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A large FINRA arbitration award was recently rendered against Citigroup Inc. (“Citigroup”) for sales practice abuses concerning Citigroup’s selling and marketing of the MAT Five LLC (“MAT Five”). The MAT Five had a $500,000 minimum investment requirement and was promoted to fixed-income investors who were seeking preservation of capital. Citigroup represented that the MAT Five was designed to produce stable cash flows in a tax-advantaged arbitrage opportunity. In actuality, the MAT Five was a very risky investment. Based on these claims, our firm has filed numerous arbitrations against Citigroup on behalf of investors and customers of Citigroup who invested in the MAT Five.

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One notable development for investors relates to several FINRA arbitration awards recently rendered against UBS Financial Services, Inc. (“UBS”) for sales practice abuses concerning UBS’s selling and marketing of principal protected structured notes issued by Lehman Brothers Holdings, Inc. (“Lehman Brothers”), which are structured investment vehicles that combine a fixed income note with a derivative typically linked to an equities index, a group of indices, or other assets. These products were developed, underwritten, offered, marketed and sold by UBS to its customers and investors as safe and principal protected investments; however, they were extremely risky and became worthless when Lehman Brothers filed for bankruptcy. Based on these claims, our firm has filed numerous arbitrations against UBS on behalf of investors and customers of UBS who invested in Lehman Brothers principal protected structured notes.

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Investors who lost $1 billion in the Goldman Sachs structured ABACAS CDO were handed a strategic road map by the SEC when it filed the civil fraud complaint against Goldman on Friday. The alleged misrepresentation to ACA by Goldman that Paulson was long the equity tranches of ABACUS and the omission to disclose to ABACUS investors in writing and orally that Paulson handpicked securities in ABACUS while it was simultaneously shorting the same securities are the crux of a potential claim by ABACUS’ investors against Goldman. But what path should investors forge to recover their losses? Court or arbitration? The recent RaceTrac v. Bear Stearns arbitration award shows that a large investor can win a private arbitration against a significant brokerage firm related to misrepresentations and omissions of CDO’s regardless of the risk disclosure language contained in the prospectus.

Since the subprime market meltdown, only one multi billion dollar investor has received a legal award or judgment against brokerage firm for misrepresenting and materially omitting to disclose facts related to CDOs. RaceTrac Petroleum, an Atlanta-based chain of more than 525 retail gasoline convenience stores in the southeast U.S., won a $3.4 million award against Bear Stearns in December 2009. The FINRA arbitration panel ruled that Bear Stearns was liable for misrepresentation and material omission, negligence and failure to supervise related to the Bear Stearns High Grade Funds, a CDO packed hedge fund which caused $1.6 billion in losses in 2007.

The issues in the Goldman ABACUS case are very similar to the Bear Stearns High Grade case. Did Goldman misrepresent or omit disclosing a material fact to the ABACUS investors? Instead of filing a lengthy, costly, public civil lawsuit against Bear Stearns, RaceTrac filed an arbitration claim at FINRA in December 2007 seeking $5 million in damages. Federal prosecutors filed criminal charges against the funds’ portfolio managers, Ralph Cioffi and Matthew Tannin. In March 2009, on the eve of the arbitration hearings in Atlanta, the U.S. Attorneys’ Office in New York ran into federal court in Brooklyn to try to stop RaceTrac from going forward with the arbitration until the criminal trials of Cioffi and Tannin were completed. Judge Block shut the government down and allowed RaceTrac to proceed. A jury then acquitted Cioffi and Tannin of all criminal charges November 2009. However, after 16 days of private arbitration hearings, the FINRA arbitration panel ruled that Bear Stearns was liable and awarded damages of almost 70% of RaceTrac’s investment.

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The investment world is buzzing about the SEC’s fraud allegations against Goldman Sachs for misrepresenting and omitting to disclose Paulson’s role in choosing RMBS securities for the ABACUS CDO and then shorting the same individual RMBS through CDS transactions with Goldman. According to the SEC, “investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.” It is hard to tell whether direct investors in ABACUS lost $1 billion or whether that includes companies which had CDS risk exposure to it. Either way, what are the money losers going to do about it?

According to the SEC complaint, IKB, the German commercial bank, bought $150 million of Class A-1 and Class A-2 Notes which seem to look like the AAA-rated upper tranches of ABACUS. But there is no other disclosure of who else bought ABACUS from Goldman. I presume that IKB was very cooperative with the SEC and allowed its name to be used in the complaint as opposed to being dubbed “Investor #1”. IKB has likely been negotiating with Goldman behind the scenes. I expect to see a civil complaint filed by IKB against Goldman in federal court in New York shortly. However, they are probably better off arbitrating the dispute for numerous reasons (privacy, low cost, limited dispositive motion practice, etc.).

The SEC complaint also explains how a division of ACA, the monoline insurance company, served as the “Portfolio Selection Agent” for ABACUS, and another division of ACA (ACA Capital) also sold protection on $909 million of the super senior tranche of ABACUS through credit default swaps as well. ABN AMRO, the European bank, then assumed that same exposure through CDS deals with Goldman and ACA. The complaint alleges Goldman defrauded IKB, ACA and ABN AMRO. ABN AMRO was bought by the Royal Bank of Scotland and after ABACUS went to almost zero, RBS paid Goldman $841 million, most of which was then paid by Goldman to Paulson due to Paulson’s short bets on the underlying tranches. Got that?

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The SEC charged Goldman Sachs with defrauding investors of ABACUS 2007-AC1, a synthetic CDO created and sold by Goldman in early 2007 when the subprime world was reeling. Investors in ABACUS ultimately lost $1 billion.

The SEC’s civil fraud complaint alleges that Goldman allowed the multi billion dollar hedge fund Paulson & Co. to help select RMBS (residential mortgage backed securities) for the Abacus CDO, knew that Paulson was concurrently shorting specific tranches of the CDO but did not disclose anything about Paulson to investors in the CDO offering documents or marketing materials.

This is a huge development in that it shows SEC has the fortitude to file actions against the biggest firm of all related to its failure to disclose material information to investors. Goldman will likely be the brunt of civil lawsuits or arbitrations related to the ABACUS CDO. The next question is whether the SEC will file claims against Paulson as well.

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Today, the SEC charged Morgan Keegan & Company, Morgan Asset Management and two employees with fraudulently overstating the value of securities backed by subprime mortgages. These are the first federal government allegations related to the Regions Morgan Keegan bond funds which lost significant value in 2008. The serious charges come on the heels of a string of recent FINRA arbitration multi-million dollar awards against Morgan Keegan related to the funds.

Morgan Keegan is the subject of numerous arbitration cases relating to over $2 billion of losses in RMK proprietary bond mutual funds managed by James Kelsoe and decimated due to allegedly risky investments. Kelsoe was charged by the SEC. Many law firms around the U.S., including our firm, have been retained by investors who lost money in the Regions Morgan Keegan funds.

It will be interesting to see how the SEC allegations effect the firms’ litigation strategy of trying most of the arbitration claims to award. Here is the text of the SEC release.
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Morgan Keegan lost two large FINRA arbitrations this week related to the Regions Morgan Keegan bond funds which were decimated in 2008. These awards are the second and third reported awards of over $1 million.

A securities arbitration panel ordered brokerage firm Morgan Keegan & Co. to pay Andrew Stein, a 38-year-old investor in Jupiter, Fla., and his two companies, $2.5 million for losses. Morgan Keegan was found liable for negligence, failure to supervise and selling unsuitable investments.

Another FINRA arbitration panel in Birmingham, Alabama ordered Morgan Keegan to pay over $1.1 million which according to counsel on the case represented 80% of the $1.4 million net losses in the RMK funds.

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Below is an article from Reuters this week regarding our client’s $3.4 million arbitration victory against Bear Stearns related to the Bear Stearns High Grade Fund. There are many investors who, for one reason or another, had decided not to file arbitrations against Bear Stearns. Investors should be aware that FINRA has a six year eligibility rule. In some jurisdictions, an investor who files a FINRA arbitration more than six years after the purchase of the High Grade Fund may be the subject to a motion to dismiss in the FINRA arbitration. Since the original High Grade Fund launched in about September 2003, early investors who are contemplating taking action should make a final decision sooner rather than later so as to avoid any potential motion. Investors who rolled over from the High Grade Fund to the Enhanced Leverage Fund should have no FINRA eligibility rule issues.

Investor in defunct Bear fund wins $3.4 mln award 3:15pm EST * Award follows acquittal of fund managers * JPMorgan Chase is responsible for paying the investor By Matthew Goldstein NEW YORK, Feb 9 (Reuters) – A Georgia-based chain of service stations that lost money with a Bear Stearns hedge fund that collapsed in July 2007 has won a $3.4 million arbitration award.

The award by the securities industry arbitration panel is the first ruling in favor of an investor in one of two now defunct Bear hedge funds since a jury acquitted the funds’ former managers of criminal charges in November.

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Below is a Reuter’s article about the first Bear Stearns High Grade Fund arbitration case won by an investor. John Rich and Ross Intelisano of Rich & Intelisano, LLP were lead trial counsel and Jake Zamansky and Ted Glenn of Zamansky & Associates were co-counsel.

“Investor in Defunct Bear Fund Wins $3.4 Mln Award”

* Award follows acquittal of fund managers

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Sean Coffey has recently embarked on a campaign to become the next Attorney General of New York State. I have never been substantially involved in a political campaign before, but Sean is different. I’ve worked with and known Sean and his prior law firm for many years and I have never been more impressed with a potential candidate for elected office as I am with Sean. He is smart, loyal, strong and possesses all of the qualities needed to be a fantastic Attorney General. Therefore, I’m going to be actively involved in helping Sean become the next Attorney General. And I think he’s going to win. The press is certainly catching on very quickly. Kate Kelley, a very well respected writer for the Wall Street Journal, wrote a great piece about the AG race. Here is the link. http://online.wsj.com/article/SB10001424052748704561004575013503448906246.html

And a snippet from the piece:

“So far, Wall Street isn’t taking much heat from current or potential candidates to succeed Mr. Cuomo.

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