Articles Posted in CMOsCDOs

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Investment fraud lawyers are currently investigating claims regarding UBS Securities. UBS Securities has agreed to pay almost $50 million to settle charges that it violated securities laws regarding certain collateralized debt obligation, or “CDO”, investments. The charges apply to the firm’s structuring and marketing of ACA ABS 2007-2 — a CDO, or collateralized debt obligation. Allegedly, UBS failed to disclose the fact that it retained millions in upfront cash while acquiring collateral. The SEC officially charged UBS on August 6, 2013.

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The collateral for the CDO was managed by ACA Management and reportedly was primarily consisted of CDS on subprime RMBS, or residential mortgage-backed securities. According to securities arbitration lawyers, the CDO — as the “insurer” — received premiums from the CDS collateral on a monthly basis. Then the premiums were used for CDO bondholder payments. According to the SEC, ACA and UBS agreed that the collateral manager would seek bids for yield that contained both a fixed running spread and upfront cash in the form of “points.”

According to the SEC’s findings, UBS collected upfront payments totaling $23.6 million while acquiring collateral and, instead of transferring the upfront fees at the same time as the collateral, UBS kept the upfront payments and chose not to disclose this information. In addition to retaining the undisclosed $23.6 million, it also retained a disclosed fee of $10.8 million. Investment fraud lawyers say the decision not to disclose the retention of the upfront points was inconsistent with prior UBS deals and the industry standard. Allegedly, UBS’ head of the U.S. CDO group stated, “Let’s see how much money we can draw out of the deal.”

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According to a news release on October 22, 2012, the Financial Industry Regulatory Authority has sanctioned David Lerner Associates Inc. and ordered the company to pay approximately $12 million to customers. The affected customers purchased Apple REIT Ten shares, which is a non-traded Real Estate Investment Trust sold by David Lerner Associates. Some customers who will be receiving restitution were also charged excessive markups. Investment fraud lawyers are still investigating potential claims on behalf of investors who purchased Apple REITs from David Lerner Associates.

FINRA Decision: David Lerner Associates to Pay $12 Million in Restitution to Customers for Unsuitable Sales of Apple REIT Ten

David Lerner Associates is the sole distributor of Apple REITs, including the $2 billion Apple REIT Ten. According to the press release, David Lerner Associates “solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors.” According to securities arbitration lawyers, selling non-traded REITs to customers for whom the investment is unsuitable is one of the biggest problems with non-traded REITs. Furthermore, misleading marketing materials were used in order to sell the REIT. These materials presented performance results but did not disclose that the REIT’s income was insufficient for supporting owners’ distributions.

In addition to the $12 million in restitution, David Lerner Associates was fined over $2.3 million for supervisory violations and charging unfair prices on collateralized mortgage obligations (CMOs) and municipal bonds. These unfair prices occurred over a 30-month period. According to investment fraud lawyers, victims of CMO and municipal bond fraud can also recover their losses through FINRA arbitration.

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Stock fraud lawyers are currently investigating claims on behalf of investors who suffered losses as a result of their investment in a collateralized debt obligation (CDO) from Mizuho Securities USA. Mizuho Securities USA and three of its former employees were recently charged by the Securities and Exchange Commission with misleading investors in a CDO through the use of “dummy assets” which inflated the credit ratings of the deal.

SEC Charges Mizuho Securities USA; CDO Investors Could Recover Losses

According to the complaint filed by the SEC, Mizuho Securities made around $10 million in marketing and structuring fees through the deal. The firm has agreed to settle the SEC’s charges by paying $127.5 million. The SEC’s allegations state that Mizuho marketed and structured a CDO, Delphinus CDO 2007-1, which was backed by subprime bonds, when signs of severe distress were being exhibited by the housing market. Allegedly, when Mizuho employees realized the CDO would not be able to satisfy a rating agency’s criteria meant to protect investors of CDOs from rating downgrade uncertainties, they submitted a portfolio which contained dummy assets amounting to millions of dollars. This portfolio inaccurately reflected the CDO’s collateral. Once this inaccurate portfolio was rated, the transaction was closed and Mizuho sold the notes to investors. The CDO defaulted in 2008 and was liquidated in 2010.

“This case demonstrates once again that bankers and market participants who embrace a ‘get the deal done at all costs’ strategy will be identified, charged and punished,” says the director of the SEC’s Division of Enforcement, Robert Khuzami.

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A Financial Industry Regulatory Authority (FINRA) announcement dated June 4, 2012, stated that a hearing panel ruled in favor of claimants against Brookstone Securities of Lakeland, Florida, along with one of its brokers, Christopher Kline, and its owner and CEO, Antony Tuberville. Brookstone, Kline and Tuberville apparently made fraudulent sales of CMOs, or collateralized mortgage obligations, to elderly, retired and unsophisticated investors. Brookstone was fined $1 million in addition to an order of restitution payment of more than $1.6 million to customers. Of that amount, $1,179,500 was imposed jointly with Kline and the remaining $440,600 was imposed jointly with Tuberville. Securities arbitration lawyers say Kline and Tuberville were also barred by the panel from working again in the securities industry. In addition, David Locy, former chief compliance officer of Brookstone, was barred from acting in any principal or supervisory capacity. Locy was also fined $25,000 and was barred for two years from acting in any capacity.

Retired, Unsophisticated Investors Targeted Again: Brookstone Found Responsible

According to the panel’s findings, from July 2005 through July 2007, Kline and Tuberville made intentional fraudulent misrepresentations and omissions regarding the risks associated with CMOs. The affected customers were all retired investors seeking an alternative to equity investments that was safer. Despite the fact that the negative effects that increasing interest rates were having on the CMOs by 2005 were evident to Kline and Tuberville, they failed to explain these conditions to their customers. The clients were instead led to believe that the CMOs were “government-guaranteed bonds” that would generate 10 to 15 percent returns and preserve capital.

For a long time, investment fraud lawyers have been warning investors that retired and elderly investors are often the targets for investment fraud, and this was certainly the case here. Of the seven customers named in the original complaint, all were retired, elderly and/or unsophisticated investors. Furthermore, two were elderly widows who were convinced to put their retirement savings in the risky CMOs and then told that because they were “government-guaranteed bonds,” their money could not be lost. However, in total, the seven investors lost $1,620,100 while Brookstone racked up $492,500 in commissions.

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David Lerner Associates was recently ordered by the Financial Industry Regulatory Authority (FINRA) to pay more than $3.7 million in restitution and fines. The decision is a result of David Lerner’s practices in overcharging retail customers on sales of 1,700 collateralized debt obligations (CDOs) and over 1,500 municipal bonds transactions. The municipal bonds and CDOs were rated investment-grade or above. Securities fraud attorneys are currently consulting with customers of David Lerner.

FINRA Fines David Lerner Associates

From January 2005 through January 2007, David Lerner charged excessive markups which resulted in “unfairly high prices” and lower yields being incurred by customers, according to a release issued by FINRA. The FINRA panel stated that David Lerner’s trades “reflected a pattern of intentional excessive markups” for investments that could be obtained at “significantly lower prices.” These types of sales practices have gotten the attention of stock fraud lawyers, whose job it is to help investors who have been wronged by their broker or firm.

These unfair pricing practices apparently continued despite a letter of caution on the topic that followed a 2004 exam and Wells notices on the issue, which were received by David Lerner Associates in July 2009. This, combined with the fact that the firm “has not taken any corrective measures to improve their fixed income markups policies and practices” was taken into consideration by the panel when the sanctions were set.

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Investment attorneys are seeking Merrill Lynch customers who purchased Mars CDO I, as they could potentially recover their losses through securities arbitration. Mars CDO I was sold to institutional and high net worth customers of Merrill Lynch. The Mars CDO I was underwritten by Merrill Lynch in 2007. However, each of the 30 CDOs underwritten by Merrill Lynch in 2007 was either in technical default, had its best-rated portion cut to junk, was in danger of being liquidated or was in the process of being liquidated by the summer of 2008. Stock fraud lawyers are now investigating how Mars CDO I was marketed and sold by Merrill Lynch.

Investors of Mars CDO I Could Recover Losses Through Securities Arbitration

Securities that are backed by underlying pools of loans or bonds are CDOs, or collateralized debt obligations. While these investments are inherently risky, they are relatively common among “qualified investors.” Currently, stock fraud lawyers are also investigating if Merrill Lynch properly disclosed the CDO risks to investors in the sale of Mars CDO I. Furthermore, the value of Mars CDO I may have been inflated and over-stated by Merrill Lynch. Many investment attorneys believe that Merrill Lynch either knew or should have known the 2007 CDO deals were bad in the existing mortgage market conditions, given the poor performance of the CDOs.

On January 31, 2012, a Financial Industry Regulatory Authority Arbitration Panel awarded $1.38 million to Bobby Hayes, an investor who purchased Collateralized Debt Obligations from Merrill Lynch in 2007. For more on this case, see the previous blog post, “After Securities Arbitration, Merrill Lynch Must Pay $1.4 Million to Investor Over CDO Loss.”

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Investment attorneys turn their eyes to Bank of America once again, only two months into the New Year. Bank of America Corp. has been subpoenaed by William Gavin, the Massachusetts securities regulator, over LCM VII Ltd. and Bryn Mawr CLO II Ltd., two related collateralized loan obligations. These two CLOs led to investor losses totaling $150 million. The subpoena will, hopefully, help authorities in determining if Bank of America knew it was overvaluing the assets of the portfolios. Both Bryn Mawr and LCM were sold in 2007, prior to the 2008 merger between Bank of America Securities and Merrill Lynch.

News: Bank of America Faces More Allegations In 2012

Bank of America held commercial loans from small banks amounting to around $400 million in 2006. In 2007, securities packages were put together from these loans and then sold to investors. The subpoena arrives only one day after Bank of America, JP Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. settled allegations of engaging in abusive mortgage practices. These abusive practices included engaging in deceptive practices in the offering of loan modifications, a failure to offer other options before closing on borrowers with federally insured mortgages, submitting improper documents to the bankruptcy court and robo-signing foreclosure documents without proper review of the paperwork.

The settlement amounted to $25 billion and involved federal agencies plus authorities in 49 states. This settlement is designed to give $2,000 to around 750 borrowers whose homes were foreclosed upon after the home values dropped 33 percent from their 2006 worth, and to provide mortgage relief. In addition, all five banks will pay $766.5 million in penalties to the Federal Reserve. This is considered to be the biggest federal-state settlement ever. Bank of America will also pay $1 billion to settle allegations that it, together with its Countrywide Financial unit, engaged in fraudulent and wrongful conduct.

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Merrill Lynch customers who purchased Bernoulli High Grade Collateralized Debt Obligations could recover their losses through securities arbitration. Bernoulli High Grade CDO-II was sold to institutional and high-net-worth customers of Merrill Lynch. The Bernoulli High Grade CDO-II was underwritten by Merrill Lynch in 2007. However, all 30 of the CDOs underwritten by Merrill Lynch in 2007 were either in technical default, had their best-rated portion cut to junk, were in danger of being liquidated or were in the process of being liquidated by the summer of 2008. Stock fraud lawyers are now investigating how Bernoulli High Grade CDO-II was marketed and sold by Merrill Lynch.

Bernoulli High Grade CDO-II Investors Could Recover Losses Through Securities Arbitration

Securities that are backed by underlying pools of loans or bonds are CDOs, or collateralized debt obligations. While these investments are inherently risky, they are relatively common among “qualified investors.” Currently, stock fraud lawyers are also investigating if Merrill Lynch properly disclosed the CDO risks to investors in the sale of Bernoulli High Grade CDO-II. Furthermore, the value of Bernoulli High Grade CDO-II may have been inflated and overstated by Merrill Lynch. Many investment attorneys believe that Merrill Lynch either knew or should have known the 2007 CDO deals were bad in the existing mortgage market conditions, given the poor performance of the CDOs.

On January 31, 2012, a Financial Industry Regulatory Authority Arbitration Panel awarded $1.38 million to Bobby Hayes, an investor who purchased Collateralized Debt Obligations from Merrill Lynch in 2007. For more on this case, see the previous blog post, “After Securities Arbitration, Merrill Lynch Must Pay $1.4 Million to Investor Over CDO Loss.”

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Merrill Lynch customers who purchased Lexington Capital Funding III Collateralized Debt Obligations could potentially recover their losses through securities arbitration. Lexington Capital was sold to institutional and high-net-worth customers of Merrill Lynch. The Lexington Capital CDO was underwritten by Merrill Lynch in 2007. However, all 30 of the CDOs underwritten by Merrill Lynch in 2007 were either in technical default, had its best-rated portion cut to junk, was in danger of being liquidated or was in the process of being liquidated by the summer of 2008. Stock fraud lawyers are now investigating how Lexington Capital was marketed and sold by Merrill Lynch.

Lexington Capital CDO Investors Could Recover Losses Through Securities Arbitration

Securities that are backed by underlying pools of loans or bonds are called CDOs, or collateralized debt obligations. While these investments are inherently risky, they are relatively common among “qualified investors.” Currently, stock fraud lawyers are also investigating if Merrill Lynch properly disclosed the CDO risks to investors in the sale of Lexington Capital. Furthermore, the value of Lexington Capital may have been inflated and over-stated by Merrill Lynch. Many investment attorneys believe that Merrill Lynch either knew or should have known the 2007 CDO deals were bad in the existing mortgage market conditions, given the poor performance of the CDOs.

On January 31, 2012, a Financial Industry Regulatory Authority Arbitration Panel awarded $1.38 million to Bobby Hayes, an investor who purchased Collateralized Debt Obligations from Merrill Lynch in 2007. For more on this case, see the previous blog post, “After Securities Arbitration, Merrill Lynch Must Pay $1.4 Million to Investor Over CDO Loss.”

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Investment attorneys are seeking Banc of America Securities customers who purchased Lyon Capital Management VII Collateralized Loan Obligations. Banc of America sold Lyon Capital to its institutional and high-net-worth customers. The CLOs were issued in July 2007. However, at this time, the value of investment, which was created by pooling loans together, was already declining. Lyon Capital’s value quickly declined and, eventually, was liquidated. The poor performance of Lyon Capital indicates that Banc of America either knew, or should have known, the existing market conditions made the deal a bad one. Investment attorneys are also questioning the valuation procedures that were used in pricing the loans.

Purchasers of Lyon Capital CLO with Banc of America Securities May Have Securities Arbitration Claim

A Financial Industry Regulatory Authority Arbitration Panel last week awarded $1.38 million to a Lyon Capital CLO investor. The award includes attorney’s fees, hearing session fees, interest and the entirety of the claimant’s investment losses. Allegations heard by the panel stated that Lyon Capital was worthless at the time of purchase. Only one month after closing the allegedly worthless deal, the disclosures about potential losses in similar loan pools was changed by Banc of America. August 2007’s prospectus stated that, because of the declining market values of loans, it was likely that “on the closing date [the value of the portfolio] will be substantially less than the principal amount.” The claimant further alleged that the investment was sold as a low-risk investment and Lyon Capital CLO was, in actuality, artificially inflated at the time of closing.

In light of the conduct of Banc of America in the sales of Lyon Capital and the recent related FINRA award, investment attorneys believe there may be other Lyon Capital investors who can seek to recover losses through securities arbitration. To find out more about your legal rights and options, contact an investment attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

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