Wall Street banks are looking for a way out of a wide-ranging regulatory investigation into the creation and sale of more than $1 trillion of securitized mortgage pools called collateralized debt obligations (CDOs), which was a major cause of the worldwide financial crisis, according to a Wall Street Journal article by Jean Eaglesham entitled “Banks in Talks to End Probe.”
Regulators have already charged some Wall Street banks with misrepresenting and failing to disclose material facts and risks associated with CDOs. The CDOs were “sliced” into tranches with differing preferences and risk levels. The riskiest tranches were often sold to investors.
Firms that received SEC subpoenas in connection with the investigation reportedly include Citigroup, Deutsche Bank AG, J.P. Morgan Chase, Morgan Stanley and UBS AG. No charges are pending at this time, according to the article.
Investigators are looking into how the assets in the CDOs were selected and valued, the influence of hedge fund clients in the selection of the underlying assets of the CDOs, whether such funds may have been betting against those assets, and whether appropriate disclosures were made to investors, according to the article.
Last July, Goldman Sachs agreed to pay $550 million to settle SEC civil charges that it misled investors by not disclosing that it selected the underlying assets of one CDO with input from a hedge-fund client that planned to bet against it. Shortly after the Goldman suit, SEC enforcement director Robert Khuzami said the agency would look closely at similar situations.
Among the CDOs being scrutinized is a $1 billion deal by Citigroup in 2007 called Class V Funding III, according to the article.
Because disclosures varied between CDO deals, as did the influence of investors betting against the them, the SEC is contemplating individual settlements with banks rather than an industry-wide settlement, according to the article. Another complicating factor is the existence of a related criminal probe launched earlier this year by the U.S. Attorney’s office in Manhattan.
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 40 occasions, and have aided clients who have been the victims of financial adviser abuse and scams. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their CDO investment problems. For further information, please contact us.