Collateralized Debt Obligations

Aozora Bank Asks NY Appeals Court to Revive $1.5B CDO Fraud Case Against Credit Suisse

Published on: September 23, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Aozora Bank Ltd. has asked a New York appeals court to allow it to sue Credit Suisse (CS) again over losses that it claims it sustained from a $1.5B collateralized debt obligation. The Japanese lender claims that a lower court erred in dismissing the claims it had previously brought on the grounds that they were submitted too late.

It was last year that New York Supreme Court Judge Charles E. Ramos threw out the CDO fraud lawsuit on the grounds that the state’s statute of limitations had already passed. In New York, fraud claims can be brought within two years from when a plaintiff could have, with reasonable diligence, realized that it was defrauded or within six years of when a transaction had closed.

Aozora believes that Credit Suisse employed a “trash bin” for its assets that were toxic. The Japanese lender purchased the Jupiter High-Grade CDO V Ltd CDO notes for $40M on 5/11/07 but did not file it’s case until 6/26/13. Ramos said that Aozara failed to prove that there was no way it could have discovered the problems with the Jupiter V notes that it purchased from Credit Suisse before that filing date.

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Goldman Sachs Settles CDO Fraud Lawsuit Brought by Basis Yield Alpha Fund

Published on: July 7, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Group Inc. (GS) and Basis Capital’s Basis Yield Alpha Fund have reached an agreement to settle the $1B collateralized debt obligation fraud lawsuit brought by the Australian hedge fund against the bank several years ago. The Basis Yield Alpha Fund accused Goldman Sachs of making false statements related to its marketing of the Timberwolf, a mortgage-linked investment, and the Point Pleasant collateralized debt obligation (CDO). (The Timberwolf investment was named in the 2011 U.S. Senate report that found that Goldman misled clients about mortgage-backed securities.)

The Australian hedge fund, in its complaint, claimed that Goldman falsely claimed that the market for CDO investments had become stable even though it knew that was not the case. These particular securities dropped in value within weeks of purchase by the fund.

The Basis Yield Alpha Fund is convinced that Goldman sold the securities to rid itself of the toxic subprime mortgages while making money by shorting the securities. The fund sought repayment of over $67M it claims was lost by investing in the collateralized debt obligations, as well as $1B in punitive damages. Goldman, which argued that the fund’s losses were caused by the demise of the housing market and not because of any alleged misrepresentations, claimed that the Australian hedge fund filed its CDO fraud lawsuit to try to get the bank to pay these losses.

Senator Warren Accuses the SEC of Poor Enforcement

Published on: January 31, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Senator Elizabeth Warren has issued a report in which she claims that the U.S. Securities and Exchange Commission and the U.S. Department of Justice have been doing a poor job on enforcement when it comes to going after companies and individuals for corporate crimes.

In Rigged Justice: How Weak Enforcement Lets Corporate Offenders off Easy, Warren takes a closer look at what she describes as the 20 worst federal enforcement failures of 2015. The Senator noted that that when federal agencies caught large companies in illegal acts, they failed to take substantial action against them. Instead, companies were fined for sums that in some cases could be written off as tax deductions.

Some of the 2015 cases that Warren Mentions:
• Standard & Poor’s consented to pay $1.375B to the DOJ, DC, and 19 states to resolve charges that it bilked investors by putting out inflated ratings misrepresenting the actual risks involved in collateral debt obligations and residential mortgage-backed securities. Warren Points out that the amount the credit rater paid is less than one-sixth of the fine the government and states had sought against it, and at S & P did not have to admit wrongdoing. No individuals were prosecuted in this case.

• Citigroup (C), Barclays (BARC), JPMorgan Chase (JPM), Royal Bank of Scotland (RBS), and UBS AG (UBS) paid the DOJ $5.6B to resolve claims that their traders colluded together to rig exchange rates. As a result, the firms made billions of dollars while investors and clients suffered. While admissions of guilt were sought, no individuals were prosecuted. Also, the SEC gave the banks waivers so they wouldn’t have to deal with collateral damages from pleading guilty.

Securities Fraud Headlines: Ne-Yo Sues Citibank, SEC Awards Whistleblower $700K, U.S. Supreme Court Takes on Insider Trading, and Morgan Stanley Must Deal with $500M CDO Case

Published on: January 19, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Performer Ne-Yo Files Countersuit Against Citibank Over Alleged $5.4M Securities Fraud
Singer Ne-Yo is suing Citibank (C), claiming that the financial institution should have had the proper safeguards and procedures in place that could have prevented his ex-money manager Kevin Foster from allegedly bilking him of $4.5M. The performer had filed a securities case against Foster and the latter’s employer, V. Brown & Co., in 2014.

Ne-Yo sought $8M. $4.5M of which Foster had purportedly swindled by moving funds out of the singer’s accounts to the money manager’s own accounts and the accounts of others. Ne-Yo sought $3.5M for service payments he says that he paid Foster and V. Brown between ’05 and ’13.

The performer claims that Foster forged his name on loan documents and took the money, including $1.4M from Citibank that the singer claims he never signed off on. Right before Ne-Yo sued his ex-manager, however, Citi filed its own lawsuit against him for the loan.

Now, Ne-Yo is saying that Citibank never told him of the numerous transactions made by Kevin, some of which involved his overdrawn account at the bank.

Sec Issues Over $700K Award to Whistleblower
The Securities and Exchange Commission is issuing an over $700K award to an individual who blew the whistle on a company. The information that the person provided led to a successful enforcement action. The whistleblower, an industry expert, was not employed at the company. This is the first time a company outsider has been issued this type of award since the SEC opened its whistleblower office in 2011.

Because the regulator protects the confidentiality of whistleblowers, the individual’s identity has not been revealed. SEC Enforcement Division Director Andrew Ceresney said that the agency values voluntary submissions by industry experts with ‘first-hand” information of wrongdoing committed by company insiders.”

FINRA Awards First United Bank & Trust Over $11.5M in Arbitration Case Against First Horizon National Involving CODs and Other Securities

Published on: November 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has awarded First United Bank & Trust and First United Corp. over $11.5M in their securities fraud case against FTN Financial Securities Corp., Hugh James Boone, and Franklin Benjamin Kennedy. The bank is claiming unsuitable investments, misrepresentations, omission, breach of fiduciary duty, failure to supervise, breach of implied contract, and common law fraud involving the claimants’ purchase of preferred term securities, trust preferred securities, and other collateralized debt obligations. Two of the preferred term securities at issue are the PreTSL Notes, also known as the I-PreTSLI notes, and the PreTSL XVII.

The claimants said that that purchase of the PreTSL Notes were among a number of transactions in their leverage strategy. They said that the respondents were aware that the notes had deteriorated after they were issued but did not inform the claimants. The respondents denied the claimants’ allegations. Boone and Kennedy in their response said that they acted properly as financial adviser.

SEC Orders Investment Advisory Firm to pay $21M For Allegedly Retaining Clients’ CDO Fees

Published on: September 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Taberna Capital Management has consented to pay $21 million to resolve Securities and Exchange Commission charges alleging that it fraudulently kept fees that belonged to collateralized debt obligation clients. According to the regulator, the investment advisor retained “exchange fees” related to restructuring transactions, which was not allowed under the CDOs governing documents. The retention of the fees was purportedly not disclosed to investors.

The SEC maintains that these fees belonged to the CDOs and became a conflict interest that was not revealed. According to the agency’s order instituting administrative proceedings, for three years, from ’09 to ’12, the Pennsylvania-based investment advisory firm sought and kept millions of dollars in exchange fees paid by issuers of the securities that the CDOs held when Taberna recommended exchange transactions to clients. The SEC said that those fees actually belonged to the CDOs and that the firm made its misconduct difficult to identify by improperly labeling the fees as third party costs in documents even though these costs were only a small portion of the total exchange fees.

Also, said the SEC, Taberna did not mention these fees in quarterly reports to investors nor did it identify them in Forms ADV even though they should have been noted. The regulator said the retention of the fees set up a conflict of interest between the firm and investors and CDO clients, even at times giving Taberna incentive to steer issuers toward a particular exchange regardless of what restructuring might benefit it the most.

UBS Settles Pursuit Partners’ CDO Lawsuit Over Asset-Backed Securities

Published on: September 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

UBS AG (UBS) and Connecticut-based hedge fund Pursuit Partners have settled a securities fraud lawsuit accusing the brokerage firm of selling asset-backed securities without disclosing that they were going to be downgraded. The resolution was reached a day before trial was scheduled to start.

Pursuit Partners claims that UBS sold it $40.5M of collateralized debt obligations in 2007. The hedge fund contends that these were the same securities that UBS employees had called “crap” and “vomit” in emails. The securities fraud case was filed in 2008, with Pursuit seeking $100M.

According to the complaint, UBS purportedly failed to disclose to the Connecticut hedge funds that the firm had engaged in private conversations with employees of Moody’s (MCO) in 2007 about how the credit rating agency did not believe the securities should be rated as investment grade. When Moody’s downgraded them three months later the securities became practically worthless. The plaintiff contended that not only did it know the CDOs were about to become toxic securities but also they plotted to get rid of them by selling them to Pursuit.

Ex-Nomura, RBS Trader Enters Guilty Plea to Bond Fraud

Published on: March 11, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Matthew Katke, formerly of Royal Bank of Scotland Group Plc (RBS) and Nomura Holdings (NMR) has pleaded guilty to conspiracy to commit securities fraud for his involvement in a multi-million dollar bond scam to bilk customers. As part of his deal he will cooperate with prosecutors into its investigation of mortgage-linked bonds and collateralized debt obligations.

Katke traded securities that were backed collateralized loan obligations, which are high-yield corporate debt. The charge is related to activities he engaged in while at RBS. Prosecutors say that Katke and co-conspirators made misrepresentations to get customers to pay prices that were inflated and sellers to say yes to deflated bond prices. The scam took place from around 2008 to June 2014.

Court documents say that Katke and co-conspirators sought to profits on bond trades through the false statements they gave customers. They misrepresented the prices that RBS had paid to get a bond or what it was asking to sell it. They also misled clients about whether a bond was from RBS’s inventory or a third party. RBS is cooperating with the probe.

SEC Cases: Brothers-In-Law Charged in Louisiana Insider Trading Scam, NY-Based Broker-Dealer Accused of CDO Liquidation-Related Fraud, & Colorado Ponzi Scam is Halted

Published on: February 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging former VP of The Shaw Group’s construction operations Scott Zeringue and his brother-in-law Jesse Roberts III with insider trading. Zeringue has already agreed to settle the regulator’s charges by consenting to pay disgorgement of ill-gotten gains plus a penalty.

The SEC says that the insider trading took place in 2012 when Zeringue, while working at The Shaw Group, became privy to confidential data about the company’s upcoming acquisition by Chicago Bridge & Iron Company. Prior to the announcement of the deal, he bought 125 shares of Shaw stock and asked Roberts to buy for him, too. Roberts went on to tip others and they collectively made close to $1 million in illicit profits.

Meantime, parallel criminal charges have been filed against Roberts. Zeringue has already pleaded guilty to the criminal charges against him.

Investment Adviser Fraud Cases Lead to Civil Charges, Criminal Convictions, and Investor Losses

Published on: January 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC Accuses Elm Tree Investment Advisors, its Founder, of $17M Securities Fraud

The Securities and Exchange Commission has filed fraud charges against Elm Tree Investment Advisors LLC and its founder Frederic Elm for running a Florida-based securities scam that raised over $17 million in a little over a year. The regulator contends that Elm, his firm, and the funds Elm Tree Motion Opportunity LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Investment Fund LP misled investors and used the bulk of the funds to issue Ponzi-like payments. Elm also is accused of using the money to purchase expensive homes, jewelry, and autos, as well as cover his daily living expenses.

According to the SEC, Elm, his unregistered advisory firm, and the three funds violated the regulator’s anti-fraud rules as well as federal securities laws. The Commission wants relief for investors as well as the restoration of the purportedly ill-gotten gains and financial penalties.