CIT Group Inc., GMAC Inc., Prudential Financial Inc., and over a dozen other financial institutions sold their bonds to individual investors after being spurned by their sophisticated institutional counterparties, according to an article by Zeke Faux titled “CIT Debt Sold to Widows Has Fine Print Pimco Resists,” Bloomberg. CIT, a commercial lender, filed a Chapter 11 bankruptcy petition in November 2009. As of August 21, 2009, CIT’s debentures that were sold to individuals traded as low as 44 cents on the dollar, according to the article.
“It’s sort of a pump-and-dump scheme in a bear market,” David Hendler, an analyst at fixed-income research firm CreditSights Inc. in New York, was quoted as saying. “CIT had a limited funding channel in the sophisticated wholesale market. They went to where they could offload risk without too many questions. The companies selling don’t talk about the negative case, otherwise they wouldn’t sell as much.”
The Financial Industry Regulatory Authority (FINRA), which is supposed to enforce “high standards of commercial honor and just and equitable principles of trade,” said it was examining the sales practices of brokers that sold the debentures, but FINRA’s description of its examination sounded more like a diversion into back-office arcanery, such as whether trades were reported within a certain timeframe, rather than brokers’ misrepresentations and omissions to disclose materials facts and risks of those debentures.
The debentures mentioned in the article include CTI InterNotes, which reportedly were sold between 2002 and March 2008.
Targeting individual bond investors “was part of a proliferation of gimmicky devices which on the surface looked attractive but was nothing more than high-pressure marketing tools,” Arthur Levitt, a former chairman of the U.S. Securities and Exchange Commission, was quoted as saying.
Elderly retirees and those on the brink of retirement appear to have been targeted. “It’s almost an affinity type of financing geared to elderly people,” said Levitt. At least one firm even set up its web site to allow elderly visitors enlarge the font so they could read its contents.
Some of the CTI InterNotes contain a “survivor’s option” that purportedly allows them to be sold back to the issuer at par when their owner dies. But InterNotes issuers had “a discretionary right to limit” use of the survivor’s option to the greater of $2 million or 2 percent of outstanding principal amount.
CIT was apparently in trouble when it raised $3.2 billion in bonds in the first quarter of 2008. Credit-default swaps on CIT were trading at distressed levels. Credit-default swap sellers were reportedly demanding $1.75 million upfront and $500,000 per year to protect $10 million of CIT bonds from default for five years.
Similarly, GMAC sold more than $25 billion in retail debt called “SmartNotes” and Prudential, the second largest U.S. life insurer, sold $146 million in retail debt. Like CIT securities, these securities had poor ratings from the ratings agencies and involved substantial risks.
Unfortunately, many elderly investors were sold these securities without being advised of the risks and have suffered huge losses. For example, Bruce Frankland, a 57 year-old electrician who said he had considered retirement, reportedly lost money on retail notes issued by CIT and American General Finance, the consumer lending unit of AIG, and GMAC. “If I lose my rear on this CIT deal,” he was quoted as saying, retirement may no longer be “on the table,” adding, “I won’t be buying any bonds anymore.”
J. Boyd Page, senior partner of Page Perry in Atlanta observed that “Many investors, particularly elderly investors, were sold these high risk notes and bonds that were unsuitable for them Similarly many brokers sold these investments without making adequate disclosures of the risks associated with the investments. Fortunately, investors who have been victimized have an avenue to recoup their losses.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions, and have aided clients across the country who have been the victims of financial adviser abuses and scams. Page Perry’s attorneys are actively involved in representing individual investors in cases involving sales of high-risk bonds and notes. For further information, please contact us.