Mortgage Backed Securities

SEC May Sue State Street Corp Over Investor Losses Related to Mortgage-Backed Securities

Published on: July 1, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is considering whether to file civil charges against State Street Corp. over possible securities violations related to subprime mortgages. The Boston-based firm is the largest asset manager for institutions in the world.

In its regulatory filing that it submitted on Monday, State Street noted that the SEC had sent State Street Bank and Trust Co. a “Wells” notice related to a probe into disclosures and management of the bank’s fixed-income investments before 2008. The asset manager is cooperating with the SEC, as well as with Massachusetts’s attorney general. Massachusetts’s lead securities regulator, Secretary of the Commonwealth William F. Galvin, is looking at allegations that State Street misled pension funds over how much risk was involved in the investments.

Just before the housing market fell in 2007, State Street’s fixed-income investment unit began to increase its investments in bonds and securities related to subprime mortgages. Customers with poor credit records were even given loans. When the market collapsed and defaults on mortgages went sky high, the investments’ values dropped significantly, leading to investor losses.

Morgan Keegan Settlement with Children’s Wish Fund Shows the Impact Recouping Investment Losses Can Have On The Little People

Published on: March 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

In 2007, Morgan Keegan settled an arbitration claim with the Indiana Children’s Wish Fund for an undisclosed amount. The charity had reported losing $48,000 in a mutual fund it had invested in with the brokerage firm.

The Wish Fund became involved in mortgage securities after a local banker persuaded the charity’s executive director, Terry Ceaser-Hudson, to invest money in a bond fund through Morgan Keegan. Ceaser-Hudson was put in touch with broker Christopher Herrmann. When she asked him about the risks of investing in the fund, she says he assured her that investing it would be as safe as investing in a CD or a money market account.

In June 2007, the Wish Fund invested nearly $223,000 in the fund. That week, two Bear Stearns funds collapsed.

Less than three weeks after investing the charity’s money in the Morgan Keegan fund, Ceaser-Hudson says she was surprised to see a $5,000 loss. As the bond fund’s net asset value fell in September, she ordered the sale of the stakes to be sold. She got back about $174,000 of the $223,000 she had invested on behalf of the Wish Fund-that’s a 22% loss in just three months. Ceaser-Hudson filed an arbitration claim against Morgan Keegan and accused Herrmann of breach of duty when he making an unsuitable recommendation to the Wish Fund.

It appears as if the Regions Morgan Keegan mutual fund board members, like many investment professionals, did not properly assess the risks that came with investing in mortgage securities. Most of the brokerage firm’s directors do not own shares in the bond funds that were devastated, which means that the majority of them were not impacted by their decline.

For a charity like the Children’s Wish Fund, however, the losses it incurred had been preventing nine sick children from having their wishes granted.

Related Web Resources:
The Debt Crisis, Where It’s Least Expected, New York Times, December 30, 2007
The Indiana Children’s Wish Fund
Continue Reading ›

Wall Street Did Not Know Mortgage Backed Securities were Junk. Baloney!

Published on: January 29, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Investment firms pretend that they did not know until a year ago that mortgage backed securities were not safe and secure. Yet, many experts were sounding warnings that many of the mortgages, which made up these investments, were ‘toxic waste.’ Thus, Wall Street firms cannot use the “stupidity” defense” to insulate themselves from investor fraud claims that they deceived investors into mortgage-backed securities.

This week it was revealed that even the FBI, which is not the primary watchdog of Wall Street, knew as early as 2002 of wholesale problems with mortgages-the majority of which were packaged into mortgage-backed securities and sold to investors. In an article published on SeattlePI.com, two retired FBI officials say that the bureau knew for years that fraud involving mortgage-fraud scams, insider scams, and corrupt appraisers was a growing problem in the mortgage industry but failed to take action to stop it.

One reason no action was taken, the retired officials say, is that after September 11, 2001, most of the FBI’s manpower was focused on fighting terrorism. Some 2,400 agents were reportedly reassigned to counterterrorism after the terrorist attacks in New York.

The retired officials claim that the FBI never got the necessary tips from the banking regulatory agencies. They also say that the Bush Administration was fully briefed about the mortgage fraud crisis and its potential financial implications but that government officials decided not to give back to the FBI the agents they needed to deal with the fraud problems. According to one of the retired officials, certified public accountants with the bureau were either assigned to HealthSouth, Enron, or terrorist financing.

Another problem that reportedly prevented the seriousness of the situation from being fully understood, or those responsible from being prosecuted, is that mortgage lenders and banks were generating so much money that the fraud that was occurring did not appear to be costly enough to warrant more attention. One of the retired officials says the Securities and Exchange Commission showed no interest in working with the FBI on the fraud problem until after the economy fell apart.

FBI Assistant Director Ken Kaiser, however, disputes the implication that the FBI could have done more to prevent the mortgage-backed securities crisis. He says the FBI’s criminal division has made 1,000 arrests and “targeted 180 criminal enterprises since 2004.” Kaiser says the agency pursued buyers and lenders involved in multiple fraud or cases involving drugs or organized crime. Continue Reading ›

State Street Sued Over Allegations of Misrepresentation Related to Mortgage-Backed Securities

Published on: August 20, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts plumbing and air conditioning supply company F.W. Webb Company is suing State Street Bank and Trust Company, State Street Global Advisors (SSgA), and CitiStreet. F.W. Webb is accusing the defendants of misrepresenting a bond fund as a low risk 401k-investment option, when in fact, the SSgA Yield Plus Fund was invested in mortgage-based securities.

FW Webb says the investment option had been represented on more than one occasion as being similar to a money market portfolio but with better returns. FW Webb alleges that beginning in 1996, State Street changed its investment strategy for the Yield Plus account so that there was an emphasis on lower-quality securities that were accompanied by greater risks.

The lawsuit contends that the Yield Plus Fund create a level of risk that was inappropriate and not in line with the stated investment goals of the Massachusetts company’s 401K Plan or the objectives of a traditional money market fund. The complaint contends that the fund dropped dramatically in mid-2007 because of its overexposure to low-quality assets and securities that were high in risk.

CitiStreet, which has provided FW Webb with investment management and recordkeeping and administrative functions since 2000, is also a defendant in the suit. FW Webb say that any instability related to the Yield Plus Fund was never an issue that CitiStreet or State Street brought to its attention, which gave the plumbing and air conditioning supply company no reason to question whether the fund should be included in its 401K Plan.

The lawsuit also noted that the decision to move the Yield Plus Fund into mortgage-backed investments during 2005-2007 occurred during a time when defaults of the subprime mortgages had skyrocketed and subprime lenders were dealing with insolvency. The SSgA Yield Plus Fund’s Board of Directors decided to liquidate the fund as of May 31, 2008.

Related Web Resources:

FW Webb Company

State Street Corporation Continue Reading ›

Investors Complain about Mutual Funds Sold by Morgan Keegan

Published on: January 12, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Some Investors have complained they were sold mutual funds by the securities firm of Morgan Keegan & Company, Inc. based on representations of safety which were unfounded. At this time such complaints are only allegations and no determination has been made that the firm and/or its representations engaged in any wrongdoing.

The funds in question include RMK High Income Fund (RMH), RMK Advantage Income Fund (RMA), and RMK Multi-Sector High Income Fund (RHY). Reportedly, these funds were heavily invested into collateralized debt obligations (CDO’s) based on sub-prime mortgages and have therefore declined sharply in value.

Morgan Keegan is a Memphis, Tenessee based brokerage firm and is a division of Regions Financial Group. The firm’s offices are located primarily in the South, including in the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia.

Morgan Keegan Settles Arbitration Claim Made By Indiana Children’s Wish Fund

Published on: January 7, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Last month, brokerage firm Morgan Keegan made an undisclosed payment to the Indiana Children’s Wish Fund to settle an arbitration dispute. The wish granting organization had lost $48,000 in a mutual fund that was heavily invested in mortgage securities.

The Indiana Children’s Wish Fund has about $1 million in assets. The Wish Fund was founded by Richard Culley, a blind attorney, in 1984. The charity has granted some 1800 wishes to children who have been diagnosed with life-threatening illnesses. If the charity had not received its settlement sum, it would not have been able to realize the wishes of nine children.

Last June, a banker at Regions Bank in Indiana recommended that the Wish Fund invest money in a bond that Morgan Keegan offered. Regions Bank and Morgan Keegan are affiliated with one another. Terry Ceaser-Hudson, the Wish Fund’s executive director, says that the Morgan Keegan broker told her that the fund was very safe.

Citadel’s $2.5 Million Investment into E-Trade Raises New Questions About Mortgage-Backed Securities

Published on: December 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Citadel Investment Group is investing $2.5 million into E*Trade Financial Corp, which has been negatively affected by shaky mortgage investments. The “bailout” will increase the hedge fund’s stake in E*Trade from 2.5% to 18%. Citadel will pay $800 million for E*Trade’s $3 billion in asset-backed securities. This will allow E-Trade to take off the riskiest assets from its balance sheet.

Citadel says the investment is a good business opportunity. The hedge fund cited E*Trade ‘s online brokerage platform as a big reason for making the large investment.

The investment deal is an indicator of how much hedge funds have become involved in both sides of the mortgage crisis, sometimes as a victim and at other times as a rescuer. It also shows the growing influence that hedge funds have in the financial arena.

Ex-Freddie Mac CEO Leland Brendsel Will Pay $16.4 Million Fine to Settle OFHEO Action

Published on: November 15, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Former Freddie Mac CEO and Chairman Leland C. Brendsel says he will pay the $13 million in penalties imposed by the Office of Federal Housing Enterprise Oversight. As part of the deal, he will also waive his claim to $3.4 million from Freddie Mac. Payment of the fine would settle the OFHEO’s administrative enforcement action against the former Freddie Mac CEO.

The OFHEO charges, initially filed in December 2003, alleged that Brendsel created a company environment that permitted improper earnings management, allowed accounting to function without the proper resources, and neglected to set up proper controls within the company. As a result of the unsound and unsafe practices, as well as the misconduct, the OFHEO claimed that Freddie Mac sustained financial losses.

The consent order is connected to an accounting scandal that forced the company to restate up to $4.5 billion in earnings.

Mortgage-Backed Securities, Collateralized Debt Obligations, Subprime Loans: Officials Scramble to Rescue Banks, Borrowers and Stock Market, but Forget Defrauded Investors

Published on: November 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In August, Wall Street pundent Jim Kramer went ballistic when he felt the Federal Reserve did not act fast enough to rescue the stock market. Washington officials from George Bush to Nancy Pelosi are vying over how and how much to make avalible to troubled mortgage holders to keep afloat. The Chairman of the Federal Reserve acknowledges the need to preserve the banking system.

But no one seems worried about millions of individual investors who have chunked billions of dollars into mortgage related securities while being told these were completely safe. Many securities which were rated AAA only months ago, have lost a fourth of their value or more and likely face further markdowns in the near future.

Other investments which carried lower ratings, but were hyped as perfectly safe, are worth less than half their purchase value and may be all but wiped out before the dust settles. Many of these securities were sold as CD substitutes to small investors and retirees and to pension funds. The fallout of the failure of such investments will be tragic.

Mortgage Backed Securities and Collateralized Debt Obligation Losses Mount as Lawyers Weigh Investors’ Options

Published on: October 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The other shoe is dropping on mortgage securities holders who have already suffered devaluations on what many were told were low risk investments. Monthly interest payments are now falling and in some cases have ended on securities backed by risky home loans.

Large numbers of collateralized debt obligations (CDO’s) and mortgage back securities (CMO’s) made up of bonds backed by sub-prime home loans are starting to shut-off cash payments to investors. Such cash flow cutoffs are expected to accelerate, as observers speculate whether this will cause a new round of panic in the battered mortgage securities market.

Owners of collateralized obligations, including investment banks, hedge funds, insurance companies and public pension funds continue to write down mortgage investments beyond the billions they have already written off. Some of the securities may, for example, fall from 70 percent of face value to almost worthless overnight, bankers and analysts say.