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Archive for November, 2008

Failure to Implement Risk Management Led to Citigroup’s Troubles

Bear Stearns, Fannie Mae and Freddie Mac, American Insurance Group and Lehman Brothers are all example of where the opposite proved to be true. Failing to live up to the “too big to fail” Wall Street theme, many of these companies were forced to resort to government rescues in the form of multibillion-dollar bailouts to prevent them from going under. Now Citigroup, once the nation’s largest financial institution, is joining the ranks, as well, after succumbing to more than $65 billion in losses.

The government’s plans to prop up Citigroup were revealed on Sunday, Nov. 23, and include an additional $20 billion of taxpayer money for the bank, along with a guarantee on more than $300 billion of the firm’s most risky assets. In exchange for the guarantee, Citigroup will issue $7 billion in preferred stock to the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC). So how did things get so bad for one of the country’s premiere financial services firms? In three words: reckless business bets.

Over the years, Citigroup created a multibillion-dollar business in mortgage backed securities and collateralized debt obligations (CDOs). As profits grew, Citigroup got bolder, taking more and more risks. At the same time, the company employed tricky accounting practices that allowed it to move troubled assets into off-balance-sheet trusts that could then market the debts to other institutions. Once the assets had been moved off Citigroup’s balance sheets, it made it appear the bank was carrying less risk.

Citigroup has suffered four quarters of consecutive multibilliondollar losses. It still holds $20 billion of mortgage-linked securities on its books, the majority of which have been marked down to between 21 cents and 41 cents on the dollar, according to a Nov. 22 article in the New York Times. But the worst may be yet to come. Citigroup has another $1.2 trillion that is held “off balance sheet.” When it begins to move those questionable assets back onto its books, get ready for a whole new firestorm of losses to ignite.

Update on Lehman Principal Protection Note Investigation

On September 15, 2008 Lehman Brothers Holdings filed for bankruptcy protection, leavinf investors who previously purchased the company’s 100% Principal Protection Notes (PPNs) unprotected and at a loss. Funnily enough it was Lehman’s own marketing brochures that touted the notes as providing “100 percent principal protection.” Little did they realize that the value of the notes was contingent on Lehman’s own solvency, meaning that when Lehman filed for bankruptcy, many of their investor’s notes subsequently went into default.

In the wake of the bankruptcy, a class action was filed on November 6, 2008 on behalf of individuals who purchased Lehman Principal Protection Notes (PPNs) from UBS Financial Services, Inc. The complaint alleges that UBS brokers made false and misleading statements that omitted key facts about the risks connected to the Lehman notes.

“Investors should be aware of the pending class action,” said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari. “The class case has certain pitfalls that investors need to be aware of in selecting an attorney.

Pennies on the Dollar for Lehman Principal Protection Notes

In what could become just the tip of a legal iceberg for UBS, Lehman Brothers and others over sales of Lehman Principal Protection Notes, a class-action lawsuit has been filed in the United States District Court for the Southern District of New York. Among the claims that the plaintiff, Stephen P. Gott, alleges: UBS, Lehman and officers and executives of both companies intentionally misstated key facts to investors about the Lehman Principal Protection Notes, as well as omitted information regarding certain risks.

The complaint further contends that UBS marketed and sold Lehman Principal Protection Notes as an investment suitable for investors who wanted to protect their entire principal investment. When Lehman Brothers filed for bankruptcy on Sept. 15, 2008 it subsequently defaulted on many of the notes. As a result, investors now face the distinct possibility of losing all or a substantial part of their investments.

On page nine of the complaint, which was formally filed Nov. 6, the plaintiff also asserts that Lehman Brothers actually used proceeds from the Principal Protection Notes for its own general business purposes, including funding other corporate operations that were suffering financially.

In addition to UBS, Lehman Principal Protected Notes were marketed and sold by several other brokerage firms, including Citigroup, Merrill Lynch and Wachovia. In each instance, the notes were touted as “conservative” investments. In reality, however, they were structured products that combined fixed-income investments with derivatives, leaving investors looking for conservative investments open to considerable – and unexpected – risk.

For these investors, Lehman Principal Protection Notes and their so-called advertised benefit of 100% principal protection translate into pennies on the dollar. Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Citigroup and JPMorgan Sued by Louisiana Pension Funds

Two Louisiana pension funds filed lawsuitas against Citigroup and JPMorgan Chase in the wake of the subprime fallout and 2008 credit crunch. The Louisiana Sheriffs’ Pension and Relief Fund and the Louisiana Municipal Employees’ Retirement System allegesd that Citigroup and JPMorgan misled investors in more than $29 billion of Citigroup’s securities offerings dating back to May 2006.

The proposed class-action lawsuits also name former Citigroup chairman Charles Prince and more than a dozen underwriters of the securities offerings, including units of Bank of America Corp., Goldman Sachs Group Inc., UBS AG, Barclays PLC, Deutsche Bank AG and Fortis.

The complaint, which was filed Oct. 1 in New York State Supreme Court in Manhattan, contends that Citigroup “harmed investors by causing a significant decline in the value of the securities purchased in or traceable to a series of securities offerings.”

The suit also claims that Citigroup failed to disclose its “massive exposure to losses from its mortgage-related assets” and failed to write down the assets to properly reflect their true value.

The success of public pension funds depends on the entities that serve as the steward of the fund’s assets. In a number of instances that are just now coming to light, that work has been severely flawed. Meanwhile, pension fund managers continue to reassure retirees and current employees that their funds are safe and the assets sufficient to pay benefits for several years.

The truth is that it depends on the quality and quantity of the securities contained in the fund’s portfolio, as well as the valuation model used to determine the value of the assets. Many portfolios of large pension funds include a high concentration of hard-to-value and difficult-to-sell assets, including mortgage-related securities and other collateralized pools of debt. These investments do not readily trade on the secondary market. Therefore, the value assigned to them simply does not reflect their actual value.

Sale of Lehman Bros. Principal Protected Notes Trouble for UBS

It seems as though another legal battle with investors in the works for Swiss-based investment bank UBS AG – this time over sales of Lehman Brothers Principal Protected Notes, which are now deemed essentially worthless.

Structured notes are financial instruments that combine derivatives – including a single security, a pool of securities, options, indices, commodities, debt issuances, foreign currencies, and credit swaps – with equity or fixed income investments. In the case of UBS, attorneys representing dozens of clients of the firm say the investment banking giant touted the structured notes, also known as guaranteed linked notes, as a low-risk, conservative investment designed to preserve capital with the potential for uncapped appreciation.

What UBS failed to tell investors was the fact that the notes in question actually were unsecured obligations of Lehman Brothers, leaving investors vulnerable to a considerable amount of risk. Apparently Lehman’s structured notes were sold just weeks before the firm declared bankruptcy on September 15, 2008 Moreover, the notes reportedly were being used by Lehman to help finance its own financial shortfalls from losses stemming to bad bets on subprime-related investments. That means investors unknowingly put themselves at the mercy of the credit of the issuer: If the issuer defaults, as in Lehman’s case, the investment becomes worthless.

UBS, the fifth-largest brokerage firm in the United States, sold about $1 billion of Lehman’s structured notes to investors. Many of them were retirees. Now, despite the fact investors were told that the Lehman Principal Protected Notes had “100 percent principal protection,” they can expect to receive pennies on the dollar for their investment. According to SecondMarket, a New York-based firm that provides a market for securities that are illiquid or barely trade, notes with full principal protection are trading at 10 cents to 14 cents on the dollar.

The latest revelation of UBS’ handling of the Lehman Brothers Principal Protected Notes adds to what has become a growing list of legal issues this year. Earlier in the summer, the company had to pay out nearly $1 billion related to charges over auction-rate securities sales. It also is being investigated by the Securities and Exchange Commission (SEC) for the sale of derivatives and investment contracts to state and local governments.

The trouble train for the investment bank doesn’t stop there as the Internal Revenue Service has also jumped on the UBS bandwagon and is looking into whether the firm improperly helped various U.S. clients evade taxes. Now state regulators are considering forming a task force to investigate brokerage firms that marketed and sold structured notes to investors.

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