Bond Fund Fraud Attorneys

Carrick Mollenkamp and Serena Ng of the WSJ report that in recent years, as home prices and mortgage lending boomed, bankers found ever-more-clever ways to repackage trillions of dollars in loans, selling them off in slivers to investors around the world. Financiers and regulators figured all the activity would disperse risk, and maybe even make markets safer and stronger.

Then along came Norma.

Norma CDO I Ltd., as its full name goes, is one of a new breed of mortgage investments created in the waning days of the U.S. housing boom. Instead of spreading the risk of a global home-finance boom, the instruments have magnified and concentrated the effects of the subprime-mortgage bust. They are now behind tens of billions of dollars of write-downs at some of the world’s largest including the $9.4 billion announced last week by Morgan Stanley.

Norma illustrates how investors and Wall Street, in their efforts to keep a lucrative market going, took a good idea too far. Created at the behest of an Illinois hedge fund looking for a tailor-made bet on subprime mortgages, the vehicle was brought into existence by Merrill Lynch & Co. and a posse of little-known partners.

To read full article click here.

Sree Vidya Bhaktavatsalam of Bloomberg reports that Merrill Lynch & Co. was subpoenaed by Massachusetts regulators after the value of collateralized debt obligations the brokerage firm sold to the city of Springfield plunged 91 percent because of losses tied to subprime mortgages.Secretary of State William Galvin yesterday issued the request for information to New York-based Merrill. Galvin, the state’s top securities regulator, said in an interview today he wants the names and details of the CDOs by 3 p.m. Jan. 10. Merrill said it will cooperate with the investigation.

To read full article click here.

Jody Shenn of Bloomberg reports that State Street Corp., BlackRock Inc., Societe Generale and Deutsche Bank AG units are among 28 managers of mortgage-linked collateralized debt obligations deemed at risk of being unable to fully pay off their most-senior classes.About $64 billion of CDOs, which repackage pools of assets into new securities with varying risks, have experienced so-called events of default since mid-October after a slump in the credit quality of their holdings, according to data sent to clients yesterday by Charlotte, North Carolina-based Wachovia Corp. analyst Justin Pauley. Harding Advisory LLC and Tricadia CDO Management LLC each manage five of such failing deals, the most.

To read the full article click here.

Anuj Gangahar and Daniel Pimlott of the Financial Times report that the subprime mortgage crisis claimed its first victim of the year yesterday as State Street, a leading US financial services group, announced the departure of its asset management chief as well as a $279m (€189m) charge to cover potential legal costs.William Hunt left only weeks after the company said four of its off-balance sheet vehicles held $29.2bn of asset-backed commercial paper, short-term securities that are often backed by revenues from subprime mortgages and consumer loans.

To read the full article click here. 

Nicholas Rummell of Financial Week reports that there’s plenty of blame to go around in the current credit crisis, but owners of mortgage-backed securities looking for someone to pin the mess on may be going after one target in particular: Wall Street firms that packaged the securities into collateralized debt obligations.

This week, charities and municipal councils in Australia sued a subsidiary of Lehman Brothers over risky CDOs that were sold to the councils in violation of investment guidelines.

Most CDO lawsuits so far have been brought against the sellers—investment banks such as Goldman Sachs and Bear Stearns—by shareholders who allege the investment vehicles’ risks were never properly disclosed. But the other litigation shoe to drop in the CDO implosion will involve legal claims against banks and hedge funds by institutional investors, including other hedge funds and pension funds, experts predict.

To read the full article click here.

Kathy Shwiff of the WSJ reports that Standard & Poor’s Ratings Services has placed on watch for possible downgrade its ratings on 149 tranches worth a total of $6.42 billion from 43 U.S. cash flow and hybrid collateralized debt obligation of asset-backed securities transactions.

The move follows last month’s downgrade of 793 classes of U.S. residential mortgage-backed securities backed by U.S. closed-end second-lien mortgage collateral issued in 2004, 2005 and 2006.

All of the CDO tranches with ratings placed on CreditWatch with negative implications are from CDOs of asset-backed securities collateralized by structured finance securities, including U.S. RMBS backed by closed-end second-lien collateral.

CDOs, which use sliced-and-diced assets such as subprime-mortgage bonds to create customized products offering various levels of risk, have been at the heart of steep write-downs at big banks and brokerage firms.

To read full article click here. 

Bloomberg News and Reuters reports that Citigroup said that it had lost more money than it had made from financial instruments based on U.S. subprime mortgages.At the same time, the share prices of major U.S. securities firms fell on Wall Street amid fears about the effect of the mortgage crisis on earnings.

William Mills, chief executive of Citigroup’s markets and banking division in Europe, said the bank had suffered “reputational damage” from the fallout even though the bank had made “adequate disclosures” to customers who were trading in collateralized debt obligations and similar instruments.

To read the full article click here.

Kathleen Howley of Bloomboog reports that as storm clouds gathered over New York on July 10, Standard & Poor’s started a 10 a.m. conference call to discuss why the credit rating company was about to take its most dramatic action in more than two years.S&P analysts said they might cut ratings on $12 billion of the world’s worst-performing subprime mortgage bonds, some of them less than a year after they had been given investment-grade designations. Not since 2005, when it downgraded Ford Motor Co. and General Motors Corp., had S&P generated so much attention.

To read full article click here.

David Scheer and Jesse Westbrook of Bloomberg report that U.S. regulators, concerned brokerages may have sold clients money-losing securities tied to subprime mortgages, are seeking information about how the investments were marketed, a person familiar with the situation said.The Financial Industry Regulatory Authority, which polices about 5,100 brokerages, sent letters Dec. 14 to more than a dozen firms that sell collateralized mortgage obligations, a type of security linked to home-loan payments, said the person, who declined to be identified because the inquiry isn’t public. One letter obtained by Bloomberg seeks sales spreadsheets, marketing materials, and procedures and methods for matching products to clients’ investment needs.

Mounting losses from securities tied to home loans are prompting regulators to examine how Wall Street firms valued and promoted the products. Finra Chief Executive Officer Mary Schapiro said in September the agency was scrutinizing sales of mortgage-backed products to retirees, and had sent a round of letters seeking information on the transactions.

To read the full article click here.

Shefali Anand of the WSJ reports that as the credit crunch is starting to hit some bond mutual-fund investors in unexpected ways, some are now taking legal recourse for losses in their investments.

In the most recent instance, an Indiana charity filed an arbitration complaint against Memphis, Tenn., broker-dealer Morgan Keegan & Co. unit of Regions Financial Corp., for an alleged misrepresentation in selling a bond mutual fund. The fund has lost nearly half of its value this year.

The complaint comes on the heels of a lawsuit filed in a federal court in Manhattan in October over an institutional bond fund of State Street Corp., which alleged that the fund invested in “high risk” investments. A State Street spokeswoman has denied that the firm incorrectly communicated the investment objective of the fund.

In its arbitration complaint, the Indiana Children’s Wish Fund says that it invested around $220,000 in the Regions Morgan Keegan Select Intermediate Bond Fund, on the understanding that it was a relatively safe investment. The complaint was filed with the Financial Industry Regulatory Authority last month.

To read full article click here.