The Financial Industry Regulatory Authority (FINRA) is investigating possible sales practice violations (e.g., misrepresentations and omissions) by Morgan Stanley, Barclays, and Credit Suisse in pitching collateralized debt obligation securities (CDOs) to institutional investors, according to a July 23, 2010 Reuters article by Steve Eder and Leslie Gevirtz, “FINRA probes M Stanley, Barclays, Credit Suisse.”
The FINRA probe reportedly comes amid several other regulatory investigations into the role that CDOs played in the financial crisis. CDOs are notes backed by pools of mortgages that were tranched or sliced into layers of different preferences and risk. Some of the riskiest tranches were held by Wall Street banks, such as Merrill Lynch. CDOs are unregulated, and, therefore, hard to quantify or even detect, even though they were and are present in large quantities. The financial crisis began when Wall Street banks became afraid to lend and do business with each other, because nobody knew how much of this stuff was being held by financial institutions, they just knew that it was a lot and it was toxic.
The article notes that Goldman Sachs recently paid $550 million to settle civil fraud charges filed by the Securities and Exchange Commission over the Goldman’s creation and marketing of the Abacus CDO, which, unbeknownst to investors, was designed in part by a speculator who stood to profit if it failed, which it did.
As pointed out by Reuters, however, “FINRA is not known for handing out stiff penalties.” Even across the pond, foreign observers know that FINRA, ostensibly a regulator, behaves more like the securities industry’s trade association. A case in point, according to Reuters, is the relatively trivial fine levied against Deutsche Bank for misrepresentations in the sale of subprime securities ? in the amount of $7.5 million.
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. Page Perry’s attorneys have extensive experience in representing investors in securities matters and are actively involved in cases involving CDOs. For further information, please contact us.