The answer appears to be a resounding yes. The SEC’s recently filed a lawsuit against Goldman Sachs alleging fraud in the sale of mortgage-backed collateralized debt obligations (CDOs). CDOs are a structured finance product in which a large number of mortgages or other debt instruments are pooled in a trust and divided into multiple layers or “tranches” that pay interest to investors based on the risk and priority of each tranche, with the senior tranches paying lower rates because they are safer investments and the junior tranches paying higher returns for comparatively higher risk debt. The SEC alleges that Goldman Sachs created CDOs backed by high-risk subprime mortgages and then took short positions betting that they would fail while simultaneously recommending that some of their customers buy the securities. In other words, some customers were sold CDO securities and told that they were a good long-term investment, while Goldman and other customers shorted them because they were expected to go down in value. If that is true, many investors were defrauded, and they too should have the right to sue or bring an arbitration claim?especially since the SEC action has not requested restitution or recision for investors.
Because CDOs are typically highly leveraged, they are susceptible to wide fluctuations in value based on the performance of the underlying debt. In addition to being highly volatile, CDOs that contained tranches of subprime mortgage debt were especially susceptible to failure because of the higher default rates of those mortgages. The SEC complaint against Goldman Sachs accuses the firm of deliberately packaging high-mortgages into structured finance products just so that Goldman Sachs and certain hedge fund clients could profit from what they predicted would be a steep decline in the housing market. That prediction turned out to be correct, and those who were in on the bet made billions. Everyone else lost money, and many investors were either forced to see their securities at a steep discount or are still holding securities that are illiquid.
It is likely this story will not end with Goldman Sachs. Just days after filing suit against Goldman, SEC has announced that it was also investigating Morgan Stanley and other firms as part of a broader probe into the role of CDOs in the financial crisis. According to Craig T. Jones of Page Perry, an Atlanta law firm that represents investors in securities fraud cases, “Goldman Sachs was surely not the only Wall Street firm that created investment products and then made bets that they would fail?without disclosing those bets to the customers who bought the products. Whether they bet against their own products or not, it is increasingly apparent that many firms were aware of the risks of CDO investments but did not disclose those risks to their customers ? at least not until they had liquidated their own CDO holdings.” For example, Jones says that a Credit Suisse executive was quoted in Euromoney magazine as saying that his firm had began closing its positions in CDO mortgage=backed securities in late 2006 and early 2007 because it perceived that the risk of those investments had increased. But during the same time frame that Credit Suisse was getting itself out of CDO securities, it began selling mortgage-backed CDOs securities to one of Page Perry’s clients?and continued doing so well into the summer of 2007, when the CDOs became illiquid and resulted in a multi-million loss for the client.
Page Perry, is based in Atlanta but represents investors in securities arbitrations and lawsuits all over the country. Jones points out that the SEC action against Goldman Sachs does not include claims for individual investors, and there are other Wall Street firms that the SEC may never get around to suing. “You can’t rely on the government to bail you out,” says Jones. “If you think you may have a case, you need to speak to an attorney while there is still time to act. There are legal deadlines for bringing claims, and depending on what state you live in or the type of claim you have, your time may be about to run out.”