Articles Posted in Collateralized Debt Obligations

The Federal Housing Finance Agency (FHFA) has filed a more than $1B residential mortgage-backed securities (RMBS) fraud lawsuit against Wells Fargo (WFC) on behalf of Freddie Mac. The government-owned mortgage company had invested in over $1B in RMBSs backed by NovaStar loans prior to the 2008 financial crisis. NovaStar, once a subprime lender, is no longer in operation.

While several banks underwrote the securities, the investor fraud case is targeting Wachovia Capital Markets, LLC, an ex-Wachovia brokerage firm, that is now Wells Fargo Securities, LLC. Wachovia was a Wells Fargo acquisition in 2008.

According to the RMBS fraud case, FHFA claims that offering documents sent to Freddie about the quality of the loans backing the RMBSs were misleading. The independent federal agency contends that Wachovia, which played a part in packaging these securities, put out registration statements that were also allegedly misleading and included misrepresentations that eventually resulted in Freddie Mac sustaining huge financial losses.

The US Securities and Exchange Commission (SEC) has filed civil charges against Talimco LLC, a registered investment adviser (RIA), and its former COO Grant Gardner Rogers. The regulator is accusing them both of rigging a commercial real estate auction it held for  one client to benefit another client, defrauding the selling client as a result. Talimco and Rogers are consenting to the cease-and-desist orders against them but without denying or admitting to the findings.

The SEC contends that around April 2015, the RIA and Rogers sought to help the selling client—a collateralized debt obligation (CDO)— sell a commercial real estate asset, while intending to help a different client—a private fund that Talimco had created—to acquire the asset. The regulator claims that instead of looking for a number of bidders for the asset that was for sale—it was the firm and Roger’s fiduciary duty to help the CDO client find a number of willing bidders so as to obtain the best price possible—Rogers purportedly only presented the selling client with the affiliated private fund client’s bid and the bids of two other “unwilling” parties. The latter two were assured that their bids would not win.

Because of this alleged “manipulation,” the private fund client’s bid ended up being the highest, and the fund was able to acquire the commercial real estate asset for half of its value at about $28.6M. The fund, with the help of further alleged manipulation by Talimco and Rogers, later sold the asset at a profit for $43.5M.


Shareholders Can Proceed with $13B CDO Fraud Case Against Goldman Sachs

A US district court judge has given Goldman Sachs (GS) shareholders the right to move forward with their $13B collateralized debt obligation fraud lawsuit accusing the bank of not disclosing certain conflicts of interest. Judge Paul A. Crotty granted the investors’ case class action certification.

The CDO fraud lawsuit revolves around investments that Goldman Sachs created and sold prior to the collapse of the housing market. According to the plaintiffs, the bank made false and misleading statements and acted counter to clients’ best interests.

Walter A. Morales III, a money manager who for years worked with high net worth individual investors and pension funds, is now barred from the securities industry. Morales resolved the US Securities and Exchange Commission’s 2012 civil lawsuit accusing him and his Commonwealth Advisors of fraud and mismanagement this week.

The regulator contends that of the approximately $750M that his clients invested through him, Morales and his firm lost over $178M in subprime and residential mortgage-backed securities (RMBSs). According to the Commission, Morales lied about heavy mortgage-backed securities losses to clients and instead tried to conceal them through trades involving his different hedge funds while touting prices that were fraudulent.

The regulator claims that Walters and his investment adviser firm recommended that the hedge funds buy into Collybus, a collateralized debt obligation (CDO) that was considered among the most high risk of such investments and the lowest of tranches. MBSs were sold into CDOs at outdated prices even while Morales was purportedly aware that the market for RMBSs had since dropped. When the CDOs kept doing poorly, Commonwealth employees were directed to engage in manipulative trading among the hedge funds they advised to hide a $32M loss sustained by one of the funds that invested in Collybus.

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The 2nd U.S. Circuit Court of Appeals in Manhattan has decided that the shareholder lawsuit brought against Goldman Sachs (GS) for its high-risk subprime securities leading up to the 2008 financial crisis cannot move forward as a class action securities fraud case. The court said that a lower court judge had put too much of a burden on the bank by mandating that it prove that the misleading statements and conflicts of interest alleged by the plaintiffs did not affect its stock price. Shareholders, however, are allowed to pursue shareholders class certification again.

The plaintiffs contend that between 2007 and the middle of 2010, they lost over $13B because the Wall Street bank was not forthcoming about being able to deal with certain conflicts. They accused Goldman Sachs of hiding short positions made in a number of subprime mortgage collateralized debt obligations, including the:

  • Timberwolf
  • Anderson Mezzanine Funding 2007-1
  • Abacus 2007 AC-1
  • Hudson Mezzanine Funding 2006-1

 

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The New York State Supreme Court has ruled that the $45M institutional investor fraud case against Patriarch Partners and owner Lynn Tilton may proceed. The financier had sought to have the fraud charges against her dropped.

The plaintiff is Norddeutsche Landesbank Girozentrale. The German bank, known as Nord/LG, invested in Tilton’s Zohar debt fund. Nord/LG later accused Tilton of misrepresenting the fund’s structure and brought a collateralized debt obligation lawsuit against her and her firm.

The German bank contends that it didn’t know that fraud might have occurred until the US Securities and Exchange Commission brought a civil case against Tilton and her firm in 2015. The regulator wants disgorgement of about $200M in allegedly bogus fees that Tilton and Patriarch purportedly collected for their services. The SEc also wants to bar Tilton from the industry.

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Moody’s Corp. (MCO) will pay nearly $864M to settle allegations about the way that credit ratings agency rated high-risk mortgage securities, including residential mortgage-backed securities (RMBSs) and collateralized debt obligations (CDOs), leading up to the 2008 financial crisis. The settlement was reached between Moody’s Corporation, Moody’s Analytics Inc., and Moodys’ Investors Services, and the US Department of Justice, the District of Columbia, and 21 US states. Moody’s is accused of knowing that it was inflating the ratings of mortgage securities that were toxic.

As part of the agreement, $437M will be paid as penalty to the DOJ. The rest of the $426.3M would be divided between DC and the states. Moody’s consented to measures that would make sure of its credit ratings’ integrity moving forward, and its chief executive will have to certify measures of compliance for a minimum of five years.

Despite settling, Moody’s maintains that its ratings pre-the 2008 crisis were valid. The credit rater also pointed out that this case has been resolved without any findings that it violated any laws. Moody’s is not admitting any liability. However, in a Statement of Facts, the company admitted to key parts of its purported behavior.

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Ex-Visium Fund Manager on Trial for Bond Fraud
Jury selection is scheduled to begin this week in the criminal trial against Stefan Lumiere, an ex-Visium Asset Management LP portfolio manager. Lumiere, who managed the Visium Credit Opportunities Fund, is accused of falsely inflating the value of securities in a fund and committing bond fraud.

Visium Asset Management LP is a New York based-hedge fund. The $8B investment hedge fund shut down in 2016 after a criminal investigation that led to charges against a number of people, including Sanjay Valvani, who  killed himself several months ago following allegations of insider trading.

According to prosecutors, from ’11 to ’13, Lumiere was among a number of people who conspired to bilk investors through the mismarking of securities’ values that were in a fund that invested in healthcare company-issued debt. The prosecution believes that the alleged misconduct caused the net asset value of the fund to be overstated by tens of millions of dollars monthly. Meantime, investors were fooled into thinking the bonds were very liquid even though they were illiquid.

Lumiere pleaded not guilty to securities fraud, conspiracy, and wire fraud charges last year.

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Goldman Sachs Group Inc. (GS) has arrived at a settlement with  ACA Financial Guaranty Corp. The bond insurer’s securities fraud lawsuit accuses the investment bank of fraudulently persuading it to guarantee payments on the , a collateralized debt obligation, prior to the financial crisis. ACA Financial Guaranty claims that Goldman and hedge fund Paulson & Co. fooled it into insuring the CDO. Details of the CDO fraud settlement have not been disclosed.

In its $120M CDO fraud case, ACA claimed it was deceived into thinking that Paulson & Co. would hold Abacus for the long-term, when, in fact, the fund played a part in choosing the CDO’s assets before taking a short position and bet that the mortgages underlying the securities would fail. ACA alleged that Abacus was set up in a manner to allow Paulson to make “huge profits” and Goldman to earn “huge fees.”

Although a NY judge had said that the case, brought in 2011, could proceed, an appeals court reversed that decision in 2013. The New York Supreme Court reversed the appeals court’s ruling in 2015.

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According to a letter written by prosecutors to Moody’s (MCO), the U.S. Department of Justice intends to sue the credit rating agency and its Moody’s Investors Services unit over valuations that the latter assigned to mortgage-backed securities leading up to the 2008 financial crisis. The MBS fraud case is expected to make claims about the way the agency rated collateralized debt obligations and residential mortgage-backed securities, as well as allege violations of the Financial Institutions Reform, Recovery, and Enforcement Act as it pertains to rating RMBSs and CDOs. Moody’s disclosed the expected case in an update that also included third quarter earning results.

Aside from the DOJ case, several states’ Attorney Generals are expected to pursue their own claims against Moody’s, except that their cases would be brought under state law.

A number of ratings companies have come under fire over their alleged failure to provide accurate warnings about the risks involved in investing in MBSs and CDOs leading up to the economic crisis. In 2013, the DOJ sued Standard & Poor’s over similar allegations, along with the claim that the agency misled investors for its own profit while misrepresenting the actual risks involved in the securities. Last year, S & P settled with the DOJ, the District of Columbia, and 19 states for almost $1.4B. The government and the states took issue with the way S & P rated the CDOs and RMBSs that it issued from ’04 to ’07.

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