Even sophisticated investors can be defrauded. M&T Bank Corporation, a bank holding company with a market capitalization of $4.4 billion, is suing Deutsche Bank to recover over $80 million in losses relating to an investment in a a collateralized debt obligation (CDO) called Gemstone, reported Vikas Bajaj in the January 20th edition of the New York Times. The suit alleges that Deutsche Bank misrepresented and omitted to disclose material facts about Gemstone, calling it “fully rock solid,” and “a layup,” when it was actually a piece of “subprime dross,” according to the article. In a nutshell, Gemstone consisted of bonds backed by subprime homes loans (a dubious asset) and credit default swaps (a contingent liability) pursuant to which Gemstone ended up owing millions of dollars to Deutsche Bank when the loans defaulted. The swaps represented a huge conflict of interest for Deutsche Bank, which stood to benefit when things did not go well for Gemstone.
The M&T Bank case illustrates a trend in which an increasing number of corporate and institutional investors (so-called “sophisticated” investors) are standing up for their shareholders and saying, we were lied to ? and with some considerable success. A few days ago, this blog reported that Merrill Lynch paid $550 million to settle a CDO lawsuit brought by the Ohio State Teachers Retirement System – confirming that even large, sophisticated investors can recoup damages when they are misled into purchasing opaque investments such as CDOs.
Brokerage firms and investment banks often argue that institutional and corporate investors do not deserve to be compensated because their officers were financially sophisticated and should have known better. It’s the “you never should have trusted us” defense. However, this defense is simply not justified, because sophisticated people can’t bring their sophistication to bear when they are lied to ? as Merrill Lynch apparently recognized when it paid the Ohio State Teachers Retirement System $550 million.
The bedrock principle of the securities laws is the duty of complete and truthful disclosure. Once a broker undertakes to disclose any information about a security to an investor or potential investor, the disclosure must be complete and truthful in all material respects. This is an absolute requirement. It applies to every broker (whether discount or full service), every security, and every person who receives any information about a security (rich or poor, financially sophisticated or not, whether or not that person has an account with the broker). If a broker fails to provide complete and truthful disclosure, and the undisclosed information would have been important in deciding whether or not to invest, the investor has a legal right of action against the broker and the firm to recover resulting losses and damages.
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 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in auction-rate securities cases. For further information, please contact us.