Filed
Fidelity Investments is being sued over losses in the Fidelity Ultra-Short bond fund, which invested in risky mortgage-backed securities.
Fidelity's Ultra-Short bond fund is one of several fixed-income funds that have come under fire and seen investor defections in recent months after losing money in securities tied to subprime mortgages, which are home loans given to borrowers with shaky credit. In the spring, investors sued Charles Schwab Corp. for deep losses in its Schwab YieldPlus fund.
Fidelity's stated objective for the Fidelity Ultra-Short bond fund is to seek a "high level of current income consistent with the preservation of capital." In large part due to its mortgage holdings, the fund is down 6.6% for the year, trailing its benchmark by 7.6%.
Fidelity's Ultra-Short bond fund is one of several fixed-income funds that have come under fire and seen investor defections in recent months after losing money in securities tied to subprime mortgages, which are home loans given to borrowers with shaky credit. In the spring, investors sued Charles Schwab Corp. for deep losses in its Schwab YieldPlus fund.
Fidelity's stated objective for the Fidelity Ultra-Short bond fund is to seek a "high level of current income consistent with the preservation of capital." In large part due to its mortgage holdings, the fund is down 6.6% for the year, trailing its benchmark by 7.6%.
Monday, June 9, 2008
Brazos Stuck with $7 Billion Auction-Rate Debt
Brazos Group Inc., the fourth largest student-loan company in the U.S., is stuck with $7 billion of debt it can't refinance, restructure or buy back.
Brazos, the largest municipal borrower in the $330 billion auction-rate securities market, is getting squeezed because it pays about 5 percent on auction-rate bonds (compare that to 2 percent last year) and receives about 4 percent on the loans backing the securities. Debt costs for Brazos have climbed by $11 million a month.
Since the auction-rate market's collapse this February, Brazos and more than 100 student lenders stopped making government-backed loans when 98% of their auctions failed to find buyers. But Brazos isn't able to generate the cash needed to buy back the bonds or pay the costs to replace them.
Like other student loan agencies and nonprofits, Brazos began using auction-rate securities a decade ago because they incurred lower rates than other types of debt. The securities attracted Brazos when the difference between what it received in interest on loans and its borrowing costs fell to about 0.2 percentage point in the 1990s from 1.5 percentage point in the 1970s. It generated the cheapest funds.
Brazos borrows through the Brazos Higher Education Authority and Brazos Student Finance Corp. and used bonds to increase lending by almost 60 percent to $11.19 billion from 2005 through 2007. Currently, auction-rate securities make up about 60 percent of Brazos's $12 billion of debt.
In 2004, Brazos officials said they never questioned the auction process controlled by Wall Street banks. Now, Brazos wants banks like Citigroup and Bank of America to find a solution to their $7 billion problem. Other student-loan agencies are suffering too. At least 3,722 workers in the student loan industry lost their jobs in recent months as lenders cut bank on loans. Brazos fired half of its staff (163 employees) in February.
Brazos say it will begin lending again after the U.S. Department of Education begins buying some guaranteed student loans. However, that may allow Brazos to stay in business but it won't help Brazos refinance or restructure its auction-rate securities because any money it gets under the plan must go toward new loans. It probably won't be able to sell any of the loans that back its bonds so it doesn't help the auction-rate problem.
Brazos, the largest municipal borrower in the $330 billion auction-rate securities market, is getting squeezed because it pays about 5 percent on auction-rate bonds (compare that to 2 percent last year) and receives about 4 percent on the loans backing the securities. Debt costs for Brazos have climbed by $11 million a month.
Since the auction-rate market's collapse this February, Brazos and more than 100 student lenders stopped making government-backed loans when 98% of their auctions failed to find buyers. But Brazos isn't able to generate the cash needed to buy back the bonds or pay the costs to replace them.
Like other student loan agencies and nonprofits, Brazos began using auction-rate securities a decade ago because they incurred lower rates than other types of debt. The securities attracted Brazos when the difference between what it received in interest on loans and its borrowing costs fell to about 0.2 percentage point in the 1990s from 1.5 percentage point in the 1970s. It generated the cheapest funds.
Brazos borrows through the Brazos Higher Education Authority and Brazos Student Finance Corp. and used bonds to increase lending by almost 60 percent to $11.19 billion from 2005 through 2007. Currently, auction-rate securities make up about 60 percent of Brazos's $12 billion of debt.
In 2004, Brazos officials said they never questioned the auction process controlled by Wall Street banks. Now, Brazos wants banks like Citigroup and Bank of America to find a solution to their $7 billion problem. Other student-loan agencies are suffering too. At least 3,722 workers in the student loan industry lost their jobs in recent months as lenders cut bank on loans. Brazos fired half of its staff (163 employees) in February.
Brazos say it will begin lending again after the U.S. Department of Education begins buying some guaranteed student loans. However, that may allow Brazos to stay in business but it won't help Brazos refinance or restructure its auction-rate securities because any money it gets under the plan must go toward new loans. It probably won't be able to sell any of the loans that back its bonds so it doesn't help the auction-rate problem.
Companies Not Oweing up to Auction-Rate Losses
According to Pluris Valuation Advisors, which specializes in valuing illiquid securities, 119 of 242 companies have disclosed exposure to auction-rate securities and taken an impairment charge with the SEC as of mid-May. Why haven't more companies holding auction-rate securities marked down their value?
Pluris expected more companies would take an auction-rate hit but perhaps the difference in analyzing these securities has not made reality apparent yet; or, it is just plain denial. Since the auction-rate market froze in February, a lot of companies with these illiquid investments took a proactive stance and wrote them down, but obviously, half of them aren't doing that.
In 2005, the major accounting firms decided to reclassify auction-rate securities from cash equivalents to short-term investments, which are generally due in one year or less. So now, each company (and its auditor) must decide how to handle the accounting for their frozen auction-rate investments. Auction-rate securities each have different underlying collateral and pay different penalty rates when auctions fail. These factors could lead auditors to give companies varying advice on how to account for the failed securities.
For example, companies with auction-rate paper backed by collateralized debt obligations have little hope of recovering their money and are more likely to take a charge. Companies that have decided against an impairment charge may think it's possible to restructure the debt within a year so it's appropriate to continue to hold the securities as a short-term investment on their balance sheets. Another scenario is that companies are holding auction-rate securities in which the credit quality of the underlying securities has not been affected, so they may expect to get the full value of their investment back at some point in the future, near or far.
Pluris expected more companies would take an auction-rate hit but perhaps the difference in analyzing these securities has not made reality apparent yet; or, it is just plain denial. Since the auction-rate market froze in February, a lot of companies with these illiquid investments took a proactive stance and wrote them down, but obviously, half of them aren't doing that.
In 2005, the major accounting firms decided to reclassify auction-rate securities from cash equivalents to short-term investments, which are generally due in one year or less. So now, each company (and its auditor) must decide how to handle the accounting for their frozen auction-rate investments. Auction-rate securities each have different underlying collateral and pay different penalty rates when auctions fail. These factors could lead auditors to give companies varying advice on how to account for the failed securities.
For example, companies with auction-rate paper backed by collateralized debt obligations have little hope of recovering their money and are more likely to take a charge. Companies that have decided against an impairment charge may think it's possible to restructure the debt within a year so it's appropriate to continue to hold the securities as a short-term investment on their balance sheets. Another scenario is that companies are holding auction-rate securities in which the credit quality of the underlying securities has not been affected, so they may expect to get the full value of their investment back at some point in the future, near or far.
UBS and Wall Street Banks Say Auction Rate Investors Can't Have Their Money Back
In the latest development with the auction-rate securities saga, investors are finding out that their banks won't let them sell their securities even if they find a buyer.
Franklin Biddar of New Jersey found a buyer for $100,000 worth of his auction-rate securities in Fieldstone Capital Group but Bank of America wouldn't release the bonds because they say the transaction wasn't in Biddar's best interest. Biddar would sell his securities at a 11% discount.
Bank of America, UBS AG, Wachovia and about four dozen other firms that sold the auction-rate securities are thwarting investor attempts to sell their bonds in the secondary market at a discount to regain access to their cash. The firms claim they are saving customers from unnecessary losses on the securities but these are the same people who marketed the securities as safe, cash alternatives. Note that if the banks allow investors to sell the securities at a discount, the investors will establish damages.
UBS says the secondary market is very illiquid and the firm is trying to find the best price for their investors. Meanwhile, Merrill Lynch and Wachoiva are trying to get their clients to refinance their auction-rate debt.
Frustrated investors are turning to litigation. Currently, there are 24 proposed class-action suits filed against brokerage firms over claims that investors were told the securities were almost as liquid as cash. Individual investors and corporations alike have been trapped in auction-rate debt for more than three months since the market froze back in February. Before February, the firms routinely bought securities that went unsold so as to reassure investors that their investments were liquid. The truth is about 99 percent of auctions for auction-rate securities sold by student-loan agencies and closed-end funds fail, as do 48 percent of those for municipals.
Franklin Biddar of New Jersey found a buyer for $100,000 worth of his auction-rate securities in Fieldstone Capital Group but Bank of America wouldn't release the bonds because they say the transaction wasn't in Biddar's best interest. Biddar would sell his securities at a 11% discount.
Bank of America, UBS AG, Wachovia and about four dozen other firms that sold the auction-rate securities are thwarting investor attempts to sell their bonds in the secondary market at a discount to regain access to their cash. The firms claim they are saving customers from unnecessary losses on the securities but these are the same people who marketed the securities as safe, cash alternatives. Note that if the banks allow investors to sell the securities at a discount, the investors will establish damages.
UBS says the secondary market is very illiquid and the firm is trying to find the best price for their investors. Meanwhile, Merrill Lynch and Wachoiva are trying to get their clients to refinance their auction-rate debt.
Frustrated investors are turning to litigation. Currently, there are 24 proposed class-action suits filed against brokerage firms over claims that investors were told the securities were almost as liquid as cash. Individual investors and corporations alike have been trapped in auction-rate debt for more than three months since the market froze back in February. Before February, the firms routinely bought securities that went unsold so as to reassure investors that their investments were liquid. The truth is about 99 percent of auctions for auction-rate securities sold by student-loan agencies and closed-end funds fail, as do 48 percent of those for municipals.
ASTA, MAT and Falcon Causing Citi's Pain
After record profits last year, most major firms' wealth management divisions are now suffering from a very shaky financial market. The trouble with Citigroup's hedge funds, aka ASTA/MAT and Falcon, exemplify the most dire results. Citi revenues were up 16% last year, but this year, net profits slid a whopping 33% largely due to the failure of these hedge funds.
ASTA/MAT reportedly used a large amount of leverage to buy municipal bonds and had been sold to Citi's retail clients through Smith Barney. Citi injected $661 million to shore up the funds but the funds are still down 60% to 80% this year. The other hedge fund, Falcon Portfolios, is a mix of municipal bonds and debt instruments and that also plunged in value.
Many of Citi's valuable high-net-worth clients are facing huge losses in ASTA/MAT and Falcon and neither they nor their advisors are happy about Citi's initial response to the losses. Now, Citi has reportedly agreed to pay up to $250 million for investors to get out of the Falcon fund with partial losses if they agree not to bring Citi to court. Advisors and investors, of course, are hoping for more.
ASTA/MAT reportedly used a large amount of leverage to buy municipal bonds and had been sold to Citi's retail clients through Smith Barney. Citi injected $661 million to shore up the funds but the funds are still down 60% to 80% this year. The other hedge fund, Falcon Portfolios, is a mix of municipal bonds and debt instruments and that also plunged in value.
Many of Citi's valuable high-net-worth clients are facing huge losses in ASTA/MAT and Falcon and neither they nor their advisors are happy about Citi's initial response to the losses. Now, Citi has reportedly agreed to pay up to $250 million for investors to get out of the Falcon fund with partial losses if they agree not to bring Citi to court. Advisors and investors, of course, are hoping for more.
Sunday, June 8, 2008
Moody's CDO Ratings Are Cause For Concern
Even as Moody's Investors Service was handing out triple-A ratings last year on a huge number of securities tied to mortgages, a senior Moody's analyst involved in rating them was warning about the housing market and asking if the ratings were too optimistic.
In late 2006 and early 2007, the Moody's Corp. unit continued to rate new collateralized debt obligations even as the analyst, Eric Kolchinsky, aired his concerns to his colleagues and boss, people familiar with the matter said. It wasn't until October 2007, with mortgage defaults soaring, that the Moody's unit downgraded hundreds of CDOs, resulting in billions of dollars in losses for investors.
Had Moody's officials agreed with the analyst's view sooner, some of the CDOs issued last year likely would have been assigned lower ratings, which might have prevented them from being sold. That could have spared investors some of the misery they've suffered now that more than 75% of all structured-finance CDOs issued in 2007 have been downgraded, causing their values to plummet.
In late 2006 and early 2007, the Moody's Corp. unit continued to rate new collateralized debt obligations even as the analyst, Eric Kolchinsky, aired his concerns to his colleagues and boss, people familiar with the matter said. It wasn't until October 2007, with mortgage defaults soaring, that the Moody's unit downgraded hundreds of CDOs, resulting in billions of dollars in losses for investors.
Had Moody's officials agreed with the analyst's view sooner, some of the CDOs issued last year likely would have been assigned lower ratings, which might have prevented them from being sold. That could have spared investors some of the misery they've suffered now that more than 75% of all structured-finance CDOs issued in 2007 have been downgraded, causing their values to plummet.
Friday, June 6, 2008
S & P, Moody's and Fitch Agree to Reforms
Moody's Investors Service, Standard & Poor and Fitch Ratings has reached an agreement with New York Attorney General Andrew Cuomo to overhaul the way they collect fees and improve the way mortgage-backed securities are rated within the next six months.
Cuomo says reforms will be aimed at reducing some of Wall Street's power to pit bond-rating firms against each other by shopping for the easiest or highest rating. The bond-rating industry (worth $5 billion a year) has been under scrutiny for its role in giving overly optimistic ratings to sub- prime mortgage bonds in 2006 and 2007.
While Cuomo's deal doesn't entail any fines for the ratings agencies, it does deal with the chronic problem with bond ratings. The ratings agencies are paid by the entities that are being rated. Also, while more than one ratings firm reviews most deals, not all of them always rate the deal and get paid.
Under this new agreement, the agencies would get paid for their review, even if they aren't hired to rate the deal. That way, the rating firms would be less reliant on getting the ratings assignment from bond issuers. Rating firms will also have to disclose the fees they collect in these securities, which could become a blueprint for more disclosure across structured-finance ratings and ratings for corporate and government bonds.
The rating firms will also be required to establish criteria for assessing loan originators and review due-diligence reports on loans that go into the securities so they can better understand what is in the mortgage securities they are rating.
The SEC praises Cuomo's deal and will unveil its own new rules in the coming weeks.
Cuomo says reforms will be aimed at reducing some of Wall Street's power to pit bond-rating firms against each other by shopping for the easiest or highest rating. The bond-rating industry (worth $5 billion a year) has been under scrutiny for its role in giving overly optimistic ratings to sub- prime mortgage bonds in 2006 and 2007.
While Cuomo's deal doesn't entail any fines for the ratings agencies, it does deal with the chronic problem with bond ratings. The ratings agencies are paid by the entities that are being rated. Also, while more than one ratings firm reviews most deals, not all of them always rate the deal and get paid.
Under this new agreement, the agencies would get paid for their review, even if they aren't hired to rate the deal. That way, the rating firms would be less reliant on getting the ratings assignment from bond issuers. Rating firms will also have to disclose the fees they collect in these securities, which could become a blueprint for more disclosure across structured-finance ratings and ratings for corporate and government bonds.
The rating firms will also be required to establish criteria for assessing loan originators and review due-diligence reports on loans that go into the securities so they can better understand what is in the mortgage securities they are rating.
The SEC praises Cuomo's deal and will unveil its own new rules in the coming weeks.
Wednesday, June 4, 2008
S & P to Settle over Business Practices
Standard & Poor, one of the nation's major credit agencies, announced today that an agreement has been reached with New York Attorney General Andrew Cuomo to overhaul business practices in the aftermath of the sub-prime mortgage crisis. Although details of the agreement have yet to be disclosed, it will most likely tweak Standard & Poor's fee structure and reform the actual ratings process. Moody's Investors Service and Fitch Ratings, the other two major agencies, are also in negotiations with Cuomo but neither agency has commented on their negotiations.
Cuomo has been investigating all three agencies on how they charge the bond issuers who ask them for ratings. Criticism at the agencies have been raised for their failure to accurately assess and warn investors about the risks mortgage investments posed to financial markets. Only over the past year did these rating agencies begin downgrading thousands of mortgage-linked securities as U.S. mortgage delinquencies soared and the value of those investments plummeted.
Questions have also been raised on how vulnerable the agencies are to conflicts of interest since they are paid by these bond issuers whose bonds they rate. So far, executives at Standard & Poor, Moody's and Fitch said they are taking measures to strengthen protections against conflicts and are cooperating with the SEC and others to improve the quality of their analysis and have changed numerous business practices in response to the mortgage mess. All three have defended their track record of analyzing the mortgage market in recent years and said they have adequate protections against conflicts of interest.
Meanwhile, the SEC is considering new rules to limit conflicts of interest in the credit-rating industry and to require the rating firms to disclose detailed information on the mortgage assets related to the securities they rate.
Cuomo has been investigating all three agencies on how they charge the bond issuers who ask them for ratings. Criticism at the agencies have been raised for their failure to accurately assess and warn investors about the risks mortgage investments posed to financial markets. Only over the past year did these rating agencies begin downgrading thousands of mortgage-linked securities as U.S. mortgage delinquencies soared and the value of those investments plummeted.
Questions have also been raised on how vulnerable the agencies are to conflicts of interest since they are paid by these bond issuers whose bonds they rate. So far, executives at Standard & Poor, Moody's and Fitch said they are taking measures to strengthen protections against conflicts and are cooperating with the SEC and others to improve the quality of their analysis and have changed numerous business practices in response to the mortgage mess. All three have defended their track record of analyzing the mortgage market in recent years and said they have adequate protections against conflicts of interest.
Meanwhile, the SEC is considering new rules to limit conflicts of interest in the credit-rating industry and to require the rating firms to disclose detailed information on the mortgage assets related to the securities they rate.
Monday, June 2, 2008
Alleged Mutual Fund Bond Fraud by Morgan Keegan Leading to Huge Losses
The dust is settling from the sub-prime mortgage blow up and investors who lost millions with Morgan Keegan and won’t accept general market volatility as a reason are lining to up recoup their losses. Those who aren’t willing to wait for a class-action lawsuit are choosing the arbitration process for a faster and more efficient way to recover their damages.
Last week, an arbitration claim against Morgan Keegan was filed with FINRA by an investor who lost a shocking sum of $4 million. The plaintiff alleges damages relating to the sale of unsuitable bond funds which include the RMK High Income Fund (RMH), the RMK Multi-Sector High Income Fund (RHY), the RMK Advantage Income Fund (RMA), the RMK Strategic Income Fund (RSF) and the Regions MK Select High Income Fund (MKHIX).
These funds are also accused of misrepresenting and omitting information in its registration statements and prospectuses with regards to the funds’ investments in collateralized debt obligations and the consequent exposure to the sub-prime mortgage market. The plaintiff alleges further damages came from false and misleading statements issued by Morgan Keegan with regard to the funds’ safety and ability to generate income.
This $4 million dollar lawsuit is not alone; other lawsuits are seeking to recover amounts ranging from $285,000 to $1.8 million. Angry investors are filing claims against Morgan Keegan for not managing the funds better and mitigating losses as the sub-prime market began to crumble last year. These investors are also accusing Morgan Keegan of fraud because they say there were led to believe the funds were a safe, stable investment and Morgan Keegan did not reveal the true risk from exposure to sub-prime mortgage. Worse, it is alleged that Morgan Keegan continued to take investors’ money and put them in these risky funds without revealing the risks even as the market deteriorated
Smaller investors like charities are not immune to the RMK funds’ failure either. Last October, a charity based in Indiana filed a claim against Morgan Keegan for a $50,000 loss in one of the RMK funds. Morgan Keegan is settling the claim with an unidentified sum.
Six of the RMK funds have lost more than half their value in 2007 due to their exposure to the volatile sub-prime mortgage market.
Last week, an arbitration claim against Morgan Keegan was filed with FINRA by an investor who lost a shocking sum of $4 million. The plaintiff alleges damages relating to the sale of unsuitable bond funds which include the RMK High Income Fund (RMH), the RMK Multi-Sector High Income Fund (RHY), the RMK Advantage Income Fund (RMA), the RMK Strategic Income Fund (RSF) and the Regions MK Select High Income Fund (MKHIX).
These funds are also accused of misrepresenting and omitting information in its registration statements and prospectuses with regards to the funds’ investments in collateralized debt obligations and the consequent exposure to the sub-prime mortgage market. The plaintiff alleges further damages came from false and misleading statements issued by Morgan Keegan with regard to the funds’ safety and ability to generate income.
This $4 million dollar lawsuit is not alone; other lawsuits are seeking to recover amounts ranging from $285,000 to $1.8 million. Angry investors are filing claims against Morgan Keegan for not managing the funds better and mitigating losses as the sub-prime market began to crumble last year. These investors are also accusing Morgan Keegan of fraud because they say there were led to believe the funds were a safe, stable investment and Morgan Keegan did not reveal the true risk from exposure to sub-prime mortgage. Worse, it is alleged that Morgan Keegan continued to take investors’ money and put them in these risky funds without revealing the risks even as the market deteriorated
Smaller investors like charities are not immune to the RMK funds’ failure either. Last October, a charity based in Indiana filed a claim against Morgan Keegan for a $50,000 loss in one of the RMK funds. Morgan Keegan is settling the claim with an unidentified sum.
Six of the RMK funds have lost more than half their value in 2007 due to their exposure to the volatile sub-prime mortgage market.
Big Banks Lose Billions in Hedge Funds
The hedge fund business used to be a no-brainer for big banks like Citigroup, Bear Stearns (now part of J.P. Morgan), Goldman Sachs and UBS AG because money was pouring into the industry and there were no doubts on their continued growth. But with the credit crunch recently, all of these banks have run into problems with their hedge funds and their management and involvement in these funds are raising questions.
Some are now wondering whether top-performing hedge funds can succeed within a big bank, especially those with an entrepreneurial streak and require more flexibility.
Hedge fund lawsuits being brought against banks like Citigroup for the meltdown of the Falcon, ASTA and MAT funds are also questioning whether the cons of the hedge fund game outweigh the potential gains; when a hedge fund collapses, there isn’t much investors can do about it except sue. The big banks should be expecting to be the targets of more lawsuits that will cost them in terms of money and client relationships.
Here’s a sampling of the hedge fund failings so far:
Recently, Citigroup's Falcon, ASTA and MAT funds racked up almost $2 billion in losses
Bear Stearns’ mortgage funds lost almost $2 billion last year
UBS's Dillon Reed fund was closed after losses in the summer
Goldman Sachs's Global Alpha fund lost almost $4 billion in 2007 and J.P. Morgan’s Highbridge Capital Management has produced disappointing returns in several of its funds in the past couple of years, including its flagship multi-strategy fund. However, both have improved returns this year and are making money.
Some are now wondering whether top-performing hedge funds can succeed within a big bank, especially those with an entrepreneurial streak and require more flexibility.
Hedge fund lawsuits being brought against banks like Citigroup for the meltdown of the Falcon, ASTA and MAT funds are also questioning whether the cons of the hedge fund game outweigh the potential gains; when a hedge fund collapses, there isn’t much investors can do about it except sue. The big banks should be expecting to be the targets of more lawsuits that will cost them in terms of money and client relationships.
Here’s a sampling of the hedge fund failings so far:
Recently, Citigroup's Falcon, ASTA and MAT funds racked up almost $2 billion in losses
Bear Stearns’ mortgage funds lost almost $2 billion last year
UBS's Dillon Reed fund was closed after losses in the summer
Goldman Sachs's Global Alpha fund lost almost $4 billion in 2007 and J.P. Morgan’s Highbridge Capital Management has produced disappointing returns in several of its funds in the past couple of years, including its flagship multi-strategy fund. However, both have improved returns this year and are making money.
Level 3 Pricing
An accounting rule, SFAS 157, now forces companies to divvy their financial assets carried at market values into one of three buckets. Level 1 is for assets whose price is easily available; say, exchange-traded stocks. Level 3 is for assets that have "no observable price." Level 2 assets fall somewhere in the middle.
Level 3 assets may be difficult to price, but that doesn't mean they're always the right gauge of corporate health.
Isn't an increase in hard-to-price assets bad? It's a problem when the market dries up for assets that were previously easy to sell, meaning they become more illiquid, or harder to unload. It's an even bigger problem if Wall Street firms only intended to own those assets for a short period. And it's a really big problem if that causes banks to report losses.
But investment banks want to hold some illiquid assets, say, private-equity or real-estate investments, for long periods. They may also seek to profit from illiquidity: Goldman Sachs Group bought $6 billion of ailing mortgages last year, hoping to make a killing if markets recover. Although those went straight into the illiquid bucket, the corresponding increase in Goldman's Level 3 assets wasn't a sign of distress.
Aren't Level 3 assets priced using dodgy models? A lot of them aren't priced using models at all. Private-equity stakes are usually carried at the cost of investment with an allowance for what an exit price would be, unless something happens to change that, like a new round of funding at a different price. Real-estate investments are often valued using basic discounted-cash-flow models.
Level 3 assets may be difficult to price, but that doesn't mean they're always the right gauge of corporate health.
Isn't an increase in hard-to-price assets bad? It's a problem when the market dries up for assets that were previously easy to sell, meaning they become more illiquid, or harder to unload. It's an even bigger problem if Wall Street firms only intended to own those assets for a short period. And it's a really big problem if that causes banks to report losses.
But investment banks want to hold some illiquid assets, say, private-equity or real-estate investments, for long periods. They may also seek to profit from illiquidity: Goldman Sachs Group bought $6 billion of ailing mortgages last year, hoping to make a killing if markets recover. Although those went straight into the illiquid bucket, the corresponding increase in Goldman's Level 3 assets wasn't a sign of distress.
Aren't Level 3 assets priced using dodgy models? A lot of them aren't priced using models at all. Private-equity stakes are usually carried at the cost of investment with an allowance for what an exit price would be, unless something happens to change that, like a new round of funding at a different price. Real-estate investments are often valued using basic discounted-cash-flow models.
Subscribe to:
Posts (Atom)