Articles Posted in Credit Default Swaps

Bloomberg reports that the U.S. Securities and Exchange Commission is looking into whether financial firms colluded together so that prices in the $6 trillion credit default swaps indexes market became skewed. According to the news outlet’s source, the regulator is trying to figure out whether dealers misrepresented index prices. The SEC is reportedly examining indexes that are less-liquid and actively traded.

With the credit-default swaps benchmark, investors can make bets on whether companies, mortgage-backed securities, or countries will default. Trading in swaps index contracts has increased in recent years because investors have been looking for easy ways to make bets via speculation.

At the conclusion of every trading day, benchmark prices for indexes are calculated by third-party providers according to dealer quotes. This sets the level at which traders are able to make their positions. This process resembles the way markets that don’t trade on exchanges establish benchmark prices.

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Details of the settlement involving a dozen big banks accused of conspiring to rig prices and restrict competition in the credit default swaps market have been released. According to papers filed in federal court in Manhattan last week, the following firms will collectively pay nearly $1.9 billion:

· JPMorgan Chase & Co. (JPM): $595M

· Morgan Stanley (MS): $230M

· Barclays Plc (BARC): $178M

· Goldman Sachs (GS): $164M

· Credit Suisse (CS): $159M

· Bank of America Corp. (BAC): $90M

· Deutsche Bank (DB): $120M

· BNP Paribas (BNP): $89M

· Citigroup (C): $60M

· Royal Bank of Scotland (RBS): $33M

· HSBC Holdings Plc (HSBC): $25M

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In U.S. District Court for the Northern District of Illinois, Danish pension funds (and their investment manager) Unipension Fondsmaeglerselskab, MP Pension-Pensionskassen for Magistre & Psykologer, Arkitekternes Pensionskasse, and Pensionskassen for Jordbrugsakademikere & Dyrlaeger are suing 12 banks accusing them of conspiring to take charge of access and pricing in the credit derivatives markets. They are claiming antitrust violations while contending that the defendants acted unreasonably to hold back competitors in the credit default swaps market.

The funds believe that the harm suffered by investors as a result was “tens of billions of dollars” worth. They want monetary damages and injunctive relief.

According to the Danish pension funds’ credit default swaps case, the defendants inflated profits by taking control of intellectual property rights in the CDS market, blocking would-be exchanges’ entry, and limiting client access to credit-default-swaps prices, and

Ex-Commission Officials, Others Want DC Circuit to Grant Stanford Ponzi Scam Victims SIPC Protection

Former SEC Officials, law professors, and trade groups are among those pressing the U.S. Court of Appeals for the District of Columbia Circuit to reject the regulator’s bid to compel Securities Investor Protection Corporation coverage for the investors who were bilked in R. Allen Stanford’s $7 billion Ponzi scam. Inclusion under the Securities Investor Protection Act would allow the fraud victims to obtain reimbursement for losses.

However, SIPC, which is a federally mandated non-profit corporation, doesn’t believe that the Stanford investors, who purchased certificates of deposit from Stanford International Bank Ltd. in Antigua, fall under this protection. Following a failure to act on the SEC’s request to initiate liquidation proceedings for brokerage firm Stanford Group Co., the regulator asked the court for a novel order that would make the organization comply.

Morgan Stanley says it may sustain $1.7B in losses over a number of securities fraud cases related to subprime mortgage deals. Citigroup Inc.’s (C.N) Citibank is the plaintiff of the securities lawsuit over the Capmark VI CDO and STACK 2006-1 CDO deals, while there are 15 plaintiffs seeking punitive damages over Cheyne Finance, a structured investment vehicle. Morgan Stanley is also reporting losses over a mortgage-backed security deal involving MBIA Corp.

Our securities fraud attorneys would like you to contact us if you are someone who sustained financial losses in any of these MBS deals with Morgan Stanley. Here are more details about the cases:

• Morgan Stanley says the losses in the Citibank securities fraud lawsuit may be a minimum of $269M over a credit default swap on the Capmark VI CDO deal and another one on the credit default swap involving the STACK 2006-1 CDO deal.

Recently, our stockbroker fraud law firm reported on the $100 million class action settlement that Massachusetts Mutual Life Insurance Co.’s OppenheimerFunds Inc. has agreed to pay to settle allegations that it did not properly manage its Oppenheimer Core Bond Fund (OPIGX) and Oppenheimer Champion Fund (OCHBX, OPCHX and OCHCX). The securities case was brought by investors who claimed that the offering documents and sales pitches misrepresented the risks involved in credit default swaps (CDS), mortgage-backed securities (MBS), and other complex securitized financial instruments. Instead, they contend that the funds were marketed and sold as high yielding, diversified, and conservative investments.

The Champion Fund would go on to lose about 80% of its value in 2008. (55% was lost just in November of that year.) The Core Bond Fund lost 33%. (Compare that to the rest of its peer group, which lost 5%.) As a result, Champion Fund investors sustained extremely significant financial losses and Core Bond investors also suffered.

The class action settlement distributes the $100 million between the two groups of mutual fund investors. While Core Bond investors will get $47.5 million, Champion investors are slated to receive $52.5 million. The Boards of Trustees for the funds have already given their approval. However, even in settling, OppenheimerFunds is not admitting to any wrongdoing. Its spokesperson has said that the proposed settlement is in the best interests of its Funds’ shareholders.

The securities case accusing Merrill Lynch International alleging breach of contract related to the $18 million credit default swap purchased by DKR Soundshore Oasis Holding Fund Ltd has been reinstated. The Appellate Division (First Department) of the New York Supreme Court rejected the financial firm’s efforts to get the case tossed on the grounds that DKR did not give enough notice of a credit event. The judges were in unanimous agreement that notifying Merrill the event happened was enough and it didn’t matter that the date hadn’t been specified.

DKR bought for ¥1.5 billion (that’s $18 million) the swap from Merrill for insurance against a certain debt obligation of Urban Corp. Per the contract, a credit event would constitute a restructuring of at least ¥1 billion of Urban’s subordinate debt.

In June 2008, DKR told Merrill that Urban had restructured its debt, but the credit default seller said the notice was not valid and refused to issue payment. DKR filed a lawsuit against Merrill claiming breach of contract and other claims. The defendant filed a motion to dismiss on the grounds that DKR did not give the exact date of when the restructuring happened. The lower court agreed.

Now the appellate court, in reversing the ruling, has determined that CDS buys are entitled to “the benefit of every possible favorable inference” and that the contract under dispute did not ask that the notice have the same precision as how a credit event was defined.

CDS buyers are required to make periodic payments to sellers in return for credit protection against a third party. If that party defaults on its obligation, the buyer tells the seller there has been a credit event and this is supposed to result in payment of the credit protection.

Related Web Resources:
DKR Soundshore Oasis Holding Fund Ltd. v. Merrill Lynch International, Justia

N.Y. Appeals Court Says Merrill Must Pay Offshore Buyer of CDS Protection, BNA Securities Law Daily, January 10, 2011

More Blog Posts:
France and Germany Press EU to Ban Naked Short Selling of Stocks and Limit Credit Default Swaps, Stockbroker Fraud Blog, July 8, 2010

The Financial Regulation Reform Act of 2008 Seeks to Regulate Investment-Bank Holding Companies and Credit Default Swaps, Stockbroker Fraud Blog, November 24, 2008

Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008

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