Articles Posted in Structured Products

According to state regulators, non-traded real estate investment trusts, structure products, and private placements, are some of the financial instruments that the states and insurance regulators are watching closely. First Deputy Commissioner of the Iowa Insurance Division Jim Mumford and Alabama Securities Commission director Joseph P. Borg recently spoke at a panel at the Insured Retirement Institute’s Government, Legal and Regulatory Conference.

Borg noted that a growing number of agents are now selling unlicensed financial products, with insurance agents selling private placements and getting clients away from insurance products and into Regulation 506 of Regulation D. The rule establishes a safe harbor for securities’ private offerings. Such instruments are only supposed to be made available to accredited investors and non-accredited investors that have enough sophistication to be able to assess this type of investment. Agents, however, have tried to circumvent securities laws by claiming that a (nonexistent) attorney gave them a letter stating that the private offering actually wasn’t a security.

Also up for sale lately are self-directed IRAs and promissory notes. Structured products have also been quite popular, although unfortunately, Borg noted, many agents and brokers don’t even understand what they are selling.

According to California Superior Court Judge Richard Kramer Fitch Inc., Standard and Poor’s parent (MHP) McGraw-Hill Companies Inc., Fitch, Inc., and Moody’s Corp. (MCO), were merely exercising their First Amendment right to free speech when they gave their highest rating to three structured investment vehicles (SIVs) that collapsed when the mortgage market failed in 2008 and 2007. The ruling, in California Public Employees’ Retirement System v. Moody’s Corp. now leaves the plaintiffs with a steep burden of proof. The plaintiff, the largest pension fund in the US, is seeking more than $1 billion in securities fraud damages stemming from the inaccurate subprime ratings.

Per the securities complaint, CAlPERS is accusing the defendants of publishing ratings that were “unreasonably high” and “wildly inaccurate” and applying “seriously flawed” methods in an “incompetent” manner. The plaintiff contends that the high ratings that were given to the SIVs contributed to their collapse during the economic crisis.

BNA was able to get court transcripts that indicate that the ruling came on a motion under California’s anti- Strategic Lawsuit Against Public Participation (SLAPP) statute, which offers a special procedure to strike a complaint involving the rights of free speech and petition. If a defendant persuades the court that the cause of action came from a protected activity, the plaintiff must prove that the claims deserve additional consideration. Now CalPERS must show a “probability of prevailing.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, there is no longer any protection from private litigation for ratings agency misstatements. Now, an investor only has to prove gross negligence to win the case. However, per Wayne State University Law School Peter Henning, in BNA Securities Daily, Dodd-Frank’s provision may not carry much weight if a ratings agency’s First Amendment rights are widely interpreted.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker fraud lawyer William Shepherd had this to say: “There have long been many restrictions on ‘speech,’ including life threats, trademarks, defamation, conspiracy, treason and threats of blackmail. But the age-old standard restriction is ‘you can’t shout fire in a crowded theater.’ The reason is that strangers might rely on the words and be injured by your ‘speech.’ How is this different than shouting ‘AAA- rated,’ knowing that strangers will rely on the words and be harmed by this ‘speech?’ The difference is that Wall Street can say anything it wants, while the rest of us have to just sit down and shut up.”

CalPERS has until March 18, 2011 to respond to the court.

Related Web Resources:
Ratings by Moody’s, Fitch, S&P Ruled to Be Protected Speech, BusinessWeek, December 11, 2010

Calpers Sues Rating Companies Over $1 Billion Loss, Bloomberg, July 15, 2010

CalPERS

California Public Employees’ Retirement System v. Moody’s Corp., Justia Dockets

Calif. Court Concludes Credit Ratings Entitled to First Amendment Protection, BNA Securities Law Daily, December 10, 2010

Credit Ratings Agencies, Stockbroker Fraud Blog

California Anti-SLAPP Project

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In what one investment banking official is calling a “second wave” of securities litigation stemming from the credit and subprime crisis of 2008, financial firms are now suing other financial institutions for damages. While speaking on a Practising Law Institute panel, Morgan Stanley managing director D. Scott Tucker noted that this “second wave” is the “exact opposite of the first wave,” which was primarily brought by smaller pension funds or states claiming violations of the 1933 Securities Act and the 1934 Securities Exchange Act.

Tucker said that with this new wave, most of the plaintiffs are financial institutions, including investment managers and hedge funds, that are asserting common law fraud and making other state law claims. Also, these latest lawsuits are primarily individual cases, rather than class actions. The securities at the center of this latest wave of litigation are complex structured products, such as credit default swaps, collateralized debt obligations, and mortgage-backed securities, as well as complaints involving private placements and derivatives or securities that don’t trade on liquid markets.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP represent institutional investors who suffered financial losses because of their dealings with investment companies. Unlike other law firms, our stockbroker fraud lawyers will never represent brokerage firms.