Monthly Archives: February 2008

The front page story in today’s Wall Street Journal illustrates how investors of all types have been stung by the subprime crisis.  The WSJ reports that the Maher brothers, M. Brian and Basil, have lost over $286 million in investments through Lehman Brothers Inc. 

The Maher’s sold their family’s shipping business this past summer for over $1 billion.  Following the sale, the brothers sought investments that were safe and conservative.  However, within weeks they had lost over a quarter million dollars.  

How can this happen? Well the Mahers are not unlike many investors who were allegedly misled regarding the investments they were sold. 

At issue in the Maher case are “auction rate” securities.  These auction rate securities are long term bonds that behave like short term bonds.  Until recently, not much was known off of Wall Street about these products.  However, as Wall Street became more and more creative with the investment products they packaged and sold, these auction rate securities started finding their way into more investors portfolios.

The lure of these bonds was that they acted like money markets while producing slightly higher returns.  In addition, these funds were easy to buy and sell.  This was exactly what many conservative investors wanted.  Unfortunately, these bonds, like many others, did not perform as represented.

One outgrowth of the ongoing mortgage and subprime crisis is that many investors and banks are not willing to add more debt positions to their books.  As a result, the market for these funds has dried up.  This has left investors holding products that are now worth only a fraction of their original value.  

While their losses are staggering, the Mahers are just one example of investors suffering losses due to Wall Street misrepresenting the complex products they have created.  Their case is no more disturbing than the scores of investors who lost far less.  No matter what the losses, Wall Street needs to be held accountable for their misrepresentations.  

In an article in today’s Wall Street Journal, Liz Rappaport and Karen Richardson report that securities tied to student loans might be succumbing to the credit crunch.

The Wall Street players that bundled and sold investments in subprime mortgages also packaged student loans into similar investments.  According to the WSJ, auctions of these securities conducted by Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Citigroup Inc. have failed to generate investors’ interest, leaving roughly $3 billion of securities without investor buyers.

In the past when demand was weak, the banks would step in and purchase the shortfall.  However, given the recent events relative to the subprime collapse, banks are already overburdened with other types of investment products they are trying to get off their books.  As a result, the auctions for the student loan products are failing.

These failures serve as an indicator that investors are growing reluctant to invest in these complex products tied to loans.  The fear is that valuing these products is difficult and that, like the subprime loans, these products will too experience declines in value.

When these auctions fail, the securities are left in the hands of investors who already hold them.  The result is that interest rates get reset.  The impact of this financial phenomenon is that students will likely see higher costs associated with their loans.

As this story illustrates, the fallout from the creation of complex securities by Wall Street continues to trickle down to Main Street.  It would appear that no credit program is beyond the reach of the current crisis.   

CountryMark Cooperative filed a federal lawsuit in Indianapolis last week against Morgan Keegan (the brokerage subsidiary of Regions Financial Corp.) alleging violations of state and federal securities laws.  CountryMark contends that Morgan Keegan, its advisor, invested $10 million into mortgage-backed securities that contained subprime loans.

According to the Indianapolis Star, the co-op alleges that its $10 million note is in default and worthless because no trading market exists for it.

The CountryMark suit is the latest in a growing list of lawsuits and arbitrations filed against Morgan Keegan by investors.  As the subprime mortgage loan crisis continues, it can be expected that more and more investors will become aware of investment losses and will seek counsel.  Maddox Hargett & Caruso, P.C. has investigated these practices and has been retained by a number of investors seeking to recover their investment losses. 

If you have suffered losses at Morgan Keegan through investments containing mortgage-backed securities, we encourage you to contact us immediately so that we can evaluate the facts and circumstances surrounding how those investments were presented to you and whether this investment was appropriate for your investment portfolio.

Maddox Hargett & Caruso, P.C. is investigating the possibility of taking legal action on behalf of investors that lost money in a collateralized debt obligation (“CDO”) called Norma CDO I Ltd.(“Norma”).

Merrill Lynch created Norma to capitalize on the sub-prime market before that market crashed. Norma’s holdings consisted primarily of CDOs and the resulting structured investment products were sold to both retail and institutional investors. Over $1.5 billion of these securities found their way into the portfolios of investors. 

As a result of the recent housing market collapse and the ongoing mortgage crisis, the value of Norma has been greatly diminished. This decline in value has led to significant losses for investors. 

We are investigating how Merrill Lynch and others marketed Norma, and whether the true risks of Norma were fully disclosed to its investors. Questions have arisen and we are working to determine whether Norma was suitable for the retail and institutional customers that invested in the product.

The Federal Bureau of Investigation has opened a criminal investigation into 14 companies/firms who have played a role in the recent mortgage crisis.

The companies/firms have not been identified. However officials did disclose that those on the list include not only mortgage brokers and lenders, but Wall Street banks that packaged and sold investments tied to subprime mortgages.   

The losses being reported by both Wall Street and Main Street as a result of the subprime meltdown are staggering. While the huge write-downs by Wall Street firms are almost daily news, the losses by individual investors have been less reported. That is not to say that individual investors have not suffered significant losses as well.

The write-downs from the likes of Merrill Lynch, Citibank and others reflect, in part, the investment products that those firms were not able to sell off to investors and therefore continued to hold on their books. It goes without saying that the investors who were sold and held these products have (and will) experience losses.

While the retired couple who lost $100,000 may not be as headline catching as the multi-billion dollar losses being reported by Wall Street, they are no less shocking. We expect to see more and more individual investors coming to realize that they too have been victimized by the mortgage crisis in the coming weeks and months.    

Even as investors line up to file arbitration claims against Morgan Keegan relating to the sales and performance of several of their proprietary funds, two of their much maligned bond funds top the list of worst-performing bond funds for the January 2008.

RMK Select Intermediate Bond (RIBIX) and RMK Select High Income (RHIIX) saw total returns in January of -17.3% and -11.3% respectively.

As of December 31, 2007, these two funds had total combined assets of $145.2 million. 

As this  poor performance continues, it can be expected that more and more investors will file arbitration claims seeking recovery of their losses. The key focus in many of these claims will be on what disclosures were made (or not made) to investors who were sold these funds. Additionally, many claims already on file have claimed that these funds were pitched and sold as very safe, conservative investments not dissimilar from CDs. Clearly these investments cannot be compared to CDs or any other generally regarded safe, income producing investment.