Citi settled a CDO case for $590 million today, and if you are following along at home you’ll note that that is more than 2x as much as it settled its last CDO case for. There are a number of reasons for that but a big one is: in this case, Citi is in trouble for buying the CDOs, whereas in the last one it was in trouble for selling them. You can’t win, of course, but you can minimize your losses, and the method is clear: next time you find yourself with billions of dollars of assets that you’ve got marked at par but that you’re pretty sure will quickly decay into a pool of oozing crap, you should sell them quickly and deceptively. You’ll get sued less.

Also you won’t lose billions of dollars on the actual CDOs, which is arguably better.

I kid I kid this is different and Citi will probably be whacked repeatedly and in creative ways by shareholders over the fraudulent selling of the CDOs – that $285mm it’s paying to the SEC is really just a down payment – so there really is no way to win (except to accurately mark your assets and disclose your exposure clearly and accurately but who would do that?). Like: CDO investors will sue over the fact that Citi sold them crappy CDOs. Citi shareholders will sue over the fact that Citi was going around selling crappy CDOs without disclosing in its 10Q “we are in the business of selling crappy CDOs.” The advanced move will be when people sue because Citi didn’t tell them that other people were going to sue it, which sounds very silly until you remember that that exact thing is happening to BofA right now. Read more »

  • 27 Aug 2012 at 2:02 PM

Not Everything Is Libor

It’s been a while since we checked in with the infinity thrillion dollars of Libor lawsuits, but the Journal has a good roundup today and, yeah, eep, this is sort of interesting:

Firms facing the biggest potential payouts, according to Morgan Stanley, based on the financial business they do rather than their assumed culpability, include Deutsche Bank AG, Royal Bank of Scotland PLC, Barclays, Bank of America and J.P. Morgan.

It seems almost unfair: you can very easily put a whole lot of leverage on your employees’ lame criminality; if you’re really really good at selling rate product even a tiny wee bit of criminality can be a disaster.* Shades of this chart – shouldn’t you get more points for being more criminal, not just for being bigger?

But this was the most jarring part:

Fund manager Charles Schwab has alleged it deserves damages related to billions of dollars in fixed-rate investments held by its funds, as well as investments with returns pegged directly to Libor. Schwab alleges in lawsuits it filed last year that the fixed rates were set in relation to Libor.

This is actually true; here is the Schwab complaint, which I’ve seen before but somehow didn’t register this: Read more »

If someone builds structured credit securities out of some dodgy stuff, and someone else rates those securities AAA for no particularly good reason, and someone else sells those securities to you without reading the offering memo, and you buy those securities without any due diligence since you figure that the structurer and rater and broker wouldn’t all be messing with you, and it turns out they were, and the stuff blows up, and you end up losing a lot of money on the AAA rated securities, the natural question for you to ask, this being America, is: whose fault was that?

That question is being asked in all the best circles these days, and the answer is probably “everybody’s,” as it usually is. One place it’s being asked and slooooowly answered is in a New York federal court considering the case of the Cheyne Finance SIV, which is special for at least two reasons. First: there is a widespread belief that credit ratings are opinions, and opinions are protected by the First Amendment, and so you can’t restrict the creativity and expression of those free spirits and S&P by suing them when their opinions turn out to be, well, wrong. But for (weird!) reasons we’ve discussed, the judge in this case, Shira Scheindlin, is unimpressed by those arguments, so this is a rare lawsuit against ratings agencies that may actually go to trial.

Second: this SIV may – may – have been the origin of “structured by cows.”* Read more »

Back in June, hedge fund manager Daniel Shak sued his ex-wife, Beth, over assets he claimed she’d hid during the couple’s divorce. Said assets were Beth’s shoes, which Daniel alleged were kept in a “secret room” and were worth approximately $1 million, 35 percent of which he wanted. It was a bit unclear as to why he was going after the footwear collection three years after the two split (though using the proceeds to relaunch his fund was a possibility) but the heart wants what the heart wants. Anyway, today brings just a couple follow-ups on the Shaks, both of which are slightly more exciting for Beth than Dan. Read more »

  • 10 Jul 2012 at 3:26 PM

Whistleblower Law Firm Finds Some Prospects

So there’s a law firm called Labaton Sucharow and a big chunk of their business model is:
(1) read newspaper,
(2) see bank did bad thing,
(3) sue bank.

This is a great business model because banks just cannot resist doing bad things and courts just cannot resist taking piles of money from shareholders of those banks and divvying it up among other shareholders of those banks and the lawyers who facilitated the transfer. For those same reasons, though, it’s a highly competitive business model and there’s every reason to branch into other related fields. So they did:

Labaton Sucharow was the first firm in the country to establish a practice exclusively focused on protecting and advocating for SEC Whistleblowers. Led by Jordan A. Thomas, a former Assistant Director and Assistance Chief Litigation Counsel in the Enforcement Division who played a leadership role in the development of the SEC Whistleblower Program, our practice leverages unparalleled securities litigation expertise and significant in-house resources to protect and advocate for courageous individuals who report possible securities violations.

This is clever as that is also a lucrative business model but a safer one: unlike securities class actions, where the decision about which lawyers get paid and how much are left to courts and can seem arbitrary to those lawyers, in whistleblower suits you actually find a client and convince him to pay you your fees out of any money he can get. And that money can also be serious money.

The problem though is that you cannot typically get these cases just by keeping a casual eye on the newspaper: banks cannot resist doing bad things, true, but once those bad things are in the newspaper the expected value of whistleblowing is low. The whole point of a whistleblower is that he voluntarily goes to regulators with information that isn’t yet widely known, so your job, as a whistleblowing broker, is to find people who have not yet come forward with their valuable crime information and make them come forward to you. And that is hard. It’s not like you can just contact a bunch of people in senior roles in the UK and US financial industries and say “hey, would you like to talk to us about possible misconduct in your industry?” Right? Read more »

It’s no surprise that more Liborneriness is coming to a bank near you; with Barclays and UBS already pretty much having admitted wide-ranging Libor manipulation and Deutsche Bank seeming to be next up for a roasting. Maybe some people will go to jail, and certainly some more banks will pay fines, but also certainly those fines will be very very very small compared to the potential lawsuits. Because there are eight hundred quazillion dollars of Libor-referencing contracts, and if you screwed them up then in some loose theoretical way you owe money to everyone who got screwed without having any offsetting claims against anyone who benefited.

Now the US legal system being what it is the lawsuits long preceded the evidence of manipulation and there’s a big mishegas of a Libor lawsuit that’s been going on for years in New York. This suit looks a little quaint now, being based on the theory that all the banks got together in a room, smoked cigars, rubbed their hands together, and agreed to lower Libor for some unspecified nefarious purpose. Now we know that they all worked against each other to lower and/or raise Libor for a variety of clearly specified nefarious purposes,* until the crisis hit and they all started working independently to lower Libor for clearly specified and maybe public-spirited purposes. And the banks will tell you that themselves, in their motion in the case filed last week:

Plaintiffs themselves cite as the primary motive for the alleged false reports a desire by Defendants to hide their supposed financial weakness from each other and the public, which would naturally call for circumspection by such banks, not discussion and agreement among them.

See? We would never work together to manipulate Libor – we’re too sneaky for that. We’d prefer to lie to each other, too. Read more »

If you knew nothing about Phil Falcone but what you read in the SEC’s assortment of complaints against him today, you would probably conclude that he’s kind of a dick. The loan thing, of course – Falcone borrowed $113mm from Harbinger at the same time he was preventing investors from withdrawing their money – but also a whole range of new and exciting charges announced today. Like that time he got mad at his prime broker and so bought 113% of the issue of a bond that the prime broker was short, and then called in the prime broker’s borrow to screw them (and gloated to them about it). Or the time – sorry, three times – that he shorted stock of companies that were doing equity offerings and then illegally covered his short with his allocation in those offerings.

Robert Khuzami is right about the marvelous variety and inventiveness of Harbinger’s scammy ways, but lots of people do lots of bad things on Wall Street. It’s just that usually their victims are either diffuse markets (insider trading) or widows and orphans (Ponzi schemes etc.) – it’s rare to spend so much time screwing so many big institutions. And it’s maybe even rarer for the SEC to stick up for those institutions.

Start with the thing that’s gotten the most attention so far: the loan that allowed Falcone to take $113mm out of his fund when investors were not allowed to redeem. How did no one tell him that that was a bad idea? Well: Read more »