Bissinger's Securities and Finance for Trial Lawyers

Good interview of Hedge Fund Manager William Ackman

Click here for an excellent interview with hedge fund manager on the credit crisis.

Bissinger -- "Salvation by Summary"

Trials -- especially involving complex business disputes -- are more document-intensive than ever.  This article provides guidance and strategies of how to effectively synthesize information from a large number of documents into a summary draws out the relevant information you need to empoer the judge, jury, or arbitrators to see the case your way.

Skilling's Big Brief

Jeff Skilling has appealed his conviction.  Now he's filed a brief.  Everyone's clucking about it.  The Wall Street Journal bashes Skilling's brief as too long.  Loren Steffy of the Houston Chronicle lambasts it as the "Attack from Planet Skilling."  However one feels about the merits of his case, the brief gives a comprehensive overview of the law governing white-collar crime, jury selection, and trial evidence and procedure.  Check it out at Download skilling_236_page_appellate_brief.pdf

Morgan Stanley's Snowballs

arFor an interesting type of investment -- and a lawsuit over them -- see the attached complaint.  Download SnowballNotes.pdf   Snowball notes are “hybrid investments” or “structured securities” combinations of straight debt instruments and derivatives.  They are sold as bonds with their own CUSIP numbers.  Their interest payments are tied to the London Interbank Offered Rate. Plaintiffs claim Morgan Stanley systematically defrauded them by false and misleading offerings and failing to disclose material information.  Apparently, Morgan Stanley sold $210 million of “inverse-ratchet snowball notes” in September and October 2004 alone.

Refco Complaint -- Allegations Against Grant Thornton, Mayer Brown, and Many More

For a comprehensive summary of what happened at Refco, see the attached complaint.Download refcocomplaint.pdf  The complaint states, "[t]he defendants include a 'who's who' of some of the biggest names in corporate finance, law, and accounting, whose reputations and substantial assistance were required for [Refco's officers] to strip out billions of dollars in Refco assets."

Credit Crisis Litigation Update

Today's New York Law Journal has a helpful report on the litigation arising out of the credit crisis.

Central Bank Intervention, the Credit Crisis, and Bond Data

Professor Becker and Judge Posner have posted an illuminating exchange of comments on their blog questioning the wisdom of the intervention of the U.S. Federal Reserve and other banks in increasing liquidity in the current credit crisis.

Judge Posner's citation to a 2005 Economist story regarding the housing boom probably reminds most of his readers of their awareness of the housing boom at that time. Savvy analysts began to question the financing of the housing boom back then, but one wonders if more information about the relatively opaque bond market (which includes the complex debt derivatives at the heart of the crisis) might have helped avert today's crisis.

Despite the power of the internet, the public has little access to information about mortgage-backed bonds and bond prices.  This stands in contrast to stock price data and public company disclosures, which are widely available at low cost.  Bond data resides in Bloomberg terminals and other proprietary databases that cost around $1500 per month per user. 

Cheaper access to information about collateralized debt obligations, collateralized mortgage obligations, and other derivatives might have led to more rigorous study of these instruments in Congress, academia, the press, and trials and arbitrations.  The costs of dissemination could be charged to industry participants who benefit from participating in these markets.  These costs would seem nominal compared to the costs of imploding hedge funds, collapsing lenders, and central bank intervention.  Saving the stock market from a steep decline and the economy from a recession would be icing on the cake.

In any event, most people agree that free flow of market information lies at the heart of free enterprise in general and the securities industry in particular.  Meanwhile, astute observers question the rating agencies that awarded investment-grade designations to many debt instruments.   

Yet even sophisticated investors have limited ability to scrutinize those ratings.  Perhaps wider availability of bond price data and other metrics would have helped raise questions sooner.

The Hedge-Fund Manager's New Clothes

For a spoof on hedge funds reminiscent of Jeff Skilling's "hypothetical future-value accounting" featured in  the film Enron:  The Smartest Guys in the Room, check out this piece by Mark Gilbert of Bloomberg.com.

Suits Against Bear Stearns Mulitiply

Bear Stearns faces litigation on several fronts.  Investor advocate Jake Zamansky has initiated at least one  arbitration claim before the former National Association of Securities Dealers, now known as the Financial Industry Regulatory Authority, or FINRA, as reported on CNBC.  At least one institutional investor has initiated legal action against Bear Stearns for losses arising out of its hedge funds.

British banking giant Barclays may bring suit, too, for losses arising out of its investment in Bear Stearns Asset Management's High-Grade Structured Credit Strategies Enhanced Leverage Fund. 

Defense law firms have formed various practice groups to address the subprime mortgage crisis.  According to the Wall Street Journal, Paul Hastings, Patterson Belknap, and Pillsbury Winthrop have all announced formation of teams for this purpose. 

CMOs on Margin, the Collapse of Brookstreet Securities, and the Potential Role of NFS/Fidelity

June 2007 witnessed the failure of a broker-dealer that specialized in trading collateralized-mortgage obligations ("CMOs") on margin.  See Bruce Kelly, "Brookstreet Clients, Counting Losses, Ponder Arbitrations," Investment News, July 9, 2007. 

Published reports indicate that Brookstreet sold clients volatile species of CMOs known as "interest only strips" and "inverse floaters."  These CMOs behave much like the margined investments.  In comparison to less volatile types of CMOs, these instruments deliver compounded returns -- and compounded losses.

A brokerage firm selling inverse floating CMOs on margin would compound that risk even more.  That's what many believe happened at Brookstreet.  Reports indicate that Brookstreet sold these investments, on margin, to elderly and/or unsophisticated investors.  When the CMOs declined in value, these elderly investors suffered not only major losses, but became indebted on their margin interest.  That's generally not the kind of thing firms should be selling to elderly or unsophisticated investors.   

Because many of Brookstreet's brokers operated out of their homes, it's doubtful that Brookstreet brokers did a lot of business with large institutional purchasers for whom these high-risk securities are best suited.

Games may also have been played with the valuation of Brookstreet's CMOs that hurt investors even more by overvaluing the CMOs at the time Brookstreet sold the investments, but undervaluing the CMOs in making margin calls.  This would be like a homebuilder loaning money based on an overvalued house and thereby creating a larger monthly note.  But when the borrower defaults, the homebuilder/lender grossly undervalues the house at foreclosure, leaving the borrower with jumbo liability but shrunken collateral. 

According to a major defense-oriented law firm, that's may have happened at Brookstreet.  In July, Holland & Hart posted an extraordinary blog post criticizing not only Brookstreet, but also its clearing firm, NFS -- owned by Fidelity -- for possible manipulation of the values of the CMOs that Brookstreet sold to retail investors.  See "Brookstreet Securities Collapse: Where Were the Regulators?"   

That sort of conduct could expand the scope investor recovery beyond the failing Brookstreet to the well-heeled NFS/Fidelity.